The markets received a lift yesterday on Warren Buffett’s proposal to buy out some of the bond insurers’ (monolines) liabilities. While this improved sentiment in the market place, I think it’s a case of Buffett trying to pick somebody’s pockets clean.
The man is obviously smart, and his offer will be beneficial for him but not for the mononlines. In essence, he’s offering to re-insure some $850 billion in municipal bonds. If the insurers agree to this, which I doubt, it means he’s getting all of the AAA holdings from their portfolio, but leaving the bond insurers stuck with the Subprime slime. Well, I can’t blame him for trying to pick up a good deal. Historically, muni bonds have a default rate of less than 1%, which makes this a low risk transaction.
The major bond insurers are facing downgrades due to more than $5 billion in losses caused by swaying form their original business models to insuring questionable Subprime related instruments.
Bottom line, this is a win-lose situation. The bond insurers are with their backs against a wall desperately trying to maintain their AAA ratings. Selling the profitable and non-problematic part of their portfolios and keeping the garbage will only hasten their demise.
However, the markets reacted euphorically as if this was the long-awaited answer to the credit crisis. It will not solve the underlying issues and the indexes ended up in split fashion with the Dow gaining 133 points, while the Nasdaq remained unchanged.
Even Treasury Secretary Hank Paulson was unusually frank in his assessment during a question and answer session by saying that “in terms of Subprime the worst isn’t over; the worst is just beginning—and we all know that.” Not very reassuring!
Our Trend Tracking Indexes (TTIs) moved closer to their respective trend lines, but remain in bear market territory as follows:
Domestic TTI: -0.04%
International TTI: -7.57%
There is no change to our current market neutral position.