U.S. stocks erased very early gains (a fleeting rally on the Berkshire/Bank of America news) to close lower for the first session in four as traders turned back to a less-than-desirable jobless claims report and waited for the big Bernanke speech. (Odds are he won’t take additional aggressive action just yet, but if he knows the GDP revision, which will be delivered to the public 90 minutes before the speech, has printed sub-1.0% then maybe he will believe the trigger needs to be pulled now.)

Also adversely affecting out market was a mini flash crash on the German bourse (DAX), which pushed other European indices lower late in their session (they close at 10:30 STL time) -- and maybe we can’t call what was a brief 5% move yesterday a “flash” crash as this morning the DAX is back to that flash low.  That market has crumbled by 28% since hitting a near three-year high in April.

Financials, basic materials and consumer staples fared the best.  Industrials, health care and consumer discretionary shares took the biggest hit.

The CRB index closed higher, bucking the decline in stocks, as the precious metals bounced back a bit and wholesale gasoline rallied eight cents to $2.96/gal. (highest level on gasoline since the market really began to slide in early August).

Well, as we’ve seen over the past three years, every time a bank CEO states that his company doesn’t need capital (the latest being BofA’s Moynihan) it means one thing:  They need capital.  As most people know by now, Berkshire Hathaway will invest $5 billion in BofA via 50,000 preferred shares @ 6%.  Oh, and the preferreds have a call option at $105/share (so even if called away from Berkshire they pick up 5%) and Berkshire gets warrants to purchases 700 million common shares at an exercise price of $7.14 (just 2.1% out of the money as of the prior session’s close and one would assume the stock could eventually manage at least a $10 share price unless they ultimately are bailed out by the government).

It surprised me to watch BofA’s shares jumped on this news (even if they closed well off the high of the day) as the terms are so sweet for Berkshire that it makes the bank’s need for capital abundantly obvious.  And then you have the 700 million in warrants that dilute BofA shareholders by 7%.

I find it interesting that this move by Buffett comes just two days after his meeting with President Obama; this drives speculation that the Treasury Department proposed the deal.  Buffett says he came up with the idea in the bathtub and the mainstream media ran with that story – he probably spilled cherry Coke (supposedly his favorite drink) all over himself due to the ensuing laugh-fest he had over their naiveté.

Market Activity for August 25, 2011

Sector Activity for August 25, 2011

Jobless Claims

The Labor Department reported initial jobless claims continue to portray a job market that is producing jobs at a woefully insufficient rate, unable to heal the very high unemployment rate and the nasty level of long-term unemployment.

Initial claims rose 5,000 to 417,000 last week, up from yet another upwardly revised figure for the previous week.  The four-week average rose 4,000 to 407,500.

Continuing claims (those on benefits for 2 weeks or more, which extends out to 99 weeks in many cases) fell again last week.  Standard claims (those that cover the first 26 weeks of joblessness) slid 80,000 to 3.641 million and extended/emergency claims (that pick up after 26 weeks) fell 20,000 to 3.636 million.  Total continuing claims are down two million over the past year.

The problem is that so long as initial claims remain above 400K it suggests too many of these people are seeing benefits expire rather than finding a job.

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Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900