Thursday, August 25, 2011

Uncle Warren to the Rescue of Bank of America; Jobs Steps Down at Apple

Two luminaries of the corporate world made moves that affected the overall markets, but a couple of stocks in particular.

Late Wednesday, Apple (AAPL) founder and CEO, Steve Jobs, announced that he was, effective immediately stepping down as CEO of the company due to health reasons and will now take up duties as Chairman of the Board.

Jobs' contributions to computing and high tech in general are the stuff of legend. Not since the heyday of Thomas Edison has the world been so influenced by one man's innovations. Jobs was a pioneer in personal computing and communications, first, with the Apple I and II, then the Macintosh, and more recently, the creation of the iPod, iPhone and iPad.

While Jobs will still have a hand in the operation of the company he founded in Cupertino, California (where it is still headquartered today) in 1976, most of the day-to-day operations will be left to newly-named CEO, Tim Cook and his staff.

Today, amid a firestorm of controversy concerning the fiscal health of Bank of America, billionaire Warren Buffett stepped up and injected $5 billion into the bank via a private offering which will net one of the world's richest men a 6% dividend over five years.

Buffett's holding company, Berkshire Hathaway, also received warrants to buy 700 million shares of common stock at just over $7.14 per share, with an unusually long 10-year exercise period.

The deal answers the question of whether Bank of America (BAC) was indeed in need of additional liquidity with a resounding "yes." Otherwise, Buffett's offer would have been turned down, as it is somewhat expensive for the bank.

The deal really solves none of BofA's liquidity and solvency issues. They are highly-levered, beset on all sides by the mortgage mess that has evolved since their purchase of Countrywide Financial in 2008, and in need of funds to meet new capital requirements. A paltry $5 billion from a rich uncle isn't going to cut it, and Buffett's bold maneuver may turn out to be another bad bet. Buffett made similar deals at the height of the financial crisis, taking out stakes in Goldman Sachs (GS) and General Electric (GE).

Inital reactions to both events were highly-charged. Apple stock fell nearly 7% in after hours trading on Wednesday, but, by the market close on Thursday, the stock was only down 2.46, or less than 1%.

On the news of Buffett's investment, Bank of America stock spiked as high as 8.80, after closing Wednesday at 6.99. At the end of the Thursday session, most of the froth had been sold off, with the nation's largest bank by deposits closing at 7.65, nearly a 10% gain.

The broader market fared less well, putting an end to the three-day winning streak which began on Monday. Uncertainty over just what Fed Chairman Ben Bernanke will say in his Friday morning speech at Jackson Hole had traders on the edge of their seats, with many deciding to take a wait-and-see position.

Bernanke is scheduled to give his keynote address at 10:00 am EDT.

On Friday morning, prior to the Chairman's speech, the government will announce its second estimate of second quarter GDP, which is expected to be revised down to 1.0% after the initial reading of 1.3%.

Most analysts are not expecting Bernanke to make any great policy pronouncements, though some are still clinging to hopes that he will announce another round of quantitative easing.

For the most part, traders were selling off positions in advance of the speech.

Dow 11,149.82, -170.89 (1.51%)
NASDAQ 2,419.63, -48.06 (1.95%)
S&P 500 1,159.27, -18.33 (1.56%)
NYSE Composite 7,149.67, -123.46 (1.70%)

In a broad retreat, declining issues outpaced advancers, 5044-1552. The NASDAQ had just eight (8) stocks making new highs, with 65 hitting new lows. Over at the NYSE, there were 14 new highs and 53 new lows. The combined total of 22 new highs and 118 new lows continues to signal risk to the downside. Volume was light.

NASDAQ Volume 1,812,493,625
NYSE Volume 5,741,944,000

Oil gained 14 cents, to $85.30. Gold, in a dramatic reversal, picked up $22.20, to $1773.50, but silver was the big winner, adding $1.39, to $41.08.

Despite Buffett's "calming effect" markets are still very shaky, as none of the issues which ignited the volatility of the past two weeks have been resolved. Bernanke's speech will likely only add some fuel to the fire, especially if, as many believe, he will not open the door to QE3. On top of all that, Wall Street is bracing for a water-logged Monday, as Hurricane Irene races along the US Eastern seaboard.

The outlook for days and weeks ahead is still quite uncertain.

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