How the Dow and Dollar Dance

With so many investors keeping tabs on the dollar, many have no doubt often noticed an uncanny relationship the greenback is now showing with stocks. In effect, when the dollar rallies, stocks lately have a tendency to fall, and when the dollar falls, stocks -- and most other “risk” assets -- tend to rise.

The raw data confirms the hypothesis. From Aug. 1, 2007, to Dec. 31, 2008, the Dollar Index and US Equity Total Return Index showed a negative correlation of -0.65%. Since the beginning of 2009, that relationship has become even more pronounced, now at -0.86%, meaning that betting on the dollar, through an ETF like PowerShares DB U.S. Dollar Index Bullish (UUP), can potentially help hedge a stock portfolio even more than gold or foreign stocks.

Dollar Index and U.S. Equity Total Return Negatively Correlated in 2009

Source: Rosewood Research

Getting a piece of Berkshire Hathaway has always been a high-price ticket. Even back in 1984, the class-A shares of Buffett’s company, which have never been split, traded for $1,000 each. In 1995, Buffett created the class B shares, valued at 1/30 of the A shares, giving smaller-capitalized investors an opportunity to own a piece of Buffett.


Baby Berkshire Blues

Berkshire Hathaway B (BRK.B)—1 year

Now the CBOE has lowered the bar even further by listing options on Berkshire Hathaway B shares (BRK.B), giving speculators and investors another tool to get (or hedge) their exposure to Buffett’s empire.

Those who want to take a long position in Berkshire will no longer need to pony up even the $2,800 at which the B shares currently trade. Out of the money calls, initially listed with strike prices of $2,900, $3,000 and $3,100, will trade at a fraction of that amount. Those who already own “Baby Berkshire” shares will, in turn, be able to sell those calls, providing a modest income stream to a stock that has only paid one dividend in its history, way back in 1967.

Buffett famously has called derivatives “financial weapons of mass destruction,” even though his own portfolio was spanked as a result of put contracts he wrote on world stock indexes just before the market began its historic 2008 decline. In reality, options are simply another way for expressing your view on a particular security. Bull or bear, that opportunity benefits all.

Regardless what the administration’s plan looks like, there’s no doubt Washington is poised to become even more integral into how health care is created, delivered and paid for in this country. My expectation is that the bigger a role government plays in health care, the more expensive — and limited — health care will become.

That’s not total speculation on my part. As we wrote last year, procedures like Lasik laser eye surgery not covered by the government safety net have dropped in price and improved in quality in a short period of time as a result of a true competitive marketplace. Government efforts will destroy whatever remnants of a free market in health care the country has.

A not-yet-trading security proposed by Macroshares could help to hedge rising health-care costs. MacroShares Medical Inflation Up and MacroShares Medical Inflation Down, currently in registration with the SEC, aim to reflect values for the medical care component of the Consumer Price Index, reflecting inflation in the cost of medical goods and services. This is a wide category, encompassing everything from prescription and over-the-counter drugs, medical-care services and hospitals to health insurance.

Macroshares have been relativity rocky trades in recent years, with some arbitrage and pricing issues making the products ultimately less than ideal. The initial public offering for MacroMarkets Housing Shares, which we wrote about earlier this spring has been scuttled as the company installs a designated market-maker to provide liquidity.

Still, this idea of a security to specifically hedge medical inflation is so revolutionary and unique. One can’t help but hope the SEC permits a speedy launch. By the time the administration “fixes” the system, it will likely already be too late.