We mentioned on Tuesday we could be nearing a bottom for Financial stocks and it seems Warren Buffet got the message. Buffett’s Berkshire Hathaway will invest $5 billion in Bank of America (BAC, $7.63, up $0.64) to shore up the company’s balance sheet and provides a much needed vote of confidence for the sector.
Shares of Bank of America surged on the news and are up 9% but have come down from a high of $8.80 which was hit shortly after the open.
The deal between the two sides involves 50,000 shares (at $100,000 each) of preferred stock that will pay a 6% annual dividend and includes warrants to buy 770 million BofA shares at an exercise price of $7-and change over the next 10 years.
The company can buy back the preferred shares at any time providing it pays Mr. Buffett a 5% premium.
It was a big bet by Uncle Warren, who did a similar deal with Goldman Sachs (GS, $109.13, down $1.18) back in 2008, on a company still dealing with billions of dollars in problem mortgage loans. There have been worries BofA might need to raise outside capital of up to $50 billion to deal with losses and meet new industry capital rules and the company said it didn’t need cash but took the money anyway so some questions are being raised.
We have been mentioning over the past few weeks that BofA has a tangible book value of over $12 a share and we were hoping to buy the stock (or options) once it traded in the $5’s. On Monday, shares hit a low of $6.01 and we thought we would get a chance this week to get in, but as you can see, we really may have put a bottom in some of these names. For those of you who participated in our BofA strangle trade that was on our Watch List, congratulations, you have made money on both sides.
Despite the surprise announcement, the market took a turn for the worse after posting solid gains at the open and testing the next layers of resistance. The selloff comes in response to water-cooler talk that Germany may lose its AAA credit rating which pounded their stock market (DAX: 5,584, down 97 points) into the close. The reaction spread to other foreign exchanges and has affected our major indexes which headed lower on the news.
Although both S&P and Fitch recently reaffirmed their Triple A ratings on Germany, it appears short-sellers and the machines are looking for new opportunities.
We have mentioned resistance levels all week and they have been holding just like we thought they would heading into Friday’s Bernanke update.
After reaching a high of 11,405, the Dow is down 125 points to 11,195 while the S&P is off 16 points to 1,161 after kissing 1,190. We don’t know if there would have been, or still is, enough mustard to get over 1,200 but the bulls will be trying to hold at least 1,150 into the close.
The Nasdaq made a trip higher despite the Apple (AAPL, $371.94, down $4.24) news and reached a peak of 2,482 at the open. We have been targeting the 2,500 level as a make-or-break rally point and Tech is currently at 2,427 – down 40 points, or 1.6%.
We like our positions heading into the Bernanke Watch on Friday so let’s see how it plays out. Subscribers, check the Members Area for the current trade updates.]]>