Tuesday – The Buffett Bottom?

Is Warren Buffett calling the bottom on the Financials?

Berkshire Hathaway is putting $5Bn into non-convertible preferred shares that will give him a 10% annual return and will also get $5Bn in warrants (about 10% of the company) at $115 a share and he already made 20% on that if the pre-market pricing holds up.  So that’s $5Bn now and $5Bn later from Buffett and Sumitomo Mitsui Financial is rumored to be buying all or most of another $2.5bn in common shares floated by Goldman.

Senator Charles Schumer of New York, a member of the Banking Committee, called the Berkshire investment "a vote of confidence not only in Goldman but in Washington’s commitment to come up with a plan."  It does seem to be just what the doctor ordered and US futures are well up in early trading.   GS CEO, Lloyd Blankfein said, "We are pleased that given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs. We view it as a strong validation of our client franchise and future prospects."

Presumably the next move will be for GS to use that $7.5Bn to buy themselves a bank, WM is on the block and several others are quieter about it but certainly for sale.   With WM back at $3.39 buying $2.50 calls for $1.10 and selling $2.50 puts for .80 makes for a fantastic pay-off if it goes up and, if not, puts you into the stock at $2.80.  WB is also interesting as they were knocked way down by a Whitney downgrade on Tuesday and the $12.50 puts can be sold for $1.57.  With the stock at $14.75, having it put to you at net $10.93 (down 25%) may not be that awful as a worst case. 

Of course, if the GS deal is well received the easy play might be to just buy BRK.B at $4,300 as Berkshire is well off it’s peak at $5,059 and Buffett is like a very rich kid in a candy store, cutting very favorable deals for his ample cash.  Berhksire’s income last year was $13.2Bn and the company is sitting on $31Bn in cash – not short-term investments, just cash.   If Buffett can spend $10Bn more of that cash and get a 10% return plus $5Bn of what amounts to free 5-year leaps, then that can boost Berkshire’s bottom line by better than 10% (assuming the economy doesn’t completely collapse and Buffett loses his bet).   If we were to assign the value of the Jan 2011 $110 calls to Buffett’s $5Bn 2013 warrants, at $43 a contract, that’s $1.7Bn so Buffet is really putting up net $3.3Bn and collecting $500M a year in interest – a neat 16.7% ROI!

I promised to do the Big Chart today so I will but it will be more about watching for levels we need to retake in the morning if this little rally is going to hold as the markets are very different than they were at the close. 

Last week, only the SOX were in the "Terror" zone and they had been there for quite some time.  Now the Transports have joined them after a 7% drop in 7 days – pushed down by a $20 rise in crude over the same period.  The SOX were actually the US index leader with a 2% gain on the week and the Nasdaq led us lower with a 3% drop.  As you can see from the black spots – we have 2 serious inflection points to watch on the NYSE and the Nasdaq and the Qs remain dangerously below the $42.40 line that we have long noted is a very bad signal if they stay below it for more than a day or two.

We actually had good gains in Asia, up about 4% for the week with India dragging behind.  Europe even managed a 1% gain and those are pretty good numbers considering the turmoil we have in our own markets.  The dollar dropping 5% is a big factor in looking at foreign market gains and we made a nice technical bounce off 76 yesterday  so we’ll see if Congress can give us some follow-up on day 2 of "tough talk on Capital Hill."

We do get hurricane-affected oil inventories and we’re expecting a 3.5Mb draw in gasoline and a 1.6Mb draw in crude along with a 500Kb draw in distillates but imports have slowed to a trickle (8.5Mbd, down from 11Mbd last year) as NYMEX traders have completed their 4th consecutive month of shorting delivery to Cushing by 4Mb per week.  This is keeping inventory levels in the US "tight" but it is worth noting that Bush offered oil from the SPR during the hurricane and less than 1Mb were actually requested indicating inventories are not very tight at all.  Refining capacity has been running at a pathetic 77% but the spike in gas prices ahead of the hurricane may have motivated them to crack a few extra barrels last week.

It’s going to be anoher crazy day tomorrow.  The market has been great for day trading but hell for everyone else – hopefully things will settle down just a bit…