17 JAN 2013
"Be Greedy when others are fearful, and be fearful when others are greedy", says Warren Buffett. Today, I bought puts on the Russel 2000 (NYSEARCA:IWM). Across three accounts, I purchased:
1. IWM May 18 89 Put @ 4.23
2. IWM May 18 90 Put @ 4.71
3. IWM May 18 90 Put @ 4.67
IWM reached and all-time high of 88.51, today. I love capitalism, and businesses, and it was painful for me to bet against them, but prices are just too high. For three weeks, now, CNBC has aired pumper after pumper, peppered with a few naysayers for good measure, but the predominant them has been to throw caution to the wind and BUY, BUY, BUY for another all-time high! Typically, I observe a 2 - 6 week thematic reporting pattern on CNBC when for the most part either all is right in the world or all is wrong in the world. For three weeks now, reporting has been mostly euphoric. Enough!
Should various indices be near or at 52 week or all-time highs? Are things really that good? There is so much to say, but I'll stick to two general points:
1. Warren Buffett has taught us that corporate profits cannot hold much above 6% of GDP for any sustained period. We are now at 11.1%! True, we were near that level at record highs of approximately 9% ... in 1929.
2. Warren Buffett has taught us that total market cap as a percentage of GDP should be 70 - 80% for stocks to be attractively priced. Today, we are at approximately 110%!
I have 4 trading accounts, and I long for companies in which to invest. I am a natural long; I am a psychologically adverse to going short. Unfortunately, I can find no stocks at suitable prices. Accordingly, in one account, I am 100% cash. In three other accounts, as an expression of my fear, today, I bought the May puts on the most overpriced of the indices--the Russell 2000--with the remainder of those accounts in cash. The Russell 2000 has a relatively high P/E and a relatively low yield. Unfortunately, the Russell 2000 will fall, and when it does, my puts will increase in value to offset the idleness of my cash for which I cannot find a home.
Of note, the most recent issue of Fortune informs us that Warren Buffett is sitting on $48 billion of cash--record levels--in these days when others are greedy. Buffett has advised us that he is willing to go down to $10 billion of cash, with a preference for $20 billion. He was down to about $25 billion as he invested during the 2008 - 2009 bottom, when others were fearful.