Tuesday, February 12, 2008

The Warren Buffet Rally

In typical fashion, the pre-market futures were pumped higher to avoid a massive sell-off at the open. Prior to the opening bell, General Motors (GM), Schering-Plough (SGP) and Credit Suisse Group (CS) all announced 4th quarter earnings that were... well, horrible.

General Motors posted the largest one-year loss in US automaker history, a staggering $38.7 billion for 2007. The company also announced buyouts to some 74,000 employees.

At Schering-Plough, the losses were explained away as charges related to the buyout of Organon Biosciences, but nevertheless were massive. The drugmaker said it lost $3.4 billion in the fourth quarter, or $2.08 per share, compared with a year-earlier profit of $182 million, or 12 cents per share.

Credit Suisse reported profits off 72% from the year ago period due to writedowns in subprime and other bad investments.

So, with that news in tow, the indices rocketed skyward, with the Dow up more than 100 points just twenty minutes into the trading day. This broke a string of six consecutive sessions in which the Dow had not surpassed the previous day's high and, for all intents, it appeared as though a massive short squeeze was underway. In fact, by 10:45, the Dow had surpassed the highs of the previous four days.

Having had their way via juicing the futures, the Fed saw fit to only accept $6.25 billion in repos. With $8.25 billion maturing, it left the investment banks to do the Fed's bidding with $2 billion less than yesterday. This cash shortage would come into play later in the session.

Within the first hour of trading, the Dow was up a whopping 190 points, a 1.5% gain, with the other indices following its lead.

By 11:30, it was clear that the battle lines were drawn at Dow 12,400. The bears kept trying to break it down, but the bulls defended it fiercely until just after 3:00.

Dow 12,373.41 +133.40; NASDAQ 2,320.04 -0.02; S&P 500 1,348.86 +9.73; NYSE Composite 8,965.35 +97.07

The bears finally drove the Dow down to 12,310 before giving way late and allowing the market to float back up to where it closed. It was an odd day, but indicative of a market that is being day-traded by professionals and a very dangerous place for the novice or buy-and-hold investor.

Bias remains to the sell side, and after today's questionable trade, Wednesday will almost surely spend much of the day in the red. Tuesday's rally was built on false promise and only a slight oversold condition, so a resumption of selling is expected.

On the day, advancers topped decliners again, 3838-2529. New lows exceeded new highs, 201-104. Volume was improved over the previous three sessions.

Tuesday's rally was largely tied to investor Warren Buffet who told CNBC that Berkshire Hathaway has offered to assume $800 billion in municipal bond liabilities from MBIA (MBI), Ambac Financial (ABK) and FGIC Corp., the three main insurers of muni bonds and also the companies which insured much of the toxic subprime debt held by the largest banks in the world.

The idea is nice in theory, but Buffet's bold offer neatly avoids the subprime slime, so the market shouldn't really have pinned much hope on it as a rescue measure. Besides, at least one of the insurers has rebuffed Buffet already.

Mr. Buffet is not a savior. He is a skilled financier and investor. The market is obviously full of fools who think that somehow he'll single-handedly fix a world-wide credit dilemma. Buffet made his offer because he thinks he can make money at it, not because he's a beneficent saint.

Commodities all eased. Oil slid 81 cents to $92.78; gold fell $15.60 to $911.10; silver was off 22 cents to $17.25.

NYSE Volume 4,028,390,500
NASDAQ Volume 2,221,637,500

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