Monday, January 28, 2008

Harley Davidson: Bought

Harley Davidson (HOG) reported results Friday and they were as expected, anemic. The guidance for 2008, was, too be honest a bit more rosy than I would have expected.

Here is the nitty gritty:

Fourth-quarter net income fell 26% to $186.1 million, or 78 cents a share, from $252.4 million, or 97 cents a share. Analysts expected earnings of 82 cents a share. Revenue fell 7.7% to $1.39 billion from $1.5 billion a year ago.

For 2008, the company said it expects "moderate" revenue growth and earnings per share growth of 4% to 7%, compared to 2007. The company said for the first quarter of 2008, it expects to ship between 68,000 and 72,000 Harley-Davidson motorcycles, compared to 67,761 units in the first quarter of 2007, and for the year overall it plans to ship fewer motorcycles than it expects dealers to sell.

Financial Services Segment
Harley-Davidson Financial Services (HDFS) reported fourth quarter operating income of $38.6 million, a decrease of $9.1 million or 19.1 percent compared to the year ago quarter. The decrease is primarily due to a $6.4 million write-down of retained securitization interests. HDFS full year operating income was $212.2 million, a 0.7 percent increase over last year's $210.7 million.

Stock Repurchase
The Company repurchased 3.2 million shares of its common stock at a cost of $153.3 million during the fourth quarter of 2007. For the full year 2007, they repurchased 20.4 million shares at a total cost of $1.15 billion. On December 31, 2007, the Company had 238.5 million shares of common stock outstanding.

As of December 31, 2007, there are 23.1 million shares remaining on board-approved share repurchase authorizations. An additional board-approved share repurchase authorization is in place to offset option exercises. This is roughly 10% of outstanding shares.

Cash Flow
Cash and marketable securities totaled $405.3 million as of December 31, 2007. Cash flow from operations was $798.1 million, and capital expenditures were $242.1 million during the full year of 2007. In 2008, capital expenditures are expected to be between $240 and $260 million.

With the US market clearly going to be in the doldrums for at least the first half of 2008, HOG must be seeing very positive trends in international markets.

The stock was down after the news in a flat market. Trading at near 5 year lows and yielding over 3%, there is not much more downside to shares from here.

Time to buy for those who have been waiting. Now, the market has been trading in some wild swings lately and looks on Friday morning to be approaching its first winning week this year so expect a wild ride (inference intended). That being said, we have been waiting since shares approached $70 to buy Harley and the time is now.

We bought on Friday at $38.05 a share

Disclosure ("none" means no position):Long HOG

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Circuit City a Target?

Shares Circuit City (CC) surged over 20% last week on news that Hollywood Entertainment Corp founder Mark Wattles acquired a 6.5% stake.

According to a filing with the SEC, Wattles acquired the stake in Circuit City for "investment purposes and may buy additional shares, encourage the company to enter a merger, or nominate candidates for the board."

Wattles, who owns 32 stores of the Ultimate Electronics Stores chain and his affiliated companies acquired 11 million shares of Circuit City after they met with management, the filing said. This comes on the heals of the Classic Fund Management Aktiengesellschaft, a Liechtenstein-based asset management company, disclosing it holds a 5.7 percent passive stake in Circuit City.

Wattles filed for a “blank check IPO” in December and wanted to raise up to $200 million "to focus on potential acquisition targets in the consumer products and retail industry."

Is Circuit City a good takeover target? Yes, but only if current management is set free to "pursue other opportunities". I have repeatedly written about management's missteps and until it is clear they are gone, any speculation on the chain's recovery because of who owns shares is a total gamble. I have said before CC has a great brand, good stores in great locations but they are just abysmally run.

Different people owning shares will not change that.

Disclosure ("none" means no position): None

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Monday's Upgrades and Downgrades

Sunpower (SPWR)= Janco Partners Accumulate » Buy
THQ Inc (THQI )=Janco Partners Accumulate » Buy
Elizabeth Arden (RDEN)= Wedbush Morgan Hold » Buy
AVX Corp (AVX)= AmTech Research Sell » Buy
Canadian Natrl Res (CNQ)= CIBC Wrld Mkts Sector Perform » Sector Outperform
XL Capital (XL)= Stifel Nicolaus Hold » Buy
Centurytel (CTL)= Stifel Nicolaus Hold » Buy
Astoria Fincl (AF)= Stifel Nicolaus Sell » Hold (CTRP )= Piper Jaffray Neutral » Buy
NYSE Euronext (NYX)= Piper Jaffray Neutral » Buy
Applied Bio (ABI)= Piper Jaffray Neutral » Buy
Sunpower (SPWR)= Piper Jaffray Neutral » Buy
Compuware (CPWR)= Piper Jaffray Neutral » Buy
Assured Guaranty (AGO)= JP Morgan Neutral » Overweight
ATP Oil & Gas (ATPG)= RBC Capital Mkts Underperform » Sector Perform
Co. Paran. de Energ (ELP)= Bear Stearns Peer Perform » Outperform
Cheesecake Factory (CAKE )= Friedman Billings Underperform » Mkt Perform
Methanex (MEOH)= UBS Neutral » Buy
Microchip (MCHP)= Credit Suisse Neutral » Outperform
ChoicePoint (CPS)= Sun Trust Rbsn Humphrey Reduce » Neutral
Emulex (ELX)= Friedman Billings Mkt Perform » Outperform
OmniVision (OVTI)= Robert W. Baird Neutral » Outperform
Textron (TXT)= Citigroup Hold » Buy
Arcelor Mittal (MT)= Citigroup Hold » Buy
Arcelor Mittal (MT)= Deutsche Securities Hold » Buy
Air Tran Holdings (AAI)= JP Morgan Neutral » Overweight
CKX Inc. (CKXE)= Bear Stearns Peer Perform » Outperform
ScanSource (SCSC)= Bear Stearns Underperform » Peer Perform
Tenneco (TEN)= Bear Stearns Underperform » Outperform
Federal Signal (FSS)= KeyBanc Capital Mkts Hold » Buy
Bronco Drilling (BRNC)= Friedman Billings Underperform » Mkt Perform

SunOpta (STKL)= Northland Securities Outperform » Market Perform
Integrated Device (IDTI)= Longbow Buy » Neutral
Integrated Device (IDTI)= Citigroup Buy » Hold
Bronco Drilling (BRNC)= BMO Capital Markets Outperform » Market Perform
Electro Scientific (ESIO)= Brean Murray Buy » Hold
Bancshares Of Florida (BOFL )= Sun Trust Rbsn Humphrey Buy » Neutral
City National (CYN)= Bear Stearns Outperform » Peer Perform
Synovus (SNV)= Keefe Bruyette Outperform » Mkt Perform
Royal Dutch Shell (RDS.A)= JP Morgan Neutral » Underweight
Fairchild Semi (FCS)= Citigroup Buy » Hold
Celera Genomics (CRA)= Piper Jaffray Buy » Neutral
AT&T (T)= Citigroup Buy » Hold
Bronco Drilling (BRNC)= Jefferies & Co Buy » Hold
Frontier Airlines (FRNT)= JP Morgan Overweight » Underweight
Cabot Micro (CCMP)= GARP Research Buy » Neutral
Sonic Foundry (SOFO)= Merriman Curhan Ford Buy » Neutral

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Sunday, January 27, 2008

"Fast Money" for Monday

Monday's Picks
Tim Seymour recommends buying Sasol (SSL) $43.11

Guy Adami prefers United Technologies (UTX) $72.75

Karen Finerman likes Golar (GLNG) $17.57

Pete Najarian thinks investors should trade alongside Warren Buffet and buy Burlington Northern (BNI) $81.8

Friday's Results
Tim Seymour likes refiners such as Tesoro (TSO) $39.81 Close $39.29 LOSS

Guy Adami prefers Cisco Systems (CSCO) $25.11 Close $24.22 LOSS

Karen Finerman says get long Goldman Sachs (GS) $199.20 Close $191.37 LOSS

Pete Najarian thinks ConocoPhillips (COP) $74.47 Close $74.13 LOSS

2008 Records:
Brian Schaeffer= 0-1
Carter Worth= 0-1
Jon Najarian= 3-1
Jeff Macke= 6-4
Tim Seymore= 2-1
Guy Adami= 4-7
Pete Najarian= 3-5
Karen Finerman= 5-4

2007 Results (Since 6/21):
Guy Adami= 58-46 = 56%
Jeff Macke= 60-40 = 60%
Pete Najarian= 49-41 = 54%
Karen Finerman= 40-30 = 57%

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Saturday, January 26, 2008

This Week's Insider Purchases

Goodrich Petroleum Corp (GDP)= $2,244,000
Lions Gate Entertainment Corp (LGF) = $ 1,685,000
Smithfield Foods Inc (SFD)= $ 1,500,000
Arbinet Thexchange Inc (ARBX) = $1,400,000
Biofield Corp (BZET)= $1,299,000
Monsanto Co New (MON) = $ 1,029,000
Ruby Tuesday Inc (RT)= $ 1,026,000

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The Weeks Top Stories at VIN

Here are the top stories this week at Value Investing News

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Friday, January 25, 2008

Leucadia Purchases AmeriCredit Shares

In an SEC filing Friday after close, Leucadia (LUK) disclosed the purchase of 975,000 shares of AmeriCredit (ACF) at $11.59 a share.

This brings Leucadia's total holdings to 17,884,300 shares as of 1/23.

The 17,884,300 shares reflects 5,593,100 shares of common stock of the Issuer directly owned by Baldwin Enterprises, Inc. ("Baldwin") and indirectly owned by Phlcorp, Inc. ("Phlcorp") and Leucadia National Corporation ("Leucadia"), the Reporting Persons' obligation to purchase 11,316,200 shares of common stock of the Issuer on February 25, 2008 pursuant to the terms of a share forward transaction.

The agreement between Baldwin and Jefferies & Company, Inc., dated January 11, 2008, and the Reporting Persons' obligation to purchase 975,000 shares of common stock of the Issuer on the earlier of (i) February 15, 2008, and (ii) the termination of all waiting periods applicable to Baldwin under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, pursuant to the terms of a share forward transaction agreement between Baldwin Enterprises, Inc. and Ramius Capital Group, L.L.C. and its affiliates, entered into on January 23, 2008.

Disclosure ("none" means no position): None

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52 Week Low's 1/25

Not much today...
(YDNT)= Young Innovations Inc
(USAK )= USA Truck Inc
(STKL )= Sunopta Inc
(PEBK )= Peoples Bancorp N C Inc
(NSE)= Mexco Energy Corp
(BHO )= B+H Ocean Carriers Ltd.
(BCRX )= BioCryst Pharmaceutic ...
(ACET )= Aceto Corporation

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Buffett Donates Shares

In an SEC filing today, Berkshire Hathaway's (BRK.A) Warren Buffett disclosed donations of 3,090 shares of Class B Common Stock to charity.

The donation dates are:
8/28/07= 120 shares
9/5/2007= 1,080 shares
9/14/2007= 805 shares
10/10/2007= 10 shares
10/31/2007= 1,000 shares
12/19/2007= 75 shares

The charity(s)that received the shares were not disclosed.

Disclosure ("none" means no position):None

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4 Million iPhones? Really Steve?

Here is an article that gives serious doubt to Apple's (AAPL) recent numbers.

The full article can be found here:

"The talk among Apple (AAPL) watchers today is Toni Sacconaghi’s dogged pursuit of the 4 million iPhones Steve Jobs claimed to have sold as of Jan. 15, the date of his Macworld keynote speech.

AT&T (T), the iPhone’s exclusive U.S. carrier, reported yesterday that it had activated “just at or just slightly under 2 million” iPhones. That’s quite a discrepancy.

Sacconaghi, Sanford Bernstein’s Apple specialist, did the math and concluded in a report to clients that there are roughly 1.4 million iPhones “missing in action,” either unlocked or sitting in inventory. Assuming that 20% of those iPhones were purchased to be unlocked (a generous assumption given that a jailbreak for the latest iPhone firmware was only released yesterday), he believes that there are at least 650,000 gathering dust somewhere — in warehouses, perhaps, or in closets, as unwanted Christmas presents waiting to be returned.

Here’s how he gets that number:

* 3.75 million iPhones sold as of Dec. 29 (per Apple’s Q1 report)
* minus 2 million iPhones activated through AT&T as of Dec. 31 (per AT&T)
* minus 350,000 iPhones sold in Europe via O2, T-Mobile and Orange
* minus 750,000 iPhones purchased to be unlocked
* equals 650,000 unaccounted for.

Sacconaghi concludes:

This is negative in two ways: (1) it indicates end-user demand for iPhone is lower than many investors may think based on Apple’s sales figure; and (2) it points to slower iPhone sales in the current quarter, since much of this inventory is likely to be drawn down.

Of course, compared to other Apple analysts, Sacconaghi is something of a bear. One day before the Q1 earnings report and the subsequent run on Apple shares, he went out on a limb and predicted that the company would sell only 7 million iPhones in 2008. That’s considerably less than the 10 million target Steve Jobs set — a goal COO Tim Cook said on Tuesday he remained “very confident” they would hit.

Most Apple watchers shared Cook’s confidence, given the 4 million number Jobs had trotted out at Macworld. Today they’re singing a different tune.

“Apple might have a demand problem,” writes Tom Krazit at CNET.

Russell Shaw at ZDNet says the iPhone is at a “crossing the chasm” moment, stuck between early adopters and the mainsteam, and predicts that to survive its price will have to come down to $299 by the end of May at the latest.

Ewan McLeod at the U.K.’s SMS Text News waxes positively elegiac in a post entitled “The Apple iPhone will only ever be a bit player”:

The geeks have all bought one and many have got theirs unlocked. The Nike wearing Soho crowd have splurged the cash. The wannabes and the I-must-have-that crowd have weighed in, swapped networks and got their devices. But that’s it. There’s a ton of people all sitting staring at the iPhone and — SADLY — (this is the bit that’s winding me up), turning their backs and walking away. (link)

This may be premature. A lot could change in the next 50 weeks. New apps. A 16 GB iPhone. A 3G model. New price points. New markets in Canada, Thailand, and maybe even China.

But one thing is certain: having promised and repromised to sell 10 million iPhones in 2008, there will be hell to pay in 2009 if Apple falls even a little bit short."

Has anyone heard this stuff before? I really like the "lower the price to $299" comment. Didn't I say that in May of 2007?

Disclosure ("none" means no position): Sold Apple $280 July calls when stock was at $165

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Friday's Links

Stockmaster's, WSJ, Sprint, "Under The Radar"

- A lot on bloggers "claim" results but these guys document their stuff.

- Good. A free site would have become clogged with ads and junk..

- This is really good news, the house cleaning has begun..

- For those who do not get it (it is free), Seeking Alpha has a great email they end out daily that contains the news you will not hear 10,000 times before lunch. I highly recommend it.

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The Case for Borders

Whitney Tilson was kind enough to send this to me regarding Borders (BGP)

Borders Group (BGP), Kian Ghazi, Hawkshaw, 9/07

Here’s a pitch on Borders…we’ve taken advantage of a significant pull back to ramp the position to one of the larger investments in our fund. We’ve been involved with Borders (BGP) for over a year now. Currently trading at ~$15.50, we believe BGP is worth at least $30/share with scenarios that could make it worth $35-45/share over time. Importantly, our view is in no way predicated on a merger or sale of BGP.

BGP has three divisions: Super Stores, Walden Books and an International Division (primarily UK and Australia). In March 2007, BGP management proposed a turnaround plan for the business that called for the divestiture of the International business, the closing of 250 of 564 Walden locations, and a renewed focus on every operational aspect of the Super Store business. BGP is in the midst of a multi-year capital spending program that has depressed historically strong free cash flows. However, we believe that the capital spending in the areas of inventory systems, store remodels to reduce sq. ft. to music (a major drag on comps the last few years), and development of an online channel represent the proper strategy to allow the Super Stores to generate a 9% EBITDA margin by 2009. This 9% margin is below past peak margins of 9.5-10% achieved as recently as 2004-2005. To generate this margin, one has to believe that the Super Stores can achieve a 2% comp and generate a 28.5% gross margin (vs 29.5% GMs in 2004-2005) as they reduce exposure to music and refine the loyalty program, which was launched in 2006.

BGP also has a significant working capital opportunity in the form of increasing inventory turns. BGP currently turns inventories at 1.6-1.7x vs. competitor Barnes and Noble at >2.5x. This gap represents a ~$500mm opportunity (vs the current EV of $1.3bn using average debt and cash). Importantly generating at least $200mm of this improvement is firmly with management’s control as they redefine current store level inventory management decisions and invest in new IT systems to go along with the recently added new distribution center.

Assuming that BGP can:

1. Get to 9% EBITDA margins in 2009 in its super store segment,
2. Generate $200mm of working capital from improved inventory turns.
3. Sell its International Business for $100mm [~0.2x estimated 2006 revs of assets for sale], and
4. Reduce current capex spending to ~$100mm starting in 2008,

Applying a 7.5x EBIT multiple to 2009 EBITDA-Maintenance Capex of $250mm (we use $75mm of maintenance capex to be conservative vs. management guidance of ~$50mm) suggests a value of $30 share. We use EBITDA less maintenance capex because depreciation is overstated.

The ~$40/share scenario comes from the possibility that BGP may be able to close the sales productivity gap between it and BKS. The $30 scenario assumes no improvement in relative productivity. However we believe that if BGP management can address the current problems in the business, it will then have a credible operating platform to attempt to address this productivity gap, which we believe is largely driven by BKS’ seasoned loyalty program, superior Starbucks productivity, and higher margin merchandise mix. In addition, a more rationale pricing posture between Borders and Barnes and Noble could dramatically improve the ROIs of both companies.

Now, with Ackman pushing his ownership to 18% and his economic stake to 26%, I think it is time to get on board here. These number make sense and are doable. With Pershing on the Board now, one can only assume management will begin to take step to accomplish these metrics.

Disclosure ("none" means no position):None

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Rick Santelli Calls Out Jim Cramer

Priceless...ypu have got to see this..

Adam Warner found this originally and has more commentary on his

Here is another Cramer Classic:

Disclosure ("none" means no position):Agree with Santelli

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Netflix: Video Stores On The Way Out

When you compare Netflix's (NFLX) recent results to those of Blockbuster (BBI), you can only shake your head.

Netflix said Wednesday that its fourth-quarter profit rose 6% as subscribers increased. Net income was $15.8 million, or 24 cents a share for the quarter ended Dec. 31, compared with a profit of $14.9 million, or 21 cents a share a year earlier. Revenue rose to $302.4 million from $277.2 million, an increase of 9%. Subscriber acquisition costs in the quarter were $34.60 per gross add, down from $37.91 in the third quarter.

Analysts were expecting a profit of 14 cents a share on revenue of $301.7 million. Subscribers rose to 7.48 million from 6.32 million a year earlier.

On the conference call CEO Reed Hasting said, "For 2008, we expect to have more net adds than 2007, with a positive factor being less aggressive competition from Blockbuster Online ...."

He continued "Blockbuster Online is still active and still has several million subscribers. While they appear to have shifted to valuing profit over growth, they can change their mind again at any time. We are widening the gap between us however, and any further attack is unlikely to be as painful as their 2005 or 2007 thrusts."

Even he does not expect Blockbuster to get its act together online for the next year

Since December 2005 the subscriber base has grown by 79% to 7.5 million subscribers., revenue has grown by 77% to $1.2 billion and they have nearly doubled free cash flow to $46 million.

It would appear based on ALL evidence to date Netflix took Blockbusters best shot (twice) and has come out the clear victor. Now it is on the the online game. Hastings did say that they are seeing good business from their younger subscribers in downloads and should in 2008, have the downloads ready for the Mac, high-definition DVD players, to game consoles and to dedicated Internet set-top boxes broadening the audience further.

A note: Not once in the entire call did they once mention "getting into the video store game". The reason? It is over...

As a matter of fact, Hastings actually said "Unless video stores are reinvented, it may be that in five years, there are tens of thousands of kiosks, millions of online DVD renters and very few video stores."

I have been saying this since last summer, get rid of the stores Blockbuster!!

Disclosure ("none" means no position): None

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Friday's Upgrades and Downgrades

St. Jude Medical (STJ)= Stanford Research Hold » Buy
Endo Pharm (END)=P Pacific Growth Equities Neutral » Buy
Informatica (INFA)= Pacific Growth Equities Neutral » Buy
Netflix (NFLX)= Utendahl Under-weight » Equal-weight
Quintana Maritime (QMAR)= Ferris Baker Watts Neutral » Buy
F5 Networks (FFIV)= Ferris Baker Watts Neutral » Buy
ITT Educational (ESI)= Barrington Research Mkt Perform » Outperform
Varian Medical (VAR)= Leerink Swann Mkt Perform » Outperform
Entercom ETM (SMH)= Capital Sell » Neutral
QLT Inc (QLTI)= Caris & Company Average » Above Average
NVE Corp ( NVEC)= Northland Securities Market Perform » Outperform
Intl Paper (IP )= Soleil Hold » Buy
NDS Group (NNDS)= RBC Capital Mkts Outperform » Top Pick
Range Resources (RRC)= BMO Capital Markets Market Perform » Outperform
EOG Resources (EOG)= Citigroup Hold » Buy
Thornburg Mortg (TMA)= Citigroup Sell » Hold
Microchip (MCHP)= Morgan Keegan Mkt Perform » Outperform
Intersil (ISIL)= Morgan Keegan Mkt Perform » Outperform
General Dynamics (GD)= Wachovia Mkt Perform » Outperform
Manhattan Assoc (MANH)= Jefferies & Co Hold » Buy
Cephalon (CEPH)= Soleil Hold » Buy
StatoilHydro (STO)= Citigroup Hold » Buy
Western Digital (WDC)= Deutsche Securities Hold » Buy
McAfee (MFE0= Bear Stearns Peer Perform » Outperform
Human Genome (HGSI)= Bear Stearns Peer Perform » Outperform
Sonus Networks (SONS)= Cantor Fitzgerald Hold » Buy
BioMed Realty (BMR)= Wachovia Mkt Perform » Outperform
Packaging Corp (PKG)= Deutsche Securities Hold » Buy
Repsol SA (REP)= Deutsche Securities Sell » Hold
AmSurg (AMSG)= Lehman Brothers Underweight » Equal-weight
Healthsouth (HLS)= Lehman Brothers Underweight » Overweight
Anglo American (AAUK)= Citigroup Hold » Buy
McAfee (MFE)= Citigroup Hold » Buy
Lifepoint Hospitals (LPNT)= Lehman Brothers Equal-weight » Overweight
Tenet Healthcare (THC)= Lehman Brothers Underweight » Equal-weight
Novacea (NOVC)= Broadpoint Capital Neutral » Buy
Stryker (SYK)= Robert W. Baird Neutral » Outperform
Human Genome (HGSI)= Robert W. Baird Neutral » Outperform
Garmin (GRMN)= Oppenheimer Perform » Outperform
Ametek (AME)= Friedman Billings Mkt Perform » Outperform
NVE Corp (NVEC)= Broadpoint Capital Neutral » Buy
Gilead Sciences (GILD)= Friedman Billings Mkt Perform » Outperform
F5 Networks (FFIV)= Robert W. Baird Neutral » Outperform

Yamana Gold (AUY)= UBS Buy » Neutral
Google (GOOG)= Stanford Research Buy » Hold
THQ Inc (THQI)= Kaufman Bros Buy » Hold
Legg Mason (LM)= Credit Suisse Neutral » Underperform
Hospitality Props (HPT)= Wachovia Outperform » Mkt Perform
Hersha Hospitality Trust (HT)= Wachovia Outperform » Mkt Perform
Strategic Hotels & Resorts (BEE)= Wachovia Outperform » Mkt Perform
Apollo Investment (AINV)= Bear Stearns Outperform » Peer Perform
DuPont (DD)= Oppenheimer Perform » Underperform
Royal Philips Electronics (PHG)= Credit Suisse Neutral » Underperform
Vertex Pharm (VRTX)= Citigroup Buy » Hold
eBay (EBAY)= Citigroup Buy » Hold
Omnicare (OCR)= Lehman Brothers Equal-weight » Underweight
THQ Inc (THQI)= Broadpoint Capital Neutral » Sell
Motorola (MOT) Charter Equity Mkt Perform » Mkt Underperform

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Thursday, January 24, 2008

Leucadia Buys More Options on AmeriCredit

In a filing after the close on Thursday, Leucadia (LUK) purchased 10,000 more options on AmeriCredit (ACF).

Leucadia now holds 32,500 contracts for 3.5 million shares. The options are exercisable at $9 a share and expire 3/14/2008

AmeriCredit closed at $12.76 on Thursday.

Disclosure ("none" means no position):

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"Fast Money" for Friday

Friday's Picks
Tim Seymour likes refiners such as Tesoro (TSO) $39.81

Guy Adami prefers Cisco Systems (CSCO) $25.11

Karen Finerman says get long Goldman Sachs (GS) $199.20

Pete Najarian thinks ConocoPhillips (COP) $74.47

Thursday's Results
Jeff Macke recommends buying the Financial Select SPDR (XLF) $27.9 Close $27.91 GAIN

Guy Adami prefers Apple (AAPL) $139.07 Close $135.60 LOSS

Karen Finerman suggests shorting Simon Properties (SPG) $90.19 Close $ 87.80 GAIN

Pete Najarian likes YRC Worldwide (YRCW) $18.72 Close $18.00 LOSS

2008 Records:
Brian Schaeffer= 0-1
Carter Worth= 0-1
Jon Najarian= 3-1
Jeff Macke= 6-3
Tim Seymore= 2-1
Guy Adami= 4-6
Pete Najarian= 3-4
Karen Finerman= 5-3

2007 Results (Since 6/21):
Guy Adami= 58-46 = 56%
Jeff Macke= 60-40 = 60%
Pete Najarian= 49-41 = 54%
Karen Finerman= 40-30 = 57%

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Berkshire Still Adding to Burlington Northern Stake

In a recent filing moments ago, Berkshire Hathaway (BRK.A) added shares of Burlington Northern (BNI)

Berkshire bought 10,300 shares through its National Indemnity subsidiary on 1/22 at $75.51, bringing the total number of shares held to 63,785,418

Disclosure ("none" means no position): None

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A Question on Sovereign Wealth Funds

I have yet to get a good answer on this...

Can anyone tell me how Kuwait investing $10 billion in either Citigroup (C), Bank of America (BAC), Merrill Lynch (MER) or Morgan Stanley (MS) and owning in most cases less than 5% of the institution would enable them to enact any more "negative undue influence" than say China holding trillions of dollars of US treasuries gives them the ability to stonewall our goverment on trade, human rights, piracy etc....?

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Another KIVA Loan Payment Received

this is really fun, this means these loans are working for these folks..

From KIVA:
"The business you have loaned to, run by Yusif Musayev, has made a
repayment of $86.00. The total amount repaid is now $86.00. This
repayment will be divided amongst all the lenders who helped to fund
this business, depending upon the percentage each lender contributed."

View Yusif's business here:

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52 Week Low's 1/24

(FIGI )Fortress Intl Group Inc
(DUF ) Duff & Phelps Corp New
(DLX ) Deluxe Corporation
(BLD ) Baldwin Technology Co ...
(ATE ) Advantest Corp
(RJF ) Raymond James Financi ...
(PLNR) Planar Systems Inc
(PEBK ) Peoples Bancorp N C Inc
(MXC ) Mexco Energy Corp
(MTSC ) MTS Systems Corporation
(MRCY ) Mercury Computer Sys

Disclosure ("none" means no position):

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Liveris on CNBC: "No Recession in US"

Dow Chemical (DOW) CEO Andrew Liveris told CNBC's Becky Quick this afternoon in an interview "From a trend point of view, we haven't seen anything that reflects a recessionary environment in the United States,".

This is an important proclamation as Liveris's Dow is invloved in virtually every industry in the US and his company is acutely sensitive to conditions here.

He continued, ""We've seen a slowdown that suggests there's a shallow drop, or soft landing ... in the back half of this year, we think there is a chance this slowdown will start reversing as the housing crisis abates."

Regarding US demand decreases for Dow's products he said "It's no more acute now than it was a few months ago. Therefore, the first half (of 2008) I think will be a continuation of this, which suggests that the overall year will be a slower year than last year -- there's no question about that,"

Offsetting the US slowdown will be "A global economy growing at 2.8 to 3 percent is probably the adjustment we are making to annual plans versus a global economy of higher than 3 percent, maybe 3.2 or 3.3," said Liveris.

As he left he reminded Quick to ask him about Dow current strategy after they release results next week. Hmmmm..

Disclosure ("none" means no position): Long DOW

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Thursday's Links

Financials, Blackrock, Retail, iPhone

- Eric makes a good case for financials..

- Sometimes boring is just better..

- James Cullen makes the case for retail stocks (some of them)

- May be just a rumor, or may be the reason for the disappointing projections

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Wachovia's Call: Oustanding

After reading Bank of America's (BAC) and now Wachovia's (WB) earnings call transcripts my optimism for this year for financials is stronger than ever..

Investors have focused on mortgage write-downs. On the call, CEO Thompson address that:
"Golden West acquisition, we looked at the Golden West experience of the early 1990s. At that time, California had 10% unemployment and 20% house price depreciation, and charge-offs peaked in 1994 at 20 basis points. Based on our portfolio today, that 20-basis point peak would translate to about $250 million in charge-offs. Our expectations for the this year are that charge-offs will exceed that historical peak. But even if charge-offs reach three or four times that peak, our Pick-a-Pay portfolio will generate very meaningful bottom-line profits in 2008. And I do not believe that investors grasp that fact today."

Wachovia's second lien home equity portfolio of $32 billion has a delinquency rate that is one quarter as high as the industry and currently has a higher Tier 1 capital ratio at the end of the year than it did at September 30th. The balance sheet should be further enhanced as A.G. Edwards FDIC sweep deposits will also be coming onto their balance sheet over the first three quarters of the year.

They have $4.178 billion of the super senior ABS CDO exposures, hedged with financial guarantees, of which $2.2 billion is hedged with mono-lines and $2 billion with AA-rated financial companies with market caps in excess of $80 billion each.

The Dividend (currently an 8% yield):
Again Thompson "Will Wachovia cut its dividend? And the answer to that question is we have no plans to cut the dividend, because we don't need to cut the dividend. We are confident in our ability to meet our 2008 business plan and that plan, as we have said before, will generate cash earnings that will cover our dividend payments, continue to build necessary credit reserves, improve our capital ratios and support growth in our business lines."

Don Truslow - Senior Executive Vice President and Chief Risk Officer

"I hate to forecast just giving what's happening in the housing markets, but I mean I would not be surprised to see the same sort of pace that we have had in the last couple of quarters, for the next couple of quarters."

Wachovia is expecting to earn "in excess" of a dollar per share each quarter for about $4.12 a share total in 2008. The economic expectations they use for that prediction? "Overall, we are thinking it's going to be environment that has GDP growth of somewhere around 2%. We would expect it to be an environment with lower short-term rates and a steepening yield curve and that should be an environment, where can expect good net interest income growth driven by deposit loan growth, wider spreads and the dilution we have taken with the balance sheet."


Wachovia will hit the $4 a share in earnings and when the banks trade around the 12 to 14 times earnings they traditionally do, that equates to a price of $48 to $52 share or 40% to 50% higher than now. Oh yea.. buying today also gives you and 8% yield on your invested funds. Real nice..

Disclosure ("none" means no position): Long Wachovia, None

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Wal-Mart + Russia = Wow

Wal-Mart (WMT), may expand into Russia in the next two years in order to capitalize on a swelling economy and a stunning lack of competitors said UBS AG (UBS) analysts last week.

The bank said, "Open markets and independent grocers generate most Russian retail sales, according to UBS. The country's $145 billion food- retailing industry accounts for almost half of total spending and will expand on average by 17 percent annually through 2010 as rising incomes boost demand for better food".

The country is in its 10th consecutive year of expansion grew 7.6% in 2007, the Economy Ministry said in December, beating a prior forecast of a 6.7% pace. Auto sales in the country may rise 13% this year and surpass deliveries in the U.K.

Because the five largest chains control just 7.4% of sales, compared with 35% in the U.S. and as much as 80 percent in Europe, UBS said the country is "ripe for consolidation".

Wal-Mart will most likely use the JV format it has used in India or enter through acquisitions like it did in Japan. Like China, Russia present a host of difficulties in its bureaucracy, but also offer a stunning opportunity. When one looks at the near 20% annual sales growth of Wal-Mart's international operations, the thought that the rapidly growing Russian market could become part of that has to make shareholders excited.

I have long pushed the need for increased spending on international operation at the expense of domestic ones as the opportunities Wal-Mart has abroad dwarf those at home.

Disclosure ("none" means no position):Long Wal-Mart

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Thursday's Upgrades and Downgrades

Amcol (ACO)= Wedbush Morgan Hold » Buy
Vistaprint (VPRT)= AmTech Research Sell » Neutral
MeadWestvaco (MWV)= Lehman Brothers Equal-weight » Overweight
Johnson & Johnson (JNJ)= Stanford Research Hold » Buy
Cache (CACH)= Sterne Agee Hold » Buy
Ariba (ARBA)= JP Morgan Underweight » Neutral
Cedar Shopping Centers (CDR)= BMO Capital Markets Market Perform » Outperform
BJ Services (BJS)= JP Morgan Underweight » Neutral
DIRECTV (DTV)= Kaufman Bros Hold » Buy
Apple (AAPL)= Needham & Co Buy » Strong Buy
DuPont (DD)= BB&T Capital Mkts Hold » Buy
Entergy (ETR)= Citigroup Hold » Buy
AK Steel (AKS)= Soleil Sell » Hold
LDK Solar (LDK)= Lazard Capital Sell » Hold
Lincoln National (LNC)= Credit Suisse Neutral » Outperform
FirstEnergy (FE)= Citigroup Hold » Buy
American Electric (AEP)= Citigroup Hold » Buy
Westar Energy (WR)= Citigroup Hold » Buy
PNM Resources (PNM)= Citigroup Hold » Buy
FPL Group (FPL)= Citigroup Hold » Buy
Exelon (EXC)= Citigroup Hold » Buy
DTE Energy (DTE)= Citigroup Hold » Buy
Edison (EIX)= Citigroup Hold » Buy
Alliant Tech (ATK)= Friedman Billings Mkt Perform » Outperform
Plum Creek (PCL)= Lehman Brothers Equal-weight » Overweight
TreeHouse Foods (THS)= JP Morgan Underweight » Neutral
Veolia Environnement (VE)= Brean Murray Hold » Buy
Heartland Express (HTLD)= Wachovia Mkt Perform » Outperform
SAFECO (SAF)= UBS Sell » Neutral
Teekay Shipping (TK)= Jefferies & Co Hold » Buy
Woodward Governor (WGOV)= Robert W. Baird Neutral » Outperform
Novo-Nordisk A/S (NV)O=Bear Stearns Peer Perform » Outperform
Choice Hotels (CHH)= Bear Stearns Underperform » Peer Perform
DISH Network (DISH)= Bear Stearns Underperform » Peer Perform
PetroChina (PTR)= Bear Stearns Peer Perform » Outperform
Union Pacific (UNP)= Bear Stearns Peer Perform » Outperform
Canadian Natl Rail (CNI)= Bear Stearns Peer Perform » Outperform
Burl Nrth Santa Fe (BNI)= Bear Stearns Peer Perform » Outperform
Canadian Solar (CSIQ)= Banc of America Sec Neutral » Buy
Molson Coors Brewing (TAP)= Banc of America Sec Neutral » Buy
Suntech Power (STP)= Banc of America Sec Neutral » Buy
L-3 Comms (LLL)= Friedman Billings Mkt Perform » Outperform
Northrop Grumman (NOC)= Friedman Billings Mkt Perform » Outperform $80 » $84
Kindred Healthcare (KND)= Friedman Billings Underperform » Mkt Perform
Canadian Natrl Res (CNQ)= Friedman Billings Mkt Perform » Outperform
Freeport-McMoRan (FCX)= Friedman Billings Mkt Perform » Outperform
A/S Dam TORM (TRMD)= Jefferies & Co Hold » Buy $43
Knightsbridge Tankers Ltd (VLCCF)= Jefferies & Co Hold » Buy
General Maritime (GMR)= Jefferies & Co Hold » Buy
ExlService (EXLS)= Jefferies & Co Hold » Buy
WNS (WNS)= Jefferies & Co Hold » Buy
DuPont (DD)= Deutsche Securities Hold » Buy
Anglo American (AAUK)= Citigroup Hold » Buy
Wipro (WIT)= JP Morgan Neutral » Overweight
National Fuel Gas (NFG)= Citigroup Sell » Hold
Repsol SA (REP)= Lehman Brothers Equal-weight » Overweight

Peoples Bank (NC) (PEBK)= BB&T Capital Mkts Buy » Hold
Smith & Wesson (SWHC)= Wedbush Morgan Strong Buy » Buy
Qimonda (QI)= AmTech Research Buy » Neutral
Temple-Inland (TIN)= Lehman Brothers Overweight » Equal-weight
Northstar Neuroscience (NSTR)= RBC Capital Mkts Outperform » Underperform
McMoRan Expl (MMR)= Stanford Research Buy » Hold
Apple (AAPL)= Caris & Company Buy » Above Average
Mentor Graphics (MENT)= JP Morgan Neutral » Underweight
Corel (CREL)= JP Morgan Overweight » Underweight
Cadence Design (CDNS)= JP Morgan Overweight » Neutral
Principal Fincl (PFG)= Credit Suisse Neutral » Underperform
AmericanWest Banc (AWBC)= Sandler O'Neill Hold » Sell
PETsMART (PETM)= Wachovia Outperform » Mkt Perform
Texas Instruments (TXN)= Citigroup Buy » Hold
LoJack (LOJN)= Morgan Joseph Buy » Hold
Chemtura (CEM)= KeyBanc Capital Mkts Buy » Hold
Triad Guaranty (TGIC)= Piper Jaffray Buy » Neutral
Glimcher Realty (GRT)= RBC Capital Mkts Outperform » Sector Perform
First Cash (FCFS)= JMP Securities Mkt Outperform » Mkt Perform
First Cash (FCFS)= Jefferies & Co Buy » Hold
Plantronics (PLT)= Robert W. Baird Outperform » Neutral
Millipore (MIL)= UBS Buy » Neutral
Peabody Energy (BTU)= Banc of America Sec Buy » Neutral
Foundation Coal (FCL)= Banc of America Sec Buy » Neutral
Arch Coal (ACI)= Banc of America Sec Buy » Neutral

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Wednesday, January 23, 2008

"Fast Money" for Thursday

Thursday's Picks
Jeff Macke recommends buying the Financial Select SPDR (XLF) $27.9

Guy Adami prefers Apple (AAPL) $139.07

Karen Finerman suggests shorting Simon Properties (SPG) $90.19

Pete Najarian likes YRC Worldwide (YRCW) $18.72

Wednesday's Results
Jeff Macke recommends getting long the Financial Select Sector SPDR (XLF) $26.05 with a stop out at 25. Close $27.90 GAIN

Guy Adami prefers Wachovia (WB) $31.91 Close $35.82 GAIN

Karen Finerman thinks investors should take a look at Macy's (M) $24.30 Close $25.41 GAIN

2008 Records:
Brian Schaeffer= 0-1
Carter Worth= 0-1
Jon Najarian= 3-1
Jeff Macke= 5-3
Tim Seymore= 2-1
Guy Adami= 4-5
Pete Najarian= 3-3
Karen Finerman= 4-3

2007 Results (Since 6/21):
Guy Adami= 58-46 = 56%
Jeff Macke= 60-40 = 60%
Pete Najarian= 49-41 = 54%
Karen Finerman= 40-30 = 57%

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52 Week Low's 1/23

(ZBRA) Zebra Technologies Co ... =$27.80
(YHOO) Yahoo! Inc =$18.98
(VNR ) Vanguard Natural Reso ...=$ 13.69
(VLO ) Valero Energy Corp New =$49.86
(TLF ) Tandy Leather Factory Inc =$2.52
(TKR ) The Timken Company =$26.34
(TINY ) Harris & Harris Group Inc=$ 6.55
(SUG ) Southern Union Company =$25.84
(STO ) Statoilhydro Asa =$24.04
(STKL ) Sunopta Inc =$8.64
(ROK) Rockwell Internationa ...=$ 53.07
(ROG) Rogers Corporation =$31.29
(RIV ) Riviera Holdings Corp ...=$ 17.96
(RHT ) Red Hat Inc =$17.09
(RFMD) Rf Microdevices Inc=$ 2.89
(REP ) Repsol, S.A. =$28.30
(MPR ) Met-Pro Corporation=$ 9.80
(MOT ) Motorola, Inc =$9.56
(GSK ) GlaxoSmithKline plc=$ 47.33
(GRB) Gerber Scientific, Inc =$8.51
(GIFI) Gulf Island Fabricati ... =$25.40
(DELL) Dell Inc =$18.95
(DBD ) Diebold, Incorporated=$ 23.55
(CIEN ) Ciena Corp =$21.83
(CENX ) Century Aluminum Company=$ 39.69
(CEM ) Chemtura Corp =$5.79
(AMGN) Amgen Inc =$44.45
(ALY ) Allis Chalmers Energy Inc=$ 11.21
(ALXA) Alexza Pharmaceutical ... =$6.71
(ALU ) Alcatel-Lucent =$5.61

Disclosure ("none" means no position):

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Wednesday's Links

Bloggers & MSM, Recession?, Bears, 33 things

- Interesting, speaking from experience, I think the number is actually higher.

- Chad Brand makes a great point about the current hysteria.

- Let them pile on, based on history, the more folks that pile into a thesis, the sooner the reverse happens

- This is pretty good

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Apple: Playing Games is Hurting Shareholders

The recent slide in Apple (AAPL) shares can be attributed to one thing: Steve Job's playing games with expectations.

For too long Steve jobs has played games with the guidance he offers investors and analysts. Now it is coming back to haunt shareholders. Here is how it typically goes. Jobs give guidance that he knows is too low and then Apple blows it away and the stock surges. Analysts have relied on those expectations to make their estimates and have traditionally been too low.

Not being idiots, they caught on to the game and have ratcheted their expectations higher than they expect Jobs to "guide them".

A funny thing happened this week. Apple guided analysts lower than what they thought the "low ball" expectation would be. Now, Apple was trading at almost 50 times earnings on Jan. 1 and have lost over 20% in the 23 days since then and look to get slashed about another 10% at the open today. The problem is that people just do not believe what Jobs is telling them.

What if he is finally telling the truth and the guidance is right on? What if iPod sales which are basically flat, despite new products stay that way or decline? iPhone sales in both France and the UK have been disappointing, is there a larger issue? Is this the reason for the lower estimate? What if the analysts have over estimated the expected "beat" Apple will produce next quarter and earnings growth is indeed going to slow? Does Apple expect the consumer slowdown to take a bigger chunk out of sales?

In the current environment, indecision equates to fear and shareholders are suffering.

If you are going to give guidance, conservative is one thing but playing games like Jobs has with it is just wrong because eventually it comes back to bite you. No one can doubt his genius or showmanship, it was hubris that was his downfall once and is hurting him again now.

Does this mean Apple will not beat the lower expectations? No. It does mean that because of Jobs's actions shareholders are in for a real unnecessarily rocky ride..

Disclosure ("none" means no position): Sold July $280 2008 calls on Apple when shares were at $166

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Ackman's Letter to Moody's: A Must Read

Below is a copy of the letter Bill Ackman sent to Moody's rating agency regarding MBIA (MBI) and Ambac (ABK). Marty Whitman can call him what he wants, but the guy knows his stuff.

January 18, 2008

Mr. Raymond McDaniel Mr. Stephen Joynt
Executive Chairman and CEO CEO and President Moody’s Corp. Fitch Ratings
99 Church St. One State Street Plaza
New York, NY 10007 New York, NY 10004

Mr. Deven Sharma
Standard & Poor’s
55 Water Street
New York, NY 10041

Re: Bond Insurer Ratings

Ladies and Gentlemen:

As a Nationally Recognized Statistical Rating Organization, Moody’s, S&P, and Fitch have been granted a level of authority that capital market participants and Federal and State regulators have historically relied upon in evaluating the safety and soundness of corporations, regulated financial institutions, and structured finance securities. To state the obvious, because of your critical role in the capital markets, it is essential that the ratings you publish are the result of comprehensive and accurate analysis.

As you well know, we have privately, in meetings and correspondence with you, and publicly in various presentations that we have made, called into question your ratings of the bond insurance industry, in particular, the ratings for MBIA Insurance Corp. and Ambac Assurance Corp. and their holding companies.

Each of you, according to your recent public statements, is in various stages of updating your ratings of the bond insurers. Unfortunately, however, your previous ratings assessments have erred materially in their omission of certain critical analysis and the inclusion of outright errors in your work. As you conduct your most recent revisions of your analysis on the bond insurers, it is vital that you conduct a thorough assessment of all aspects of the bond insurers’ business lines, their reinsurers, and investment portfolios so that the rating decisions that you ultimately publish can be relied upon by capital markets participants.

Below we highlight a number of factors that you have failed to consider in your prior assessments of the bond insurers’ capital adequacy:

1) Impact of Losses Should be Measured on a Pre-tax Basis

We believe that each of you overstates the bond insurers capital cushion due to tax benefits you include in calculating the impact of RMBS and CDO losses. For instance, in S&P’s recent press release update published yesterday, MBIA’s losses on RMBS and CDOs are expressed as “after-tax” losses. In order, therefore, to determine the actual cash losses implied by S&P’s after-tax estimate, one must gross up the reported $3.18 billion of after-tax losses. Assuming a tax rate of 38%, it appears that S&P is estimating MBIA’s actual cash losses at $5.13 billion, nearly $2 billion more than the losses adjusted for tax benefits.

Insurance claims must be paid in cash. A bond insurer is only able to obtain tax benefits if the insurer is a going concern and is able to generate sufficient taxable income in the current or future years to offset the losses from paid insurance claims. Your analysis makes the aggressive assumption that the bond insurers will remain going concerns and will therefore be able to continue to write new premiums and generate income in the future.

Based on recent industry developments – including Berkshire Hathaway’s entrance into the business – it appears unlikely that MBIA, Ambac and many of the other bond insurers will be able to continue as going concerns. In a runoff scenario, we do not believe that the bond insurers will generate sufficient taxable income to offset the net operating losses generated by paid losses. While U.S. corporations can receive tax refunds by carrying back tax losses up to two calendar years, the amounts that could be refunded from carrying back losses are de minimis relative to claims payable. Even in the event the bond insurers generate taxable income in future years, it may be many years before these tax benefits can be realized, if ever, particularly in the event of corporate ownership changes caused by capital raising or stockholder turnover.

Net operating loss carryforwards are not cash and are not available to pay claims and should therefore not be deducted from losses in calculating bond insurer capital adequacy. By using after-tax loss estimates rather than pre-tax losses – the amount that will need to be paid in cash – you are understating the actual losses payable by more than 60%.

Your updated rating assessments should be adjusted to exclude tax benefits in your calculation of capital adequacy

2) Covenant Violations and Loss of Access to Liquidity Facilities

As a result of recent losses, both MBIA and Ambac have triggered covenant violations on their liquidity facilities. As a result, Ambac has lost access to $400 million of funding and MBIA to $500 million of capital. The impact of the loss of these facilities is material to the liquidity profile of the holding companies and their insurance subsidiaries and must be considered in your credit assessment.

3) Loss Estimates Must Incorporate Reinsured Exposures

Your ratings of the bond insurers are based on the bond insurers’ net credit exposures. That is, you reduce their credit exposure by those exposures that have been reinsured. This is best understood by example.

As of September 30, 2007, MBIA has re-insured approximately $80 billion of par value
of its exposures. More than $42 billion of this reinsurance was purchased from Channel Re, a Bermuda- based reinsurer whose only customer is MBIA. The two most senior officers of Channel Re are former executives of MBIA. MBIA owns 17% of the company and has two representatives on Channel Re’s board of directors.

On recent conference calls, Moody’s and S&P have stated that they have not yet updated their ratings of the monoline reinsurers including Channel Re. Earlier this week, on January 16th, Partner Re and Renaissance Re, the majority equity owners of Channel Re, wrote off the entire value of their investments in Channel Re due to losses it has recently incurred that substantially exceed Channel Re’s capital, an impairment that Channel Re’s two majority owners have concluded is “other than temporary.”

Despite the fact that Channel Re has negative book equity and $42 billion of MBIA’s credit exposure – $21.5 billion of which is CDOs of ABS or CLO/CBOs – Moody’s and S&P continue to rate the company Triple A with a stable outlook. Fitch does not rate Channel Re and apparently relies on S&P’s and Moody’s stale Triple A ratings in its
analysis of MBIA’s capital adequacy.

Captive reinsurers whose ratings are not regularly updated offer the potential for abuse.

We believe that MBIA reinsured on a quota share basis 25% of its 2007 CDO transactions with Channel Re. As a result of Moody’s and S&P not updating its ratings of Channel Re, these exposures do not appear on MBIA’s list of exposures and have not been included in your calculation of MBIA’s capital adequacy.

MBIA’s second largest reinsurer is Ram Re which has reinsured $11 billion of par as of September 30, 2007. While the rating agencies have not updated their credit ratings of Ram Re, the market appears to have already done so. The publicly traded stock of Ram Holdings Ltd., the parent company of Ram Re, has declined 92% in the last year. The company currently trades as a penny stock with a market value of $32 million.

We believe that Ram Re is substantially undercapitalized and therefore, like Channel Re, is unlikely to be able to meet its obligations to MBIA.

We also note that MBIA reinsures Ambac, and Ambac reinsures MBIA. You must also consider the iterative impact of downgrades of one on the other with respect to both reinsurance and their respective guarantees of each other’s investment portfolio assets which we discuss further below.

In your updated assessment, it is critical that you update your ratings of the bond insurers’ reinsurers and reconsolidate and calculate the losses on these exposures that have been reinsured with reinsurers that are inadequately capitalized.

4) Investment Portfolios are Riskier Than They Appear

As you are well aware, the investment portfolios of the bond insurers include a substantial amount, often a majority, of bonds that are guaranteed by either the bond insurer itself or by other bond insurers. The bond insurers include these guarantees in calculating the weighted average ratings of their investment portfolios. We note that a minimum average Double A rating is a key rating agency criterion for the insurers’ Triple A rating.

A guaranty to oneself is of course worthless and therefore you should exclude the bond insurers’ guaranty of its own investment obligations and use the underlying ratings of these instruments in determining the portfolios’ credit quality.

You should also carefully calculate the impact of a downgrade of the bonds held by one bond insurer that are guaranteed by other insurers in your calculation of capital adequacy. In light of the general distress in the industry, we believe that the rating agencies should evaluate the bond insurers’ investment portfolios as considered on an underlying rating basis.

5) Commercial Mortgage Backed Securities (CMBS)

To date, you have limited your analysis to RMBS securities and other structured finance securities with exposure to RMBS (CDOs). This limited review of exposures ignores the fact that the same lending practices and flawed incentive schemes that fueled the subprime lending bubble have been very much at work in CMBS and corporate finance.

On January 17, 2008, Fitch commented that it believed that CMBS delinquencies are “likely to double, and perhaps even triple, by the end of 2008.” As of September 30, 2007, MBIA had insured $43 billion net par of CMBS securities, the vast majority of which was underwritten in the past two years. Failing to consider the potential for losses in this portfolio in your calculation of capital adequacy is simply negligent.

6) Claims-Paying Resources Definition Overstates Capital Available to Pay Claims

The rating agencies have adopted the bond insurance industry’s definition of capital in the form of “Claims Paying Resources” or “CPR.” We believe there are significant flaws with the calculation of CPR used by the industry and the rating agencies.

First, bond insurers include the present value of future premiums discounted at extremely low discount rates ~5% in their calculation of claims paying resources. Substantially all of these premiums are from structured finance guarantees. We believe that the bond insurers and the rating agencies do not adequately consider the facts that:

(1) when structured finance obligations default, accelerate, or otherwise prepay ahead of schedule these premiums disappear,
(2) purchasers of secondary market guarantees are likely to terminate their periodic premium payments because of the deteriorating credit quality of the bond insurers,
(3) the reserves for losses on these exposures (for example 12% of premium for MBIA) have proven to be inadequate and therefore overstate the net premium income, and
(4) there is no provision for overhead, remediation, legal or other costs required for the bond insurers to run their business going forward.

There is also no mechanism whereby the bond insurers can borrow against these potential future premiums to be used to pay claims in the present day.

There is no other financial institution in the world which takes the present value of interest spread income on loans in its portfolio and adds it to its capital. For all of the above reasons, we believe that the present value of future premiums should not be included in CPR.

CPR includes the bond insurers’ so-called depression lines of credit. As you well know, depression lines of credit can only be drawn to pay claims on municipal obligations and only after a substantial deductible. In that the losses are occurring primarily on structured finance obligations, these lines of credit should not be included in CPR

The Capital Base included in CPR is also likely to be overstated because the investment assets of the bond insurers consist primarily of bond insurer guaranteed obligations that are valued inclusive of the guarantee, when they should be valued on an unwrapped basis. The high degree of balance sheet leverage for certain bond insurers means that small changes in the values of these portfolios have a large impact on the bond insurers’ capital base.

You should adjust your estimate of CPR for each insurer to reflect the above factors in order to accurately establish the capital available to pay claims.

7) MBIA’s $1 Billion Surplus Note Issuance

Last Friday, MBIA priced an offering of surplus notes at par with a 14% yield. Within one week the notes traded down to the mid-70s and have a yield to call of more than 20%. Previous to their pricing, the notes were rated by Moody’s and S&P at Double A.

The MBIA surplus note issuance is perhaps the clearest example of the failure of the rating agencies to accurately assess the creditworthiness of a bond insurer. MBIA is still rated Triple A by all three raters. The notes received a Double A rating because of their subordination to the other obligations of MBIA Insurance Corporation. That said, how can a billion dollars of Double A rated obligations sell in a cash transaction between sophisticated parties at a 14% yield, and then trade to yield of 20% or more — a rate consistent with a Triple C or near-to-default obligation?

Bank of America 5 ¾% bonds due 2017, obligations of a financial institution that is also rated Double A, closed today at 5.55% yield, a more than 15 percentage point lower rate than the MBIA surplus notes. This is prima facie evidence that your ratings of MBIA are overstated.

8) Billions of MBIA’s CDO Exposure Require Payment on Default

You have stated that bond insurers have no accelerating CDO guarantees and that all of their contracts are structured as “pay-as-you-go.” I quote S&P from a paragraph entitled, “Time is On Their Side,” in their December 19, 2007 report: “Detailed Results of Subprime Stress Test of Financial Guarantors.”

“As for swap exposure, except for ACA there are no collateral posting requirements and swaps are written in pay-as-you-go format.”

On January 9, 2008, MBIA filed a copy of a powerpoint presentation which was used in the Surplus Notes offering road show. On page 8, MBIA states that $8.1 billion of its Multi-sector CDOs require payment with “Credit events as they occur.”

The liquidity demands of accelerating CDO exposure create extreme liquidity risk and must be considered in the context of the bond insurer ratings. We encourage you to examine all of the bond insurers CDS/CDO exposure to determine the amount of exposure that is not pay-as-you-go, but rather accelerates, and consider the liquidity demands of such exposures in your rating assessments.

9) Holding Company Liquidity Risk

In light of recent events, we believe it is likely that most bond insurers will be prevented from upstreaming dividends to their holding companies as a result of regulatory intervention, as regulators work to preserve capital for policyholders.

Most bond insurer holding companies have limited cash, have lost or will lose access to liquidity facilities, and have substantial cash needs for interest payments, operating expenses, and dividends (for so long as they continue to be paid). In addition, bond insurers with substantial investment management or swap operations have additional liquidity needs in the event of a downgrade.

We believe that both MBIA and Ambac have substantial collateral posting obligations in the event of a holding company downgrade. For example, MBIA has $45 billion of derivative obligations at the holding company that relate to currency, interest-rate, and credit default swaps that the holding company has entered into. The combination of volatility in each of these markets and the increased collateral demands required in holding company downgrade scenarios will put a severe strain on holding company

The bond insurers’ muni-GIC business is also a large potential liquidity strain as municipalities withdraw funds from these GIC programs, assets must be liquidated, and/or collateral must be posted. Various MTM programs also create liquidity risk as assets may have to be sold to meet redeeming bondholders. The liquidity risks of these programs and the underlying assets should be carefully examined.

ACA’s immolation is but one example of what happens to a once-investment grade bond insurer which, if downgraded, is required to post collateral.

In addition, as a result of shareholder, bondholder, and/or surplus noteholder litigation, we expect holding company legal expenses and eventual litigation claims to rise substantially. Because the holding companies typically provide indemnities for employees and directors, we would expect that directors would be loathe to allow liquidity to leave the holding company estate, depriving directors and employees of the resources to protect themselves from claims. In these circumstances, we would expect companies to seek bankruptcy as a means to protect the allocation of value among various stakeholders.

10) MBIA - Warburg Pincus Transaction

You have assumed in your analysis that the Warburg Pincus deal and follow-on rights offering are certainties even though neither transaction has closed. While Warburg has made affirmative statements about the transaction, both publicly as well as privately, to surplus note buyers and the media, we believe there continues to be transaction closure risk for both the initial stock purchase and future rights offering, with the rights offering having greater uncertainty.

You have also assumed that 100% of the $1 billion Warburg deal will be downstreamed to the insurance subsidiaries and this, too, is not a certainty. You should receive assurances from MBIA and require it to contribute the full billion dollars to its insurance subsidiaries before you include the funds in calculating insurance company capital.

With the collapse in MBIA’s stock price and today’s downgrade of Ambac, we believe it will be difficult for MBIA to execute the rights offering, particularly before the March 31st, 2008 drop dead date. With the stock at $8.55 per share and the market aware that the $500 million in rights offering proceeds is insufficient to adequately capitalize the company, it will be difficult to set a market-clearing price. Assuming for a moment the price is set at $5.00 per share, the company would have to issue 100 million shares and may sell control to Warburg at a discount in the event shareholders elect not to participate. We believe a shareholder vote and approved registration statement will likely be required in such a circumstance, delaying the ability to consummate the transaction beyond the March 31st Warburg backstop drop dead date.

11) Future Business Prospects and Franchise Value Have Been Irreparably

Following the dramatic decline in share prices, widening of credit protection spreads, dismal performance of the high yield surplus note issuance, and recognition of multibillion dollar losses in a supposed “no-loss” business, the ability of bond insurers to market their “AAA” seal of approval has been permanently undermined. As uncertainty has grown, municipalities have raised capital without insurance and found that they can borrow at attractive rates as compared to historical insured bond issuances.

The entrance of Berkshire Hathaway is a devastating competitive reality that will capture the lion’s share of an already shrinking market for municipal bond insurance. While some commentators have suggested that this might create a pricing umbrella that will benefit the existing bond insurers, this is demonstrably false. Because Berkshire Hathaway already possesses a real Triple A rating, the bonds that are wrapped with its guarantee will trade with a tighter spread when compared to a bond insured by a traditional bond insurer, even one without legacy structured finance exposure.

Consequently, Berkshire will be able to charge higher premiums than the other monolines by taking a higher percentage of the spread (perhaps as much as 80% or more) that is saved through the use of insurance, and still provide the issuer with an overall lower cost of borrowing that if they bought insurance from a traditional monoline. As such, we believe that Berkshire Hathaway will likely quickly reach an 80%-90% market share of municipal bond insurance.

12) Going Concern Opinion

In light of all of the above and other current developments, we believe it will be difficult for MBIA, Ambac, and certain other bond insurers to obtain going concern opinions from their auditors. You should consider the likelihood of the insurers’ obtaining clean opinions and the implications if they do not in your rating assessments.

Lastly I encourage you to ask yourself the following question while looking at your image in the mirror:

Does a company deserve your highest Triple A rating whose stock price has declined 90%, has cut its dividend, is scrambling to raise capital, completed a partial financing at 14% interest (now trading at a 20% yield one week later), has incurred losses massively in excess of its promised zero-loss expectations wiping out more than half of book value, with Berkshire Hathaway as a new competitor, having lost access to its only liquidity facility, and having concealed material information from the marketplace?

Can this possibly make sense?

Please call me if you have any questions about the above. As usual, I will make myself available at your convenience.


William A. Ackman

Disclosure ("none" means no position): None

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