ETF Expert

The financial markets have been clamoring for good news. And today, they jumped on the Buffett bandwagon.

Warren Buffett appeared on CNBC this morning to explain that his world-famous company, Berkshire Hathaway (BRKA), offered to reinsure $800 billion in muni bonds. The debt in question is debt being held by beleaguered bond insurers, such as MBIA (MBI) and Ambac (ABK).

Now, let’s take a step back. How many investors really understand the depths of bond insurer problems? Or, for that matter, why it seems to matter so much to the financial markets?

It follows that it may be more important to understand how Warren’s overture is beneficial to enhancing market stability. However, today’s announcement is hardly a panacea for the economy at large.

Still, we have to take our cues from what moves the markets. For example, the Fed’s emergency rate cut of 0.75% was helpful on 1/22/08, but the market still fell more than 1%. And the following day, the market was down 3% out of the gate…

But then something happened. The market rallied more than 600 points… 5% off the bottom… on news that the New York Superintendent of Insurance would try to orchestrate a rescue of on-the-ropes bond insurers through bank funding. (Again with the bond insurers.)

Would a rescue/bail-out of bond insurers succeed? Well, if it had been a done deal weeks ago, we wouldn’t see Warren Buffett coming to the table today with another offer.

But here’s the take-home:

It’s not that the Fed’s rate cuts will enhance lending activity overnight…
It’s not that Congressional tax rebates and increased conforming loan limits to $730,000 will stop the housing decline…
It’s not that the New York Superintendent’s efforts will culminate in a successful bailout of faltering bond insurers…
And it’s not that Buffett’s offer to reinsure muni bonds has much to do with the bad subprime debt held by the same bond companies.

It’s about restoring confidence in the overall financial system. And guess what… it is working.

For those who doubt the restoration of confidence in high finance, they need only look at the 4-week returns of the sector. Whereas Energy, Tech, Healthcare and Utilities all sport 7%-9% losses over the last 4 weeks, Financials (XLF) remain one of the select few areas that have managed to post gains. (Consumer Discretionary XLY and and Materials XLB are up as well.)

The fact remains that the Berkshire proposal helped lift the overall market. And a similar effect was felt on 1/23/08 with the New York Superintendent of Insurance’s meeting. Confidence is slowly being restored.

Moreover, Buffett is not one of the world’s richest men because he likes to throw money at bad investments. If he sees value in bond reinsurance, perhaps the Dow Jones Insurance Index Fund (IAK) that hit 52-week lows just yesterday, may be able to free itself from the bear’s grip.

I myself feel less inclined to venture into sub-segments like insurance. I see plenty of opportunity in broader financial exposure through the PowerShares Financial Preferred Portfolio (PGF), the S&P Select Financial SPDR (XLF) and the financial-heavy Dow Jones Select Dividend Index Fund (DVY).

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.