Buffett-day

by Larry Levin

I expected increased volatility today and we sure got it. We saw a strong rally at the opening bell and a strong swoon in the afternoon. Yesterday I guessed it may have come from AIG spillover, but was wrong. Today's action was close to what ails AIG, bond related problems, but was due to Warren Buffett's early proclamation of "bailing out the monolines."

As it turns out, however, "bailing out the monolines" is not what Mr. Buffett actually said. Warren Buffett offered to take on $800 billion worth of municipal bond risks currently covered by Ambac Financial, MBIA Inc., and Financial Guarantee Insurance Co. One of the companies immediately refused the offer (I think it was Ambac). The refusal by Ambac was surely due to Mr. Buffett's shrewd attempt to cherry-pick the good assets from the bad.

When the early euphoria finally subsided traders realized this wouldn't help the real problem much at all, which hasn't been the insurance companies themselves but their derivative holdings. Other than insuring toxic CDO investments, these companies insure municipal bonds. And as I said above, the latter is only what Mr. Buffett wants to insure. Said another way, he is NOT pumping billions into these companies to fix their balance sheets. He is NOT waving a magic wand and "fixing" the mortgage market. He's a smart man: he wants the best and will leave the rest.

"Unfortunately, the structured finance 'side' of the business, with its many moving pieces and interdependent variables, has proven to be beyond our ability to adequately analyze," said Ajit Jain, a reinsurance executive at Berkshire in a letter to MBIA's bankers at Lazard Ltd.

Peter Boockvar, equity strategist at Miller Tabak said, "People weren't fleeing [the market] because of problems in the muni-bond business. Default rates are less than 1%, so reinsuring the muni-bond business is a no-brainer for anybody."

But that wasn't the only news today. The "free market" got a little less free today. Once again, Big-Brother is forcing banks to "agree" with its new program - Project Lifeline. The program is not a solution to the housing crisis, but is considered a "pause" in the foreclosure process that gives homeowners an extra 30 days to work out a payment or modification program.

"None of these efforts are a silver bullet that will undo the excesses of the past years nor are they designed to bail out real-estate speculators or those who committed fraud," Treasury Secretary Henry Paulson said in announcing the program. He warned, however, that the worst of the housing crisis is still ahead as holders of subprime mortgages come up for interest-rate resets. "The worst is just beginning."

That last comment is probably what caused the afternoon swoon.

Real Time Trading Signals*for

Trade Date: 2/12/07

E-Mini S&P Trades*
(before fees and commissions):

1) ENGF buy @ 8:50am at 1350.00 = +1.00 & +5.50

2) ENGF buy @ 9:35am at 1358.25 = +1.00 & -1.50

3) OTF buy @ 10:30am at 1359.25 = +1.00 & -1.50

4) ENGF sell @ 10:55am at 1359.00 = +1.00 & +3.00

5) FT sell @ 12:05pm at 1356.25 = +.75 & b/e

6) TP buy @ 12:50pm at 1358.00 = b/e (1 lot)...+10.25 points.

E-Mini Russell Trades*
(before fees and commissions):


1) Buy @ 8:40am at 703.0 = -1.2 & -1.2

2) Buy @ 8:54am at 704.0 = +4.0 (1 lot)

3) Buy @ 9:36am at 708.0 = -1.2 (1 lot)

4) Sell @ 11:14am at 709.6 = +.8 (1 lot)

5) Sell @ 12:00pm at 708.8 = -.3 & -.3

6) Sell @ 1:43pm at 708.6 = -1.3 (1 lot)


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