The Buffett and Berkshire S&P Set-Up (BRK-B, BRK-A, BNI)

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Today is the great trade set-up that many have hoped would come for more than a decade.  Berkshire Hathaway Inc. (NYSE: BRK-B, BRK-A) is completing the acquisition of Burlington Northern Santa Fe (NYSE: BNI), but more importantly this is the closing bell that Berkshire Hathaway gets added to the S&P 500 Index.  We are seeing active trading in the name, and not just in stock…. Options trading is very active as well.

It was on the evening of January 26 that the announcement of Berkshire’s S&P addition was announced.  Shares were at $68.00 on that close, and they rose to $1.36 on that day.  Despite a choppy market, Buffett’s stock has risen to close at $76.69 on Thursday and shares are trading up just under $77 mid-day.

On the options front, Joe Kunkle of OptionsHawk.com told us,  “Berkshire options are active into it’s S&P inclusion, 34,800 calls and 25,700 puts, around 6X average volume.  The largest trades on the day include a buyer of 2,500 February 80/75 strangles, and another buyer of 2,500 February $80 calls.  Caution breeds longer term with opening positions in March 75 puts attracting multiple block buyers.”

Berkshire Hathaway may continue to move on other news, but the big event has been telegraphed for over two weeks now and a 13% run-up just for an index addition is considerable.  That is during a bad stock market to boot.  Profit taking may be seen today or it may come early next week.  Either way, chance are that it will come.

Traders are likely to start selling the news either as soon as this afternoon or early next week.  This event has been known for over two weeks and many of the S&P tracking funds and those funds which trade around big index trades have had ample time to get into the stock.  In short, you have seen a 13% move and there have been new fundamental events that were effectively not known.

Traders definitely trade ahead of and into huge index events.  Some were saying that $14 billion of Berkshire Hathaway needed to be bought.  It just needs to be remembered that an S&P analyst told me that he now sees more than one-third of the required buying happens ahead of the index change event, then there is buying the day of the event, and then a long tail of gradual buying by the funds for a week or two after the event.  It is no longer that funds just wait and buy all at the close or the day of the index change.

Berkshire Hathaway may continue to move on other news, but the big event has been telegraphed for over two weeks now and a 13% run-up just for an index addition is considerable.  That is during a bad stock market to boot.  Profit taking may be seen today or it may come early next week.  Either way, chance are that it will come.

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JON C. OGG