When All Else Fails, Turn To Warren

Warren Buffett did it again. Bank of America

this morning it would be selling 50,000 preferred shares to Warren Buffett and Berkshire Hathaway

, worth $5 billion. Buffett, as is his customary deal, will also get warrants to purchase 700 million shares at an exercise price of $7.142857 per share. “We are building the best franchise in financial services and we have laid out a clear plan to deliver long-term shareholder value,” said Bank of America Chief Executive Officer Brian Moynihan. “I remain confident that we have the capital and liquidity we need to run our business. At the same time, I also recognize that a large investment by Warren Buffett is a strong endorsement in our vision and our strategy.” “Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it,” said Berkshire Hathaway Chairman and Chief Executive Officer Warren Buffett. “I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That's what customers want, and that's the company's strategy.” This is incredible, Buffett saved the day. Again. BofA's stock price is up 25% on this news, and equity futures are soaring. What is more extraordinary, is that Meredith Whitney, of Meredith Whitney Advisory Group said just

the company did not need new capital. This goes to show you that Buffett might know more than Whitney, but both have arrived at the same conclusion: that Bank of America is a strong brand, and the earnings power will be far greater than anyone thinks. The $5 billion that Buffett put into BofA will probably not be the entire amount that it needs for mortgage putback settlements, but the psychology of the event is much stronger than the actual amount. It signifies that Buffett has stepped up, put his money where his mouth is, and is acting like Superman to save the day for BofA. It is obvious that Buffett sees the value in the Bank of America franchise, and the earnings power it will eventually have. Buffett putting money into BofA means the $16 book value is probably closer to the truth than the bears would like you to believe. That would be an 8 multiple on $2 per share in earnings. If the recovery is normal, and that is a big IF, it could earn well north of $2 per share. It is possible the trajectory of the bank has changed, all with one fell swoop. A major move like this has the ability to change sentiment, and markets trade more on psychology than many would like to think. Buffett and his mentor Ben Graham have always said that in the short term, the market is a voting machine. In the long-term, it trades on fundamentals. Warren, you just voted in favor of BofA. Let's see what the market thinks. I suspect you may be right in the long-term as well.

Traders who believe that Buffett is right might want to consider the following trades:

Traders who believe that Buffett is wrong may consider alternate positions: