The Buffett Floor (BAC)

Well, summer trading is now over. Labor Day is past (I hope you enjoyed the holiday) vacations are done, and we should be getting back to full participation in the stock market. August, especially, is usually a very light volume month. But the one that just ended was an exception, as the near default, and S&P downgrade were met with extreme volume, and point declines.

So what do we have to look forward to, now that Fall trading is here?

Good question, and not an easy one to answer. The usual suspects – U.S. banks and European debt – are still at the forefront. And the situation for U.S. banks is getting worse.

I’ve been saying that Bank of America (NYSE:BAC) is broken for a little while. I was somewhat bullish on the bank, right up until proposed settlements for mortgage issues were rejected. That opens the door to higher liabilities for BofA. And really, we don’t know how much higher the totals could be.

One thing is clear: the stock has fallen below the Buffett Floor today. The Buffett Floor is $7.14, the price where Buffett can exercise his warrants for 700,000 shares of BofA. For the stock to fall below that level is an indication that sentiment toward the stock is very poor.

The news last week that the Fed asked Bank of America for its contingency plan in the event that business conditions worsen is also not a good sign.

There is speculation that BofA will have to either sell or spin-off Merrill Lynch. News that clarifies this possibility is your next catalyst for BofA stock. And clearly, it would be better for the stock if BofA can keep Merrill.

It is feared that Europe’s banks are under-capitalized, too. And given that the stress tests administered by the EU were even more of a sham than U.S. stress tests, this is a legitimate concern. Throw in the fact that European banks own much of the outstanding European sovereign debt, and the situation looks even worse.

Finally, there’s the broken U.S. political machine. The debt ceiling/default contest between Congress and the Obama administration forced the dysfunction into the spotlight. And it’s worrisome for investors.

Usually, stalemate between Congress and the President is a good thing for the stock market, because it means that there won’t be any new policies enacted that could jeopardize the status quo.

Right now, however, the economy needs help. And not just the help you get from cutting spending. In a different environment, Obama’s jobs speech later this week might be a bullish event. But virtually no one thinks Obama can get any legislation passed right now.

And so rather than a bullish catalyst, Obama’s jobs speech will just be another reminder that government isn’t going to help the economy. And unfortunately, status quo now means high unemployment and weak growth.

Still, despite the problems the stock market is facing, investors should still seek out opportunity. Microsoft (Nasdaq:MSFT) holds its annual meeting next week, September 14. There’s a good chance the company will make a significant boost to its dividend and that should push the stock higher.

Write me anytime at [email protected].

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