Today we saw a typical Buffet move as he surprised everyone by taking a $5B investment into BAC. Everyone is talking about it and praising how good this is for the company, I guess it kind of is, but there are others, like me, who are more worried now than before Buffet made the investment. I do not own BAC and I am not short BAC or any financial firm right now so I have no self serving purpose for this.

What concerned me is the fact that the figure was $5B just like the Goldman deal. This seems to be a figure Buffet is comfortable risking in times of duress. Buffet has billions on hand, but only $5B that could yield him 6% something isn’t right. Now, I considered the pre-Buffet chatter about BAC to be the typical rumor mill stuff, illiuid, cut off from the markets, huge liabilities that haven’t been realized and the like, but nothing real or substantially true. However, I admit the massive selling of pieces of their business did strike me as if they were concerned about things, but it did not strike me as they were going out of business it was merely troubling. However, now with Buffet adding in his now typical $5B ‘petty risk cash’ into the firm does make me concerned about BAC.

Clearly the firm needed the cash as it was presented to and accepted in, what, 12 hours. You do not take $5B paying out 6% when we are in a zero interest rate environment and can issue paper cheaper without raising any suspicions. Frankly, taking a middle of the night cash infusion from Buffet is strikingly similar to 2008 for my taste. BAC got hosed on this deal, as many others have already said, and they are paying way too much for this cash. A case can be made that BAC paid the premium for the Buffet ‘seal of approval’ but that seal did not work for Goldman in 2008.

If one followed Buffet in 2008 on the Goldman deal they lost out pretty bad. After the cash infusion was made Goldman dropped to $48/share, about $70/share below Buffets investment, and the average investor would have probably sold at a loss given the events of 2008. If they were smart they would have doubled up, but come on, it was 2008! Regardless, Buffet was too early and could have done much better if he waited, but more to the point what kind of due diligence did he do back then? I am thinking more than he did with BAC, but no one knows for sure. What I do know is the government had to follow up on Buffet’s investment to the tune of $700B as they had to save the whole system. The government bailed out Buffet in the Goldman deal, basically.

What is different this time is the fact that countries are going broke now, not just banks, and there is risk everywhere. With BAC not only do you have sovereign risk, but you have derivatives risk and a whole bunch of mortgage issues from put backs to just bad loans altogether. I believe this time is very different because it is sovereign risk and we have had this issue before… in the 1930’s. In the Depression Europe had defaults and many countries devalued their currency which hurt the U.S. as we, at that time, were a net exporter of goods. The European issue deepened our Depression and the same thing will happen this time around, unfortunately. Not only may BAC hold European debt on its books, but they might have CDS exposure as well, not that we would know about that, thanks Frankendodd. In any event BAC is one hot mess and the sad thing is that BAC will not drop from $110 to $48 because it is at $7 already, you do the math to see what a similar drop would look like for BAC.

I do not think BAC is finished, it might be, but I doubt it. I do believe it will be stuck in the single digits for a very long time. For crying out loud, they bought Countrywide, just a reminder.

It is kind of crazy to think that someone would shell out billions in this environment to buy a railroad when loads are way down. This purchase also saved the transports index from a complete breakdown which would have, according to Dow Theorists, a broad decline in all of the markets. Whether or not this was a good move, I do not know since I do not follow the railroads, but I do know that it temporarily saved the transport index as it is up pretty big today.

If one wants to draw a conspiracy theory to all of this, they could very easily. After all, Mr. Buffet is very close to the Obama administration and he did invest heavily last year knowing things were very bad, worse than he let on. He also did this on the day that the transports were about to meltdown as well, so, as I said one could very easily draw conspiracy theories from this purchase. However, I believe the transports will still meltdown, it will just take a bit longer than expected.

As for the ISM data yester, as David Rosenberg put it, you got 55.9 from all those regional readings. Right, that is believable. Rosenberg also called into question the GDP number as well, which I did as well, as we had a decrease in hours worked, but a 3.5% print. Well, with the government steroids, sure it is possible, but if you knock out government forget it as the historical average is -.5% GDP growth with that type of hours worked. However, that ISM number did scare this bull and I did knock out my January puts, at only a 205 profit, only to have a reversal in the market.

So, my point is if this market was for real it would have rallied on yesterday’s huge ISM number and what happened? It fizzled out and almost posted a negative day, that should scare you if you are long. As for the rest of the week, the FOMC might change its language in its decision, but other than that don’t get too excited. The ADP number will give you insight into Friday’s number, but when Friday comes around, check out the BLS.gov’s birth/death model to see what voodoo they added to the number, I know the government never would stretch the truth or anything. Thursday, if we do not crack below that 500K initial claims, there is no recovery, sorry.

Again, nice play Mr. Buffet.

Who says the commoditization of the equity markets isn’t a good thing? This morning the dollar started out fairly strong which led to lower equity prices, rightfully so given the over extension of the equity markets, but that turned in the late morning. The dollar began to sell off, perhaps because of Buffet’s op-ed piece published this morning.

Regardless, it is clear that the markets are merely responding to a lower value for the dollar versus any real economic or other data points. Of course, this is not being talked about by the media or others who merely trumpet this as a continuation of the ‘new bull market’, with bull being the operative word. While the dollar is weaker by about .50% today I expect that there will continue to be strength in the near future as the markets realize that things are not as rosy as they think.

However, the crude inventory report is being perceived as bullish with rather large draw downs, but I believe those draw downs need to be put into perspective. Demand has been so weak in the US that the import of oil has trailed down recently and without that replenishment of more oil it was inevitable that the draw down was going to happen eventually. Because I believe it is relatively weaker demand and imports have been reduced I am not seeing this as a long-term bull more in crude.

With the report being framed as bullish it caused the dollar to lose strength which has the trickledown effect of higher equity and commodity prices. Outside of this resilient rally most trends do not go in a straight line which is why I expected the dollar to fluctuate. Because of this volatility I have not added to my gold or silver holdings as I believe we will get lower prices in the near future.

While I am a short-term bull on the dollar that does not mean I think it is a long-term trend. In fact, I believe the PIMCO report and Buffet’s concerns are very valid and why I am a long-term bear on the dollar. Regardless of my view on the dollar it is still the place to run in the event of catastrophe which I expect to see in the near future by some ‘black swan’ event.

As I have said many times, enjoy the rally, but the buying power of the dollar has not really increased as it is a mere tradeoff between the currency and the equity markets. In a nutshell, it is more of an inflationary event, minus the actual inflation as of right now, instead of a real economic event. This does not change my prediction of a sharp, painful decline in the near future, September to December area, where we could see spectacular movements in the indices.

Please review the 1 minute chart below comparing the S&P 500 to the DXY. There is a clear connection between the dollar’s decline and higher equity price movements, but most people will ignore it and continue on with framing everything as a recovery or green shoots. As I have said before, this much liquidity, printed by the Fed, in the market can make spectacular things happen. Either way, I am very happy with being out of equities as we are still heading lower.

If you follow Mr. Buffet then you already know that he made some significant portfolio changes in his recent SEC filings. Now, I do not recommend following him since he has billions and ‘he’ can afford to hold stocks forever because it is in his corporate account, which means he really isn’t risking his own money. However, his recent moves are very telling, in my opinion.

He sold Carmax, Home Depot, ConocoPhillips, Eaton and other health care stocks. First and foremost it tells me that he expects health care reform, which is not really reform it is a public option, to pass otherwise he would not have sold those health insurers. He sees through the whole cash for clunkers nonsense as it is not a long-term solution for auto sales and it also makes a statement that he feels the consumer is not coming back anytime soon.

His reduction of Home Depot is another vote for the consumer to not return in the near-term and that housing will more than likely stay stagnant for awhile. By selling COP he was simply undoing a bad decision which he took a lot of criticism for to begin with. However, if you want to read into it, means he thinks the energy trade is dead at the moment and prices, which is more my opinion, are going to be flat for sometime into the future which is good news for consumers as fuel costs should remain ‘low’ in the near-term.

His addition of Becton Dickerson and Johnson and Johnson indicates 2 things to me. First, it means that he thinks BDX will benefit from the public option or, in the event it does not pass, that while health insurers are dangerous to own health care stocks are not, which he is right on about. Second, JNJ is a good company that is well diversified and a defensive play, which, again, is right on for this market.

In short, I see this report as bearish as he did far more selling than buying and his buys were defensive stocks. He is buying classic defensive stocks and stocks that would clearly benefit if the healthcare reform actually passes. While I do not mimic his moves, and have no positions in any of those holdings, I think he made some pretty good calls.

Of course my opinion really doesn’t matter, however I did find the moves of interest to how he may view the markets at this time. It looks like he is getting much more conservative even if the media is telling you to jump in with both feet in this ‘new bull market’ which really does not exist. Based on these moves, regardless of you think I am too bearish or not, I would suggest you invest defensively as it is just not me who believes this market is more dangerous than rewarding.