Buffet Buys a Stake in Bank of America

Story: Yahoo News, Warren Buffet to Invest $5 Billion in Bank of America, Ben Berkowitz and Joe Rauch

One of the big stories of the day was the announcement by Warren Buffet that his company, Berkshire Hathaway would make a $5 billion investment in Bank of America.  Over the last several weeks we have watched shares of BofA go down to levels not seen since the financial crisis, due to its ongoing exposure to liability from bad mortgages from Countrywide Financial, which Bank of America bought in 2008.  There have also been rumors that BofA has large amounts of exposure to European banks.  Other financial institutions have followed BofA down, though to a lesser extent, with Citigroup in particular (which I hold in my portfolio) taking on the appearance of a "BofA lite".  (See below chart from Yahoo Finance: BofA is the blue line; Citi is green).

3 month chart from finance.yahoo.com

The announcement of the deal, which Buffet --now said to be the third richest man in the world with a net worth over $50 billion-- thought up while in the bathtub, caused BofA stocks to jump considerably, along with the other financials.

5 day chart from finance.yahoo.com

As of this writing, the Dow Jones Industrial average has followed the European markets downward, and is now off by about 130 points or just over 1% -- which used to be a lot, but could change in the blink of an eye  in these recent weeks of high volatility.  But the financials are a bright spot, at least today, with BofA up by over 10%, and Citi up by just under 5%.

Yesterday's Market Excitement

In case, you haven't heard, the U.S. stock market was down big time yesterday.  The Dow Jones Industrial average dropped 634.76 points, or 5.5%.  This had something to do with Standard & Poor's downgrade of the U.S.'s credit rating from AAA to AA+ on Friday evening, but exactly how much is an open question.  The Wall Street Journal's front page headline this morning was: Downgrade Ignites a Global Selloff, but the unavoidable irony is that prices of Treasury bonds were up yesterday (yield on the 10-year note, which moves inversely to price, was down to 2.339%, its lowest rate since January 2009).  And repo markets, the main wholesale funding market by which Wall Street banks lend each other money using U.S. securities as collateral, were largely unaffected.

The sell-off seemed to be caused by a general flight from risky assets into safer ones, such as U.S. treasuries, gold and Swiss Francs, which in the past has been the result of fear of a double-dip recession and default and contagion in Europe.  Perhaps the downgrade just added an extra element of panic to the equation.  Or perhaps large market participants were afraid that the downgrade would cause politicians to do something stupid in reaction to what should be a non-event, what philosophers call an epi-phenomenon, like the smoke from a passing train, or the after-the-fact commentary by a sportscaster.  President Obama's speech certainly did nothing to stem the downturn.

Based on the Wilshire 5000 Total Index, which represents the total value of the U.S. stock market, the market has lost about $2.6 trillion since late July.  Unless you are an S&P sovereign debt analyst, this is quite a chunk of change--about $8,500 for each man, woman and child in the U.S.

data from finance.yahoo.com

Certain stocks were especially hard-hit in yesterday's sell-off: Bank of America and Citi were both down over 15%.  I lost quite a bit on the latter, not to mention Caterpillar, a Germany ETF and others.  Despite stern warnings from CNBC commentators --like lifeguards at Jones Beach--  that it is extremely risky for individuals to trade in such market conditions, I nibbled, and bought a bit more Citi at its new marked-down price.  Of course it dropped as soon as I bought it.  This morning, I saw that Citi was trading at less than half of its book value, and bought some more, using up the bulk of my available cash.   As of this writing, Citi is back up 12% on the day, so maybe I made a good decision -- for now.