On Wednesday, the NYT floated a rumor that Warren Buffett was considering taking a stake in Bear Stearns. Have a read of the actual flailing report itself:
Bear Stearns, its shares and reputation beaten down
after the collapse of two hedge funds, is in serious talks with several
outside investors, including Warren E. Buffett, about selling as much
as 20 percent of the firm, people briefed on the discussions told The
New York Times Wednesday.
Other investors who have expressed an interest in buying a minority stake include the Bank of America, Wachovia and two Chinese institutions the Citic Group and China Construction Bank, these people said.
There are many rumors I give a smidgen of credit for being very loosely based on fact. Where there’s smoke, there’s fire, etc.
This is not one of them.
First
off, Bear Stearns (BSC) has become a giant rumor factory itself. First,
a Chinese bank was taking a big stake. Then, a major money center bank
was an acquirer. And now, Warren Buffett.
That’s right, the
world’s best known value investor wants to own a company that could
very likely have zero book value. A buyer of businesses with reliable
earnings streams now wants to get into trading? Buffett is the guy who
had an unpleasant time running the ego factory at Salomon Brothers, and
now we are told is looking at Bear? The man who is the chief
spokesperson for the “Derivatives are financial WMDs” — he’s a tire kicker for the poster boy for MBS derivatives driven hedge fund disasters?
PUH-leeze.
As we noted yesterday,
much of the broker’s reported earnings gains are accounting sleight of
hand. Bear Stearns’ earnings benefited from a drop in the value of
their own debt — about $225 million. Some people have estimated that
the gains from such write downs were 140% of the quarterly earnings.
So
while I doubt Buffett is seriously considering buying a stake in Bear,
it does make sense that BSC needs a deep pocketed partner. Let’s go to
Punk Ziegel analyst Richard Bove, the man who had a very timely sell
call on the brokers months ago:
“According to Bove, Bear needs a third party to make an
investment for a few reasons. First, the companys cost of funding has
increased, making it less competitive in a number of businesses where
it is a factor, with prime brokerage at the top of the list.
Therefore, Bove said, Bear needs a deep pocket partner to shore up its balance sheet.
Bove
also noted that the companys main business, the origination,
packaging, securitizing and structuring of mortgage products is under
pressure and will remain under pressure for some time.
However, it does not take more than a nano second of contemplation to recognize
this as little more than an end of quarter goosing from the usual
suspects.
Indeed,
it seems that every time a given sector or stock is in trouble, someone
floats a rumor that Buffett is a buyer. I had the same reaction to this
absurdity that I did back in February when we heard Warren was buying a
major stake in a large public home builder (Surprise! turned out to be
nonsense). A commenter yesterday pointed out this November 2006 story
regarding the Bill & Melinda Gates Foundation, a charitable trust
that for some reason was taking a stake in 7 homebuilders. (Also, if
you forward this email to 10 people, Bill Gates will give you $1000!)
It
looks like someone is simply wildly throwing shit against the side of
the barn, hoping something will stick. That may work for cooking pasta, but its not a way to base your trading and investing.
The timing of these rumors — option expiry, end of quarter mark up, or pre-earnings — always seems to be suspect.
Then
there’s the companies themselves: Funny, these rumors always seem to
fly around troubled firms or industries that just happen to have very
large short interests.
Gee, do you think anyone is trying to squeeze the shorts?
Sources:
Buffett Said to Consider Bear Stake
LANDON THOMAS Jr.
NYT, September 26, 2007
http://www.nytimes.com/2007/09/27/business/27wall.html
Bear Soars On Buffett Rumors
Carl Gutierrez,
09.26.07, 4:15 PM
http://tinyurl.com/2msgfe
Originaly from Source
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