Wednesday, June 02, 2010

Strong late rally, WHY?

Reading and listening to commentary about this afternoon's broad and robust rally in U.S. equities, there seemed to be universal acceptance of the catalyst, higher than expected used home sales and higher than expected auto sales. Not correct. Used home sales were, it's true, higher but soon to expire tax credits for homebuyers contributed to the higher number and that's not sustainable. Auto sales were higher as well, with percentages calculated on year over year sales, a comparison to a time when car companies were all going bankrupt, or just about.

I'm not saying the numbers weren't welcome but they weren't earthshaking and there were other economic statistics during the day that weren't so stellar. Warren Buffett's testimony to the Financial Crisis Investigation Committee was the deal of the day, hands down.

He was interviewed briefly by Bloomberg television just before going into the hearing. The interviewer, Betty Liu, asked him why he had turned down the invitation and had to be subpoenaed. Buffett just said, "That's their right". She asked what he and the other representatives of Moody's expected. He responded that he was there to discuss the reasons for the crisis, the committee's mandate, and that he had just this morning found out that it was just Moody's representatives and himself. She asked if as the largest shareholder didn't he have regular discussions with Moody's and Buffett responded, "I haven't seen the CEO or spoken to the company in three or four years. I'm not sure that I'll recognize him until I'm shown where I'm sitting."

Buffett was in an uncharacteristically agitated mood. The hearing started off on shaky ground. When asked for an opening statement Buffett responded "No statement". I was concerned for him. After about 15 minutes, however, he relaxed and regained his common sense easy touch. While the questions were direct and challenging, this committee was not personal, unfair, and hostile, like the vile Senator Levin and his goons.

As two plus hours went on, Buffett was asked repeatedly about derivatives and he answered the questions simply, in a friendly and not a patronizing way. By the end of those questions even Blanche Lincoln might have possibly understood something. He did not trash Moody's or anyone else specifically. He did bring up Fannie and Freddie several times and pointed out statements that their Congressional oversight staff had made that were not out of line with what Moody's had thought. Buffett did this in such a low key and polite manner that the committee members didn't seem to know that they were being skewered. Buffett repeatedly stressed leverage and incentives as what should be central regulatory focuses.

It was just an exceptional performance. When asked, actually challenged, with the firmly stated question, "What do you use derivatives for?", Buffett responded, "I use them to make money". You had to see it. Those in the market who did had the courage and desire to bid up equities when he finished talking.


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