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A Few Bright Spots in the Markets

Written By Brian Hicks

Posted August 17, 2007

Well, after holding sway over the markets for so long, the bulls have had it absolutely handed it to them since those heady and short-lived days at the 14 k mark on the Dow.

A near run on the bank by the financials yesterday has put the bears firmly in charge, despite the Fed cut in the discount rate this morning.

In fact, the Dow’s drop to nearly 12,500 this week means that my 15,000 call will have to wait till sometime beyond the end of the year.

But despite all of the short-term credit related madness that has taken the broader markets by storm lately, there have been a few glimmers of hope that the worst will soon be behind us.

One of them comes courtesy of none other than Warren Buffett himself.

If you have ever read anything about the legendary stock picker, you know that panic is word that’s not even in his vocabulary.

In fact, one of things that I admire most about the man is that he pays absolutely no attention to the daily movements of the markets. There’s not even a TV anywhere to be found in his offices.

In other words, you just won’t find him caught up in the madness of crowds. It’s just not his style. It’s smarts like that that have made him the legend he is.

So when I found out this morning that the Oracle of Omaha has been buying financials, of all things, it really made me wonder about the current rush to throw nothing but shovels of dirt on these guys.

The latest SEC filings reveal that Buffett has been adding to his long-term positions in Wells Fargo, and has opened a new investment in Bank of America (BAC:NYSE) valued at $425.3 million.

So while many have headed for the exits, some of the smart money has been doing just the opposite. But then again, that’s why they call it the smart money.

What’s more, despite the overall selloff, the tech sector has held up pretty well compared to its peers.

In fact, one of the bright spots this week has been the VMware (VMW:NYSE) IPO.

Amid a bear market, shares of the tech company soared on Tuesday as it closed at $51.00, up 76% from its IPO price of $29. That makes it the hottest technology stock to debut since Google stormed the Street in 2004.

An offspring of parent company EMC Corp. (EMC:NYSE), the nine-year-old company now carries a $19 billion market cap, which makes it the world’s number-five publicly traded software company. Only Microsoft, Oracle, SAP AGand Adobe outweigh the new issue.

Among the early investors are both Cisco Systems and Intel, which between them spent $350 million on VMware stock. EMC, by the way, still controls about 90% of the company’s stock, making it the largest investor in the Palo Alto, Calif. company.

So what is all the buzz about?

Well, it’s called "virtualization software," and at this stage in the game, VMware practically owns the space, with nearly 90% of the market share.

Virtualization software is what allows one piece of hardware to run multiple operating systems at the same. It does so by creating a "virtual machine" that runs without disturbing the original system.

In short, it’s what breaks the bond between your existing PC and its native operating system. The result is a machine that can run practically any application, regardless of its "main" operating system.

It’s the type of software that makes Mac and Linux enthusiasts warm all over, since it allows those systems to be run on Windows-based machines. And for IT departments everywhere it represents something of a revolution, since it has the capacity to beef up servers and allows businesses to spend less on hardware.

It’s a combination that has gotten the full attention of the sector.

As a result, says Jefferies & Co. analyst Katherine Egbert, "Nearly all IT hardware and software vendors are looking at VMware’s success and trying to find ways to virtualize their products."

So while the mortgage mess continues to play itself out in the broader markets, the madness of crowds hasn’t taken down everything with it. That much is for sure.

Tech companies still continue to grow and innovate, while the smart money somehow manages to get just a little bit smarter.

Funny how that works.

Wishing you happiness, health, and wealth,

Steve Christ, Editor