Warren Buffett goes bargain hunting: Gottliebsen

My friends in the US say that the bailout package will be passed tonight although it must go to the House of Representatives on Friday. Certainly that’s what the market is assuming.

My friends in the US say that the bailout package will be passed tonight although it must go to the House of Representatives on Friday. Certainly that’s what the market is assuming.

What fascinated me about last night’s trading was the movement in the share price of GE, which received a $US3 billion injection from Warren Buffett.

Jeffrey R Immelt has just competed his seventh year as head of GE after taking over from the legendary Jack Welch. During his seventh year he has seen GE stock plummet from just under $US42 to last night’s low of $21.65 – the lowest level in more than 10 years. When Immelt took over from Welch, GE was almost $60.

The truth is that Immelt took over a mess at GE and a stock that was inflated. Even so, to lose almost two thirds of your value over seven years is not a pleasant experience for a CEO.

But last night’s GE share price slump and later recovery is a good indicator of some of the market trends we are going to see when the bailout saga is completed.

Last night’s data on factory orders in the US showed a steep decline and they will have fallen even further during in the crisis. There is no doubt that the US is now in recession and that last night’s fall in GE shares from $25.75 to $21.65 when the factory figures came out shows that the analysts still have not understood what’s happening in the US economy.

Then Buffett injected $3 billion into GE which caused the stock to rally and close at $24.85.

But Buffett is getting preferred stock and, as we saw in Goldman Sachs, is using his name to gain very favourable equity terms from embattled leaders. They give him good terms and know that the fact that he backs them means that their stock will firm.

However, this glimmer of hope should not obscure the fact that after the bailout euphoria is over, the US market has more trials to come.

This article first appeared in Business Spectator