Wall Street Wrap – Warren Buys Trains and India Buys Gold
By Robert Perrego, at 5:38 pm on November 3rd, 2009$44 billion and 200 tons were the two numbers flashing across screens this morning on Wall Street. Warren Buffet’s Berkshire Hathaway Inc. (NYSE: BRK’A) bought the 77.4% of Burlington Northern Santa Fe (NYSE: BNI) it did not already own in a cash and stock deal for $100 a share, valuing the company at $44 billion. This would be the largest acquisition ever by Berkshire, and it seems to show that Warren is bullish long term on the U.S. economy. Of course Warren only invests long term.
To me this buy looks like a derivative bet on the price of oil. Railroads move tonnage more efficiently and for less energy than any other mode of transport. The distance between the coastal United States and the inner places, such as the mid west where a significant population lives, makes moving products and materials crucial to economic activity. Once any product gets to a port, or is produced in the middle states (grain, cattle, cars, etc…), it needs to be brought to where the demand is. Should oil rise into triple digits again, trucking becomes more expensive and less competitive with rail. Also, when trucking raises their rates, the railroads can raise their rates even though their profit margins will not be as strained and the raise will fall straight to the bottom line.
Berkshire Hathaway is also going to split their class B shares 50 to 1, which will allow the investing public to finally trade the empire Warren built.
The other large number came out when it was announced that India’s Central bank bought 200 tons of gold off the International Monetary Fund over a two week period ending October 30th. This might seem like a lot of gold (and it is), but a ton is 32,000 ounces and at the price of $1,046 an ounce, this buy only comes to $6.69 billion. This is a huge trade for the gold market and the comparison to the buyout of BNI shows you just how small, relatively, the gold market is.
Traders took note of that trade as it is large, and what it also did is cleared half of the announced 403.3 tons of gold that the IMF planned to sell, cutting the overhanging supply in the market. Overhanging supply is what creates resistance to anything that trades, and this halving of the supply sent gold prices ripping to new all time high levels. Even though the dollar was up today, New York Spot Gold gained $25.60 an ounce (+2.42%, $1,085.20, 4:10 p.m.) with the high trade on the day being $1,089.10.
If you read yesterday’s Wall Street Wrap, I mentioned that the chart on the gold ETF (NYSE: GLD) was setting up nicely for a run at $1,100 by mid November. I would like to tweak that call now – we could be there this week, maybe even tomorrow.
There were reports that China was going to buy the full lot off the IMF. It looks like India jumped in and stole a few hundred tons and it would be no surprise to hear China clears the order soon. With the U.S. dollar on a long slide down in value, and given that China, Japan, the Middle East and India have trillions of dollars of foreign reserves in treasuries, these countries are starting to get desperate for some diversification. India just managed to diversify a few percentage points of their foreign currency holdings. If China follows suit, and then Russia and Japan and Saudi Arabia, etc… gold $2,000 will be a road sign you will get whiplash trying to read. I am a huge gold bug, guilty as charged.
I keep hearing arguments against gold involving inflation and deflation and how it is in a bubble right now. Well I have one word for you – currency. Gold was the world’s first currency, and the way things are going, it might very well be the last too. Gold still has a deep psychological hold on human beings and I just cannot imagine a politician getting all dirty digging in his suit to get more gold so he can spend more money.
Oh yeah – the rest of the market! The Dow Jones Industrial Average traded in an 84 point range sideways all day and closed down 17.53 points (-0.17%, 9,771.91). The indexes split today as the S&P 500 gained 2.53 points (+0.24%, 1,045.41) and the Nasdaq 100 closed up 6.29 points (+0.37%, 1,679.20). Nymex crude rose $1.47 a barrel (+1.89%, $79.41, 4:22 p.m.).
All eyes will be on the FOMC tomorrow as they announce their interest rate decision at 2:15 p.m. The stock market has been very sensitive to the strength of the dollar as the carry trade cowboys are using shorts on the dollar to fund their stock plays. The Fed is not expected to raise rates, but how they word the release with the announcement can make a world of difference in how the dollar trades, and thus how the stock market trades.
Stay tuned.
