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Thursday, August 25, 2011 11:56 AM

Bank of America Surges on Fluff Buffett Deal; German DAX Market Plunges 4% in 15 Minutes; What's Buffett Doing? Bear Market Rallies End on Good News

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Deal Book says "Buffett to the Rescue Again". Mish says "Hardly".

Everyone is excited Buffet is investing $5 billion in Bank of America. I suggest it may be a ploy.

It's difficult to know if Buffett really likes Bank of America or not. Perhaps he merely believes BAC can honor its dividend commitments. Perhaps Buffett is attempting to stabilize the markets.

Here are questions, the answers to which show Buffett may have other angles than simply believing in Bank of America.

  1. How much Wells Fargo does Buffett hold?
  2. Might not he attempt to change psychology in the banking sector given he is stuffed to the gills with bank stocks?
  3. Remember S&P PUTs Buffett Sold?

Please consider Buffett Invests $5 Billion in Bank of America
Warren E. Buffett comes to the rescue, again.

On Thursday, Berkshire Hathaway, run by Mr. Buffett, announced plans to invest $5 billion in Bank of America, a vote of confidence for the beleaguered financial firm.

The conglomerate has agreed to buy 50,000 preferred shares that will pay a 6 percent annual dividend. Bank of America has the option to buy back the shares at any time for a 5 percent premium.

“I remain confident that we have the capital and liquidity we need to run our business,” Bank of America chief executive Brian Moynihan said in a statement. “At the same time, I also recognize that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy.”
Buffett did not buy common shares he bought preferred shares. And here are the "temporary results"

JPMorgan rose 4 percent. Citigroup rose 7 percent and Bank of America jumped a whopping 17 percent to a high of $8.80. Many Bank of America shorts were blown out today. An air pocket sits below.

That 17% pop did not last long. Share prices are sinking fast.

Bank of America 60 Minute Chart

DAX Drops 4% in 15 Minutes

Bloomberg reports European Stocks Slide as DAX Drops 4 Percent in 15 Minutes; RWE, EON Sink
European stocks declined, snapping three days of gains, as Germany’s DAX Index tumbled 4 percent in 15 minutes amid speculation that regulators planned to impose further restrictions on equity markets.

Futures on the DAX plunged as much as 4.1 percent as a cascade of trades pushed the volume in the contracts to a quarter of the daily average between 3:45 p.m. and 4:15 p.m. in Frankfurt.

“It looks like someone fears the update today from French and Spanish regulators will extend the short-selling ban,” said Michael Scholz, executive director for client solutions and derivatives at WestLB AG in Dusseldorf. “It was a strange move selling the DAX futures in 30 minutes. Someone may be preparing their portfolio for tomorrow.”

A total of 50,000 contracts exchanged hands in the 30- minute period, according to Bloomberg data. The average volume in the past 30 days was 207,000, Bloomberg data show.
Short-Selling Restrictions

Authorities in France, Spain and Italy all had to decide whether to extend short-selling bans that would have expired over the next 48 hours.

Bear Market Rallies End on Good News Not Bad

Once Again, it's difficult to know precisely what the stock market is reacting to. It may or may not have anything to do with short-selling restrictions.

What I do know is that bear market rallies typically end on good news, not bad news. This fluff maneuver by Buffett, whatever his reasons, is just the kind of seemingly good news that gets sold.

Bank of America is now up 6.44% and sinking fast. It is just this kind of fluff good news that ends bear market rallies.

Mike "Mish" Shedlock
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