Perpetually Preferred

No problem can be solved from the same consciousness that created it.
-Albert Einstein

In a made for CNBC headline announcement last night, Larry Kudlow proclaimed the mystery of his faith… No socialist bailout is too far from him buying into, provided that it can make the stock market go up; especially if Warren Buffett rubber stamps it.

I wrote my senior thesis here in New Haven on Buffett. He remains, The Man. He also remains the only investor of consequence who has unlimited duration in his investment mandate. This morning, he is the only investor with these “perpetual preferred” terms on Goldman’s stock. So before you get all heated up and run out buying into consensus TV’s take on this “deal”, stop, breathe, and think about it. There’s one man in this world who gets this deal. The rest of you get the scraps of Goldman’s $5B raise that they just doubled down on. No, no – never mind what the company said yesterday, last week, and last month that they don’t need money. We simpletons are supposed to be stupid, and not hold people accountable to what comes out of their mouths.

Reality TV’s session with Hank Paulson yesterday enlightened America on the enormity of their financial system’s confusion. Confusion in markets breeds contempt. After this morning’s pre-market futures love fest, we’ll be staring down Paulson’s ‘You Tubing’ session with Chuck Schumer at 10:00AM tomorrow in front of the Joint Economic committee, then again at 2:30PM EST in front of Barney Frank and the Financial Services Committee. This is not going to be a positive catalyst folks. America has already voted.

In the Bloomberg/LA Times surveys this morning, 80% of Americans are now saying the country is headed in the wrong direction. More interestingly, 55% oppose the Paulson Plan vs. 33% supporting it, and 45% of Americans think Obama is more apt to handle this economic situation vs. McCain’s 33%. This mounting contempt is both unprecedented and warranted. Wall Street investment banks have compromised the integrity of their handshakes. If you didn’t get that yesterday, you’ll have another chance to watch it on Thursday.

Not surprisingly, the rest of the world isn’t stupid either. If you show people something on TV, they neither need to read or count to understand whether someone looks like they are afraid. It’s called intuition. Asian, European, and Middle Eastern stock markets are screaming this right now, and I think you should be paying attention to their vote.

Asia opened higher, and closed mixed. Bailout master of the universe, Japan, closed +20 basis points last night – hooray. European markets opened higher and have now turned lower as I hit these keystrokes. The major indices across Asia and Europe are broken, and they realize that the only investor getting a 10% preferred dividend in Goldman, is an American.

The contagion associated with our investment bankers losing the world’s trust is now spreading to the Middle East. Prince Alaweed threw up his hands last week and said, “I’m out.” This morning, despite the preferential All American investor treatment, why is the Saudi stock market trading down -5.5%. Why has the mother of all “Sovereign” support (Saudi’s Tadawul Index) dropped -21% in the last month? Why are Qatar and the United Arab Emirates trading down -3.7%, and -3.5% respectively this morning despite oil trading higher to $108/barrel? I think it’s because they aren’t stupid.

Pakistan is calling in the 1-800 US bailout line this morning. Moody’s downgraded their debt yesterday; their stock market gets stoned by their own people; and their currency has lost -21% of its value year to date. Their new “leader”, Zardari, is allegedly a lot of things, but one of those things may not be stupid. He meets with Condi Rice on September 26th. Is he going to ask for something the US cannot afford to give? What will he have to do if/when the answer is no?

It’s global this time. And yesterday assures you that there are more questions to answer locally, never mind globally. The US has a “perpetually preferred” investor who is much larger than Warren Buffett – the common American tax payer. That tax payer is not going to let the investment bankers one up him/her this time. Been there, done that.

I shorted the S&P 500 yesterday. Hopefully the government doesn’t ban me from doing so tomorrow. My immediate downside target is now 1150.57.
Good luck out there today,
KM