BUSINESS CLASS: What becomes of the broken markets?

Our travels this week take us on a round trip of the world's financial markets, where up is down, black is red, John Paulson is bullish and Warren Buffett is, well, Warren Buffett.

"I don't think the markets are behaving in a rational way." That's the red-hot tip from Jean-Claude Juncker, chairman of the Eurogroup forum of eurozone finance ministers.

And while Juncker was referring, in this instance, to the European markets, where mass sell-offs sent the euro to a four-year low on Wednesday – sell-offs he has credited to "a certain reluctance to believe the Greeks can overcome the current crisis" – the general feeling that the markets must be crazy is certainly not unique to Europe.

Take Thailand. As Business Spectator's Sarah Danckert pointed out this week, Thailand’s sharemarket has risen 1.17 per cent since violence, fuelled by the country's escalating civil unrest, started on April 10. It even posted gains on Wednesday, when the Stock Exchange of Thailand building – vacated though it was – was, quite literally, on fire.

And then there was Wall Street's "flash crash" of May 6, which saw the Dow Jones index perform a 1,000 point swan-dive, erasing more than $1 trillion in market value in 15 minutes before rebounding almost as quickly – an as-yet unexplained blip that has been variously blamed on a computer glitch, a trader spello, angry Greeks, dodgy traders and cyber-terrorism.

Meanwhile, the Australian market was expecting (but then totally avoided!) a bad end to the week, after Wall Street got spooked, again, by the eurozone overnight. This, in turn, gave the Australian dollar a pounding, taking it to an eight-month low before making a slight recovery.

So it's exciting times for business journalists and other interested economic observers. For investors and traders, not-so much. As Pimco CEO Mohamed El-Erian wrote in a letter to investors last week, "the new normal” for stock market players is one in which "the public sector plays a much more influential role."

In other words, says The New Yorker's James Surowiecki, "investors have a vast range of new things to worry about, like voter sentiment in Westphalia. They have to try to figure out whether policymakers will do things they shouldn’t, like slash spending during a downturn, and not do what they should, which is to intervene promptly when systemic crises appear. Unfortunately, this sort of thing is inherently harder to predict than, say, how Procter & Gamble is going to do over the next few years."

"So much comes down to the personal choices of policymakers, whether prime ministers or heads of central banks," he adds. "And those choices aren’t always going to be economically rational."

No kidding. And BGC Partners trader David Buik, for one, is feeling it. "We are in for one hell of a ride," Buik told The Guardian's Katie Allen. "I am not saying we are going down the trashcan, but we have had a dose of the poorest European leadership imaginable."

And here in Australia, there's some talk that the battering local stocks and the dollar have taken lately is less to do with our indebted Greek cousins and more to do with a certain proposed mining tax that shall remain nameless. But then why is the Canadian stock exchange dropping? Oh, never mind.

So while everyone else is running for cover, what are the big boys up to?

A quick check-up on our old friend John Paulson – he of the $3.7 billion sub-prime windfall – suggests he's feeling quite peppy, all things considered. According to Jonathan Burton and Sam Mamudi of MarketWatch, Paulson "has been bullish on US financial companies" lately; which might explain his hedge fund Paulson & Co increasing its stake in Bank of America by 16.8 million shares in the first quarter. Paulson now holds 168 million shares of the bank, valued at $US3 billion, according to a filing this week. This will go nicely with his other bank holdings– a $US2 billion stake in Citigroup and smaller stakes in JPMorgan Chase and Wells Fargo.

Obviously, Paulson isn't too bothered by the whole irrational-is-the-new-black thing. Unlike Meredith "it's-going-to-be-rocky-sledding" Whitney, the renowned US banking analyst who told CNBC this week that investors should "avoid financials at all costs."

"Politicians have proven far worse than our worst expectations," Whitney said in an interview. "It could be very bad for banks." And as for European banks – fuggedaboutit! Mez says she wouldn't invest in those things "for a million years."

Back to Paulson, however, who also seems to be bullish on housing, of all the ironies. "If you don't own a home today, now is the time to buy one," Paulson told investors in a conference call on Monday, he also advised that people might even consider buying a second house or helping relatives to get into the market. For his fund's part, it bought 5 million shares in US house builder Beazer Homes.

Paulson's prediction is that housing in the US will grow by 3 to 5 per cent this year and by 8 to 12 per cent in 2011, says Reuters' Svea Herbst-Bayliss – despite Fannie Mae and Freddie Mac recently offering "much more gloomy forecasts." He also thinks America has "the basis for a strong economic recovery," and that it "will continue to grow in excess of the estimates."

It's worth mentioning, at this stage, that Paulson's other other big move was a 40-million-share stake of MGM Mirage, which could make him the casino, er, "entertainment" company's largest shareholder, depending on the moves of other investors.

Meanwhile, Las Vegas is "trying to recover by building what it does not need." says David Streitfield in The New York Times. It has "9,517 spanking new houses sitting empty. An additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale. Yet builders ...are putting up 1,100 homes, and ...frantically buying lots for even more." Just sayin'.

Over in Omaha, the grandaddy of prudent-yet-lucrative investment, Warren Buffett, seems to have a slightly less up-beat perspective than Paulson. While leaving some bank stocks untouched, he unloaded Berkshire Hathaway's entire stake in Travelers Companies and SunTrust Banks, and trimmed 1 million shares of ratings agency Moody's.

Buffett was also unimpressed by Kraft Foods' recent manoeuvres, in particular the takeover of Cadbury and the sale of its pizza brands. "Both deals were dumb,” Buffett told Berkshire investors after dumping some of the company's stake in Kraft at the start of the month. "The pizza deal," he added, "was particularly dumb.” Now that's the kind of rational insight you pay for.

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