Warren Buffett Saves the Day

Warren Buffett's $5 billion investment in Goldman Sachs (GS) could change everything.

Yes, Warren got a sweetheart deal--a preferred stock yielding 10% and a warrant to buy $5 billion of common stock at $115 (8% below the close). But the fact that he had the confidence to pull the trigger on a $5 billion investment in a company whose very existence seemed threatened last week could turn the whole market around (temporarily).

Goldman's up 8% in the aftermarket, to $135. This despite the impending incremental dilution from a $2.5 billion common equity offering.
Morgan Stanley's up 10%, to $30
Bank of America's up 4% to $35
etc.

Warren's investment also shows that, at least for some financial firms, the private markets are still open. This could induce other banks to seek private capital and other investors to follow in Warren's footsteps.

Just as important, the investment could reduce the need for the Wall Street Bailout Hank Paulson and Ben Bernanke tried so hard to sell to Congress today. (At the very least, it will reduce the likelihood that Congress signs off on the current plan: If Goldman can raise $5 billion in short order from one of the world's pickiest investors, surely the situation can't be as dire as Paulson and Bernanke are saying? And surely the government doesn't need to buy trash assets at a premium just to get banks to play ball?)

In our opinion, it's likely we've seen the bottom in Goldman's stock (not necessarily today's $125, but the high-$80s the stock hit last week). Is it possible we've also seen the bottom in the market?

It's possible--but less likely. The financial sector has been completely washed out, but the rest of the market and economy haven't. We'll be closer to the market-bottom day, we think, when we see the Oracle toss $10 or $20 billion into US real estate investments.

Alternatively, could this be one of the rare occasions in which Warren loses his shirt? Anything's possible. (A reader notes that Warren's investment in Salomon and the late 80s didn't go so well). But if you want to put your money on that one, be our guest.

Warren Buffett Saves The Day