Smartest Investor Holding More Cash Than Stocks, German Election Winner Pledges Independence From U.S.

To gain an edge, this is what you need to know today.

Buffett's Letter

Please click here for an enlarged chart of Warren Buffett's company Berkshire Hathaway Inc Class B (BRK.B).

Note the following:

• This article 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 Inc (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. 
• 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.

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.  As full disclosure, European financial ETF iShares MSCI Europe Financials ETF (EUFN) in The Arora Report’s ZYX Allocation Model Portfolio.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Amazon.com, Inc. (AMZN), Alphabet Inc Class C (GOOG), Meta Platforms Inc (META), Microsoft Corp (MSFT), NVIDIA Corp (NVDA), and Tesla Inc (TSLA).

In the early trade, money flows are negative in Apple Inc (AAPL).

In the early trade, money flows are neutral in SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust Series 1 (QQQ).

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust (GLD).  The most popular ETF for silver is iShares Silver Trust (SLV).  The most popular ETF for oil is United States Oil ETF (USO).

Bitcoin

The SEC has dropped crypto related charges against Robinhood Markets Inc (HOOD).  Last week, the SEC dropped charges against Coinbase Global Inc (COIN). 

In the largest crypto theft, hackers have stolen $1.5B from crypto exchange Bybit.  

Bitcoin is range bound as a result of crosscurrents.

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 a protection band consisting of cash or Treasury bills or short-term tactical trades as well as short to medium term hedges and short term hedges. 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.

The Arora Report is known for its accurate calls. The Arora Report correctly called the big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.