Market Insider: Wednesday Look Ahead
Warren Buffett is driving the latest ambulance to show up on Wall Street, and his first aid may in fact give a boost of confidence to the market and Washington's rescue process.
All kinds of worry about the financial bailout package is rippling through markets as regulators head to the Hill for a second day Wednesday.
Late Tuesday, Goldman Sachs revealed that it struck a deal with Buffett's Berkshire Hathaway to take a stake in the firm through preferred shares and warrants.
Berkshire receives a preferred stock with a dividend of 10 percent. It is callable at any time at a 10 percent premium. In conjunction with the offering, Berkshire Hathaway will also receive warrants to buy $5 billion of common stock with a strike price of $115 per share, are exercisable any time for a five year term. Goldman also is raising at least $2.5 billion in common in a public offering.
"I thought he swore on the bible he'd never invest in another broker deal!" was PNC's Eugene Stone's first reaction. Stone, chief investment strategist at PNC Wealth Management, has followed Buffett and Berkshire for years. He was referring to how Buffett's investment in Salomon Brothers in the early 1990s soured the investor on Wall Street firms.
"He probably figures what was laid out was the kind of deal he likes. They've (Berkshire) kind of said they'd be happy with a 10 percent return on stocks. He's got 10 percent in the bag as long as they don't go under. Plus, he's got big upside if the stock does very well. It perfectly fits the hurdle that he's thrown out there," said Stone.
Goldman, considered the premier Wall Street firm, would not say how the deal came about but it has had a long relationship with Buffett. "It was an opportunity he clearly found attractive and so did we," said a Goldman spokesman, without elaborating further.
It's interesting to note that Buffett's name has been thrown out as someone who might make sense as an overseer for the financial markets bailout plan. Goldman and rival Morgan Stanley were the last two major investment banks standing this week, and both opted to become bank holding companies, regulated under the umbrella of the Fed.
Buffett may reveal more about how the deal came about when he appears on CNBC's "Squawk Box" Wednesday at 8 a.m.
Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson will testify on Capital Hill before the House Financial Services committee at 2:30 p.m. Wednesday. Before that, Bernanke appears alone before the Joint Economic Committee for a planned testimony on the economy at 10 a.m. On the data front, existing home sales are reported at 10 a.m.
"The last couple of days Congress has been debating what they're going to do about the Paulson plan. You can just see the financials continue to erode as they wait for the news, and the uncertainty grows again. This should give them a little shot in the arm, as Buffett is thinking there is obviously value. You should see a lift," Stone said.
Tuesday's market drifted throughout the day with a big move down in the final hour. The Dow finished off 161 points at 10,854, taking it down 4.7 percent in two days, it's biggest two day drop since July, 2002. The S&P 500 was off 1.6 percent at 1188, for a two day drop of 5.6 percent. In a reversal of Monday, commodities and oil were out of favor and that pushed their shares down about 3 percent.
Traders closely monitored comments from Senate Banking Committee members who interviewed Paulson, Bernanke and Securities and Exchange Commission Chairman Christopher Cox.
UBS director of floor operations Art Cashin said the market was made nervous by concern there was Congressional resistance to the plan, which includes the purchase by the government of $700 billion in bad debt held on the books of financial firms.
"Now we're going into a night of uncertainty. You never know what Congressman or Senators will say something and people are paring back" positions, said Cashin at the end of Tuesday's market session.
"The whole story is: Deal or no deal?" Cashin said.
Traders fear modifications to the plan may make it less effective. Add that to concerns, the plan won't work at all to unfreeze markets. In Washington, the debate focuses on the cost to taxpayers and whether the plan to purchase mortgage securities will actually heal the market and allow the government to recoup its investment
In a late development Tuesday, NBC News reported that the FBI probe into possible wrongdoing in the mortgage collapse has spread to include preliminary probes into AIG, Lehman, Fannie and Freddie and the issue is possible misstatement of assets.
Traders say there's some relief that the two big down moves this week in the stock market have not been on the huge record volume seen last week. They also said missing from the action were hedge funds, many of whom are sidelined for now in a period of uncertainty about the markets and hedging strategies.
Oil's reversal helped the stock market but helped the dollar which recovered some ground, gaining 0.9 percent against the euro. Crude on NYMEX fell $2.76 per barrel or 2.5 percent to a close of $106.61 per barrel. Traders said concern about the health of the economy overshadowed supply concerns. Weekly inventory data is due Wednesday at 10:35 a.m.
Credit markets continue to be constricted as swap spreads widened Tuesday.
CNBC's Rick Santelli points out that Caterpillar's Caterpillar Financial issued $1.3 billion in a two-part debt sale, the first corporate deal to come to market since Sept. 9. The 5-year portion was priced to yield 3.20 percent above Treasurys and the 10-year portion, 3.25 percent above Treasurys.
"They had to ante up in this environment. It's not so much the detail but the message it sends. This is the center piece of Paulson's whole theme here," said Santelli.
Jim Galluzzo, who trades T-bills at RBS, said it was busy on his desk Tuesday as investors looking for safety piled into bills. But it was nothing like the frenzy of last week when the three-month T-bill yield touched near zero. The yield Tuesday though fell below one percent.
Galluzzo said there was a relief trade after news of the Treasury plan initially broke last Thursday. Of Tuesday's action he said: "I don't think it's a panic trade necessarily, but when we're in uncertain times, people try to hide in the shortest possible securities because they're not sure. They don't know what to do," he said.
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