With all the baloney being pedalled on the Street, people sit up and take notice when one of the straight-shooters shows up at high noon, firing from the hip.

When it’s Warren Buffett, they run to the bank.

So when the world’s superstar investor recently sounded the alarm on the dangers of derivative contracts in pre-released excepts of his annual letter to Berkshire Hathaway shareholders, it was a bombshell in the laps of investors.

If anyone else but Buffett had warned that derivatives were “financial weapons of mass destruction with potentially lethal” consequences for the financial markets, it would’ve been taken with a grain of salt. But that it was the Oracle of Omaha talking gave this story credibility.

In a bear market, no one commands more respect than the wily chairman of Berkshire Hathaway.

Buffett’s no-nonsense blasting of derivatives and his extreme bearishness on stocks had even some of the staunchest bulls on Wall Street grudgingly nodding in agreement.

Buffett knows first-hand about the risks of derivatives as he himself is in the process of closing down General Re Securities, a derivatives dealer that he has failed to sell since taking over General Re Corp in 1998 for his Berkshire empire.

Buffett is concerned that substantial credit risk has become concentrated “in the hands of relatively few derivatives dealers.

“The reinsurance and derivatives businesses are similar,” Buffett wrote in the letter to shareholders. “Like hell, both of them are easy to enter and almost impossible to exit.”

Buffett’s Berkshire partner, Charlie Munger, seconds the motion: “To say derivative contracts in America are in the sewer is an insult to sewage.”

Derivatives can lead to catastrophes for financial institutions and the markets. They were blamed for triggering the October 1987 stock market crash. Derivatives contracts are instruments that call for money to change hands at some future date, with the amount to be determined by interest rates, stock prices or currency values.

The world’s second-richest man is also feeling very queasy about stocks, having watched his Berkshire Hathaway (BRK.A-NYSE) shares plunge $12,000 per share, or about 14 per cent, to $64,800 per share in the past 12 months.

“We will sit on the sidelines,” wrote Buffett. “Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us.

“That dismal fact is testimony to the insanity of valuations reached during The Great Bubble (1999-2000). Unfortunately, the hangover may prove to be proportionate to the binge. Occasionally, successful investing requires inactivity.”

Although Buffett neglected to mention the word gold, his comments fuelled speculation that he was buying the yellow metal and breathed life into a sagging gold price.

In 1998, when Buffett revealed he and Munger had bought 4,000 tons of silver, it caused a frenzy of buying in the silver market.

Andy Smith, an influential London-based bullion analyst, responded to Buffett’s comments by publishing a report that speculated that Buffett was buying gold.

Wrote Smith: “The derivatives genie is out of the bottle and you do not have three wishes. Just a potentially toxic, mega-catastrophic mess. True, the G-word does not appear. Except between every line.”

A complete version of Buffett’s letter was slated for release on the www.berkshire hathaway.com website on March 8.

* HEALY HANGS UP ON TELUS: Ross Healy of Strategic Analysis Corp. gave Telus (T-TSX) and CEO Darren Entwistle a scathing review.

“I was going to say (Telus) is a company I don’t like, but that’s not fair, it’s the management I don’t like and, frankly, as long as top senior management is in control of this company, I simply don’t trust what this company is doing,” Healy said on ROB-TV’s Market Call Tonight. Telus stock, recently at $16, has almost tripled since July when it traded as low as $5.76.

“I avoid Telus at all costs,” continued Healy. “I had a short sell on it about a year or so ago and we did very well. The earnings, either this year or next year, do not support current levels until you get to $10 or $12 and that might be the place where I might consider thinking about Telus again.”

Healy also tore a strip off the Air Canada unions. “Things are tough, (Air Canada’s) cash is getting way down and, if I were the unions, I’d listen very, very carefully to what Mr. (CEO Robert) Milton has to say. They’ve got major problems and this is not the time to be a jerk.”



HOT ALBERTA STOCK: SOUTHWESTERN RESOURCES
SWG-TSX $16.60
Up $3.15 (+23.4%) on 2,150,700 shares (for week ending March 7).
There’s no fever like gold fever and Vancouver-based Southwestern has had investors burning up over its prospects in China. In three hours of trading after a halt for news of drilling results from the Boka mine, the stock got a 30-per-cent boost on 1.5 million shares. Discovery of the mine late last year had already pushed the shares from $2 to $19.



COLD ALBERTA STOCK: FIRST CALGARY PETROLEUMS
FCP-TSX $2.15
Down 95 cents (-30.7%) on 13,007,300 shares (for week ending March 7).
News of abandonment of one of its Algerian wells sent First Calgary plummeting on massive volume. First Calgary noted there was non-commercial oil in the well. Still, the stock is a triple off its 52-week low.