8/26/11…day of the ‘B’s

Bloomberg Top Stories:


*European Stocks Fall Before Bernanke Address; Dollar, U.S. Futures Weaken

*Bernanke Scholar Advises Bernanke Fed Chief to Be Bold on Monetary Policy

*Buffets BofA Investment is Latest to Capitalize on Wall Street Weakness

*Havens Prove Different This Time as Asset-Backeds Favored – usually!

*World Economy Faces 50% Chance of Renewed Slump, Nobel Winner Spence Says

*Hottest Summer Since 1955 Threatens Corn Crop – you know what that means!

*Short Sellers May Spend Another Month on European Stock Market Sidelines

*Fed’s Pledge Inflates Hong Kong Misery With Currency Peg

*Irene Forecast to Strike North Carolina as Emergencies Issued Along Coast

*Mexico Casino Attack Claims at Least 51 Lives as Gunmen Fuel Deadly Fire

*Yankees Hit Record Three Grand Slams, Stay Game Behind Red Sox in AL East


Volume rose to 5.07 billion shares from 4.6 billion shares, casting doubt on the sustainability of the rally for a second day ahead of Bernanke’s speech today. Big Board volume rose slightly to 1.2B vs 1.1B shares, lowest since 7/28 and making five days near lows since 8/1! But the real news is that BAC, which rose 9.6% on Buffett’s preferred/warrant purchase was 860 million of those shares – meaning all other stocks on the NYSE combined for just 140 million shares! Advance/Declines ran -3.3:1 vs +2.3:1 vs +5.5:1 vs -1.2:1 on NYSE and -4:1 vs +2:1 vs +4.8:1 vs -1.2:1 on Nasdaq while Breadth was -3.1x vs +3.4x vs +4.4x vs -1.2x on NYSE and -9x!!! vs +2.6x vs +6.2x vs -1.3x on Nasdaq. That is five days of sheer hell! New 52 week highs fell back to 22 from 28, while new lows rose again to 129 from 96, the high was 616 last Friday! If you can’t look at these metrics and find market direction nothing will help you. The ratio is still highly negative and has been for weeks. The VIX soared again and closed at 39.76, just off the intra-day high of 40.14, vs 35.90. 48 was the selloff high, not seen since 5/21/10: 48.20!


Not even the ‘Oracle of Omaha’ plunking down $5 billion into BofA (more below) could incite a rally. Shortly after the open the Dow wa up 86, then spiraled down 300 points before recovering on position squaring to close off 170 points.

BofA was the only game in town.  Dow -1.5% vs +1.3% vs +3% vs +0.3% vs -1.6% vs -3.7%; Transports -1.9% vs +1.4% vs +3.3% vs +0.1% vs -1.8% vs -6.3%; S&P 500 -1.6% vs +1.3% vs +3.4% vs flat vs -1.5% vs -4.5%; Nasdaq Comp -2% vs +0.9% vs +4.3% vs +0.2% vs -1.6% vs -5.2%; 100 -1.7% vs +0.7% vs +4.1% vs +0.3% vs -1.7% vs -5.0%; Russell 2000 -2.6% vs +1.4% vs +4.9% vs -0.1% vs -1.6% vs -5.9%. So where are we ytd, qtd, and month to date (updated through yesterday’s close!).


YTD        QTD        MTD

Dow 30            -3.7%      -10.3%      -8.3%

Dow Transports    -15.2%      -20.3%      -16.5%

S&P 500           -7.6%      -12.4%      -10.5%

Nasdaq Composite  -9.0%      -13.3%      -12.5%

Nasdaq 100        -5.0%      -9.4%      -10.9%

Russell 2000      -14.2%      -18.9%      -15.7%



But here is the sick part. The financial sector, despite the nearly 10% rally in BofA fell 2.3%. For the year to date NYSE Financials are -18.9%, -18.8% quarter to date, and 15.4% month to date. Bank on that!


Overnight global equities are weak, ahead of the Bernanke disappointment which is sure to follow, except Japan and Korea. FTSE -1.1% vs -0.4% vs +0.8% vs +0.5% vs +2.3% vs -1.5% vs -2.7%; CAC 40 -1.7% vs +0.3% vs +1.3% vs +1% vs +2.3% vs -1.6% vs -3%; DAX -2.2% vs -0.1% vs +2.4% vs +07% vs +1.3% vs -2.7% vs -3.8%!!!; Nikkei +0.3% vs +1.5% vs -1.1% vs +1.2% vs -1% vs -2.5% vs -1.3%; Hang Seng -0.9% vs +1.5% vs -2.1% vs +2% vs +0.5% vs -3.1% vs -1.3%; Korean KOSPI +0.8% vs +0.6% vs -1.2% vs +3.9% vs -2% vs -6.2%!!! vs -1.7%; Indian Sensex -1.8% vs -0.9% vs -1.3% vs +1% vs +1.2% vs -2% vs -2.2%. U.S. futures are tenuously weaker: DOW -38; SPX -4.60; NDQ -5.75. Golds tumbled was stanched yesterdayday but only after falling $212 from the big record high of $1917.90 on Monday. It closed up $5 Thursday and is up $16 overnight. It is currently $1777 +$13.20. Crude stalled then fell and is off another $1.35 overnight to $83.94. First resistance is at $90, then $92-95. Bonds are rallying for a second day after Wednesday thrashing: 30 year 3.54% +1-1/8;10 yr 2.18% +7/16.


…call it the three ‘B’s: Big Ben Bernanke Day…and it will likely lead to further disappointment. Disappointment for what? Because he is toothless now. He knows what has to be done as the historian who chronicled the Fed’s failure which deepened the Depression in the 1930’s but he is Fed Chairman now and faced with at least three board members who are at the least closet tea baggers. Furthermore, as David Kotok pointed out, how can he introduce QE3 ahead of Obama’s September 5th announcement on the jobs program?…new and improved of course. Aren’t they always?


TB has been saying that this recession (understated) is worse than the Great Depression in impact. Last night on NPR (no wonder the GOP wants to cut its funding), TB heard Carmen M. Reinhart, who co-authored “This Time is Different: Eight Centuries of Financial Folly” with her research partner Kenneth S. Rogoff.

The book and their research has been attacked by several scholars including Robert Schiller and Joseph Steiglitz. In the interview however she points out that this is worse than the Depression as the per capita debt levels are double what they were at that time. TB has pointed this out several times and also noted that this time it is taking two incomes to survive. She pointed out, again as TB has, that the problem began in the early 1980’s…hmmm, who was president then…oh yeah, the Gipper, who thanks to his friend Art Laffer, saddled us with Supply-Side Economics which despite its proven failure is still loved by the right wing of the GOP. It doesn’t work…it never worked…and it produced the debt levels that we are facing now. Note that another advocate was Nobel laureate Robert Mundell – father of the Euro, which makes him two for two on being wrong and with serious global repercussions.


What R&R are saying is that the debt cycle produces the problem…and we in the U.S. went on a credit binge for thirty years the likes of which the world has never seen. We spent our future on cars, homes, and other pleasurable dalliances. Now we must unwind it. But unlike the tea party, R&R see it as having to begin with you – the consumer, and that cannot be good for GDP. As for the federal debt, it has been hyped beyond belief (except to the true believers), since we have a revenue problem that will be exacerbated, not solved by budget cuts alone. Growth is the answer and the budget cuts as proposed by the GOP are anti-growth.


Can any of you honestly tell TB that raising taxes on billionaires will hurt revenue growth? The problem is history says it will…but those studies were not based on hedge fund operators paying 15% taxes or the effective tax rate on the top 1% being just 22% of income. When it crosses 50% then you may see an effect, but look at Buffet who paid just under $7 million in tax and says it should be double – to match the rates paid by his other employees. What is $1 million to a billionaire? …but to the government it is huge, especially with the taxes paid by others being so small…but are they? The GOP would have us believe nobody but the rich pay taxes…income taxes maybe, but what about the other taxes which as a percentage of income are high. Will replacing the income tax (which will not happen nor will any meaningful reform), with a consumption tax work? Who knows.

This brings us to the other ‘B; again: Buffett. Here is a kindly, jovial old man who learned investing under Ben Graham. Unfortunately, he does not use those methods to invest any more. He is no longer a value investor but an income investor. During the crisis he bought ONLY the preferred stock – at 10% interest – of Goldman Sachs and GE, with warrants (TB also found out yesterday he had top GS management agree to not sell their stock until he sold his! That was one smart move!  But we also now know that he was informed of the TARP plans and that he spoke with Obama prior to investing in BofA, 6% preferred. The only bank common stock he owns is Wells Fargo which never was a problem bank. As for the warrants he can buy 700 million shares at $7.14 a share meaning at the high yesterday he was up $700 million on his $5 billion investment. That is a dilution of 7% on the stock…yet the fools…and short positions… paid 9% more for the stock! Was Buffett shrewed or BofA just plain dumb? TB opts for the latter.


The dividend on Buffett’s stock is $300 million a year…a big hit with no tax benefit in the future for BofA, so it is effectively 8%. Under Basel III preferred stock does not even count as capital, so they are reducing the value of the shares and less than 24 hours after management said they don’t need capital. As for Buffett’s game, BRK is off 9.6% over the past year (by the way did you know that the top four banks are trading at less than their book value? Kotok also pointed this out…unheard of). As for yesterday Berkshire had a key reversal – higher high, lower low, and close below the prior session low, which is a strong nay vote!


So Mr. Buffett, the genius, is doing nothing more than TB has been doing: not value investing, definitely not growth investing, but INCOME investing, which is the sensible move here, but don’t go following him around. One reason why Berkshire is so cash heavy is it drains its companies of dividends, note how they ruined Burlington Northern by taking the 5.6% dividend…and BRK never pays a dividend. But that too is against investing principles because the return on equity is shrinking so it should be paid out and buying preferreds is the only way he can keep the game going. Good luck Mr. B. and Berkshire shareholders…he is not the man you made your money by staying with.


. . .  – – –  . . .    . . .  – – –  . . .


Add to the similarities to the Depression…sorry to bring this up but we are in the worst drought since 1955 in the southern Midwest states and that is what happened to the Dust Bowl then…we are having horrible events…isn’t it interesting that Pat Robertson and the other evangelists don’t ever blame them on residents lifestyles unless it hits New Orleans of San Francisco? Why are they called ‘acts of God?’ dunno because they most certainly are not. They are tragedies…human tragedies.


Thankfully it is Friday and judging from the market opening (Dow is off 65), it will be a big disappointment…especially if/when Bernanke fails to deliver. Do what you have to then get away and enjoy your weekend…unless of course you are on the east coast and are getting prepared for the big one.




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