Some analysts have been puzzling over the high price Buffett agreed to pay for Burlington Northern Santa Fe (BNI). He paid $100 a share for a company that has earned $5.38 over the last 12 months for a trailing multiple of 18.6. Book value is $36 a share.

Buffett himself admitted that he stretched to make this deal: “I stretched on this one. I went to the last nickel,” he said in an interview. What explains the deal, then, is not valuation but more complex motives relating to Buffett’s age and legacy.

The Fed made no substantial changes to policy or the statement. The key sentence on “exceptionally low levels of the federal funds rate for an extended period of time” was unchanged. Essentially, they didn’t want to take any chances of disrupting the fragile recovery and will kick the can down the road as far as the dollar and inflation.

As far as inflation, they continue to “expect that inflation will remain subdued for some time.” What about the roaring financial markets? What about gold near $1100? What about the dollar getting crushed? Not an issue, apparently.

Most important of all, however, it’s an all-in wager on the economic future of the United States.

- Warren Buffett on his acquisition of Burlington Northern

The market has stumbled in recent days even as the economic news has been highly positive. On Thursday, 3Q GDP came in at +3.5%. On Monday, the October ISM Manufacturing index came in at 56. Tuesday morning we had the news that Berkshire Hathaway (BRK.A) will be acquiring railroad Burlington Northern Santa Fe (BNI) for $100 a share in cash and stock - a 31% premium to Monday’s closing price. Warren Buffett said this represents a long term bet on the U.S. economy.

Yet stocks are selling off when you’d expect them to move higher. Not only that but volume has returned to the market of late with NYSE Composite volume in excess of 6 billion shares 3 of the last 4 trading days. We haven’t seen that in a few months. The Volatility Index (VIX), commonly called The Fear Index, has spiked 50% towards 30 in just the last couple of weeks. This suggests many pros are buying put options to protect their profits or even speculate on a decline in stocks.

We’ve got this very unstable situation in which Fed policy is dictating the behavior of so many assets. The dollar is at the nexus of this.

- Dean Curnutt, President, Macro Risk Advisors, quoted in “Dollar Calls the Tune For Stocks, Bonds, Oil”, Tom Lauricella, The Wall Street Journal, November 2, C1

A better than expected GDP report spurred markets higher Thursday (3Q GDP Report - from the Bureau of Economic Analysis).

Two thirds of the growth was driven by “Motor Vehicles & Parts”, “Residential Fixed Investment” and “Federal Government” - that is the sale of autos and homes spurred by Cash For Clunkers, The 1st Time Home Buyer Tax Credit and low mortgage rates, and increased government spending.

The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a “bottom up” investor.

…….

Honeywell (HON), a big, diversified manufacturer, reported earnings Friday morning. The company earned 80 cents a share, beating estimates for 72 cents, but revenues were off 17%, more than $1.5 billion to $7.7 billion. They cut Selling, General & Administrative expenses by $275 million (21%), saving 36 cents a share for the quarter.

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McDonald’s (MCD) yesterday morning reported another excellent quarter. Global same store sales increased 3.8% compared to the year ago period including gains of 2.5% in the US, 5.8% in Europe and 2.2% in Asia, the Middle East and Africa. That’s some solid sales growth in this environment. Net Income was up 6% and EPS 10% as they bought back 3.3% of outstanding shares over the last 12 months. They are going to earn about $4 a share this year so at the current $60 price that’s a 15 multiple on current earnings - not expensive at all. They also raised their quarterly dividend to 55 cents for a 3.67% yield. This is a good stock and one that I’m interested in owning in the low $50s.

Notably, McDonald’s stock has only rallied about 18% since the March low - far below the overall move in the S&P. This rally doesn’t seem all that interested in quality stocks.

On a day when the S&P peeked its nose above 1100 for a few minutes in the morning, the market ended up having a severe late day selloff Wednesday as respected financials analyst Dick Bove downgraded Wells Fargo (WFC) to sell in the wake of the bank's third quarter earnings report.

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I really respect David Einhorn because he has evolved from a pure value investor into recognizing the importance of macro. Anybody who doesn’t recognize that at this point is going to pretty useless going forward. Buy great companies with high free cash flow and big moats! Hoo-ray! It’s a new world, y’all and Einhorn gets it. His speech Monday at The Value Investing Congress is a masterpiece:

The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a “bottom up” investor.

We’ve been more and more amazed at the strength of the rally.

You have to listen to and respect the market. Sometimes the market just wants to go up.

I came across a letter today addressed to Geithner, Summers and Donovan (Secretary of Housing and Urban Development) from the National Association of Homebuilders, National Association of Realtors and the Mortgage Bankers Association asking for an extension of the $8,000 1st time home buyer tax credit. You can read it here.

Bear David Rosenberg wrestles with the uber-rally on CNBC Monday morning:

Marriott Internatioal (MAR) yesterday morning reported results for their 3rd quarter ended August 31, 2009. With 3,292 hotels and more than 570,000 rooms worldwide, Marriott is an excellent barometer of travel & leisure spending.

The key metric in the hotel business is REVPAR: Revenue Per Available Room Day. In its North American division, systemwide REVPAR declined by 19.3% to $80.16 compared to the year ago period. That was a result of a 5.6% decline in occupancy rates to 68.5% and a 12.7% decline in the average daily room rate to $117.09.

The securitization markets are dead.

- Robert Shiller, Economist, Yale University

The Cash For Clunkers program was widely held as a smashing success with more than 700,000 vehicles sold with the rebates between July 27 and August 24. August 2009 auto sales were up 1% from the year ago period at 1,262,189.

Unfortunately, September auto sales plummetted as the Cash For Clunkers program expired. 745,997 new cars were sold in September - down 23% from last year. GM’s September sales were off 45%, Chrysler’s 42%, Honda’s 20%, Toyota’s 13% and Ford’s 5%. [NOTE: September 2008 wasn't exactly a great month for new car sales either. Overall industry sales dropped 27% to 964,783 - the first month in which less than 1 million new cars were sold since February 1993]. That’s no surprise since any good economist would tell you that an incentive like Cash For Clunkers would pull sales from future months forward as consumers bought during the window in which they could receive the subsidy.

This is a big story on the front of Monday’s New York Times Business Section by Andrew Ross Sorkin:

Stanford University is selling stakes in funds run by the biggest names in private equity at deeply discounted prices.

Yes, the financial crisis has passed and the economy is growing again, but there’s a good chance that growth will be temporary - the result of one-time events like “Cash for Clunkers”, the tax credit for first-time home buyers and the restocking of inventories allowed to dwindle during last year’s crisis. But with businesses still reducing payrolls, bank lending still contracting, and anxious consumers determined to save more and spend less, a sustained recovery in 2010 isn’t looking very likely.

- “A New Bubble Of the Fed’s Creation”, Steven Pearlstein, The Washington Post, September 23

We’ve been frugal. Now we can get back to normal. We might even take a trip.

- Charles Ojuri, whose small construction firm received a $780,000 contract to clear trees around I-215