Richard Glenn's  Instablog

 With Warren Buffett plunking down 44 billion to buy Burlington Northern, many folks are examining the tea leaves and looking for the hidden meaning of the Oracle's latest move. Economic cheerleaders (mostly in the MSM) were quick to call this a big vote of confidence in the economic recovery. They are wrong.
On the other hand, the gloom-and-doomers see a Buffett that is desperate to buy hard assets before a tidal wave of inflation wipes out the value of his cash hoard. I doubt it.
With a little back of the envelope number crunching, I think it's quite clear that this latest purchase by Buffett (and the largest of his career) is just another example of buying boring, productive assets at pennies on the dollar of their replacement cost. While it is true that economic recovery will help his return on investment, as long as the economy as we know it does not come to an end he will do just fine.
Let's see, for 44 billion Buffett just bought 32,000 miles of rail. (he also gets 220,000 rail cars, buildings and land but that's just icing on the cake). That comes to just 1.375 million dollars a mile. How much would it cost to replace these assets? Well, China just announced that they plan to build a bunch of new rail lines at a cost of over 20 million dollars a mile. And that's in China -- you can bet the cost would be quite a bit higher here.
Picking up assets far below the cost of replacement wouldn't mean anything if they didn't have any pricing power (real estate in Detroit, anyone?), but with rails that is not much of a worry. As long as we need to move large amounts of goods, rails will continue to be by far the cheapest way to do it. Even if oil went to $20 a barrel tomorrow, no one is going to start shipping grains or coal long distance by truck.
The bottom line is Buffett saw the chance to buy irreplaceable productive assets at five cents on the dollar, and he pounced. Simple. Safe. Vintage Buffett.
Disclosure: no positions, but I am salivating over the prospect of finally having options on Berkshire stock after the 50:1 split.

 A couple weeks ago, with Amazon trading below 90, I wrote an article about why I thought Amazon was a terrible short candidate  (see here http://seekingalpha.com/article/162186-why-shorting-amazon-is-a-bad-idea). Since then, Amazon has plowed even higher, and currently sits at just over $123. This latest rally stretches the valuation even further into nosebleed territory. While I still think that until Amazon shows some weakness it is a very dangerous short, for those who just can't stay away here is a safe way to play it: Use an in the money calendar spread.
A Calendar spread is where you buy a long dated option while at the same time selling a shorter dated option at the same strike price. One nice thing about using a calendar spread is that your risk is capped at the amount you pay for the spread. Amazon can go to $200 and you can still sleep at night -- unlike shorting the stock. It also usually has a positive theta, which is just a fancy way of saying that time value is working for you rather than against you. Unlike just buying a put, for example, where you lose a little bit of time value every day.
While it is true that a calendar spread is not exactly a short position, if you choose a strike that is deep in the money then the position will gain value as the stock falls -- at least until it falls through the strike price. So if you think that a stock is at risk of collapsing, then this would not be a very good strategy. Amazon, however, is merely overvalued. If it falls, I would expect it to bounce at some point where the valuation becomes more compelling.
Let's look at a sample position:
Buy 1 AMZN April 105 call for $25.85
Sell 1 AMZN Jan '10 105 call for $22.00
Net cost: $3.85 per combo
Over the next couple of months, if AMZN declines in price, the value of the combo will increase until the stock hits $105  -- roughly 20% below where it is trading now. At that point, even if there is time left on the Jan '10 calls that were sold, it should be possible to close the position at a substantial profit. +100 - 150% would not be unusual.
The great thing about this position, however, is that if you are wrong and AMZN continues to climb the downside is capped. The most you can lose is the $385 that you paid to open the position. And the reality is that because the call you sold will lose the $3.40 in time value it has by January  no matter what happens to the stock price, there is a built in margin of safety, as the call you sell decays much faster than the one that you bought.
It is also true that with this position the upside is not unlimited. Even if the stock cooperates and ends at $105 in January, the position will likely 'only' be worth 10 -11$, capping the gains at 200% or so. Given how much margin would be tied up if you just shorted the stock, however, a 200% return on shorting the stock is unlikely even if the stock were to collapse.
Once again, I would say that shorting a stock based on nothing but perceived over valuation is foolhardy in the extreme. With a stock that has had such a huge run, however, betting that it will at least have a pullback / consolidation period is a much better bet -- and one that this call spread captures nicely.
Overall, I think a deep in the money calendar call spread offers a very good risk/reward, particularly when compared with shorting the stock or buying puts.
Disclosure: Long AMZN calendar call spreads and put spreads.

 Much ink has been spilled on the pros and cons (mostly cons) of the new breed of leveraged ETF's that burst on the scene in the past year. They have quickly become a day trading favorite, with some of the ETF's turning over tens of millions of shares a day. The main knock on them is that they are just not suited to even medium term investors. In fact, due to their structure -- they calculate leverage for each day's move, and this gives them a downward bias overall -- they are not even suited to being held for a couple of weeks. Over any kind of a longer term, these products are toxic and will fleece investors of most of their money, no matter which way the market goes. For a more in depth treatment of the hazards of levered ETF's, go herehttp://seekingalpha.com/article/35789-the-case-against-leveraged-etfs