Señor, señor, can you tell me where we’re
Lincoln County Road or Armageddon?
Seems like I been
down this way before.
Is there any truth in that, señor?
Bob Dylan — Señor (Tales Of Yankee Power)
OK, so I am a huge fan of Bob Dylan’s music. As a wise man once
told me, sometimes our vices, can in fact be a virtue. If Bob Dylan’s
music is all I have going against me, then I think I’m doing pretty well….
Anyone with a red cent in this market is desperate to know where
we’re heading. Up, down, sideways? Regardless, we have indeed been
down this road before, and so has Warren Buffet. If Mr. Buffet’s
plans are not foiled by mass stupidity and avarice, he is about to
pull off a coup that should make every investor take a long hard look
at themselves. While bond insurers MBIA, AMBAC, and FGIC are headed
towards Armageddon, Warren Buffet is talking a leisurely walk
down Lincoln County Road. Making sure to enjoy his cherry Cokes, and
Buffet’s extension of 800 billion dollars of capital to
troubled bond insurers, MBIA, AMBAC, and FGIC is nothing short of
pure genius. Why? Because he is offering to get in on action where
there is enormous market stability, (muni bonds) and offers him the
prospect of putting huge amounts of cash onto his books. This is
classic Buffet investing. Find an undervalued asset, make an offer
that provides the stability of the Berkshire name, and Bond rating,
and pile up mountains of cash to invest in other ares. Notice
that Buffet’s offer was stayed away from anything that was related to
CDOs. This is a brilliant move as the Municipal Bond market has an
unparalleled record for defaults; in a good way. The long term
traditional default rate for municipal bonds is .02 percent. (That
number may have edged a bit higher, but it’s still very low.)
Governments do not want to default on their debt. Not only is it
considered bad form, but it is generally accepted as being worse than
losing the Super Bowl to Eli Manning. (See the 18-1 Patriots).
So what happens if these companies turn Buffet down? There is
already talk of government intervention. (See article here.)
Will munis begin to shy away from insuring their bonds? Or could
there be an exodus to Buffet’s Berkshire Hathaway Assurance Corp.?
Either way the Muni market is beginning to take on a new shine.
Buffet’s move sent the Markets on an upward motion, so it raises
another interesting question; how powerful is the Buffet put? Does
The Oracle of Omaha have more sway over the markets than Mr.
Bernanke, Team Fed, and the Central Bankers? Could there possibly be
any truth in that,Señor?