Why did Warren Buffet buy $5bn stake in Goldman Sachs - my take on it

Through Berkshire, Buffett is taking $5 billion worth of perpetual preferred stock in Goldman in a private offering. For that, he'll get a 10% dividend and warrants to buy $5 billion of common stock with a strike price of $115 a share. He'll be able to exercise the warrants at any time within five years. Until now, Mr. Buffett, who has navigated the stock market with legendary prowess, has largely refrained from investing in the stricken financial industry, saying repeatedly that things could get worse. But may be Mr. Warren Buffett is thinking about the worst being nearly over for the finance industry or at least for Goldman Sachs!

Goldman is one of the few big free-standing investment banks left on the Wall Street after collapse of Bear Stearns and Lehman Brothers recently. "Goldman Sachs is an exceptional institution," Buffett said in a statement. "It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance." On Sunday, Goldman won Federal Reserve approval to become a bank holding company, giving it easier access to financing and adding to speculation it might buy another bank.

Warren Buffet invests when he sees monopoly – Coke, P&G, Washington Post, Walmart, Nike and many more. As he says, “Be fearful when others are greedy and be greedy when others are fearful.” But only in next breath he may utter, “Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years. “ OR “Our favorite holding period is forever. “ So it is not necessary that this is the bottom for GS or the US stock markets, things may take time to improve– but the important thing is, smart money has come in somewhere! Future will only tell if Goldman also becomes a monopoly like other investments of Warren Buffet.

There won’t be a better time than this to take a bet on US financials stocks. Goldman is a pure Buffett play: - it is a blue-chip organization, it has a long and successful track-record, he is investing in a stock that has already plummeted from $248 to around $130 now. If the warrants do get exercised, it would give Warren Buffet nearly 9% stake in GS and most probably a seat on the board of directors to be involved in decision-making. He is still getting 10% on the preferred stock also, which is not at all bad as far as US interest rates are concerned. These shares are senior to both Goldman's other preferred stock and its common stock. That means no other shareholders will receive any dividends until Buffett has been paid his 10%, in full, each year.

But that was all about “FUNDAMENTALS”; it seems there is more to this deal than meets the eye. Mr. Buffett has a close relationship with Byron Trott, who heads Goldman’s Chicago office. It was Mr. Trott who brought Mr. Buffett into Mars Inc.'s $23 billion acquisition of Wm. Wrigley Jr. & Co. earlier this year. Mr. Buffett agreed to put about $6.5 billion into the deal. It wasn't immediately clear what role Mr. Trott may have played in Mr. Buffett's decision to invest in Goldman. Other thing is the US Government is in the process of finalizing the $700bn bailout for the finance industry. If the bailout goes through, GS will have the US Govt as a buyer of last resort for its bad mortgage debt. Goldman has dropped nearly 50% from its peak going towards which Warren Buffet can get all his investment back by exercising warrants. Warren Buffet has time and again said that the bailout is needed for USA.  To quote him, “We are looking over a precipice in terms of the economic condition of the country for the next few years. If Congress doesn't help us on this, heaven help us. Thank heavens that Paulson had the imagination to step up with something that is of the scope that can really do something about it." Why should Warren Buffett after striking a best deal be interested in Bailout package of U.S Govt where the Govt doesn’t take stake in any bailout company and they will buy only distress asset? Is that Paulson who holds ESOP in Goldman Sachs helping Buffett get the best possible deal, so that his asset valuation grows in times to come? And who can better oversee investment interest of Warren Buffet in Goldman Sachs than Henry Paulson, the ex-Chairman and ex-CEO of Goldman Sachs? Should I have to mention about “something cooking”!

United States presidential election of 2009- a view by A.K.Prabhakar

The United States presidential election of 2008, scheduled for Tuesday November 4, 2008 will be the 56th consecutive quadrennial United States presidential election and will select the President of the United States and Vice President of the United States. The president-elect and vice president-elect are scheduled to be inaugurated on January 20, 2009.

Bristol palin, 17, (center) held her brother as her mother, Sarah Palin, stood with Sen. McCain at an Ohio campaign stop Friday (29/08/2008).

On August 28 McCain offered Senator Sarah Palin the vice presidential spot just moments after their meeting concluded.

Facts: U.S hasn’t had a women president or Vice-president while most of the world countries have had women at high post, so called 2^nd biggest demo-crac(z)y has failed, while fundamentalist Iran had 2 woman Vice-president 1997-2005 Vice-President Prof. Dr. Masoumek Ebtekar, Iran and Currently from 2005- Vice-President Fatemeh Javadi, Iran. Twist and Turn: Barack Obama has been in lead as per survey and if he wins he will be the first non-white to do so and Democrats had a woman or Non-white choice but republics had to do catch up game which can be filled in by Sarah Palin in my view and the one sided contest has changed into a tough touch and go. What matters most are people who vote on 4November and to whom they vote.

http://en.wikipedia.org/wiki/United_States_presidential_election,_2008 U.S election data

• George Herbert Walker Bush (born June 12, 1924) served as the forty-first President of the United States from 1989 to 1993 http://en.wikipedia.org/wiki/George_H._W._Bush

• William Jefferson "Bill" Clinton served as the forty-second President of the United States from 1993 to 2001 http://en.wikipedia.org/wiki/Bill_Clinton

• George Walker Bush (born July 6, 1946) is the forty-third and current President of the United from 2001 to 2009 http://en.wikipedia.org/wiki/George_W._Bush

As per U.S laws a person can’t be a president for more than 2term each term is 4years.

Why do we need to know about U.S election 2009?

Traditionally Indian market and Global market has reacted to U.S election I have presented a graph below where 1992 and 2000 have seen major bear phase and even in 1996 we did see major correction. And now in run-up election in 2009 we are seeing a correction which has extended from Jan2008 till now and may extend till Jan-Feb2009.

When do you see recovery coming?

Past record of 8year rally, high in 1992 saw a low made in 1993 and High in 2000 saw a low made in 2001 and most important is the all time high was crossed only in 1994 after 1992 high and 2004 after 2000 high. So we have made a high in 2008 and low can be possible in 2009 and new high possibility arises in 2010 or after that.

What would be the impact to Global market?

U.S policy undergoes major changes in an 8year cycle and that have impacted global economies in major way. While father and son Bush attacked Gulf (Iraq) in there respective term which saw high Crude oil price, Clinton term saw a surplus of $599 and Crude prices were in control.

What impact it would give to Indian market?

After almost a gap of 17-18years U.S payroll data and employment data is worst and there is a feeling that U.S outsourcing to India and other Asian countries has to be controlled and visa rules made strict, this has been election issue from 1997, 2001 and 2005 and this time the impact has been worst in 20years. This can impact Tech, BPO, KPO and other outsourcing industries, many are skeptical real impact will be known latter.

Which sector would benefit?

Alternate energy would be one major sector to watch, and Carbon credit (Non-polluting) Industries can benefit as new Govt may favor reduction in green house gas emission.

Senator Barack Obama http://en.wikipedia.org/wiki/Barack_Obama

Obama stated that if elected he would enact budget cuts in the range of tens of billions of dollars, stop investing in "unproven" missile defense systems, not "weaponize" space, "slow development of future combat systems," and work towards eliminating all nuclear weapons. Obama favors ending development of new nuclear weapons, reducing the current U.S. nuclear stockpile, enacting a global ban on production of fissile material, and seeking negotiations with Russia in order to take ICBMs off high alert stat.

Highlight: Many fear that Indian Nuclear deal may face problem if it doesn’t pass through before President Bush term ends.

Senator John McCain http://en.wikipedia.org/wiki/John_McCain

If inaugurated in 2009 at age 72 years and 144 days, he would be the oldest U.S. president upon ascension to the presidency, and the second-oldest president to be inaugurated.

On the economy, McCain says he would make the Bush tax cuts permanent instead of letting them expire, he would eliminate the Alternative Minimum Tax so as to assist the middle-class, he would double the personal exemption for dependents, reduce the corporate tax rate, and offer a new research and development tax credit. At the same time, he pledges to eliminate pork-barrel spending, freeze nondefense discretionary spending for a year or more, and reduce Medicare growth. McCain is also opposed to high salaries and lucrative severance deals of corporate CEOs. Another proposal of the Arizona senator is to build 45 new nuclear reactors by 2030, in order to fight climate change and establish U.S. energy independence.

Conclude: U.S election has always had its impact on Global markets and Indian markets and this time possibility of Indian election following (Before May2009) and SEBI policy silent about PN-Notes which expires in March2009 makes investors to go slow. Sector rotation, many get struck up as new policy initiative changes the leadership in growth sector. As a long term investor above 3-5years I would be bullish on Indian markets and this would be the market which would lead the Global recovery, but problem is many fail to understand long-term. Market to correct from peak of 20,000 levels started distribution from November 2007 till January 2008 3months and few days of false rally one should not get carried away

Quote: When we were young kids growing up in America, we were told to eat our vegetables at dinner and not leave them. Mothers said, think of the starving children in India and finish the dinner.”

And now I tell my children: 'Finish your homework. Think of the children in India who would make you starve, if you don't?' THE WORLD IS FLAT- BY THOMAS FRIEDMAN

Recap: I was going through the entire news summary I have sent from Nov2007 to Jan2008. November2007 in Bangalore seminar a market correction from 20,500 to 14,000 levels was predicted and announced and time period was given as next 3months. I went through all the mails I sent many interesting facts, loads of warning of coming crash we have talked about 8year cycle and we were first, 7/1/2008 we talked about how U.S market correction will impact Indian market- Just a sample below.

Market summary for January 3^rd 2008-A.K.Prabhakar (for use of ANANDRATHI)

When caution is given traders and short term investor short sell the markets and they get trapped, caution is given seeing excesses in market, euphoria, rampant manipulation which is part of euphoric bull markets. Predicting the top & bottom of any market is very difficult. we have almost 1000 stocks hitting upper circuit on average which is never good for healthy markets, Many want tips and news and not quality research report and no one is ready do basic homework.

Many rumors are spread on Reliance energy IPO that markets are held till that and Reliance pack will move heavily from today, these are news and rumors spread on vested interest. Fundamental is the one which is time tested and has proved over the years to be beneficial. Insiders and manipulators have never crossed one cycle of markets (4 to 8 years), so please understand the dynamics of markets and take your risk.

Author A.K.Prabhakar

DAILY REPORT FOR 01 SEPTEMBER, 2008

NIFTY (4360 +146 pts)

Supp 4315/4280/4250 Res 4400/4435/4480

SENSEX (14564 +516 pts)

Supp 14460/14350/14220 Res 14670/14790/14900

Review of the previous session:-

• It was a solid start after many lackluster trading sessions as markets shrug away the gloomy mood on the first day of a news series. Fall in inflation and crude prices added the needed boost for the bulls as Sensex closed up by more than 500 points.

• Banks, realty and metals were major gainers. Only 1 stock CAIRN closed in the negative from the Nifty 50.

• BSE Breadth 1851 Adv- 790 Dec NSE Breadth 969 Adv-239 Dec Upper Circuit -187 Lower Circuit –109

• BSE Vol Rs 5430 Cr NSE Vol Rs 10626 Cr F&O NSE Vol Rs 43170 Cr

• FIIs sold Rs 364 Cr in cash market and MFs bought 281 Cr provisionally. In F&O, FIIs bought Index Futures worth Rs 1015 Cr and sold Stock Futures worth Rs 447 Cr. Their Outstanding position in Futures is 30423 Cr and Options is 20232 Cr.

• Additional Data:- Gold $837.70/oz Nymex Crude $115.59/bbl

• SGX Nifty Index Futures (Singapore) 4315 (-45 pts) at 7.35 am

• Indian economy recorded its slowest growth for any quarter in over three years at 7.9 per cent owing to a dismal performance by industry. The deceleration was on expected lines as a tight monetary policy by RBI to control over 13-year high inflation had made borrowings of the industry costlier, impacting output of growth engines, particularly manufacturing.

F&O observations:-

• Long build-up – KS Oil, Noida, Titan, Infosys, Moser, BhartiAir, IDFC, Educomp, Renuka, Balrampur, BankIndia, ITC, Punj, RelCap, BHEL, NagarConst, ONGC, IVRCLInfra, TCS, IFCI, RNRL, SBIN

• Short build-up – Sun TV, MahSeamless

• OI 62726 Cr (+6048 Cr) Nifty OI Up 2% PCR 1.37 (from 1.36)

• It was bullish all the day through as money flowed into many stocks on the first day of settlement. BankNifty and GT Offshore saw major short-covering indicating some cap on upside for those instruments.

Global markets:-

• U.S. stocks tumbled on Friday, led lower by tech shares after computer maker Dell warned that companies worldwide are cutting back on technology spending. The Dow Jones Industrial Average closed down by 171 points with all 30 constituents closing in the negative.

Outlook for 01 September, 2008:-

• The trend is still uncertain with volumes not confirming the rally. A weak opening on the back of negative global markets is not ruled out but Nifty has strong supports at 4315 and 4280. Major selling is possible only below 4280. Nifty to face resistance at 4430 and 4480 going up.

• Bullish stocks in short-term :- NTPC, NIIT Tech, TCS, Welspun Guj

• Negative stocks :- Chambal, DLF

• April-July No Hit Rs 1, 15,980 Cr against Annual Target of Rs 1, 33,287 Cr

Indicating clearly that managing the fiscal deficit is going to be an uphill task for the government, official data released on Friday said the fiscal deficit in just the first four months of the financial year touched 87% of the level targeted for 2008-09. According to data released by the Controller General of Accounts (CGA), fiscal deficit for April-July stood at Rs 1,15,980 crore against the annual target of Rs 1,33,287 crore.

• The Reserve Bank of India released its Annual Report for 2007-2008.

Overall Performance

The Indian economy continued to perform well during 2007-08, although the growth moderated marginally. This was the third year in succession when the Indian economy achieved a growth rate of 9 per cent and above. This was also the highest average growth rate achieved during any three year period in the history of independent India. During each of the last three years, the growth rate of agriculture was well above the trend growth rate with foodgrains production touching a new high in each of the last two years. Industry also registered robust growth with the growth rate in the previous year being in double digits. Services exhibited double digit growth in all the three years. Although the Indian economy has been generally performing well in the post-reform period, the performance during the last three years was indeed noteworthy and it was second only to China among the major countries,

Read complete article at http://tinyurl.com/5v6cx8

http://tanmaygopal.blogspot.com/

Disclaimer: These recommendations are based on the theory of technical analysis and personal observations. This does not claim for profit. I am not responsible for any losses made by traders. It is only the outlook of the market with reference to its previous performance. You are advised to take your position with your sense and judgment. I am trying to consider the fundamental validity of stocks as far as possible, but demand and supply affects it with vision variations.