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Two Ways To Play: Smoke Signals From Berkshire Hathaway


Strengthen your portfolio in good times and bad.


How gloomy are the credit markets? According to Bloomberg, the cost of protecting against default on Warren Buffett's Berkshire Hathaway's (BRK.A) AAA-rated debt nearly tripled in the last few months.

Berkshire's credit-default swap (CDS) contracts are 140 basis points above Allstate Corp (ALL) - and approximately 4 times that of rival insurer The Travelers Companies (TRV). Both Travelers and Allstate have lower credit ratings than Berkshire.

But data provided by CMA Datavision shows that Berkshire's CDS contracts have jumped 415 basis points from 140 basis points just two months ago. This means it costs $415,000 a year to cover $10 million in debt for 5 years. At these levels, the swaps are typical of companies rated Baa3 by Moody's - just one level above junk. And in order for the contracts to pay off, Berkshire must go through its $33.4 billion in cash

See Professor Bennet Sedacca's Why Debt Is Best.

From the Bull Pen: A gloomy credit market indeed. But in the short term, the risks to equities remain to the upside. Consider the Ultra long S&P (SSO) for a trade. One can set a sell stop near $23.

From the Bear Cave: We're reminded of the time not too long ago when traders, via CDS contracts, were pricing debt from Lehman Brothers, Goldman Sachs (GS) and Bear Stearns as junk. It seemed far-fetched at the time. Nonetheless, traders can consider playing the downside in Travelers as it approaches its 200 DMA ($45).

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Position in GS, SSO

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