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by John Dalt

8/26/11

GDP numbers came out this morning for the second quarter, on an annualized bases the second quarter GDP grew at a 1% rate.  This was less than the 1.1% analysts expected.  Not enough to make a difference.

Yesterday, just before the market opened, Berkshire Hathaway (BRK) invested $5 billion dollars in Bank of America (BAC).  Warren Buffett said, “Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it.  I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That’s what customers want, and that’s the company’s strategy.”  The market price of BAC jumped 22% at open as this was seen as a “vote of confidence” in BAC.

Brian Moynihan BAC Warren Buffett BRK
Who helped who?

Brian Moynihan had been telling anyone who would listen, that the bank had a strong balance sheet.  Dick Bove, bank analyst at Rochdale Securities, scoffed at the notion that the bank was in trouble and needed cash.  The bottom line was investors were not sure.  BAC was rumored to be trying to sell its stake in the Construction Bank of China as soon as the lock up period expired.  There was nothing like the golden endorsement of Warren Buffett to shake the market up and push BAC’s stock higher.  Long term, the deal is dang expensive for BAC.

The $5 billion dollars purchases 50,000 preferred shares that pay a 6% annual dividend.  Berkshire also received warrants for 700 million shares that can be exercised anytime over the next ten years at $7.14.  BAC has the option to buy back the preferred shares at any time for a 5% premium.

Buffett gets 6% on his money and all of his money back when the preferred shares are redeemed.   Then sometime during the next ten years, when he desires, BRK can exercise their warrants and purchase $5 billion dollars worth of common stock at roughly what the stock closed for on Wednesday. This stock would be without restrictions and could immediately be resold at market price.  The shares BRK will buy amount to 6.9% of all outstanding stock.  Did the market traders realize investors had just been diluted?

There is a lot of value to having a pile of cash lying around and buying when there is “Blood in the Streets.”  BAC was trading at prices not seen since March 2009.  The old man knows how to make money!

Ben Bernanke spoke from Jackson Hole, Wyoming this morning.  He didn’t promise any new stimulus and the market dropped a 100 points on the Dow, on the release of his comments.  Then the market started recovering on a note on his prepared text that the September FOMC meeting would be extended to two days.  Bernanke said the two day meeting was for “fuller discussion…is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.”

Bernanke said the Fed was “ready to use their tools.”  There was another line later in his speech that caught my attention.  “Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view--the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well.”

That leaves the door open to QE3, and that is why the market went from down 200 to up 200 in two hours.  You can read Ben Bernanke’s comments at the Federal Reserve website.

We wrote yesterday that customers of all of our premium services have some precious metals exposure.  Today's chart gives us a long-term perspective in regards to the gold market. Gold has been in a strong bull market since 2001. The pace of that upward trend has increased over time. There was a slight increase in slope both in 2001 and 2005. During and after the financial crisis of 2008, gold significantly increased the pace of its ascent. Recently, gold made new rally highs but has pulled back after approaching long-standing resistance (red line) of its current accelerated trend channel. Despite the pullback, gold currently trades for over six times what it did when the rally began back in 2001.  Buy precious metals!

Chart courtesy of www.chartoftheday.com

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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