By Nigam Arora & Dr. Natasha Arora
To gain an edge, this is what you need to know today.
Buffett’s Letter
Please click here for a chart of Warren Buffett’s company Berkshire Hathaway stock (BRK.B).
Note the following:
- The Morning Capsule is about the big picture, not an individual stock. The chart of BRK.B is being used to illustrate the point.
- Warren Buffett is the smartest investor of our time. Prudent investors eagerly await his annual letter. Here are the important points from Warren Buffett’s letter to Berkshire Hathaway shareholders:
- Cash reserves hit a record of $334.2B at the end of 2024.
- Berkshire’s holdings of publicly traded stocks fell to $272B at the end of 2024.
- Berkshire sold stock worth $143.4B by the end of 2024.
- Buffett wrote, “Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities.”
- Berkshire reported strong operating earnings.
- In The Arora Report analysis, the most important point for prudent investors from Buffett’s letter is that he is now holding more cash than publicly traded stocks. Buffett’s position is the equivalent of 55% in the protection band. As a reference, the top band of The Arora Report’s protection band is 44%. In contrast, the momo crowd has a negative protection band because they are borrowing money to invest in stocks. This sets up the momo crowd for forced selling as they will get margin calls if the stock market drops. On the other hand, if the stock market continues to go up, the momo crowd will keep on buying.
- In Friday’s Morning Capsule, we wrote:
University of Michigan consumer sentiment will be released at 10am ET. At The Arora Report, we will be very carefully scrutinizing this data after the lower guidance from Walmart (WMT). The data may be market moving.
- The stock market experienced a significant drop on the University of Michigan consumer sentiment data. Here are the key points:
- Consumer sentiment came at 64.7 vs. 67.5 consensus. The reading was a 10% drop from January.
- All five components of the index decreased.
- The largest component drop was 19% in durables, mostly due to fears of price increases stemming from tariffs.
- Inflation expectations increased to 4.3% from 3.3% in January. This is the highest reading since 2023.
- The long term economic outlook dropped by 6%. This is the lowest reading since 2023.
- In The Arora Report analysis, the most important data point from the University of Michigan consumer sentiment is rising inflation expectations to 4.3%. The prospect of stagflation is real. A stagflationary environment is the worst scenario for investors’ portfolios, short of extraordinary events. For those wanting next level information, listen to the podcast series in Arora Ambassador Club that analyzed Warren Buffett’s portfolio in the context of a stagflation scenario.
- This morning in the early trade, stocks are experiencing a reflex rally from Friday’s selloff for two reasons:
- Berkshire Hathaway reported strong operating earnings.
- The usual momo guru pump over the weekend to persuade the momo crowd to buy stocks.
- As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents. Please scroll down to see the protection band. The protection band is one of the large number of unique edges that are available to members of The Arora Report.
Germany
Exit polls indicate Friedrich Merz of the center-right Christian Democratic Union will be the next chancellor of Germany. Merz stated that his top priority is German independence from the U.S. He plans to strengthen Europe, particularly its defense capabilities.
At a time when U.S. defense stocks are coming under pressure, European defense stocks are rallying. Depending upon how the government is formed in Germany, The Arora Report will give a signal on adding European defense stocks to the portfolios. There may also be merit to adding European financial stocks. There are very nice profits on the European financial ETF EUFN in the ZYX Allocation Model Portfolio.
Magnificent Seven Money Flows
In the early trade, money flows are positive in Amazon (AMZN), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOG), Meta (META), and Tesla (TSLA).
In the early trade, money flows are negative in Apple (AAPL).
In the early trade, money flows are neutral in S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ).
Momo Crowd And Smart Money In Stocks
The momo crowd is *** (To see the locked content, please take a 30 day free trial) stocks in the early trade. Smart money is *** in the early trade.
Note for new members: Smart money often sells into the strength generated by momo crowd buying and buys into the weakness generated by momo crowd selling. Over a long period of time, investors come out ahead by adopting smart money’s ways. The exception is in a raging bull market – for very short term trades, consider following the momo crowd and not smart money.
Very Very Short-Term Indicator
Our very, very short-term early stock market indicator is ***. This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.
Gold
The momo crowd is *** gold in the early trade. Smart money is *** in the early trade.
For longer-term, please see gold and silver ratings.
Oil
The momo crowd is *** oil in the early trade. Smart money is *** in the early trade.
For longer-term, please see oil ratings.
Bitcoin
The SEC has dropped crypto related charges against Robinhood (HOOD). Last week, the SEC dropped charges against Coinbase (COIN). The crypto industry is getting a very large payback from spending hundreds of millions of dollars in the last election.
In the largest crypto theft, hackers have stolen $1.5B from crypto exchange Bybit.
Bitcoin (BTC.USD) is range bound as a result of crosscurrents.
Markets
Interest rates are ticking up, and bonds are ticking down.
The dollar is range bound.
Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.
S&P 500 futures are trading at 6061 as of this writing. S&P 500 futures resistance levels are 6131, 6256, and 6500: support levels are 6017, 5926, and 5748.
DJIA futures are up 226 points.
Gold futures are at $2970, silver futures are at $33.06, and oil futures are at $70.26.
Protection Band And What To Do Now
It is important for investors to look ahead and not in the rearview mirror. The proprietary protection band from The Arora Report is very popular. The protection band puts all of the data, all of the indicators, all of the news, all of the crosscurrents, all of the models, and all of the analysis in an analytical framework that is easily actionable by investors.
Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding *** in cash, Treasury bills, short term fixed income, or allocated to short-term tactical trades; and short to medium-term hedges of ***, and short term hedges of ***. This is a good way to protect yourself and participate in the upside at the same time.
You can determine your protection bands by adding cash to hedges. The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive. If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.
A protection band of 0% would be very bullish and would indicate full investment with 0% in cash. A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.
It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash. When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks. High beta stocks are the ones that move more than the market.
Traditional 60/40 Portfolio
Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.
Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less. Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.
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Nigam Arora
Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.
Dr. Natasha Arora
Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.
