Sam Collins

Buffett's Bailout

by Sam Collins   09/24/08

Tuesday was another day of back-and-forth trading which keyed on the testimony being given to the Senate Banking Committee by the Bush financial team headed by Fed Chairman Ben Bernanke, SEC Chairman Christopher Cox and Treasury Secretary Hank Paulson.

As usual, more than a few senators used the occasion to do their act before the cameras, and investors generally gave them a thumbs-down for questions that were loaded with partisan accusations and contention while the witnesses tried to focus them on problems they said were so serious that, if not addressed, could bring down the country's financial system. But a few lawmakers seemed genuinely unconvinced of the administration's ability to oversee the plan and many thought the cost was just too high to bear.

The market started off the day with a higher opening, with the expectation that something might come of the Senate's meeting. But as the testimony and questioning became grounded and reports of modest losses in oil futures became known, much of the early gains were lost.

By 1:30 p.m. Eastern, the Dow Industrials (DJI) were down more than 100 points. Oppenheimer cut earnings estimates on Bank of America (BAC), Citigroup (C) and Wachovia (WB), and General Electric (GE) was cut to "neutral" by Merrill Lynch (MER).

At mid-afternoon, Microsoft (MSFT) said that it approved a $40-billion share repurchase plan and the stock rallied, along with a number of others in the tech group.

The news rallied other sectors, too, and by 3 p.m. Eastern, the Dow Industrials were up more than 100 points. However, by the close, the gains had vanished into losses with crude oil trading sharply lower along with other futures and the government reporting that U.S. home values fell 0.6% in July from June.

At the close, the Dow Jones Industrial Average (DJI) was off 162 points at 10,854. The S&P 500 (SPX) was down 19 points to 1,188 and the Nasdaq fell 26 points to 2,153.

Volume on the New York Stock Exchange was again light at just 1.2 billion shares traded, and the Nasdaq crossed 827 million shares. Decliners were ahead of advancers on both exchanges by about 2-to-1.

The November crude oil contract fell $2.76 to $106.61 a barrel, and the Amex Energy SPDR (XLE) dropped $2.31 to close at $67.69.

Gold futures fell sharply, as the December contract fell $17.80 to end the day at $891.20 an ounce. The PHLX Gold/Silver Index (XAU) fell $4.59 to $145.05.

What the Markets Are Saying

With many lawmakers not at all convinced that the rescue attempt can be successfully concluded soon, it will take some other positive news to restrain the markets from punching through Thursday's lows. And that news may have come last evening from non-other than Warren Buffett.

The Oracle of Omaha has decided to put up $5 billion from Berkshire Hathaway and buy perpetual preferred stock in Goldman Sachs (GS) with an option to buy another $5 billion in common stock at some future time.

There are many investors who follow Mr. Buffett's investment moves and who will conclude that if he sees value in today's prices, maybe they should too.

Technically, a more positive approach couldn't come at a better time since a successful drive against Thursday's reversal low at S&P 500 (SPX) 1,134 could easily result in not only a new low but a decline of another 10% to the next support area at around 1,062 to 1,078.

With the sentiment numbers again at oversold levels and our internal indicators again turning down, a period of more stable prices is now necessary to prevent another crisis sell-off.

Today's Trading Landscape

Earnings to be reported include: Bed Bath & Beyond (BBBY), Copart (CPRT), Craftmade International (CRFT), Financial Federal Corp (FIF), Misonix (MSON), Neogen (NEOG), Nike (NKE) and Paychex (PAYX).

The lone economic report due today is the August Existing Home Sales (the consensus expects negative 1.0%).

Democrats have decided not to block offshore drilling and, under the threat of a veto, have decided to let the ban expire. Key congress members have said that emergency legislation will more than likely be passed by this weekend.

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