Oracle of Omaha clears his throat

After months of criticism over his silence since the March selloff, Warren Buffett has been showing signs that he’s not ready to quit anytime soon.

In his latest move, reported after Friday’s close, the Oracle of Omaha sold 535,000 shares of Axalta Coating ($AXTA). Although that’s a tiny transaction for Berkshire Hathaway ($BRK.B) at about $12 million and representing about 2% of its stake in Axalta, it may be another indication that Buffett is preparing to reallocate more capital.

The two topics that have been the subject of much speculation regarding Berkshire recently are financials and overseas investments. In the first area, Buffett’s sale of Wells Fargo ($WFC) stock disclosed in recent weeks dwarfed the Axalta trade in terms of raising cash, and the financial press jumped all over that move to contend that he’s turned sour on banks.

The truth is that Berkshire still owns 3.3% of $WFC shares, much less than the 10% it has traditionally held but still a substantial stake. The company has also cut its holdings in JP Morgan ($JPM) but remains invested in that bank as well. Moreover, on the last day of July, Buffett made headlines with a $5 billion investment in Bank of America ($BAC) that raised his stake to 11.8%. Filings indicate that he had been accumulating shares in the bank since July 20.

Coincidentally (or not), our Activity Log shows that huge call buying took place in $BAC starting on July 21. Then a large vertical spread went off in the SPDR Financial Fund ($XLF) on July 30, the day before the Buffett/$BAC news broke: 10,000 October 27 calls were bought for 0.21 above open interest of 8,409 contracts while 10,000 October 29 calls were sold for 0.05-0.04 above open interest of 741 contracts with shares at 23.86-23.87.

The bottom line is that it’s simplistic to assume that Buffett is abandoning financials overall, as much as he may be just looking for better opportunities in that space and elsewhere. Which leads us to Berkshire’s second thesis, the investment of some $6B in the five largest trading houses in Japan, or about 5% in each.

That move was surprising not just for Buffett but in general, as the Financial Times notes that foreign investors have been net sellers of Japanese equities for nearly five years, amounting to $220B in outflow since the early optimism of the “Abenomics” era.

On Aug. 25, a few days before Berkshire announced those stakes, our Heat Seeker detected the following trade in the WisdomTree Japan Hedged Equity Fund ($DXJ), its first paper of any kind on the Log in more than six months: 4,500 October 49 calls were bought for 1.20 to 1.25 above open interest of 37 contracts while 4,500 October 47 puts were sold for 0.80 to 0.77 above open interest of 8 contracts with shares at 48.72-18.77.

Despite its “hedged” moniker, the $DXJ has acted more like a levered exchange-traded fund in previous years when compared to the more conservative iShares MSCI Japan ETF ($EWJ). But it has actually underperformed the $EWJ in recent months, perhaps because the $DXJ is tied to moves in the yen at a time when we’ve seen unprecedented dislocation of currency-pair relations across the globe.

In the three subsequent sessions after that $DXJ paper, we also saw large bullish plays in the U.S. banks mentioned above that will cover their next earnings reports. This immediately followed the Fed’s policy revision to allow inflation to rise “moderately” past its longtime 2% target:

–$JPM, 8/26: 12,000 October 105 calls bought for 2.63-2.64 above open interest of 2,688 contracts, 12,000 October 115 calls sold for 0.78 above open interest of 2,579. Stock 99.88. EPS 10/13 before open.
–$BAC, 8/27: 38,000 October 27 calls bought mostly in one print of 10,000 for 0.97 to 1.04 above open interest of 16,376 contracts; partially rolled from 10,000 September 26 calls sold for 0.80 below open interest of 58,365 contracts. Stock 26.05-26.12.
–$WFC, 8/28: 15,000 November 25 calls bought in two prints for 1.88-1.93 above open interest of 2,708 contracts; 15,000 November 30 calls sold in two prints for 0.52-0.49 above open interest of 2,339 contracts; 15,000 November 22.50 puts sold in two prints for 1.19-1.16 above open interest of 3,056 contracts. Vertical call spread bought combined with short puts. Stock 24.58-24.67.

So regardless of Buffett’s moves, there apparently remains some positive sentiment toward big banks. And who knows? Maybe the Oracle was behind that paper as well. Despite famously saying that options are “financial weapons of mass destruction” more than a decade ago, we now know that he was aggressively using them to make a killing of his own.

(Disclosure: I am long $BRK.B)