• I have to leave early for a dentist appointment.

• At 3:47 p.m. there is about $355 million to buy market on close.

• I don't agree with the analyst's conclusion.

BTIG put their angle on Omega Advisors' Lee Cooperman's appearance on Fast Money Halftime -- and that is that Omega's bid for Visa's (V) Monitise (MONIF) shares "puts a floor" on the company's share price.

I don't agree with the analyst's conclusion:

* Omega's bid was for a specific price and at a particular point of time. No one knows for sure whether the bid is still there to be hit by Visa. 

* It is reasonable to assume that Omega may have a continued interest in buying Visa's shares but, like any investor, that is subject to Monitise's evolving fundamentals, Omega's market views, the appeal of other alternative investments to Omega, and other factors.

* The above are actively changing variables that suggest that there is no floor (or ceiling for that matter!).  

 (Though I certainly could be wrong) I continue to sell on strength today on the belief that I can buy back shares at cheaper prices in the next 1-2 months.  

"While investors in Buy-ratedMonitise (AIM: MONI; OTC: MONIF)await announcements from the company about progress on execution of its new business development efforts in the belief that they would buoy the stock, Omega Advisers founder Lee Cooperman earlier this afternoon essentially put a floor under the level at which Visa Inc.'s (V ¿ Not Rated) 5.45% stake in the company's shares would be valued.

During a CNBC interview, Cooperman not only revealed that he had not sold a single share of MONIF during the stock's recent downdraft -- Omega as of September 11 owned 11.27% of the company's outstanding shares -- but he also disclosed that he had bid 27.25p for Visa's entire stake and was rebuffed.

We believe that Cooperman's statement was meaningful not only because it put a floor under MONIF's stock price, but also because it demonstrated that the well-respected hedge fund manager had sufficient conviction in the story to be willing to increase his firm's stake in the company to over 16.5%.

So while Visa Inc.'s announcement on September 18 that it would assess its stake in MONIF -- while at the same time indicating that it intended to bring its development of mobile capabilities in house -- created the impression that the stock and the company had been orphaned, Cooperman's comments provided reassurance that both have retained strong sponsorship.

And as Cooperman pointed out during his interview with CNBC's Scott Wapner, MONIF in March switched to a subscription model so that its future growth would be better aligned with the global growth of mobile money. Visa Inc., which receives help from MONIF in developing its own mobile platform, was never going to be a subscription customer of the company. Hence, MONIF was able to reiterate its guidance of 200mm users by YE18 even after Visa Inc.'s September 18 announcement."

• A vigorous S&P 500 rally is not unexpected

As I mentioned last week, the hedge fund community is almost universally long their individual stock favorites and short S&P 500 futures against their portfolio.

As a result, a vigorous S&P rally (over the last three trading days) is not to have been unexpected.

For that reason my short hedges are still small.

I have added modestly to my PowerShares QQQ (QQQ) short, re-established my Berkshire Hathaway (BRK.B) short and been selling a portion of my Monitise (MONIF) long holdings on a scale as the stock is likely benefiting from short covering after Omega Advisors' Lee Cooperman's Fast Money Halftimecomments.

On the later point I responded to Pierre in the Comments Section:

Frankly Pierre I have been too busy to address your original comment.

For that I apologize, I guess. I have a lot on my plate and not everyone cares about Monitise.

Many have commented, "enough with Monitise" -- and I understand that.

I have a number of new long ideas, subject to price, and I am spending time on all these.

You have a good grasp of the situation.

My view is that the share price has responded justifiably to the two specific disappointments of last Spring and early Summer.

Prior to today the shares have not acted like a biotech --they have not been volatile, imho.

As to the information flow you put me in an impossible and odd situation as I don't manage the company -- it's their decision and they have explained on the conference call why they are reticent to update sub growth frequently.

The company said that they will give details on sub adds when they feel they are significant.

It was just a few months ago that Monitise changed their approach to licensing.

I think you have to be patient - or you should sell your stock now because you will not likely be satisfied with the "black box" feature you describe of the company.

We won't hear about sub adds until the first half of 2015. Moreover, tax loss selling will be an issue over the balance of the year.

1. Reasonable acquisition price - I can't give you a rigorous answer unless I have a sense of the flow of sub growth. If you believe the company's forecast three years out -- the company could be worth a multiple of current prices in two years.

2. Should the company execute I can make the case that if they execute it would be valued much higher in three years, without a takeover. How much more I can't yet calculate -- we have no way to ascertain the competitive landscape..

3. My % holding for the umpteenth time is irrelevant. It is subject to one's risk profile. Everyone's risk profile is different. As someone who's long positions RARELY exceed 5% -- am I conservative investor? Or do I feel safety in diversification? Again this is subject to investment capital, incomes, expenses, health, age. etc. And it is also subject to one's market views.

The reason I sold stock today and I am continuing to sell it as it rises back over $0.50 is because it has climbed solely on Lee's interview.

If the share price was rising based on visibility of sub adds I wouldn't be selling a share.

• Adding to Best Ideas (short) list.

I have re-established my Berkshire short and I am adding the stock to my Best Ideas list (short) at $136.75.

The reasons might be obvious, but I will expand on this short later on in the week.

More from Sir Arthur Cashin.

S&P now within hailing distance of resistance.  First 1898 (high of Friday and Tuesday).

Then 1900 to 1910, which has the 200 DMA right in the middle.

• My guess is that last week was the first shot across the bow of volatility.

I am now further reducing my overall gross exposure -- both longs and shorts -- in order to optimize my portfolio positioning as I ready for a continuation of a volatile and uncertain trading backdrop.

There are simply too many cross currents that lie ahead over the balance of the year and few have a sense of the outcome.

I want to employ most of my capital in an opportunistic trading manner.

Again, this approach is not for everyone. Most should just sit tight.

I am not changing any of my Best Ideas names.

But, for me, I would prefer to be liquid and opportunistic.

My guess is that last week was the first shot across the bow of volatility.

• Nice column by my friend/buddy/pal Jeff Cox on the IBM miss.

• Taking off some of my low-priced stock.

Omega's Lee Cooperman gave a lengthy case in support of Monitise on "Fast Money Halftime."

As a result the shares are more than 12% higher.

I presume some of the advance today is short covering as the short base is high.

For those who have trading-oriented positions, I don't see much short-term upside from here as (1) there was nothing that we didn't know in Lee's presentation and (2) we won't know about the success of subscriber adds until next year.

While I remain optimistic about the intermediate term, I am taking some of my low-priced stock off (above $0.49 a share ) on the basis that i will likely be able to buy back at lower prices.

I might be wrong in being able to buy lower, which would be fine with me (and would represent a high-class problem.

• Midday musings from Sir Arthur Cashin.

Market trying to say IBM is a "one off" and not symptomatic of the earnings outlook.

Also, helping is the fact that WTI has not headed down to threaten $80 ¿ add in Europe trading relatively level.

Run rate well below last week's string of billion share days.  At 12:15, it projects to an NYSE final volume of 680/760 million shares.

• My friend/buddy/pal Jeff Matthews on IBM ("Dont Blame IBM. Blame Wall Street.")

Well the biggest stock-market levitation act since HP under Mark Hurd is going the way of all levitation acts: IBM is throwing in the towel on its $20 EPS "roadmap" (reportedly mocked as "roadkill" in some internal IBM quarters) and admitting what anybody with a calculator and the IBM 10Ks before them has understood for some time--it is exceedingly difficult to grow earnings regularly, not to mention with to-the-penny precision, when your sales are falling, hard, nearly everywhere, quarter after quarter...no matter how many people you lay off, how many "one-time" charges you take, how many lagging businesses you sell at fire-sale prices, how many shares you buy back at whatever price, or how often you try to direct the gaze of Wall Street's Finest to shiny new objects like your years-too-late efforts in "the cloud," which happens to be the very thing that is causing your revenues to fall in the first place.

 But shareholders--in particular the small investors who have clung to IBM's earnings "roadmap"even when the potholes were there for any professional to see--should not direct their ire at IBM management.  

 After all, IBM's low-quality earnings were apparent and easily dissected, as you can read here, here and especially here if you like.   Most companies (not all--Berkshire Hathaway is a notable exception, as are some others we could mention) report earnings in their best light possible, and IBM executives were simply doing what most of Wall Street's Finest (not all--there were some skeptics) allowed them to, no questions asked.

• The excitement of previous launches just doesn't seem to be there for the iPhone 6.

As I have posted, over the last few weeks I have taken back some of my short in Apple (AAPL), on weakness, for some good gains.

That said, Apple's shares have outperformed the broader markets.

I will stick with my thesis and will stand on my call that the iPhone 6 and 6+ could represent the last important product upgrade cycle for some time, and that investors will look through the next two quarters -- which should come in above consensus expectations.  

Anecdotally, I spent about two hours at the North Palm Beach (downtown) Apple store on Sunday.

I witnessed neither the excitement nor the "buzz" of previous product launches.

I went to upgrade my iPhone 5 to the iPhone 6 Plus.  Though I am in the Apple "ecosystem," I decided to hold back and look at the new offerings of competitive products that, to me, offer more for less, before I made a decision.

I plan to stay with my small short in Apple into the third-quarter earnings report. Barring the unexpected, I plan to add to my short on any strength today.

• I'm either very smart -- or something else.

This is the 12th trading day out of the last 14 that I have purchased additional Monitise (MONI, MONIF) shares.

To quote something that my Grandma Koufax used to say to me in circumstances such as these: "Dougie, you are either a sch**ck or very smart."

• Goldman Sachs downgrades its rate expectations this morning. 

Lower oil prices, the recent sharp re-pricing of asset prices, and eroding growth in Europe causes GS Research (Francesco Garzarelli) to revise down our forecast path for 10-year US Treasuries and Bund yields. We now expect 10-year US Treasuries to end the year at 2.5%, and German Bunds at 1.0%. Reflecting the downside inflation risks and some uncertainties coming from the Euro area, we have lowered slightly our medium-term forecasts -- on the assumption that it will take longer for the term premium to normalize. We note, however, that our new numbers are below what our valuation tools suggest is consistent with the macroeconomic outlook.

Forecast changes: We revise down our forecast path for 10-year US Treasuries and Bund yields. Specifically, we now expect 10-year USTs at 2.50% by end-2014 (from 3.00% previously), 3.00% at end-2015 (3.50%), 3.50% at end-2016 (from 3.75%) and 3.75% at end-2017 (4.0%). We forecast 10-year German Bunds at 1.00% by end-2014 (1.30% previously), 1.50% at end-2015 (1.75%).We have left unchanged our end-2016 and end-2017 10-year Bund yield forecast at 2.25% and 2.75%, respectively. These numbers remain above the forwards, although less so than previously. Our forecasts for government bond yields in other advanced economies are also under review. We discuss below the rationale behind the change to our forecast.

• At $93.75.

I am scaling further on ramp into my short in the Nasdaq -- that is, PowerShares QQQ (QQQ), at $93.75.

• Don't walk.

Run, don't walk, to watch Omega Advisors' Lee Cooperman on Fast Money Halftime with Judge (Scott Wapner) and the gang today. 

Lee is the hardest-working hedge hogger extent, as I previously have written, and his investment performance record speaks volumes. 

Lee was among those that suggested, before the recent market dive, that the market was about fairly valued. 

If I were Judge, looking at the classical and historic leading economic indicators or looking at the backdrop of monetary policy (quantitative easing and the zero-interest-rate policy from the Federal Reserve), I would ask: Is it different this time? 

Should we consider, instead, some new factors in assessing domestic and global economic growth and where the stock market is headed? I discussed this recently in, "7 Reasons a Recession's More Likely than You Think": 

________________________

Over the last two months I have argued that the U.S. stock market may have moved from a Generation Low to a Cyclical Top.

The reasons for my market concerns run deep as I see multiple peaks. 

I have argued that investors should be sellers on rallies.

By contrast, the (very much) consensus view is that the five-year Bull Market in the U.S. stock market can only be interrupted by a sharp business downturn or recession.

Those observers seem to be looking at many traditional (and historically accurate) leading factors that are currently not signaling such a slowdown and downturn, but rather represent to them a disconnect between the global equity markets and likely global economic growth.  

As such, they argue, the recent market decline is just another opportunity to buy. 

The odds of a recession in 2015-16, according to many that look at those indicators, are less than 15%, maybe even lower.

My Contrary View of Impending Economic Weakness

I would argue that it is different this time and the risks of recession have increased.

• The Yield Curve May Not Invert Prior to a Recession
• Stock Prices Appear to Be Issuing Economic Warnings
• The Signal of the Bond Markets Might Be a Precursor to Slowing Growth
• The Signal of the Oil Markets Is Negative
• Expanding Geopolitical Risks Raise Risks 
• Growing Health Concerns Could Dent Economic Growth
• The Growing Dominance of the  U.S. Could Have a Negative Twist                                                            

The Yield Curve May Not Invert Prior to a Recession

Most importantly the beer goggles (hat tip Peter Boockvar) of unprecedented monetary easing (ZIRP and QE) have raised new and different risks to investors and, importantly, have upended those calculations that have tipped us off to a business contraction.

The best example is the structure of the yield curve. Most economists and strategists are in agreement that a bear market and recession are unlikely unless the yield curve inverts. But what happens if this rule of- thumb no longer applies as the yield curve has been distorted by the largesse of the Federal Reserve and the world's central bankers?

From my perch it is possible that the yield curve -- particularly with a new neutral (hat tip Pimco) in the federal funds rate -- may not invert in this cycle and may not necessarily issue a signal that a recession looms.

Stock Prices (Especially of a Cyclical Kind) Appear to Be Issuing Their Own Economic Warnings

One variable that few strategists have highlighted is the forward indicator of lower stock prices, especially those that are cyclically sensitive.

In the past, many have made the point that stock prices are an important leading economic leading indicator.

Look at these stocks (and asset classes) in broadly different industries and tell me what the might be signifying. 

1. Autos --General Motors(GM)  

2. Housing -- Toll Brothers (TOL)  

3. Diversified Industrials -- General Electric(GE), Eaton (ETN)  

4. Machinery/Ag/Construction -- Caterpillar (CAT) 

5. Energy -- Schlumberger (SLB) 

These charts should not be ignored.

The Signal of the Bond Markets

Then there is the chart of the 10-year U.S. note that in some measure represents future growth expectations, as well as the conspicuous outperformance of most bond-equivalent stock sectors (utilities, consumer staples, etc.) that clearly indicate an economic contraction is more likely than consensus expectations.

The Signal of the Oil Markets

The rapid fall in energy prices represents another signal that global economic growth might be foundering. (This morning the price of oil is down to $80 a barrel, or nearly 25% lower than the highs seen in June, 2014).

Expanding Geopolitical Risks

Arguably, unlike previous periods, the expansion in geopolitical risks around the globe (Middle East, Russia/Ukraine) poses an increased threat to worldwide economic growth.

ISIS, in particular, may be creating hell beyond its borders very soon. (If ISIS takes Baghdad our markets will be exposed). We would be leaving Iraq in the hands of Attila the Hun on steroids bent on killing you and me.    

This morning, several news services suggest that certain Federal officials are warning U.S. law enforcement about the threat of Islamic State-inspired terror attacks against police officers, government workers and media figures in the U.S.

Growing Health Concerns

The Black Swan of Ebola looms over the umbrella of global economic growth. (A second health worker case in Texas has been diagnosed). This is yet another different factor and headwind to worldwide economic growth.

The Rising Economic Dominance of the U.S. 

The eurozone faces its third recession in three years as the region is splintered and is reluctant to confront structural issues.  

China is slowing and Russia and Japan are in recession.

The rising economic dominance of the U.S.  is growing more and more conspicuous.  While this should typically augur (relatively) well for U.S. assets, the other side of the coin is that the strength of our currency that follows is serving to reduce our export opportunities and growth aspirations.

The Bottom Line: Based on non-traditional indicators, economic risks are rising.

To this observer, the risks of recession are increasing relative to market expectations.

At the very least the market's tranquility, demonstrated almost consistently in the five-year bull market, is over.

At the worst, a recession looms over the horizon, an economic downturn that almost no one is anticipating as new and more influential and relevant factors are pressuring global economic growth.

Given my continued market and economic concerns, it is probably too late to sell and too early to buy this market.

• Just now.

Adding to my PowerShares QQQ (QQQ) short at $93.45 now.

• BTIG chimes in why IBM's miss might bode well for Monitise. 

IBM (IBM ¿ Not Rated) CEO Ginni Rometty was blunt in assessing the company's weaker-than-expected 3Q14 results released this morning, stating that "we are disappointed in our performance." But while IBM's significant earnings miss and its acknowledgement that it will not reach its longstanding FY15 EPS target of $20 is bad news for the company's shareholders, we believe it could translate into good news for buy-rated Monitise (AIM: MONI; OTC: MONIF).

IBM attributed its 3Q14 miss to "a marked slowdown in September in client buying behavior," noting particular weakness in product lines such as software as quarterly revenue fell by 4%. It was the 10th straight quarter that IBM's revenues had shrunk. Observers immediately attributed the poor results to IBM's struggle to keep up with industrywide shifts in the technology space.

However, Rometty made it clear that the company's subpar results were attributable to weakness in traditional lines of business such as software and chip manufacturing ¿ not growing business lines such as mobile.

"While we did not produce the results we expected to achieve, we again performed well in our strategic growth areas ¿ cloud, data and analytics, security, social and mobile ¿ where we continue to shift our business," Rometty stated in the news release announcing the results. "We will accelerate this transformation."

One beneficiary of this accelerated transformation and the heightened urgency that Rometty and her team will undoubtedly bring to the task after IBM's poor quarter could be MONIF. The company on August 27 announced an enhanced sales, marketing and technology arrangement in which IBM's sales and specialist resources are used in a joint effort to pitch mobile money products.

So as mobile moves up on IBM's list of priorities, its partnership with MONIF could become more important to its efforts to grow the business line, particularly with banks. IBM's technology powers 90% of banks across the globe, and MONIF is helping it to help these banking clients to make the transition from traditional bricks-and-mortar banking to mobile and online, which is consistent with the ongoing shift in consumer preferences.

IBM has been ramping up its investments in mobile technology during the past two years, and Robert LeBlanc, Senior Vice President of its Software and Cloud Solutions Group, has said that in addition to increasing its internal investment, the company would consider acquisitions in mobile services. We continue to believe there is a good chance that that MONIF, which will transfer 20% of its employees to IBM at the end of 2014, will ultimately be acquired by Big Blue.

While delivering the keynote address at the Mobile World Congress 2014 in February, Rometty offered three predictions for how a mobile-first world would work. First, she noted that secure transactions are critical, that mobile plus cloud would redefine software development as we know it, and that for enterprises, mobile would put a premium on authentic and transparent culture as well as speedy, prescriptive analytics.

MONIF's offerings and efforts are aligned with each of these predictions. So it made sense when IBM on July 21 announced an expanded, multi-year global alliance with the company to deliver cloud-based mobile commerce solutions to help financial services institutions embrace the mobile channel and better engage with customers.

Five weeks later, the August 27 announcement heralded a further enhancement of IBM's relationship with MONIF.

Given the likelihood that Rometty will take additional actions to move IBM in the direction of its targeted growth areas, we would not be surprised to see the company put an even greater emphasis on mobile, with MONIF playing a key role in that renewed push.

"You know, if I have learned nothing else in all my years here, my biggest lesson is you have to constantly reinvent this company," Rometty told Fortune last month. "That's how you get to be 103 years old."

• My expectations going into next year.

As promised, I'll be describing my specific price expectations for the balance of the year for each long position on my Best Ideas list. The forecasts that I make are within the context of a cautious and negative broad-market view, and are based on the expectation that stocks will move lower over the remainder of the year.

I would warn that these price expectations are guesstimates, and are not meant to be precise. That is the reason I will not give a price target, but rather upside and downside ranges for each equity.

I have previously discussed Best Ideas Monitise (MONI, MONIF), Ocwen (OCN), Potash (POT) and Bon-Ton Stores (BONT).

This morning's discussion is on Northwest Banchares (NWBI).

The company's third-quarter earnings of $0.19 share were $0.02 better than expected, even despite the headwinds of low interest rates on U.S. Treasury bonds and decelerating domestic economic growth. The bank's effective tax rate slipped, and there were some small securities gains, and these factors accounted for the beat.

Loan growth was better and asset quality continued to improve -- non-performers dropped by $7 million to $105 million, now only 1.76% of loans. We also saw a positive shift in the banks' balance sheet mix: The bank sold some lower-yielding mortgage-backed securities and reinvested back into loans, which grew by 1.3%. Net interest margins were flat at 3.47%.

Northwest Bancshares is a defensive holding that appears to be capable of providing above-average returns. My estimate for the current calendar year is now $0.66 per share. Fiscal 2015 EPS should be rise between 8% and 10%.

The bank is liquid and has excess capital, with tangible common equity ratio standing at 11.8%. It also delivers a better-than-4% dividend yield, and it possesses a sensible capital allocation via consistent share buybacks.

I expect the shares to range between $11.75 and $13 over the balance of the year.

Assuming a flat year for the S&P 500, Northwest Bancshares is likely to trade in the range of $12.50 to $15.50 in 2015.

I have recently added to my holdings under $12. 

• And on Buffett's investment in it.

In February 2014 I wrote a column, "Warren Buffett's Moats Are Breached," in which I (respectfully) questioned the wisdom of The Oracle's investments in IBM (IBM) and Coca-Cola (KO).

Given the magnitude of the IBM miss, I wanted to rerun that post in its entirety -- so here it is.

________________________

I start almost every column I have ever written about Berkshire Hathaway (BRK.A/BRK.B) with the sincere message that, similar to many investors, I worship at the investment altar of Warren Buffett and Charlie Munger. But that adulation doesn't preclude me, as an investor, from questioning their and the company's direction/strategy nor does it inhibit me from being short Berkshire's stock (which I have been over the last nine months).

• Recent earnings reports at Coca-Cola (KO) and IBM (IBM), two large Berkshire Hathaway investments totaling almost $30 billion, suggest that the companies' moats appear to be vanishing.
• Healthier drink choices and the penetration of the cloud seem to have weakened the previously seen moats and have damaged the profit results at Coca-Cola and IBM.
• In the past Warren Buffett has hunted gazelles (that are undervalued); he is now hunting elephants (that are fairly valued to overvalued).
• I remain short Berkshire's shares.

Last year Warren Buffett labeled me a "credentialed bear" and invited me to ask some hard-hitting questions at Berkshire Hathaway's annual shareholders meeting. I did quite a lot ofresearch in preparation for that day, and I think that is what Warren expected of me and why he invited me.

It was important for me to balance my hard-hitting and pointed questions with a courteous and respectful delivery, considering the extraordinary accomplishments and the respect we all have of the men that I was addressing and the unique invitation to a short seller who was negative on their company. Initially, each of my original six questions was far too lengthy (500-1,000 words). Given the setting and Warren's crafty ways of answering questions, my mission was to condense each into a tightly worded question.

Upon reflection, I was pleased with the questions as well as Warren and Charlie's responses -- my mission was accomplished.

Question No. 1 -- Size Matters

Q: As it is said, Warren, "Size matters!"

In the past, Berkshire bought cheap or wholesale -- for instance, Geico, MidAmerican Energy, the initial Coca-Cola purchase and Benjamin Moore. Arguably, your company has shifted to becoming a buyer of pricier and more mature businesses -- for instance, IBM, Burlington Northern Santa Fe, Heinz (HNZ) and Lubrizol, which were done at prices to sales, earnings and book value multiples well above the prior acquisitions and after the stock prices rose.

Many of the recent buys might be great additions to Berkshire's portfolio of companies, however, the relatively high prices paid for these investments could potentially result in a lower return on invested capital. In the past you hunted gazelles, but now you are hunting elephants.

To me, the recent buys look like preparation for your legacy, creating a more mature, slower-growing enterprise. Is Berkshire morphing into a stock that has begun to resemble an index fund that is more appropriate for widows and orphans rather than past investors who sought out differentiated and superior compounded growth?

In the past, you have quoted Benjamin Graham, saying "price is what you pay -- value is what you get." Are your recent deals and large investments bringing Berkshire less value than the deals done previously?

A: Warren admitted that Berkshire won't grow as rapidly in the future as it has in the past but it will still generate a lot of incremental value. "We think we will do better than the giants of the past," he said. Charlie chimed in and said much of the same. Warren then exclaimed, "Doug, you haven't convinced me to sell the stock, but keep trying!"

Unasked Question No. 2 -- Are Some of Berkshire's Bank Moats Damaged or Disappearing?

A changing bank regulatory climate has put constraints on leverage and has produced less robust return on assets and capital. As well, banking has become more homogenous and less differentiated, what Charlie and you describe as, "standing on tiptoe at a parade" -- when one bank offers a new product, every bank has to offer or match it.

Given the fact that the banking industry has a lower profit growth rate potential going forward (think of it as damaged and shrinking moats of profitability), why is Berkshire continuing to acquire shares and becoming more exposed to banks, specifically Wells Fargo (WFC)?

Note: This question, too, was one of my six original questions. But, Charlie and Warren had already discussed the impact of Dodd-Frank legislation on reducing bank industry returns.

-- Doug Kass, "My Berkshire Q&A Recap"

There's Something About Coca-Cola and IBM

Ted (Ben Stiller): So you're moving down to Miami?

Pat Healy (Matt Dillon): I accepted a job offer.

Ted: With who?

Pat Healy: With... uh... Rice-a-Roni.

Ted: Isn't that the San Francisco treat?

Pat Healy: It was. They're changing their image.

-- There's Something About Mary

Berkshire Hathaway owns about 9% of Coca-Cola (valued at over $15 billion) and approximately 6% of IBM (valued at $13 billion). The total investment in these two companies approaches $30 billion, which represents about one sixth of the market capitalization of Berkshire Hathaway.

Recent earnings reports at Coca-Cola and IBM suggest that the companies' moats appear to be vanishing.

Some of the more significant questions I had for Warren Buffet at last year's Berkshire Hathaway annual meeting had to do with a changing acquisition strategy that settled for moat-less or less threatening moats -- that is, large cash flow and market share elephants rather than significantly undervalued gazelles that faced a long runway of growth ahead. I further questioned whether the company's more defensive acquisition and investment strategy would result in Berkshire Hathaway gaining the look of an index fund and remarked that its ever larger size might provide a continuing headwind for the company to differentiate its results and expand its intrinsic value relative to the S&P 500.

These questions continue to raise issues that have a direct bearing on Berkshire's investment in IBM and Coca-Cola and speak to the general attractiveness of Berkshire's shares.

From 2008 to the end of 2013, the S&P 500 returned 128%. Berkshire (which computes return based on book value per Class A share) returned 80% from 2008 through September 2013, according to Bloomberg. That won't be enough to get him past the index when the company reports 2013 results.

-- Steven Perlberg, "Chart: Warren Buffett Will Fail Berkshire Hathaway Shareholders for the First Time in 44 Years," Business Insider (Jan. 2, 2014)

To date, we've never had a five-year period of underperformance, having managed 43 times to surpass the S&P over such a stretch. But the S&P has now had gains in each of the last four years, outpacing us over that period. If the market continues to advance in 2013, our streak of five-year wins will end.

-- Warren Buffett, 2012 annual letter to Berkshire shareholders

In defense of my conclusions, I would note that for the first time in 43 years Berkshire's five-year rolling returns (defined as book value gains) in the period ending Dec. 31, 2013, failed to outperform the change in the S&P 500.

The answers to my questions last May in Omaha help to understand and frame why, in part, I have been short Berkshire Hathaway since last May.

Forever Is a Long Time

"Forever is a long time, and time has a way of changing things."

-- The Fox and the Hound

Warren Buffett has historically invested with a forever time frame based on the notion that his investment holdings would be enduring, consisting of profitable companies that possessed moats that provided them with a nearly invulnerable market share position, sustainable profit margins and returns on invested capital, and superior earnings growth.

Recent results for IBM and Coca-Cola, which represent sizeable investments at Berkshire Hathaway, have seemingly unearthed an unexpected vulnerability to both companies' forward revenue and profit growth rates. Specifically, major secular industry changes are exposing weaknesses in the moats that Warren thought might have existed when he initially purchased the shares of IBM and Coca-Cola.

• IBM faces a serious competitive threat from the cloud. (As Stanley Druckenmiller said onBloomberg TV, "Buy IBM if you want to be short innovation.")
• Coca-Cola faces a secular deterioration in the carbonated soft drink market -- volumes in North America dropped an eye popping three percent in the most recent quarter -- as healthier drink choices rip into their market share.

Forever is a long time.

While IBM and Coca-Cola started out as forever holdings for Warren, developing headwinds have unexpectedly surfaced and have threatened what might have been previously considered impenetrable franchise moats.

While there is recent evidence that both companies are trying to adapt to a changing industry environment (through internal moves and growth by acquisition), it is unclear whether the needles of growth can be moved significantly over the next few years in order to diminish the headwinds.

Those headwinds have weighed on the price performance of the shares of IBM and Coca-Cola, and I am short both of them.

As well, I remain short Berkshire Hathaway's shares.

This Year in Omaha?

"If I forget you, O Jerusalem, let my right hand wither."

-- Psalm 137 (in which the Jews lament and weep by the rivers of Babylon)

My Grandma Koufax always used the phrase, "Dougie, next year in Jerusalem."

This was meant to be an expression of spiritual hope, as Jerusalem was the spiritual center of the Jewish world.

As I learned last year, the pilgrimage to Omaha (to Berkshire's annual shareholders meeting) is also a religious experience to many.

Last year's appearance in Omaha was one of the most exciting experiences of my investment career. Warren, Charlie and the rest of the Board of Directors couldn't have been nicer to me last year.

I have more questions to be addressed toward The Oracle of Omaha and to Charlie Munger, and regardless of my view on Berkshire's shares, I am hopeful that I will be invited back to the 2014 Berkshire Hathaway annual shareholders meeting to ask some more penetrating questions.

• Here is a sum-up of the day's earnings from Goldman Sachs.

Energy

(+/=) [Peabody Energy] (BTU): Q3 adj. EBITDA beat, $216M vs $195M cons and ahead of Sept. guidance of $190-210M. For FY14, BTU guided adj. EBITDA $765-815M ahead of $770M cons, and total sales of 245-255M tons vs prior 245-260M tons. Above cons guide likely driven by lower Aussie Dollar, cost cuts and better operating performance as BTU sees Australian costs ~$70/ton. Expect stock to outperform but would not be surprised to see shorts add to positions on strength. 

(+) [Halliburton] (HAL): Q3 EPS ($1.19 vs $1.10 cons) & revs beat.  North America margins (19.2% vs 19.0% gs) better with exit rate in excess of 20%.  Other segment margins were light though and overall margin was 16.5% (vs 18% gs).  Headline and NA results should be viewed favorably though some below the line items also seemed to help.  Shrs +3.0% in premkt.  Call at 9am.

Healthcare

(+) [Valeant Pharmaceuticals] (VRX):  Q3 EPS $2.11 vs ST $1.99, REV $2.06B vs ST $2.06B, Guides Q4 EPS $2.45-2.55 vs ST $2.37, Guides FY 14 EPS $8.22-8.32 vs ST $8.04 and prior $7.90-8.10, Guides FY 15 EPS $10.00 vs ST $9.64.  Positive news but remember that VRX basically pre-anncd back on 9/24.  4.5% sht int/14.8M shares   5% impld move, stock is up +2.3% YTD.

TMT

(+) [Gannett] (GCI): Reported in line Revs ($1.44B vs. cons $1.44B), but better profitability with EBITDA beating ($341.7M vs. cons $326M), flowing down to an 4c EPS beat (59c v.s cons 55c). Pubishing Ad Revs light, offset by better Broadcasting Revenue.  On the desk we've been a better buyer over the last week, bought 1MM shares for a holder adding. 

(-) [IBM] (IBM):  Q3 results disappointing. Company missed revs across virtually every segment, and GM and EPS also were light vs. the street.  Additionally, company stated that it no longer expects to deliver "at least $20 in op. EPS in 2015." *Note* company also announced agreement with Globalfoundries for Globalfoundries to acquire IBM's semi unit. IBM will pay Globalfoundries $1.5B to take over the unprofitable unit. 

(-) [NCR] (NCR):  Neg-Pre for Q3 and FY14 guide: Q3 EPS $0.67 vs. cons $0.71, Q3 Revs 1.64B vs. cons 1.66B,  FY EPS Guide 2.60-2.70 vs. 3-3.10 prior vs. cons 3.01, FY Rev 6.575-6.625B vs. prior 6.75-6.85B vs. cons 6.75B. 

• Where it began.

The rundown:

• U.S. futures are down modestly (S&P 500 futures are down 4 and Nasdaq futures are down 3 handles). This is a reversal from earlier, and when I went to sleep last night, futures were much higher than that.

• European bourses are subject to profit-taking after a grand Friday.

• Japan's Nikkei 225 is up 3.98%: Stocks surged across the board due in large part to word that the Government Pension Investment Fund (GPIF) will increase its allocation in Japanese stocks. Within the Nikkei, gains were broad -- but telecom, industrials, health care and consumer discretionary all outperformed. Tokyu Fudosan, Hitachi Zosen, Minebea, Fuji Heavy, NSK, NEC, and Resona Holdings all were among the top performing stocks. NEC was helped higher on back of a positive Nikkei article. The Japanese yen has been weakening for the last few days and is off about 22 basis points so far this morning. 

• China is up 0.66% following little news. But a lot of economic news comes out tonight and tomorrow morning. Materials and healthcare outperformed, while telecoms and consumer staples lagged. Foreign-exchange action is muted: The U.S. dollar is up 0.03% and the euro is up 0.08%.

• Gold is up $3 per ounce. Crude oil is flat. Copper is down 0.92%.

• The yield on the 10-year U.S. Treasury note is up 1 bps to at 2.21%. (I am out of my bond short for now.) Sovereign debt yields are mixed to slightly higher.  

Japan's market strength is the clear global highlight.

The worldwide improvement in stock prices over the last few days probably relates to a sturdier fundamental backdrop -- as measured by the lack of guide-downs and better consumer confidence and economic data -- combined with a short-term selling climax in stocks and a buying climax in bonds. 

The focus on earnings is the key to the U.S. session -- and Halliburton (HAL), IBM (IBM) and VF Corp (VFC) have all released their numbers this morning. IBM in particular missed estimates widely. Apple (AAPL), Chipotle (CMG) and Texas Instruments (TXN) are due after the close.

I took out some small short rentals in the indices near the highs on Friday.

I plan to short any strength and to rebuild my short.

• Probably why futures went negative.

Break in!

There IBM (IBM) put in a huge earnings miss vs. analyst expectations. That likely accounts for the futures turnaround from positive to negative.

• From my friends at BTIG, on 'selling climaxes.'

Much of this week was scary for those who are holding stocks or betting against volatility, but at least Wednesday and Thursday saw massive upside reversals which followed through on Friday.

The big dip intra-week and late reversal triggered a large number of selling climaxes in S&P 500 components. These occur when a stock drops to a 52-week low, and then reverses enough to close the week higher than its previous week's close.

Among S&P 500 stocks, there were 50 such selling climaxes this week, the most since 2011. It actually ranks as one of the highest weeks in the past 20 years, as shown in table below

Other than during the depths of the financial crisis in 2008, these tended to be good omens going forward.

These coincide with highly volatile periods by definition, so there was often some whipping back and forth. But returns from one to three months later were encouraging, especially if we stick our heads in the sand and pretend that the depths of 2008 didn't occur.

We discussed the opposite of this - buying climaxes - in December and January, as stocks had frequently set new 52- week highs and then closed lower on the week. That tends to precede weak returns, and did (temporarily) early this year, but tops are different than bottoms and are often more drawn out. Bottoms tend to be "spiky" so when we see a jump in selling climaxes, they tend to be more reliable than buying climaxes.

(As always, if we're on the grip of a bear market, any "oversold" kind of measure is mostly useless, but that would be unusual given our current conditions.)

Sell Climaxes, 1998-2014

View Chart »View in New Window »

• The futures are coming down.

When I went to sleep last night, the S&Ps were +11 and Nasdaq futures -- the Nazzies -- were +23.

Now up only +1 and +7, respectively.

• 'Ah ha moment' revisited.

I was interviewed by the New York Times' Jim Stewart over the weekend. 

Here is a synopsis of the article and why I believe we are approaching an "Ah Ha Moment".