The Overnight Report: Saint Warren

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Rudi Filapek-Vandyck

For US investors, there’s little Warren Buffett can do wrong. Just ask all those shareholders of his investment vehicle Berkshire Hathaway. Many of them have been on the register for decades and they have been greatly rewarded for it.

Yesterday, Warren “The Oracle of Omaha” Buffett used investor tv channel CNBC to announce his proposal to assume US$800bn in municipal bond risk from major bond insurers. Even though it’s only a proposal at this stage, and one of three companies approached has already said “no thanks”, investors jumped happily on the bandwagon pushing share prices of US financial stocks higher and prices of US Treasuries lower (yields higher).

Buffett’s cheeky proposal, which in effect would see bond insurers pass on their premium to Buffett’s insurance company in exchange for the ability to retain their AAA-rating, was seen as a signal of receding risks for a potential mass dumping of municipal bonds on the market. Warren’s timing was close to perfect, with credit spreads in Europe widening to record gaps on persistent rumours the markets were about to be hit by forced selling from the unravelling of structured credit products. European markets opened lower, but once Warren had spoken on tv, they rose in unison with US equities.

The Dow Jones closed 133.40 points higher at 12,373.41. The S&P500 gained 9.73 (0.73%) to 1,348.86 but the Nasdaq closed virtually unchanged at 2,320.04 (-0.02 points). It is widely assumed Microsoft will have to raise its bid for search engine/webportal Yahoo!

By tomorrow morning (Australian time) we will all know whether fears of another decline in US retail sales are correct. In the meantime US investors drew support from yet another Fed official who indicated there was still hope the country could avert a recession. Also, the SpendingPulse survey in the US indicated non-auto retail sales rose by 0.2% in January. More hope.

The US dollar fell against major currencies and one possible explanation for this is that Warren Buffett’s offer to assume municipal bond risk boosted the risk appetite of investors. More risk appetite is seen as bad for the greenback these days. The Euro rose from US$1.4500 to US$1.4610, before ending New York trade around $1.4590. The Aussie rose from lows of US90.30c in early European trade to highs above US90.80c, ending US trade around US90.40c. And the Japanese yen eased from 106.85 yen per US dollar in early European trade to almost JPY107.50, before ending US trade near JPY107.30.

Crude oil prices eased on Tuesday on hopes that Venezuela wouldn’t carry through with its threat to halt oil shipments to the US. The March Nymex crude oil quote fell by US69c a barrel or 0.7% to US$92.90. London Brent crude fell by US74c to US$92.79 a barrel. Also, Russia and Ukraine came to a settlement regarding their continuous gas disputes as well.

Base metals prices were mixed. Copper traders are now looking for signs of renewed Chinese buying. Gold and silver slumped after top gold consumer India reported lower bullion demand. In Australia, the consumer confidence survey is released and investors will be presented with a more detailed insight into the operational performances of the Commonwealth Bank ((CBA)) and Rio Tinto ((RIO)).

As said before, the all-important US retail sales data for January will be released later (Wednesday US time). Stay tuned.

Click to view our Glossary of Financial Terms