Altria Beats...Buys Back $1.2 billion Shares in Quarter

The chimps in the MSM are saying "Altria's (MO) profits fall". Well, if you spun off 75% or your business, yea, they would. But the 25% that is left did better this year than last and that is all that matters.

Here is the headlines out there today failed to tell you:
• Reported diluted earnings per share from continuing operations of $0.45 versus $0.34 in the second quarter of 2007 (32% growth)
• Adjusted diluted earnings per share from continuing operations up 12.2% to $0.46 versus $0.41 in the second quarter of 2007
• Altria reaffirms its 2008 guidance for adjusted diluted earnings per share from continuing operations in the range of $1.63 to $1.67, representing a growth rate of approximately 9% to 11%, from a base of $1.50 per share in 2007
• Philip Morris USA’s adjusted operating companies income up 3.8% versus the second quarter of 2007
• Marlboro achieves record retail share of 41.8%, up 0.8 share points versus the second quarter of 2007
• John Middleton Co. delivers strong cigar volume gains, up 11.0% versus the second quarter of 2007

Here is a buyback for you. Altria began repurchasing shares as part of its previously announced share repurchase program. Altria spent $1.2 billion and repurchased 53.5 million shares of stock at an average price of $21.81 in the second quarter of 2008.

For the first 6 months of 2008 EPS from continuing operations is up 10.8% vs 2007.

In a market s and an economy like we have currently, is there anything out there more solid that MO and PM (Phillip Morris) right now? Double digit EPS growth and a 4% yield to boot.

Full release:


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

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Phillip Morris Buys Canadian Cigarette Producer

Philip Morris International(PM) announced today that the company has entered into an agreement with Rothmans Inc. (Rothmans) to purchase, by way of a tender offer, all of the outstanding common shares of Rothmans. The agreement and related offer have the unanimous support of the Board of Directors of Rothmans.

Rothmans’ sole holding is a 60% interest in Rothmans, Benson & Hedges Inc. (RBH). The remaining 40% interest in RBH is currently owned by PMI and, as a result of this transaction, RBH will become wholly owned by PMI. PMI and Rothmans have been joint shareholders of RBH since 1986.

PMI agreed to make the offer following Rothmans’ and RBH’s finalization of the CAD $550 million settlement, announced today in a separate release issued by Rothmans, with the Government of Canada and all ten provinces. The settlement resolves the Royal Canadian Mounted Police’s investigation relating to products exported from Canada by RBH during the 1989-1996 period.

Read full agreement here:

So, how will it affect earnings?
As a result of the finalization of the settlement described above, PMI has revised its second quarter 2008 results that were set forth in PMI’s earnings press release issued and furnished to the SEC on Form 8-K (Item 2.02) on July 23, 2008. The revision will record an after-tax, non-cash charge of $124 million. The charge, which will be included in the operating results of the Latin America segment, represents the present value of PMI’s 40% equity interest in RBH’s portion of the settlement (CAD $350 million) and will reduce PMI’s reported second quarter net earnings by $124 million to $1.7 billion. Diluted and basic earnings per share will be revised from $0.86 to $0.80 and from $0.87 to $0.81, respectively, as per the schedules attached to the press release.

PMI anticipates that the transaction will not affect 2008 full-year results and will be modestly accretive to earnings per share in 2009.

Consequently, PMI reaffirms its forecast for 2008 adjusted full-year diluted earnings per share, previously announced on July 23, 2008, projecting growth of approximately 19% to 21% to a range of $3.32 to $3.38 from a 2007 pro-forma adjusted base of $2.79.

what is nice is that a litigation free asset is being purchased that will add to earnings next year and further expands the market. It is really hard to fins something not to like here.





Full PM Filing



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

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Lampert files 13D/A in AutoNation

Current numbers are in for Lampert's investment in AutoNation (AN)


"As of July 31, 2008, the Filing Persons may be deemed to beneficially own an aggregate of 77,679,856 Shares (approximately 44.0% of the outstanding Shares based on the Issuer having 176,658,137 Shares outstanding on July 21, 2008, as disclosed in the Issuer’s last quarterly report on Form 10-Q). "

Full Filing


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

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Thursday's Links

Thank you, Justice, Oil, Criminal, Video

- A thank you to Felix for the mention and the compliment

- If business only took care of its business this fast

- Do people really still think it is "speculators"....are they the new boogyman?

- It is obscene this took so long to act on

- Another nail in the Blockbuster coffin

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Starbucks......Stop Blaming Me...Blame Howard

No, "I am not happy" about Starbucks (SBUX) results yesterday so stop emailing me. Unless, my stance on the company for the last year and a half stropped some people from investing in it and losing their shirts. In that case I am happy for them.

Wednesday morning I said:
"Here is what is happening. This quarter is going to be abysmal. These moves will allow Howard to say on the earnings call, "recent actions will save us "x" per year". This will make it look like things are going to get better. Howard will also take the charges this quarter so as to hide the terrible operating performance he will turn in. It will be a convoluted earnings release in which the losses will be made to look like the results of "one time charges".

Earlier I said flatly that "estimates are for 15 cents a share, Starbucks will miss that"


Starbucks, less than 24 hours later said:
"Consolidated net revenues increased 9 percent to $2.6 billion for the third quarter of 2008, compared to $2.4 billion for the third quarter of 2007. For the 13-week period ended June 29, 2008, Starbucks reported a net loss of $6.7 million compared to net income of $158.3 million for the same period a year ago. Earnings per share (EPS) for the quarter was $(0.01), compared to EPS of $0.21 per share earned in the prior year period. The company estimates that costs associated with the ongoing implementation of its transformation agenda impacted third quarter 2008 EPS by approximately $0.17 per share, primarily for restructuring charges associated with the U.S. company-operated store closures announced on July 1, 2008 totaling $167.7 million pre-tax or $0.14 per share after tax."

In other words, "what he said".

Here is a gem from the release:
"The combination of all these actions is estimated to result in a pre-tax benefit of approximately $200 million to $210 million in fiscal 2009, which equates to approximately $0.17 to $0.18 of EPS. The beneficial impact estimated here excludes the related carry over of the lease termination and severance costs from the store closure actions."

So, they make it look like you can add 17 to 18 cents a share to earnings next year due to the closures. But, then they tell you that numbers excludes "lease termination and severance costs" from those closures that will be present. So, how about just giving us the real number? Why are they always playing these games? Once again they try to paint a nice picture but leave investors guessing as to the reality.

Here was line that surprised me "Of note, many of the company’s operating expenses are fixed in nature. As a result, the softness in U.S. revenues during the third quarter fiscal 2008 impacted nearly all consolidated and U.S. segment operating expense line items when viewed as a percentage of sales." Simply put, there is not much cost cutting that can be done other than headcount and stores.

"Starbucks now expects full-year fiscal 2008 non-GAAP EPS to be in the mid-seventy-cent range, which excludes the $0.19 year-to-date impact from restructuring and other transformation costs, as well as additional costs to be incurred in the fourth quarter related to executing on recently announced decisions. Full-year fiscal 2008 EPS, on a GAAP basis, will be impacted by the remaining restructuring charges that are expected to be spread across the fourth quarter of fiscal 2008 and the first half of fiscal 2009, the timing of which is dependent on lease termination negotiations with third parties. In line with this revised view, Starbucks anticipates total net revenue growth of approximately 11 percent in fiscal year 2008. These targets reflect the company’s current assumption that fourth quarter company-operated comparable store sales trends will remain relatively stable with the third quarter."

Translation? Earnings are going to get hit from closures through mid 2009. These "one time events" in earnings releases will continue for the next year. another thing, why are they assuming same store sales trend will be stable? Haven't they been declining for a year now? Ought not they be assuming "continued deterioration"?

Here is the problem in a nutshell. "The company’s lower than expected revenue growth was driven by continued slow traffic trends in the U.S., which resulted in a mid-single-digit decline in U.S. comparable store sales, and was a slight deterioration from the second quarter." Until that reverses, this slide will continue.




Disclosure ("none" means no position):None

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Lampert Buys More AutoNation (AN) Shares

Just a week after Bill Gates picked up 5% of the shares of AutoNation (AN), Sears Holdings (SHLD) Chairman Eddie Lampert purchased an additional 3.478 million shares at $9.80 to $10.35 a share

Lampert now controls in excess of 75 million shares or over 43% of the company.




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

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Sherwin Williams Call Notables

Some interesting thoughts on the earnings call last week

An interesting back and forth regarding Dow (DOW) and Rohm & Hass (ROH)

Jeff Zekauskas - J.P. Morgan
"I don’t know if you noticed, but there’s some possible consolidation among your acrylic suppliers."

Christopher M. Connor
"Wow, we hadn’t heard."

Jeff Zekauskas - J.P. Morgan
"What do you make of that? And do you think that that -- you know, is that neutral for Sherwin or negative or positive?"

Christopher M. Connor
"Well, time will tell. I guess I would comment on Dow and Roman Haus that both of these companies have had longstanding relationships with Sherwin-Williams. They are important suppliers to us. They’ve been very good companies to deal with and we expect that that relationship will continue and time will tell whether this is a positive, neutral, or negative -- too early to make that call."

Jeff Zekauskas - J.P. Morgan
"Would you have any interest in integrating into acrylics?"

Christopher M. Connor
"Again, too early to make that call."

The follow up question ought to have been "any thoughts on becoming part of Dow Chemical?"

On Domestic and International Acquisitions:
Donald Carson - Merrill Lynch
"Okay, and then a capital structure question -- you said you haven’t really changed your view yet post the successful resolution of the pigment litigation to lever up a bit more. Is that partly because you are trying to keep your powder dry for acquisitions? And what is the acquisition environment? Are some of the smaller companies still a little shell-shocked about the environment and not yet willing to consider selling?"

Christopher M. Connor
"On your first point, you are absolutely correct. We want to keep the powder dry. We do think -- we think we -- and it goes to your second point; we think that eventually there might be some real nice assets here. We’re continuing to look at it but I don’t think the owners of these businesses has really changed. I think that we’ll see how they feel over the next six months and year, but we continue to push."

Donald Carson - Merrill Lynch
"Okay, and what’s the backlog like on international acquisitions? Is there anymore progress there?"

Christopher M. Connor
"There’s some interesting properties out there right now. To Sean’s point, a little bit more activity there than domestically, given a more robust market and willingness to sell more of the -- on an up trend. And we don’t comment much more beyond that in terms of what we are seeing or what we are doing."


Look for Sherwin to now resume an active acquisition strategy that the lead paint specter has all but vanquished. They have weathered the housing storm to this point because of them and will come through this a far stronger compnay than when they went it.




Disclosure ("none" means no position):Long SHW, Dow, none

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Wednesday's Links

Einhorn, Partners, SEC, Buying

- More pain?

- Hey Monsanto (MON), isn't SmartStax a partnership with Dow Chemical (DOW)? You'd never know it from their earnings call.

- More madness

- Somebody is getting smart.

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Starbucks Earnings......Who Cares?

so, Starbucks (SBUX) reports later today......should we expect anything good? That depends.

Estimates are for 15 cents a share, below the 19 posted last year. Starbucks will miss that. 600 locations closed are not enough and now we have International locations, once the "future earnings growth driver" being shuttered.

In addition to those losing their jobs at the 600 locations being closed, 1,000 people just got notice they are being allowed to "pursue other opportunities". There will be more. Schultz said the problems in Australia "are unique" and will leave 23 stores there open.

The COO position is being eliminated and Internationl President Jim Alling has left the company and Martin Coles is the new President of Starbucks Coffee International.

How is any of this "transforming the brand"? Isn't this what we have been hearing?

It seems to me like Howard is running around out there chopping heads. Here is what is happening. this quarter is going to be abysmal. These moves will allow Howard to say on the earnings call, "recent actions will save us "x" per year". This will make it look like things are going to get better. Howard will also take the charges this quarter so as to hide the terrible operating performance he will turn in. It will be a convoluted earnings release in which the losses will be made to look like the results of "one time charges".

Starbucks has been less than forthcoming with investors up until this point, no reason to expect anything else now.

Now if Howard could just find a way to get people to stop leaving him for McDonald's (MCD) and Dunkin' Donuts, that would be something.

Oh yea, the "that depends" at the beginning? The good news would be of you are a short....wish I was..


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

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The Sullivan Boys Meet John McCain

Rainy day on vacation last week.......you just cannot sit inside, if you go out, you'll never know what will end up happening.....Pretty cool...

Mine are in the front...

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Owens Corning to Double Russian Insulation Production

Looks like the St. Gobian deal will be paying off in spades for Owens Corning (OC). Owens acquired the Gous-Khrustalny, Russia, production facility as part of its 2007 acquisition of Saint-Gobain's composites businesses.

OC announced that it will more than double the production capacity of its glass fiber composites facility in Gous-Khrustalny, Russia, to meet growing global demand.

"This investment will serve existing customer growth in Russia and throughout Europe and the Middle East," said Mike Thaman, chairman and chief executive officer. "The expansion leverages our 2007 acquisition of the Saint-Gobain composite businesses by building out our platform in Russia to take advantage of strong market demand."

The expanded facility in Russia will produce a complete range of composite products using Owens Corning's best technology for glass fiber production and fabrication. It will incorporate the company's patented Advantex® and advanced glass-melting technology platforms that bring world-class energy efficiency and emissions control in manufacturing, while providing customers with unique product benefits including corrosion resistance and high strength.

"Our additional capacity in Russia will create meaningful value for our customers," said Chuck Dana, president of Composite Solutions. "The expanded facility will meet growing global demand for glass fiber composite products in infrastructure, wind energy, construction, electronics and automotive markets. This expansion is ideal in the favorable business climate of the Vladimir Province, and establishes a foundation for the addition of a technical fabrics operation that will fully capture the growth of wind energy and distribution in Western Europe."

The growth rate of glass fiber composite demand in Russia is estimated to be greater than 10 percent per year, and growing at nearly twice the rate of gross domestic product (GDP) around the world. Construction is planned to begin in 2008, with start-up anticipated by the end of 2009. The facility will continue full production during the expansion process.

Owens corning has been diversifying into composites and away from its reliance on US housing for a year now. That effort has picked up steam in the last 6 months and shareholders are seeing the benefits.




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

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Dow Chemical Director Hess Buys More Shares

In a just released SEC filing, Dow Chemical Director John Hess purchased an additional 30,900 shares on Monday at $32.35 for a total of $999k.

He now directly owns 82,270 shares



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

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Will Merrill Sell Me Something?

This is the classic "I'll pay you to take it" scenario...Thain is a pretty shrewd guy (please note sarcasm. )

So, Merrill Lynch (MER) unloaded $30bn in CDO for 22 cents on the dollar to Lone Star. They required Lone Star to put up 6 cents on the dollar to buy the portfolio and then loaned them the balance. Here is the kicker, as collateral for the loan, Lone Star, the buyer, is using the CDO's it bought from Merrill.

In short, if Lone Star defaults in the loan, their losses are limited to the initial investment of $1.8 billion and Merrill's sole recourse is to get's back the CDO's they just dumped. Lone Star's upside is total, meaning they share none of it with Merrill...

From Merrill's press release:
"Merrill Lynch will provide financing to the purchaser for approximately 75 percent of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction. The transaction is expected to close within 60 days."

If Merrill wants to sell anything else, please email me!!!!!!!!!!!....Please?



Disclosure ("none" means no position):None ...Thank God

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Latest Fed Auction Results

This is the highest rate yet since January

Release Date: July 29, 2008
For release at 10:00 a.m. EDT

On July 28, 2008, the Federal Reserve conducted an auction of $75 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 2.350 percent

Total propositions submitted: $90.555 billion
Total propositions accepted: $75.000 billion
Bid/cover ratio: 1.21

Number of bidders: 70

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Berkshire Hathaway A Value Now? No

A follow-up on a post from March based on news today for Berkshire Hathaway (BRK.A).

Whitney Tilson and Andy Kilpatrick (who worte the best book on Berkshire, "Of Permanent Value") were on CNBC today discussing the subject. Before we go on, watch what they said.



Now, earlier Tilson had this to say about housing and lenders.



Okay, so, if housing is going to drag for another 18 months, then Berkshire's results will also. So, one would then expect lower comp. earnings and hence a lower share price.

Financials institutions like American Express (AXP), Wells Fargo (WFC), Bank of America (BAC), USB (USB), M&T Bank (MTB) make up about 30%-40% of Berkshire equity portfolio (it varies based on valuations). The argument can be made that these are the class of the financials and that may be true, but all have seen share prices cut almost in half in the last year and a half no mater their quality. The other parts are tied to housing (shares have suffered) and the consumer like Home Depot (HD), Lowes (LOW), USG (USG), Coke (KO) and others. A prolonged housing downturn could see further deterioration.

Wholly-owned subs such as Shaw Industries, Clayton Homes, Jordan's Furniture (the are 4 furniture companies), Benjamin Moore, Home Services and Acme Brick and directly tied to housing and will suffer in the downturn Tilson predicts.

For all its holdings, Berkshire is essentially an insurance company. It has operated under "perfect" conditions for the last two years according to Buffett and eventually to run must end. Premiums are already falling and as houses are re-poed and fewer new cars are purchase, insurance premiums derived from those products will fall accordingly. I know people who are looking at homeowners and auto policies for way to decrease coverage and save money. Whether or not this is a good idea is irrelevant (I do not think it is), it is happening. Throw in a hurricane or two (we are due) and insurance could suffer quite a poor year.

For more on Berkshire's insurance read this former post:

Back in March when shares sat at $133,000 I argued they were not a "value". Today they sit at $111,000. Are they a value now? Perhaps but one also has to expect that the near term, if Tilson is correct is fraught with potholes for Berkshire and earnings ought to take a hit.

Based on that, share price ought to suffer also meaning you will probably be able to pick them up cheaper down the road. If I owned shares would I sell? If I needed the money in the next year, yes. If I had a multi-year time frame would I sell? No. If that was the case I would be watching down the road for a cheaper entry price, I think you'll get it.



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

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Thain the Next Casualty?

When he made the first statement I said he was putting the noose around his neck. Now Merrill Lynch's (MER) John Thain just joined the list of execs who made statements regarding their firms fiscal well-being only to go back on them a few months later. Will his fate be the same as theirs?

Let's go back. In April Thain said "“We deliberately raised more capital than we lost last year ... we believe that will allow us to not have to go back to the equity market in the foreseeable future,” realizing he just was very vague he later clarified it to say "through issuing additional equity".

Less than a month later he reiterated that his company would not need additional funds. At the time I said he had nothing to gain and everything to lose in the situation since no oe would believe him anyway, why say it at all?

Two months later in an effort to raise more capital Merrill announce they would shed valuable assets (Bloomberg). Even this was worse than raising it through equity I said as it permanently impairs earnings power while an equity dilution can be undone over time.

Now comes news that Merrill will issue $8.5bn share offering and $5.7bn in additional write-downs from the sale of mortgage securities only 10 days after they reported a $4.6bn Q2 loss that included $9.4bn writedown, and announced the previously discussed asset sales aimed at raising an additional $8bn.

The CDO sale is shocking as Merrill said it would sell CDOs valued at $30.6bn to Lone Star Funds. At the end of Q2, the bank had estimated the value of the CDOs at $11.1bn. The securities are being sold for just $6.7bn, or about 22 cents on the dollar.

Thain clearly did not have a clue back in April when he opened his mouth.
Nor in May when he followed it up.....

It remains to be seen what happens but the mes Thain has put himself into rivals that of Chuck Prince at Citi (C), Ken Thompson at Wachovia (WB), Stan O'Neil at Merrill (MER) and Erin Callan at Lehman (LEH). All made promises that turned out not just to be wrong, but spectacularly so.



Disclosure ("none" means no position):Long WB,C, none

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Tuesday's links

Congress, Greenspan, Financial TV, Smokes

- This is actually a very interesting idea

- Agreed

- The more the better

- Yes it is

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ADM to Produce Ethanol from Brazilian Cane

This is bigger news than is being reported...

Remember this little nuggett from last summer?

Archer Daniels Midland (ADM) will now apparently start cane-based ethanol production in Brazil with local partners according to a Brazilian newspaper Monday. According to the paper, ADM's CEO Patricia Woertz is scheduled to be in the area August 19th and an announcement will happen on the 20th.

The company will participate in joint ventures to open two mills, both in center-western Goias state, financial newspaper Valor Economico said. Each mill will be able to crush 3 million to 4 million tons of sugar cane per year and first one should come on stream in 2010.

ADM of course has nothing to say about the potential deal. So if 1 ton of sugar cane gives us about 19.5 gallons of ethanol then ADM will ad roughly 120 to 160 million gallons of ethanol production a year to its abilities (approx. 1.5 billion gallons after current expansion finished).

Now, since we know that ethanol can be shipped to the US duty-free by using the Carribean Basin agreement and that currently the limits to those import are not even close to being tapped, ADM should be able to funnel this ethanol into the US duty free should it wish. As much talk as there is about "getting rid of the tariff on Brazilian ethanol" it is just that, all talk. The reason is that Brazil is currently decreasing its ethanol exports because it is requiring more for domestic use. Even if the tariff were lifted, it would not result in additional imports.

The bigger news here for shareholders is finally to company seems to have broken into the Brazilian market. Last June I wrote that ADM seemed to be intent on using the strategy that is currently being employed by Dow Chemical (DOW) and would go the JV route rather than just try for an outright purchase in the country. This seems to be happening.

It will require minimum cash outlays by the company ans assuming success, opens up options for other partnerships......win-win.


Disclosure ("none" means no position):Long ADM, Dow

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KKR's Finally Going Public, Good News or Bad?

So, what does KKR's decision to finally go public mean?

Last August KKR said they had "not delayed" their IPO plans despite earlier reports they would and a year later, here they go. Yea, that was a bit of a delay boys but, no matter.

The AP reports:
"The transaction is a big departure from plans announced a year ago by founders Henry R. Kravis and George R. Roberts to tap equity markets for up to $1.25 billion through an initial public offering. Credit market turmoil torpedoed that plan.

Late Sunday, the buyout shop said KKR principals will hold 79 percent of the combined company and KKR Private Equity shareholders will own 21 percent.

No cash will change hands in the deal, which is expected to close in the fourth quarter, and no additional public stock sales are planned. But by having the shares of the combined company trading on the NYSE, KKR said it should have enough cash needed to finance additional takeovers.

The value of the combined company will depend on how KKR Private Equity shares trade in the weeks and months ahead.

KKR Private Equity Investors said in an earnings release Sunday it has 204.9 million units outstanding, giving it a market capitalization of $2.15 billion at the current price of $10.50 per unit. That would suggest a value for the combined company of $10.25 billion.

But in its earnings statement, KKR Private Equity said its net asset value totaled $4.56 billion, or $22.25 per unit, at the end of the second quarter -- nearly double its June 30 market price of $12.75. Therefore, KKR said it will make additional payments if KKR Private Equity shares don't reach a level of at least $22.25 each, which would suggest it values the entire enterprise at more than $21 billion."

Why list now? The optimist in me says that perhaps KKR sees the current environment at or near a bottom so going public now will lead to significant share price inflation in the future.

The pessimist says that perhaps conditions are getting worse and perhaps raising cash is getting difficult. By listing KKR would be able to raise some additional money that way and even used the stock as currency should they wish.

What to think? I tend to lean towards the former. Using the public route to raise cash at this point would smack of a bit of desperation or worse, a loss of investors willing to give KKR money to invest. Unlike the Blackstone IPO in which insiders sold out at the top essentially, KKR will significantly benefit from any share appreciation incurred as markets recover. Only time will tell but perhaps this will be a mark of a bottom...

On a final note, was Blackstone's (BX) IPO perhaps the "market timing" gem of the last couple years? It indeed marked the high water mark for the industry.


Disclosure ("none" means no position):None

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SEC Finally Exercises Some Logic

Well, at least if they actually do it..

The SEC may force investors to disclose short positions and may take additional steps to rein in rapid-fire short sales, Chairman Christopher Cox said. The SEC is examining whether to require short sellers to reveal "substantial" stakes, just as investors must disclose significant positions in companies. The agency may also reinstate a version of the so-called uptick rule, which barred short sales of stocks when prices are falling, he said Thursday in testimony to the House Financial Services Committee.

The regulator is trying to strike a balance between installing a "circuit breaker, or something that keeps things from running away," and providing trading liquidity, Cox told the House panel.

Now, I have stumped here many times that disclosure for some should mean disclosure for all. If you are long or short you ought to be required to disclose it.

When asked, Whitney Tilson said, "Many short-sellers will object to disclosure because there is such a stigma associated with short selling,". I partially agree and at the same time disagree with Whitney. I agree short sellers will balk at the rule but I also think part of the "stigma" associated with short selling is because it is often done in the shadows, since no disclosure it necessary. Anything that is viewed being done in secret, is always going to be viewed sceptically.

Admittedly, Tilson, Ackman and Einhorn do not fall into this camp as they are upfront and honest with the investor community about their actions. Thus they tend to be viewed (at least by those other than their targets) as "short investors" rather than traders that "pile on" falling stocks. It does make a tremendous difference.

When the above mention three short something, it is because they view a fundamental flaw in the business, not because they think "banks stock will fall". They are almost betting on the extinction of the company like Ackman and Tilson in MBIA (MBI) and Ambac (ABK) (although both have reduced short positions in those) and Einhorn in Lehman (LEH).

Far from a "we can make 20% here", it is a "this thing ought to go to zero".

The SEC is right to require disclosure, the more open everything is, the better. I think the more open it is, the less short sellers would be viewed as though they are "boogymen".



Disclosure ("none" means no position):None

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Monday's Links

RIP, Cullen, WaMu, SEC

- Really sad.......

- James hits the important points

- Are they for real?

- Finally

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Dow Chemical Earnings Call Notes

Getting through some past information from the week away..

Dow Chemical (DOW) released earnings last week and while the results were down, the fact that they were remotely as strong as they were speaks volumes as to where we are going.

On the earnings call:

- Geographies outside of North America posted very strong growth. Europe was up 11%, Asia-Pacific was up 12%, and Latin America was up 5%, including the impact of some of the recent divestitures. Volume growth of 12% in emerging economies, which today represent 27% of Dow sales, Eastern Europe was up 19%, India was up 64%, and the Middle East was up 89%.

- Feedstock and energy costs increased $2.4 billion compared with the same quarter last year, and increased a $1 billion sequentially. These were the highest increases in Dow's history. In this quarter oil hit $145 a barrel. It has since dropped over $20, yet Dow's price increases will remain.

- Dow AgroSciences. Following a stellar first quarter, Dow Ag delivered even better results in the second quarter based on their strong product portfolio and robust industry conditions, posting price and volume gains in every geography. Sales of new Ag chem products increased 65% compared with the year ago, with strong growth of these products in North America, Europe, Latin America and Asia-Pacific, while sales of seeds and traits increased almost 40%.

- Dow AgroSciences made two very important announcements in the quarter. First, the business announced it has submitted SmartStax, its new 8 way gene combination for corn, in the U.S. EPA for regulatory review. This marks the critical first step in clearing SmartStax for commercialization. This is a joint venture with Monsanto (MON)

- Share buybacks, another $393 million was used to purchase 9.6 million shares of Dow stock in the second quarter. Since the beginning of 2006, they have spent $3 billion to repurchase approximately 7% of outstanding shares.

- Year-to-date return on capital and return on equity were 13% and 17% respectively

- Operations of K-Dow Petrochemicals will begin in the fourth quarter (Kuwait JV)

Regarding oil prices and it effects oi margins, in the Q&A CEO Andrew Liveris said:
"As you have noted and others have noted, what is really important to us is stability. If we can hover around these ranges now, $120, $130 oil and therefore its associated naphtha equivalents, then frankly that gives all of us a platform to operate from in terms of restoring the margin and then expanding the margins if we can.

Right now, apart from the US, I think we are all seeing great strength around the world that is enabling us to keep price momentum and therefore -- we went very close Frank, if you look at how close we came to keeping our margins level despite this unprecedented surge, we did pretty good. And so with the full quarter to work with we have better certainty to get to even or better."

More on Oil:
Jeffrey Zekauskas - JPMorgan
"Good morning. On average shouldn't your raw material costs be down sequentially in the third quarter? Natural gas has gone from -- I don't know -- $12 to $9 and oil has come from $135 to $125?"

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors
"Yeah Jeff, this is Geoffrey here. Just to take oil, Brent crude average price as of this morning, let's say, $124, $125. At today's level it is still higher than our average cost during the first quarter. The average cost in the first quarter was around $122. I'm using crude as a reference point. And we are already towards the end of the first month of one-third of the quarter. So if you use an average rate for the third quarter of let's say around $125, $126 then you are talking about over $0.5 billion additional cost for the company to absorb."

Share repurchases:
Kevin McCarthy - Banc of America Securities
"Okay and then financial question for Geoffery, if I may. You have been very active in repurchasing shares, including during the second quarter. Given the pending Rohm and Haas deal, should we anticipate an even keel there in the back half of the year, or would you expect activity to diminish?"

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer; Member of the Board of Directors
"I think that -- look, for the time being, until we close the K-Dow transaction, I think we're going to take a little breather from a large buyback. Having said that, we do remain committed to reducing our share count over time. So, there will be a time when we will be back very actively, but we're going to take a breather for the time being."

Dow is inching close to the cusp of its transformation. If you read the call you can sense it not only in the executives tone but even in the analysts.

Please visit the blog Prudent speculation who had a nice post on the current price environment vs. cost from the call. I was going to get into it but Prudent does a great job in the post. Please read it here


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

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AutoNation Earnings Call Notes

Some interesting tidbits in the earnings call.

- AutoNation retailed 73, 500 new vehicles on a same-store basis, down 13%, compared to the period a year ago. But favorable compared to the industry that, according to CNW Research, was off 16% at retail on the quarter. Used vehicle results were favorable relative to new. They retailed just under 50,000 units in the quarter, 4% less compared to a year ago. Inventory at June 30th reflects a new vehicle day supply of 62 days. This represents an increase of seven days compared to a year ago, it reflects the slower sales pace in May and June and compares favorably to the industry at 67 days. Margins are 10 basis points higher than the nearest competitor, and 140 bps higher than the average used-car dealer.

In short, AutoNation is clearly the class of the auto retailing industry.

At June 30th, store count numbered 242, representing 319 franchises and 39 brands in 15 states. In September, AN will open Mercedes-Benz of Del Rey in Del Rey Beach, Florida. This add point brings the Mercedes dealership count to seven in Florida and 14 company-wide.


AutoNation is focused on profitability rather than market share. Market share will take care of itself as US auto makers shrink brands and dealerships in an effort to streamline operations. As AutoNation lessons it reliance on US brands, it's market share will increase by default. Said Jackson, "we continue to divest underperforming stores to optimize our portfolio. The divestitures are primarily domestic franchise. However, we will retain our high-volume, core domestic franchises. We expect over time that these domestic franchises will constitute about 20% of our new vehicle revenue (29% currently).

Jackson was asked specifically about this on the call:
Rick Nelson - Stephens
"Are you seeing an acceleration in store closings among competitors?"

Mike Jackson
"Yes, on the domestic side, absolutely. And as I said earlier, we have a core group of domestic stores that are great locations with high throughput franchises that as painful as the current environment will be long-term, we will be served well by the shakeout that is going on now."

This news piggybacks on a previous post regarding the potential gains for AutoNation from domestic automaker's problems.

It seems that expectations for several holdings, Dow Chemical (DOW), Sherwin Williams (SHW), Citigroup (C) and now AutoNation (AN) were all far worse than reality. With the exception of Citigroup (the jury is still out) they all have top flight management who are deftly steering their respective businesses through unprecedented times. With depressed share prices, better than anticipated results, and visibility clearing, buy opportunities abound.



Disclosure ("none" means no position):Long AN, none

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While I Was Away.......Weirdness

It seems like as soon as I go on vacation, the news start flowing like mad..and makes very little sense..or does it?

- Citigroup (C) lost $2.5 billion and people were thrilled

- Wachovia (WB) figured they would one up them so they lost over $8 billion, eliminated over 6,000 jobs and cut the dividend.....people were thrilled

- Wachovia looks so bad the CEO just spent $16 million buying a million shares

- McDonalds (MCD) beat estimates and gets downgraded

- Obama disses injured troops in Germany and then offers contradicting excuses on Friday and Saturday...what will Sunday bring? This one actually makes sense.....he doesn't care..

- Starbucks (SBUX), after "not telling" what stores were closed realized it was cruel to keep people in wonder as to their job status and finally released the list. They can't do anything right at this point..

- An analyst got sued by a company that did not like what he had to say.

- Starbucks apparently still thinks they can execute breakfast.......I thought they mercifully gave up on it..

-


Disclosure ("none" means no position):

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Friday's Links

Shelby Steele, NY Times, Obama, SEC

- Fascinating

- Doesn't everyone outside of Manhattan?

- If you say anything enough, it becomes seen as true, whether it really is or not.

- They have become a hindrance to the market..

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Phillip Morris International on Fire

Well Q1 as an independent company is in the books for Phillip Morris International (PM) and of to a great start we are.

On Wednesday, Philip Morris reported double-digit sales and profits increases in the second quarter, boosted by higher prices and the weaker dollar.

Philip Morris shipped 223.2 billion cigarettes in Q2, up 1.0% from a year earlier. For the year, Philip Morris forecast earnings of $3.32 to $3.38 a share, up from its previous forecast of $3.18 to $3.24. This represents a growth of about 19% to 21% from a 2007 pro-forma adjusted base of $2.79 per share. Analysts had expected the company to earn $3.25 per share.

The company has just started to return cash to shareholders in the form uf a multi-billion dollar share repurchase which will further support EPS. How much you ask? During Q2, Philip Morris repurchased 41.4 million common shares for $2.1 billion, which is a part of its two year $13 billion share repurchase program that began in May of this year.

PM also declared its inaugural regular quarterly dividend of 46 cents during the quarter, which represents an annualized rate of $1.84 per share and a dividend yield of 3.6%.

In the quarter, Philip Morris International said profits rose 20.0%, to $1.8 billion, or 86 cents per share, from $1.5 billion, or 70 cents per share, in the year-earlier quarter. Revenues jumped 20.1%, to $16.7 billion, up from $13.9 billion last year. The sales include excise taxes totaling $10.0 billion. Excluding those taxes, revenue rose 15.5%.

Sales in the Eastern Europe, Middle East and Africa segment jumped 19% with operating income climbing 28%. Europe, its largest market, saw a 15% increase in sales and a 20% profit increase. Latin America and Asia recorded earnings jumps of 44% and 22%, respectively.

Just buy this stock and look back at it in ten years....you'll be very happy


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

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Dow's Quarter and Rohm & Haas

Another fantastic management job at Dow Chemical (DOW) this quarter and more affirmation as to why the Rohm & Haas (ROH) deal went for the price it did and why it is a great purchase.

Results:
Sales for the second quarter set another Company record, rising 23 percent from the same period last year to $16.4 billion. Double-digit price increases were recorded in all operating segments and all geographic areas.

· Volume grew 5 percent, with 12 percent growth in geographic areas outside of North America, including an 11 percent volume increase in Europe.

· Earnings for the quarter were $0.81 per share, compared with earnings per share of $1.07 in the same quarter last year.

· Purchased feedstock and energy costs surged 42 percent, or $2.4 billion, compared with the same quarter last year, the largest year-over-year increase in the Company’s history.

· EBIT(1) in the combined Performance segments rose compared with the same period last year despite substantial increases in raw material and supply chain costs.

· Agricultural Sciences set a new quarterly record for both sales and EBIT. Sales rose 25 percent, and EBIT grew more than 60 percent versus the same period last year.

· Equity earnings were $251 million for the quarter, once again demonstrating consistent contributions from joint ventures to the Company’s results.

In my interview with Andrew Liveris he stated why he was most excited about Dow Ag. Today's results would show why

The Agricultural Sciences segment posted record sales of $1.4 billion, 25 percent higher than the same period last year. All geographic areas posted double-digit increases in sales, reflecting organic growth and growth from recent acquisitions. Dow AgroSciences’ broad portfolio of both agricultural chemicals and seeds benefited from rising prices and low global inventories of farm commodities. Price was up 12 percent, with strong increases in all geographic areas. Volume was up 13 percent compared with the same period last year, with double-digit increases in North America, Europe, Latin America and Asia Pacific. Ag chemicals showed particular strength. Sales were up sharply for new cereal and rice herbicides, and for spinetoram insecticide, which continued its successful launch in the United States. Seeds and traits continued to benefit from a strong ag economy with global demand for agricultural output at record levels. The recent acquisitions of Agromen, MTI and Duo Maize continue to perform well, and the integration of newly acquired Triumph Seeds is progressing. Second quarter EBIT for Agricultural Sciences was $335 million, compared with $208 million in the year ago period.

For Dow currently it comes down to costs for the remainder of the year. Oil surged in the quarter and the price increases did not take effect until the second half of the quarter. Now that oil has come back and the full price increases are in effect, Q3 will show far better results.

At the end of the year, the commodity business goes to the Kuwaiti's, the Rohm deal closes and the earnings profile is forever changed. Until then, you can still get shares on the cheap, oh yea, and they pack a 5% yield.



Full release:

Why Rohm & Hass(ROH)? The specialty chemical maker today reported an 8% increase in earnings. Liveris on CNBC (below) confirmed there was a 3-way bidding war for the company and the other finalist was BASF (BASF), who ultimately lacked the financial flexibility Dow now has to finalize a deal.



What is being lost currently is the cost synergies the two companies will now enjoy. Rohm is a major purchaser of Dow materials and Liveris has stated the amount come close to $800 million in annual cost savings. Should we believe it? I think when one considers every other deal he has done has recognized in excess of his stated synergies in a time frame that exceeded his estimates, I think we ought to expect more than the $800 million. In materials like Latex, the combined company with be a behemoth and enjoy added pricing power.



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

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AutoNation (AN) CEO on Earnings

AutoNation (AN) released results today and the news was far better than one would expect given its current operating environment.

America’s largest automotive retailer, today reported 2008 second quarter net income from continuing operations of $53 million or $0.29 per share, compared to year-ago net income from continuing operations of $79 million or $0.38 per share. After adjusting for certain items disclosed in the attached financial tables, net income from continuing operations for the 2008 second quarter was $59 million or $0.33 per share, compared to $76 million or $0.36 per share in the prior year. analysts had expected $.30 cents a share.

Second quarter 2008 revenue totaled $3.9 billion, compared to $4.5 billion in the year-ago period, driven primarily by lower new vehicle sales. In the second quarter, total U.S. industry retail sales declined 16%, based on CNW Research data. In comparison, in the second quarter AutoNation’s new vehicle unit sales declined 12%.
Commenting on the second quarter, Mike Jackson, Chairman and Chief Executive Officer, said, “Despite the fact that this past quarter was the most challenging automotive sales environment any of us have encountered, AutoNation delivered solid profitability.” Mr. Jackson also noted, “In the second quarter, the industry encountered $4.00 per gallon gasoline on top of the continued housing depression and credit crisis, resulting in a significant challenge as consumers are either postponing the purchase of vehicles or they are purchasing smaller vehicles that are more economical both at the time of purchase and at the pump. We now believe that, in 2008, U.S. new vehicle industry sales will decline to the low-14 million unit level.”

Mr. Jackson added, “In continuing response to the ongoing macroeconomic and industry challenges, we are executing a cost reduction plan with a targeted annualized run rate pre-tax savings of $100 million. In the first half of the year, we achieved approximately $25 million of this benefit. In the second half of the year, we expect to achieve approximately $50 million of savings, for a full-year 2008 impact of $75 million on a pre-tax basis. Our targeted annualized cost savings include reductions in advertising spending, corporate overhead expense and store personnel expense.”

Full release:

I don't think (at least I hope) anyone is buying share of AutoNation now expecting an immediate payoff. This is a true value investment. The deal here is that when auto's rebound, AutoNation, being the largest and also the most well run organization of the lot will benefit the most from its currently depressed levels.

Jackson is cutting costs and making the necessary moves to position the company for the rebound.

Watch him on CNBC this morning:



Nissan CEO Carlos Ghosn seems to back Jackson's thoughts. The advantage Jackson has is that he will benefit from all the automakers, and whatever trend(s) emerge not just one.



With famed investors like Berkshires's (BRK.A) Buffett, Sears' (SHLD) Lampert, Gates, Leucadia (LUK) and Sullivan jumping into the sector, now it the time to be buying shares.




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

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John Paulson's Jedi-like Instinct

John Paulson made $3.7B in 2007 betting against an over levered financial system. The ability to go left when everyone else is going right is truly the mark of a great investor.

I would like to point out some of Paulson's superhuman abilities:

1. Paulson had an almost clairvoyant insight into the machinations of Bear Stearns, who at the time was propping up faltering Mortgage Backed Securities (MBS),

"..by purchasing individual mortgages that were rapidly losing value to avoid doling out billions in swap payments".

2. In the days leading up to the Bear Stearns collapse Paulson instinctively cashed out of all Bear Stearns related investments.

I would also point out what his detractors say:

1. Paulson's insight was more like insider information.

"Back in January (2007).. Bear's head mortgage trader, Scott Eichel, talked with a small group of traders over drinks in the Venetian hotel about propping up the ABX index by buying and rescuing some struggling subprime bonds, say two people who were there."

and,

"In April .. Paulson executives called Mr. Eichel to ask whether he was contemplating a plan to repurchase mortgage-backed securities. 'Maybe we are, maybe we're not,' Mr. Eichel replied, according to two Paulson executives, who say he added they should call him if they were interested."

2. Paulson's early cash-out even made the SEC suspicious of wrong doing:

"Bear Stearns Cos. plans to turn over documents to securities regulators showing that several financial giants, including Goldman Sachs Group Inc., Citadel Investment Group and Paulson & Co., slashed their exposure to the securities firm in the weeks before its collapse."

and just days before the fall of Bear Stearns,

"Beginning March 10, Paulson .. unloaded dozens of credit-default swaps with Bear Stearns.. In every case, Bear Stearns owed Paulson money on the swaps, based on mark-to-market values at the time of the transfer."

Disclosure ("none" means no position): None

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Icahn Files 13D/A in Guaranty Financial Group

Icahn files this with the SEC today in Guaranty Financial (GFG)

Item 4 of the Initial 13D is hereby amended by adding the following:

On July 21, 2008, the transactions contemplated by the Investment Agreement
and the Purchase Agreement closed. At the closing, the Reporting Persons
received, in exchange for aggregate consideration of $230,000,011 in cash,
1,469,830 shares of Series B Preferred Stock and $175 million in principal
amount of Subordinated Notes. Approval by the Issuer's stockholders is required
before the conversion feature of the Series B Preferred Stock can be exercised.

In connection with the closing, the Reporting Persons and certain of their
affiliates entered into an Agreement for Rebuttal of Rebuttable Determination of
Control (the "Rebuttal of Control Agreement") with the Office of Thrift
Supervision, substantially in the form required by OTS regulations at 12 C.F.R.
Part 574. Under the Rebuttal of Control Agreement, unless otherwise approved by
the Office of Thrift Supervision, the Reporting Persons and certain of their
affiliates are obligated not to:

o Seek or accept representation of more than one member of the board of
directors of the Issuer or its principal savings bank subsidiary,
Guaranty Bank ("Guaranty Bank");

o Have or seek to have any representative serve as the chairman of the
board of directors, or chairman of an executive or similar committee
of the Issuer's or Guaranty Bank's board of directors or as president
or chief executive officer of the Issuer or Guaranty Bank;

o Engage in any intercompany transaction with the Issuer or the Issuer's
affiliates, except as provided in an existing agreement;

o Propose a director in opposition to nominees proposed by the
management of the Issuer or Guaranty Bank for the board of directors
of the Issuer or Guaranty Bank, other than as permitted above;

o Solicit proxies or participate in any solicitation of proxies with
respect to any matter presented to the stockholders of the Issuer
other than in support of, or in opposition to, a solicitation
conducted on behalf of management of the Issuer;

o Do any of the following, except as necessary solely in connection with
the performance of duties by the Reporting Persons' representative as
a member of the Issuer's board of directors:

(a) Influence or attempt to influence in any respect the loan and
credit decisions or policies of the Issuer or Guaranty Bank,
the pricing of services, any personnel decisions, the location
of any offices, branching, the hours of operation or similar
activities of the Issuer or Guaranty Bank;

(b) Influence or attempt to influence the dividend policies and
practices of the Issuer or Guaranty Bank or any decisions or
policies of the Issuer or Guaranty Bank as to the offering or
exchange of any securities;

(c) Seek to amend, or otherwise take action to change, the bylaws,
articles of incorporation, or charter of the Issuer or
Guaranty Bank;

(d) Exercise, or attempt to exercise, directly or indirectly,
control or a controlling influence over the management,
policies or business operations of the Issuer or Guaranty
Bank; or

(e) Seek or accept access to any non-public information concerning
the Issuer or Guaranty Bank; or

o Assist, aid or abet any of the Reporting Persons' affiliates or
associates that are not parties to the Rebuttal of Control Agreement
to act, or act in concert with any person or company, in a manner
which is inconsistent with the terms of the Rebuttal of Control
Agreement or which constitutes an attempt to evade the requirements
therein.

Item 5. Interest in Securities of the Issuer

Item 5(a) of the Initial 13D is hereby amended and restated as follows:

(a) The Reporting Persons may be deemed to beneficially own, in the
aggregate, (i) 3,455,493 Shares, representing approximately 7.73% of the
Issuer's outstanding Shares (based upon the 44,684,585 Shares stated to be
outstanding by the Issuer as of July 14, 2008) and (ii) 1,469,830 shares of
Series B Preferred Stock, representing approximately 23.78% of the Issuer's
outstanding shares of Series B Preferred Stock (based upon the 6,181,934
shares of Series B Preferred Stock stated to be outstanding by the Issuer
as of July 14, 2008).

Item 5(c) of the Initial 13D is hereby amended and restated as follows:

(c) Except as described in Item 4, no transactions with respect to
Shares were effected during the past sixty (60) days by any of the
Reporting Persons.




Disclosure ("none" means no position):None

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Bill Gates Buys AutoNation (AN) Shares

Bill Gates' Cascade Investments and The Gates Foundation in a recent SEC filing disclosed a 5.5% stake in the auto retailer.


From the filing:
"(1) Cascade Investment, L.L.C. (“Cascade”) holds 5,263,588 shares of Common Stock. For purposes of Rule 13d-3 under the Securities Exchange Act of 1934, as amended, all shares of Common Stock held by Cascade may be deemed to be beneficially owned by William H. Gates III as the sole member of Cascade. Michael Larson, the Business Manager of Cascade, has voting and investment power with respect to the shares of Common Stock held by Cascade. Mr. Larson disclaims any beneficial ownership of the shares of Common Stock beneficially owned by Cascade and Mr. Gates.



(2) The Bill & Melinda Gates Foundation Trust (“Trust”) holds 4,640,000 shares of Common Stock. For purposes of Rule 13d-3 under the Securities Exchange Act of 1934, as amended, all shares of Common Stock held by the Trust may be deemed to be beneficially owned by William H. Gates III and Melinda French Gates as Co-Trustees of the Trust. Michael Larson has voting and investment power with respect to the shares of Common Stock owned by the Trust. Mr. Larson disclaims any beneficial ownership of the shares of Common Stock beneficially owned by the Trust or Mr. and Mrs. Gates."



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

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Goldman Sachs (GS): No Value Investing Here

Still on vacation but some things need attention. Read some of Goldman Sachs' (GS) research report on Sherwin Williams (SHW) today..

"Although the company’s long-term growth potential remains intact, we are cautious that the cost and demand headwinds will continue challenging SHW in the near term: (1) our economists expect existing home sales (key indicator for paint demand) to trough in 1H2009; (2) the overall non- residential market is poised for a downturn as a substantially tighter credit condition and slowing overall activity weigh on the sector; (3) the raw material cost spike will reach a crescendo on SHW’s P&L in 2H2008 and the consolidation among leading paint ingredient suppliers (DOW & ROH)
may exert additional cost pressure on the paint industry; (4) the double blow of demand weakness and cost spikes could limit the success of SHW’s ongoing aggressive price hikes. Therefore, we see meaningful downside risk to SHW’s earnings and share price in the short term."

So, short term problem but long term, everything ok. Sell???

Isn't this a textbook case of what Berkshire Hathaway's (BEK.A) Warren Buffett means when he say "buy fear"?

I mean, things look tough so sell the hell out of it? Ought we not buy it when there are short term problem that do not affect the long term outlook and growth potential? If you are a current shareholder, Goldman is saying that sell you shares even though long term they expect them to be fine because they may dip for the next months.

These "buy" and "sell" ratings really ought to be ignored by anyone who holds securities for more than a month. They are only good for the day they are issued. Anyone remember all the "buy" recommendations on Google as it neared $700 a share?

If not, read here:

Not sure why much if this matters anyway, Dow chemical (DOW) is going to buy Sherwin anyway...




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

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Monday's Links

Reid, Borders, Dimon, Sherwin


- Hey Harry!!! Why not "tackle" the LACK OF OIL...?

- The new site is great

- Read this

- Dividend

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Please Welcome A New Contributor.....

You may have notice a new blogger here at ValuePlays. Vlado ia taking a shot at it and will occasionally contribute. I think the value folks out there will find is style , topics and ability to find information has real merit.

Vlado's first post is here

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Is Bruce Berkowitz calling Transportation The New Energy Sector?

In a recent interview Bruce Berkowitz, of Fairholme Capital Management (FAIRX), revealed that he was leaving Energy and heading into the Health Care sector. Was Berkowitz sincere? Or was it a quarterback misdirection?

A Google search revealed this unreferenced pdf presentation from June 2007 that points out (on page 19) that Fairholme Capital Management (FAIRX) is Clarke Inc's second largest institutional investor, with 1,142,400 shares (4.5% equity stake).

Also came across this article on a man often compared to Carl Icahn, George Armoyan whose private holding company Geosam Investments controls Clarke Inc (CLKFF) (a Canadian-based parent company of 6 subsidiaries, involved in transportation/shipping). This page describes their value-based investment process: Clarke value investment process.

This blog raves about Clarke Inc like it was a baby-Berkshire Hathaway.

Further digging reveals that Bruce Berkowitz is also holding an 8.44% stake in TAL International Group, Inc. (TAL), which is involved in Maritime container management services, Dry freight containers, etc.- and describes itself as a premier container leasing company.

Notice Berkowitz's transportation-themed investments? Need I remind you about another well respected investor who recently became interested in transportation by way of Burlington Northern Santa Fe Corp (BNI).

Bottom line, two All-American quarterbacks have called the play: "Go long" (transportation).


Disclosure ("none" means no position): None

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On Vacation (Again)

Off to Maine this week

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Friday's Links

Starbucks, Iraq, Rodgers, Inflation

- Another view

- Nothing like telegraphing the move. If I were the terrorists I would be insulted he thinks they are so stupid..

- Uh, Jim, who has said this is happening?

- More dangerous than slow growth
\

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Financials......Is it for Real?

I think it depends on what you own..

Just as I am skeptical when something falls 49% in a couple days barring extreme circumstances I am equally un-enthused when the converse happens.

Watch the following discussion:


Now, holders in JP Morgan (JPM) and Wells Fargo (WFC) can be assured that the rally in their share is for real for the simple reason that the sell-off in them was far overdone. A word of caution, this isn't really so much a rally of enthusiasm that "bad news is done" as much as it is a rally of confirmation of quality. Dramatic share gains from here ,may not be likely but a slow climb probably is.

But, holder of shares in Washington Mutual (WM), Merrill (MER), Wachovia (WB), Lehman (LEH), National City (NCC) and other weak firms ought not get too caught up in what is happening. There are plenty of dark clouds out there still and you are going to get rained in sooner, rather than later. That is not to say we may have seen a bottom but a return to year earlier price levels won't be seen for a while. There is a very real chance that 6 months from now you are staring at prices level you see today.

All in all it is very good news. For the first time in a long while we are now going to be able to look at individual firms and have some level of expectation that share performance will track firm performance rather than what has happened the past 6 months, everything was killed.




Disclosure ("none" means no position):Long WB,WFC, none

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Annello on Sears Holdings

Here is a nice post by Jeff Annello on Sears Holdings (SHLD) in which he gives it a valuation



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

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Friday's Upgrades and Downgrades

Upgrades
CB&I (CBI)- Stanford Research Sell » Hold
Steven Madden (SHOO)- Wedbush Morgan Hold » Buy
EOG Resources (EOG)- RBC Capital Mkts Underperform » Sector Perform
Starwood Hotels (HOT)- Wachovia Mkt Perform » Outperform
PF Chang's (PFCB)- Piper Jaffray Neutral » Buy
ACE Limited (ACE)- Citigroup Hold » Buy
Marshall & Ilsley (MI)- Keefe Bruyette Underperform » Mkt Perform
Microchip (MCHP)- UBS Neutral » Buy
Colnl BancGrp (CNB)- JP Morgan Neutral » Overweight
Linear Tech (LLTC)- UBS Neutral » Buy
Blackboard (BBBB)- Robert W. Baird Neutral » Outperform

Downgrades
Jamba (JMBA)- Piper Jaffray Buy » Neutral
ProLogis (PLD)- JP Morgan Overweight » Neutral
St. Joe Company (JOE)- Wachovia Mkt Perform » Underperform
Host Hotels (HST)- Stifel Nicolaus Buy » Hold
eBay (EBAY)- AmTech Research Neutral » Sell
InterVoice (INTV)- Wedbush Morgan Strong Buy » Hold
Polycom (PLCM)- Wedbush Morgan Buy » Hold
Omnicom (OMC)- Citigroup Buy » Hold
Albany Molecular (AMRI)- Jefferies & Co Buy » Hold
InterVoice (INTV)- Brean Murray Buy » Hold
Host Hotels (HST)- Susquehanna Financial Positive » Neutral
Diamondrock Hospitality (DRH)- Wachovia Outperform » Mkt Perform
FelCor Lodging (FCH)- Wachovia Outperform » Mkt Perform
Host Hotels (HST)- Wachovia Outperform » Mkt Perform
Ashford Hospitality Trust (AHT)- Wachovia Mkt Perform » Underperform
Strategic Hotels & Resorts (BEE)- Wachovia Mkt Perform » Underperform
Starbucks (SBUX)- Piper Jaffray Buy » Neutral
Wells Fargo (WFC)- UBS Buy » Neutral
AMB Property (AMB)- JP Morgan Overweight » Neutral
Georgia Gulf (GGC)- Lehman Brothers Equal-Weight » Underweight

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JP Morgan Joins Wells Fargo

Looks like in banking it is now a two horse race. JP Morgan (JPM) reported today and like Wells Fargo (WFC) yesterday, investors were undoubtedly pleased.

From the Release:
JPMorgan (JPM) today reported 2008 second-quarter net income of $2.0 billion, compared with net income of $4.2 billion in the second quarter of 2007. Earnings per share of $0.54 were down 55%, compared with earnings per share of $1.20 in the second quarter of 2007. Current-quarter results include the effect of merger-related items amounting to a net loss of $540 million (after-tax) related to the acquisition of The Bear Stearns Companies Inc., which closed on May 30, 2008. Excluding these items, net income would have been $2.5 billion.

Jamie Dimon, Chairman and Chief Executive Officer, commented on the quarter: “Our earnings were down significantly due to the unfavorable credit environment and market conditions. The Investment Bank took additional markdowns on leveraged loans and mortgage-related positions. Retail Financial Services experienced further deterioration in its home lending portfolio, which resulted in higher charge-offs and an increase in the allowance for credit losses. However, the firm overall continued to maintain solid underlying business momentum. We had market share gains in Investment Banking fees and key product areas. Retail Financial Services posted organic revenue growth of 15%, and all of our major businesses produced growth in accounts, balances and volumes. Further positive results in the quarter included record performance from both Commercial Banking and Treasury & Securities Services.”

Mr. Dimon added, “We also completed the highly complex Bear Stearns acquisition as planned. Through the truly remarkable partnership and efforts of our people in extremely difficult times, we made great progress towards full integration, while also significantly reducing our combined risk positions. We now have an expanded platform to better serve our institutional clients – one which we fully expect will make our franchise stronger over time.”

Mr. Dimon further remarked, “I am pleased with the strength of our balance sheet and capital positions, particularly in the context of the market challenges we have faced during the past year. During the quarter, we added $1.3 billion to our allowance for credit losses (which now totals $13.9 billion) and maintained strong capital ratios.”

Discussing the firm’s outlook, Dimon said, “Our expectation is for the economic environment to continue to be weak – and to likely get weaker – and for the capital markets to remain under stress. We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer. However, the firm has delivered underlying growth across most of our businesses, and with our substantial capital base we can continue to invest for the future. In spite of the environment, we are confident that we are building an increasingly strong and profitable company.”


Dick Bove said:


Bove is right, Dimon is tempering expectations as there is still some ambiguity out there. Rather than thump his chest and make flashy predictions, Dimon reminds people it is tough out there.

Now here is the good part for shareholders. Because of his superior management ability, like Sherwin Williams (SHW) and Harley Davidson (HOG) earlier today results were not nearly as bad as expected. Poor operating environments will inevitably lead to earnings decline but superior management will soften the losses compared to peers while positioning the company to take advantage of the eventual economic rebounds.

Meanwhile people over0react to the operating environment forgetting the superior management and thus "value" investing opportunities are created....




Disclosure ("none" means no position):Long WFC, SHW, HOG, None

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More on Naked Shorts or "Why the SEC Sucks"

Just a day after banning "naked shorting" in financial stocks, the Chris Cox and his decides it is necessary to let some people do it. You know what? Just shut them down....the SEC that is. They are more aggravation than they are worth. Let's get our act together over there kids...

The WSJ reported today:

"By putting the kibosh on so-called naked short-selling in companies like Fannie Mae and Freddie Mac, the SEC would complicate life for market makers who take the opposite side of orders to trade stocks and options.

Early Wednesday, one day after the SEC issued the order for 19 financial companies, representatives from the seven U.S. options exchanges contacted SEC officials to convey concerns and raise the possibility of an exemption.

The SEC is now considering such a move, an agency spokesman said, although no decision had been made at press time.

The SEC's order stirred immediate panic in the options market. Market makers often short-sell companies' stock in order to hedge positions they take in options contracts. If they sell put contracts, they turn around and sell stock in the same company.

"If market makers can't hedge themselves," said Andy Schwarz, founder of AGS Specialist Partners, "they will be unable to sell puts and buy calls."


Ooops!!

Did anyone over there actually think this thing through? How can this happen? We are now going to need a scorecard just to tell who can do what in what stocks.

As I watch Cox sit in front of Congress doing his best impersonation of a constipated toll collector contemplating a potentially lethal dose of Metamucil, I get angry. He has let this stuff go on for years and only now, when the shorts are actually right, decided to jump in with both feet and screw things up even more.


Again, why not investigate Lehman's (LEH) Erin Callan, citi's (C) Chuck Prince, Merrill's (MER) Stan O'Neil, Wachovia's (WB) Ken Thompson and on and on. They all told shareholders "things were great" only to have those who bought shares listening to them get slaughtered. What does Cox do? Investigate the guys who were screaming "things are not alright" the whole time and oh yea......were right!!

Chris, just please go back to whatever it is you have been doing for the past 4 years and get out of our way please.... we really don't need you




Disclosure ("none" means no position):Long C,WB none

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Look Under the Sofa Cushion To Buy Six Flags Shares

As much as a doubter of Six flags (SIX) that I am, even this dramatic move surprised me.

Six Flags' shares lost 37 cents to close at 48 cents, after touching an all-time low of 25 cents during the day yesterday. Shares have lost more than 90 percent from its 52-week high of $5.92 last July. Today they trade at 60 cents each.

On Tuesday, research firm IBISWorld predicted that fewer Americans will visit U.S. amusement parks this year and admissions will improve only slightly in 2009. Is this really news to anyone?

Something else is happening. Someone is dumping shares in a big way.



Disclosure ("none" means no position):None

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Sherwin Williams Beats Estimates

Sherwin Williams (SHW) posted results this mornings and more than a few people are going to be surprised.

Profit for the quarter slid to $171.7 million, or $1.45 per share, from $202.6 million, or $1.52 per share, in the same quarter last year. Revenue edged up about 1 percent to $2.23 billion from $2.2 billion. Analysts polled by Thomson Financial, on average, predicted a profit of $1.38 per share on revenue of $2.19 billion.

Sherwin-Williams said acquisitions and strong global results partly offset what Christopher M. Connor, company chairman and chief executive, called "an unprecedented downturn in the U.S. housing market that is both deep and wide."

How well did the International Group do? Seven acquisitions completed after the second quarter of 2007 increased consolidated net sales 2.4% in the quarter and 2.5% in the first six months. Favorable currency translation rate changes increased consolidated net sales 1.1% in the quarter and 1.3% in the first six months.

Acquisitions and currency translation rate changes had a combined favorable impact on diluted net income per common share of approximately $.02 per share in the quarter.

The Global Group's net sales stated in U.S. dollars increased $54.6 million, or 12.6%, to $488.9 million in the quarter and $114.3 million, or 13.7%, to $950.8 million in the first six months due primarily to volume gains, selling price increases, currency translation impact and acquisitions. Favorable currency translation rate changes increased net sales of the Global Group by 5.8% in the quarter and 6.3% in the first six months. Acquisitions increased this Group's net sales in U.S. dollars by 3.8% in the quarter and 3.7% in the first six months.

This part really surprised me, domestic net sales in the Paint Stores Group decreased $10.4 million, or 0.8%, to $1.355 billion in the quarter and $30.2 million, or 1.2%, to $2.386 billion in the first six months due primarily to soft domestic architectural paint sales in the new residential, residential repaint, DIY and commercial markets as well as weak sales in non-paint categories. Acquisitions added 2.6% to this Group's net sales in the quarter and 2.9% in the first six months. Net sales from stores open for more than twelve calendar months decreased 4.5% in the quarter and 5.4% in the first six months over last year's comparable periods.

I would have expect a much greater decline. This really does bode very well for the eventual turn in housing. If we can see housing conditions not seen since the Depression, and only see a 4.5% sales decline, when housing normalizes, things will look just great.

The Company acquired 2.1 million shares of its common stock through open market purchases during the quarter and 6.2 million shares during the first six months. The Company had remaining authorization at June 30, 2008 to purchase 20.8 million shares.

Looking forward:
"During the third quarter of 2008, we anticipate consolidated net sales will be slightly below last year's third quarter. We expect diluted net income per common share for the third quarter will be in the range of $1.20 to $1.45 per share compared to $1.55 per share last year. For the full year 2008, we are reaffirming our June 3, 2008 guidance that we anticipate consolidated net sales will be slightly lower than 2007. We are also reaffirming our June 3, 2008 guidance that we expect diluted net income per common share for full year 2008 will be in the range of $3.60 to $4.10 per share compared to $4.70 per share earned in 2007." CEO Chris Connor

You know, great management always manages to steer through tough times and come out stronger. With lead litigation effectively behind it and results holding their own despite unprecedented conditions, Connor is doing just that with Sherwin.




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

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Harley Davidson Crushes Estimates

So, maybe it would seem high gas prices are providing a buffer for Harley Davidson (HOG) against the economy?

Harley-Davidson (HOG) reported Q2 EPS of $0.95 this morning, 19 cents better than estimates. Revenue for the quarter was $1.57 billion vs. consensus of $1.4 billion.

"During the second quarter we shipped 80,326 Harley-Davidson® motorcycles to our dealers and distributors around the world. While this result exceeds our guidance range of 76,000 to 80,000 units for the quarter, it is a decrease of 15.6 percent from the year-ago period. This decrease reflects the impact of the shipment reduction we announced April 17th in response to ongoing weakness in the U.S. economy," said Jim Ziemer, CEO.

For the first six months of 2008, revenue totaled $2.88 billion, a 2.9 percent increase over the year-ago period. Earnings per share were $1.74, a decrease of 7.9 percent compared to the same period last year.

Through the first six months of this year, shipments of Harley-Davidson motorcycles were 152,194 units, a 6.6 percent decrease compared to last year's 162,878 units.

The Company expects to ship between 74,000 and 78,000 Harley-Davidson motorcycles during the third quarter of 2008. For the full year of 2008, Harley-Davidson still plans to ship between 303,500 and 307,500 units. The Company continues to expect full-year EPS of $3.00 to $3.18.

The Company repurchased 1.3 million shares of its common stock at a cost of $50.0 million during the second quarter of 2008. On June 29, 2008, the Company had 235.3 million shares of common stock outstanding. As of June 29, 2008, there were 19.3 million shares remaining on a board- approved share repurchase authorization.

When one consider the current economic environment and credit conditions out there, these results really are fantastic. Far from a "luxury item", it would seem motorcycles, especially Harley are becoming the alternative of choice for gas pained consumers.

Here is the kicker, when credit conditions improve, sales ought to increase even further. One really ought not expect oil and gas prices to fall very far anytime soon so motorcycles as an alternative will remain while becoming more affordable.

International sales, the current growth of the company grew 11%. What will be interesting and I hope it is asked on the earnings call is what contribution can be expected from the recent acquisition. Also, can someone ask is the double digit growth these is expected to continue for a while?




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

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AutoNation's Jackson on $4 Gas.....Good

AutoNation's (AN) CEO Mike Jackson was on NBC's Nightly News the other night.

Here is the appearance:



Now, Jackson is both being right and a little self-serving which, as a shareholder is just fine. $4 gas for a prolonged period will lead to a fundamental shift in consumer behavior. The tens of millions of SUV's that have been sold in the past decade are going to be traded in for smaller, more efficient models in droves.

As the largest auto-dealer in the nation, Jackson (and shareholders) will benefit from that activity. As gas prices inch higher ($4.25 around here) that activity will begin sooner and become greater. Good....

While auto sales are currently down (along with AN's stock price), this is not an evaporated demand situation. It isn't like retail where I may pass on something and just never get it. People need cars as they age and deteriorate (or trade in a gas guzzler). The demand builds over time as the purchases are put off, then it releases and the longer the build, the faster the release.

The key here is Jackson's market share. As dealerships close, Jackson is getting an even bigger piece of a shrinking pie without expending more capital to do so. The Kiplinger Letter recently predicted 15 million auto units to be sold this year. Here is what got me. They said "expect 1,200 dealerships, mostly US only brands to be gone by the end of the year".

Since they will not be Jackson's, this is good news for AutoNation shareholders.





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

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Thursday's Links

Callan, Naked Shorting, SEC, Heating oil


- Finally http://feeds.wsjonline.com/~r/wsj/xml/rss/3_7011/~3/336326064/SB121614671139755285.html

- Hasn't this been illegal anyway?

- Why are they doing this? What about the folks who got themselves into this mess?

- This is when things get ugly, AC can be turned off, heat, no

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Sherwin Williams: Time For Shareholders to Sue RI?

More thoughts on litigation by shareholders of Sherwin Williams (SHW) vs The State of Rhode Island

The Court Said:
"we conclude that the state has not and cannot allege any set of facts to support its public nuisance claim that would establish that defendants interfered with a public right or that defendants were in control of the lead pigment they, or their predecessors, manufactured at the time it caused harm to Rhode Island children."

They continued:

"defendants were not in control of any lead pigment at the time the lead caused harm to children in Rhode Island, making defendants unable to abate the alleged nuisance, the standard remedy in a public nuisance action."

Here is a veiled rebuke of the original trial Judge Silverstien:
"This Court is bound by the law and can provide justice only to the extent that the law allows. Law consists for the most part of enactments that the General Assembly provides to us, whereas justice extends farther. Justice is based on the relationship among people, but it must be based upon the rule of law. This Court is powerless to fashion independently a cause of action....."

This is what Silverstien did in the original trial by even letting it go forward as a public nuisance action.

Here is the best part:
"After all, the judiciary’s “duty [is] to determine the law, not to make the law.” City of Pawtucket v. Sundlun, 662 A.2d 40, 57 (R.I. 1995). “To do otherwise, even if based on sound policy and the best of intentions, would be to substitute our will for that of a body democratically elected by the citizens of this state and to overplay our proper role in the theater of Rhode Island government.” DeSantis v. Prelle, 891 A.2d 873, 881 (R.I. 2006)."

In January 2000, defendants moved to dismiss all counts of the state’s complaint pursuant to Rule 12(b)(6) of the Superior Court Rules of Civil Procedure. With respect to the public nuisance claim, defendants asserted that they did not control the lead pigment at the time it caused harm to Rhode Island children and that, therefore, they cannot be held liable for public nuisance.

Now, where have I read that before? Oh yea.....I the RISC decision, almost verbatim!!!!!!!

In 2000 Sherwin asked for the State's Claim to be dismissed for the very reason it was dismissed by the RISC almost a decade later. Judge Silverstien, ignoring the actual laws of the State of Rhode Island dismissed Sherwin's motion. 8.5 years of legal fees that should have never been incurred.

What Rhode Island did was the equivalent of charging the person who laid the asphalt on the highway with murder because a pothole on the road 3 decades later caused an accident in which someone died. They knew the correct claim, product liability was un-winnable so they trumped up another charge. Why the dramatic analogy? Had they prevailed, lead paint would have been the next asbestos and the defendants would have faced bankruptcy just as asbestos defendants like USG (USG) and Owens Corning (OC) did as suits would have mushroomed.

In dismissing the Illinois public nuisance lead litigation, the court made the following analogy should public nuisance become defined the way states wanted it to:

"Similarly, cell phones, DVD players, and other lawful products may be misused by drivers, creating a risk of harm to others. In an increasing number of jurisdictions, state legislatures have acted to ban the use of these otherwise legal products while driving. A public right to be free from the threat that other drivers
may defy these laws would permit nuisance liability to be imposed on an endless list of manufacturers, distributors, and retailers of manufactured products that are intended to be, or are likely to be, used by drivers, distracting them and causing injury to others.”

Again, 8.5 years of legal expenses that according the the RISC, if the laws of the State has be applied, should have never been incurred.

As proof of this, the RISC, in its decision said "We agree with defendants that the public nuisance claim should have been dismissed at the outset because the state has not and cannot allege that defendants’ conduct interfered with a public right or that defendants were in control of lead pigment at the time it caused harm to children in Rhode Island."

"For the alleged public nuisance to be actionable, the state would have had to
assert that defendants not only manufactured the lead pigment but also controlled that pigment at the time it caused injury to children in Rhode Island and there is no allegation of such control. Translation? The State did not even allege the necessary elements for a public nuisance case!! Yet, Judge Silverstien allowed the action to go to trial. Kind of like charging someone with theft when nothing is stolen.

Am I right? Just ask the RISC who said "In denying defendants’ motion to dismiss, the highly respected trial justice, however well intentioned, departed from the traditional requirements of common law public nuisance."

8.5 years of unnecessary legal fees, not just in Rhode Island but in New Jersey, Ohio, Wisconsin, California and Missouri. Suits were filed in all these jurisdictions AFTER the case in Rhode Island was brought to trial.

Let's look at numbers now:

The suit is not about lost stock price appreciation. That would be a guesstimate based on today's environment. How would we argue what mattered more, the litigation or housing etc. We need a number we can prove. Take the total legal fees incurred and multiply them by Sherwin's return on equity (29% average since litigation began) and lets find out what it cost us in earnings.

The reason to do this is because that money, if it had been left in Sherwin's control would have grown at that rate annually based on the last 8 years results. Now, were that money not spent on the litigation, we would have seen the results directly on the bottom line so we need to find out the EPS impact of the litigation.

I have spaced the legal fees equally over the course of 8 years. There is now way to know when what was incurred. I have scoured SEC filings and cannot ind the answer. Each amount is compounded at 29% annually over 8 years then I divided it by the 119 million shares outstanding.

$50 million gives us $223 million in equity and $1.87 in EPS lost

$100 million gives us $446 million in equity and $3.74 in EPS lost

$250 million gives us $1.16 billion in equity and $9.74 in EPS lost.

$500 million gives us $2.3 billion in equity and $19.32 in EPS lost.

Now, you would apply a moderate PE of 15 times each amount and we can come up with a per share appreciation (or lack thereof) due to the litigation.

Sherwin or its shareholders need to pursue these amounts (adjusted for details of course) against RI. It is justified because, as the RISC said "the public nuisance claim should have been dismissed at the outset".

The irony here is that I am sure they could find someone to take it on a contingency fee. Should Sherwin not do it, a class action shareholder suit would be the way to go. We are the owners of the company and have been economically harmed by the persecution err... prosecution.

Clearly I am waiting to see what Sherwin does as rumors are now they will pursue legal costs but things are getting rolling on this end.

Interested parties may email me.

For everything lead, email James Cordrey at Lexis/Nexis and visit Jane Genova at Law and More


Full decision:



Disclosure ("none" means no position):Long SHW, none

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Thursday's Upgrades and Downgrades

Upgrades
QLogic (QLGC)- Pacific Growth Equities Neutral » Buy
Massey Energy (MEE)- Caris & Company Above Average » Buy
PF Chang's (PFCB)- Wedbush Morgan Sell » Hold
Scotts Miracle-Gro (SMG)- BMO Capital Markets Underperform » Market Perform
Walgreen (WAG)- Credit Suisse Neutral » Outperform
SW Energy (SWN)- Sun Trust Rbsn Humphrey Neutral » Buy
Ultra Petroleum (UPL)- Sun Trust Rbsn Humphrey Neutral » Buy
American Eagle (AEO)- Needham Underperform » Hold
Brigham Exploration (BEXP)- JP Morgan Underweight » Overweight
Concho Resources (CXO)- Sun Trust Rbsn Humphrey Neutral » Buy
Arena Resources (ARD)- Sun Trust Rbsn Humphrey Neutral » Buy
Bill Barrett (BBG)- Sun Trust Rbsn Humphrey Neutral » Buy
PF Chang's (PFCB)- Jefferies & Co Hold » Buy
Nalco (NLC)- JP Morgan Underweight » Neutral
Borg Warner (BWA)- Robert W. Baird Neutral » Outperform


Downgrades
Royal Bank of Scotland (RBS)- Edward Jones Buy » Hold
US Bancorp (USB)- Deutsche Securities Hold » Sell
Navigators Group (NAVG)- Fox Pitt Outperform » In Line
Nymagic (NYM)- Fox Pitt Outperform » In Line
Procter & Gamble (PG)- BMO Capital Markets Outperform » Market Perform
Sun Microsystems (JAVA)- Cross Research Buy » Hold
Orion Energy Systems (OESX)- Northland Securities Outperform » Market Perform
St. Mary Lnd/Expl (SM)- Sun Trust Rbsn Humphrey Buy » Neutral
Research In Motion (RIMM)- Needham Hold » Underperform
CSG Systems (CSGS)- Kaufman Bros Buy » Hold
Cardiome Pharma (CRME)- RBC Capital Mkts Outperform » Sector Perform
eResearchTech (ERES)- Leerink Swann Mkt Perform » Underperform
CB&I (CBI)- JP Morgan Overweight » Neutral
Penn Virginia (PVA)- Sun Trust Rbsn Humphrey Buy » Neutral
O2Micro (OIIM)- Roth Capital Buy » Hold
Brigham Exploration (BEXP)- Sun Trust Rbsn Humphrey Buy » Neutral
SAIC (SAI)- Cowen & Co Outperform » Neutral
Informatica (INFA)- Piper Jaffray Buy » Neutral
Lev Pharmaceuticals (LEVP)- Jefferies & Co Buy » Hold
Veraz Networks (VRAZ)- Jefferies & Co Hold » Underperform
Cisco Systems (CSCO)- Credit Suisse Outperform » Neutral
ADC Telecom (ADCT)- Credit Suisse Outperform » Neutral
Optium (OPTM)- Credit Suisse Outperform » Neutral
ADTRAN (ADTN)- Credit Suisse Neutral » Underperform
Ciena (CIEN)- Credit Suisse Outperform » Underperform
EW Scripps (SSP)- Lehman Brothers Overweight » Underweight
Esco Tech (ESE)- JP Morgan Neutral » Underweight
Time Warner Tcom (TWTC)- JP Morgan Overweight » Underweight
Washington Mutual (WM)- Edward Jones Hold » Sell

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Wells Fargo: Earnings and a Dividend Increase From a Bank? What?

Just a yesterday I said, "It is getting to the point where you have Goldman (GS), JP Morgan (JPM) and Wells Fargo (WFC) as the cream of the crop in financials.." Wishing now I had listened to myself and bought more...

Wells Fargo reported today and:

Net income of $1.8 billion compared with $2.3 billion a year ago
-- Diluted earnings per share of $0.53 compared with $0.67 a year ago (estimates were for 50 cents)
-- Record revenue of $11.5 billion, up 16 percent from prior year and
34 percent (annualized) from prior quarter
-- Record cross-sell for both retail and commercial customers
-- Provision for credit losses of $3.0 billion (including reserve
build of $1.5 billion)
-- Positive operating leverage (revenue growth of 16 percent; expense
growth of 2 percent from prior year)
-- Average loans up 18 percent from prior year and 8 percent
(annualized) from prior quarter
-- Average earning assets up 20 percent from prior year and 15 percent
(annualized) from prior quarter
-- Net interest margin of 4.92 percent, up 23 basis points from prior
quarter
-- Tier 1 capital of 8.24 percent, up from 7.92 percent at March 31,
2008, and 7.59 percent at December 31, 2007


“Wells Fargo continued to strengthen its franchise during the second quarter,” said President and CEO John Stumpf. “Earnings per share were 14 cents below that of last year due to $2.3 billion of higher provision expense, including a credit reserve build of $1.5 billion (30 cents per share). We were able to lend more to current customers where we believed it was prudent and properly priced. We grew core deposits while reducing funding costs. We achieved record cross-sell results with our retail and commercial customers – a testament to our relationship-based strategy and our 160,000 team members who serve our customers. We are open for business and getting lots of it. We also continued to benefit from opportunities in this environment to gain new business and customers through selective acquisitions. We maintained a strong balance sheet and, for the 21st consecutive year, increased our dividend. We’re still affected by the weak economy, but we believe we’re one of the best positioned in financial services to grow through this adversity and to build an even stronger company for our team members, customers, communities and shareholders.”

Now, is that the most confident you have heard a banks exec is a very long time or what? Wait, let me rephrase, confident and you actually believed what he had to say?

Here is the thing. Unlike the pother banks who are writing down loans, shrinking business and recording losses, Wells is still profitable and growing. When these write downs become write up, earnings will explode. A dividend increase? Did anyone actually expect that?

Wells is superbly positioned (other than JP Morgan (JPM) and Goldman, they are the only one positioned) to take a run at a struggling bank like Wachovia (WB). In one fell swoop they could expand their base into the Southeast and dramatically expand their footprint. Wachovia may get whacked when they report another billion dollar loss soon. I would be surprised not to see Wells start picking up smaller regional bank.

Here is the CFO discussing the results:




Earnings call transcript




Disclosure ("none" means no position):Long WFC,WB,GS, none

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More on SEC Chief Chris Cox

Dealbreaker has it right..


"Every time this man speaks he adds uncertainty and regulatory risk to the markets."

Read full post

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FOMC Minutes

Key paragraph...

"In the Committee's discussion of monetary policy for the intermeeting period, members generally agreed that the risks to growth had diminished somewhat since the time of the last FOMC meeting while the upside risks to inflation had increased. Nonetheless, the risks to growth remained tilted to the downside. Conditions in some financial markets had improved, but many financial institutions continued to experience significant credit losses and balance sheet pressures, and in these circumstances credit availability was likely to remain constrained for some time. At the same time, however, the near-term outlook for inflation had deteriorated, and the risks that underlying inflation pressures could prove to be greater than anticipated appeared to have risen. Members commented that the continued strong increases in energy and other commodity prices would prompt a difficult adjustment process involving both lower growth and higher rates of inflation in the near term. Members were also concerned about the heightened potential in current circumstances for an upward drift in long-run inflation expectations. With increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate; indeed, one member thought that policy should be firmed at this meeting. However, in the view of most members, the outlook for both economic activity and price pressures remained very uncertain, and thus the timing and magnitude of future policy actions was quite unclear. Against this backdrop, most members judged that an unchanged federal funds rate at this meeting represented an appropriate balancing of the risks to the economic outlook and was consistent, for now, with a policy path that would support an eventual decline in both inflation and unemployment. Nonetheless, members recognized that circumstances could change quickly and noted that they might need to respond promptly to incoming information about the evolution of risks."

Rates on their way up........good




Full release:

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SEC Tries to Eliminate Free Market, Promises to Find Patsy

The SEC said "As a result (of short selling), the prices of securities may artificially and unnecessarily decline well below the price level that would have resulted from the normal price discovery process," the SEC said. "If significant financial institutions are involved, this chain of events can threaten disruption of our markets." Well perfect....more rules they will not enforce to protect people from themselves.

The agency's rule change would prevent investors from making "naked" short sales of the biggest financial stocks (an investor sells stock that has not yet been borrowed). These companies would include Merrill (MER), Citi (C), Lehman (LEH), Morgan (MS), Fannie (FNM), Freddie (FRE), Wachovia (WB). Bank of America (BAC) and almost any other financial of any significance. Naked shorting is not always done intentionally as many times broker-dealers will accidentally fail to deliver stocks to investors who have arranged to borrow a stock. If it is done intentionally, it is illegal. If not intentional, it is a mulligan? Why is the investor being held up to scrutiny here? Why isn't the SEC coming down on broker-dealers for doing it?

I cannot short shares without going through my broker, if they allow me to do it without having shares available to borrow, why is it my fault? They are the ones with the information, not me.

"Today's commission action aims to stop unlawful manipulation through naked short selling that threatens the stability of financial institutions," SEC Chairman Christopher Cox said in a statement.

The "new /old" rule would require a short seller to borrow the securities before executing the sale. It would also require the investor to deliver the securities on the settlement date. Hasn't naked shorting been a no-no for a long time? Is this like Cox doing a Dean Wermer and now putting the investor community on "double secret probation"?

Now, As of June 30, shorts held about 14% of Fannie's outstanding stock, almost 12% of Freddie's, and 10% of Lehman's stock. Does it matter that all three are sitting on billions in losses and actually may go under? If their performance did not suck, the shorts would ignore them. This is the genesis for Cox finally coming in off the golf course.

Bill Fleckstien said, "While no one in Washington did their job, now they are trying to blame short sellers," he continued, "Short sellers don't make stocks go down. If a short seller was trying to push a stock to a price where it didn't belong, it would come back right away."

All this while the SEC subpoenaed Deutsche Bank (DB), Goldman Sachs (GS) and Merrill Lynch (MER) in a probe of suspected manipulation of Lehman Brothers (LEH) and Bear Stearns shares. The SEC requested trading records and e-mails.

They also sent subpoenas to more than 50 hedge-fund advisers, seeking trading and communications data related to short-selling and options trading in Bear Stearns or Lehman.

Here is what will happen. Cox and Crew are going to find their "patsy". Some poor slob buried deep in a trading floor is going down and his boss will resign. They will find an email from the guy who said to someone "hey did you here the latest on Lehman?". The rumor will have turned out to be false but no matter the intent, this lackey is going down. Then the SEC will hold a press conference, thump its chest and claim to be looking out for the "little guy" and protecting them from "rumor mongering price manipulators".

The executives that caused the billions in losses are going to just walk away with their multi-million dollar paydays and Johnny, the one year out of business school derivatives trader gets 3-5 and a million dollar fine. Go Chris!!!!!

This is so predictable....



Disclosure ("none" means no position):Long GS,WB,C, none

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Wednesday's Links

Ambac, JP Morgan, Graham, Steve & Barry


- Miller and Whitman buy more

- Perhaps the next time Dimon gets involved with a proposed buyout, he'll make sure the CEO and Chairman know about it?

- Interesting thoughts

- I think it would be worth it

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Ackman's Presentation (ppt.)

Thanks to John for the email alerting me to this. It is a slide show on Ackman's plan for Freddie Mac (FRE) and Fannie Mae (FNM)

| View | Upload your own

Disclosure ("none" means no position):None

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Wednesday's Upgrades and Downgrades

Upgrades
F5 Networks (FFIV)- Wedbush Morgan Hold » Buy
IntercontinentalExchange (ICE)- BMO Capital Markets Market Perform » Outperform
CSG Systems (CSGS)- Brean Murray Hold » Buy
Acergy (ACGY)- Lehman Brothers Underweight » Equal-Weight
Schering-Plough (SGP)- Lehman Brothers Equal-Weight » Overweight
Bankrate (RATE)- Roth Capital Hold » Buy
Nike (NKE)- Susquehanna Financial Neutral » Positive
CSG Systems (CSGS)- Citigroup Hold » Buy
Lennar (LEN)- UBS Sell » Neutral
eHealth (EHTH)- Oppenheimer Underperform » Perform


Downgrades
LaSalle Hotel (LHO)- RBC Capital Mkts Top Pick » Outperform
Continental Resources (CLR)- Broadpoint Capital Buy » Neutral
Cogent Communications (CCOI)- Friedman Billings Mkt Perform » Underperform
Memsic (MEMS)- Jefferies & Co Buy » Hold
LHC Group (LHCG)- BB&T Capital Mkts Buy » Hold
Sunstone Hotel (SHO)- RBC Capital Mkts Outperform » Sector Perform
Groupe Danone (GDNNY)- Citigroup Buy » Hold
Vail Resorts (MTN)- Banc of America Sec Buy » Neutral
American Intl (AIG)- Wachovia Outperform » Mkt Perform
Third Wave (TWTI)- Deutsche Securities Buy » Hold
Kimberly-Clark (KMB)- Wachovia Outperform » Mkt Perform
Wachovia (WB)- Oppenheimer Perform » Underperform

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Ackman on Fannie (FNM) and Freddie (FRE) (video)

Ackman is short the junior debt and equity of both, but not the senior debt.


First watch Rep. Paul Ryan from the Ways and Means and listen to his concerns regarding Fannie (FNM) and Freddie (FRE).



Now listen to Ackman's plan:

Part 1:



Part 2:




Ackman's plan is brilliant as it restores the institutions financially so they can help the housing market, punishes equity holders for investing in a company with equity of 140 to 1, save senior debt that has the implicit guarantee and uses most likely, no tax payer funds.

If you do not get it, listen to the plan again. It is very simple and covers all the bases as far as the current objections to any government involvement in them.

With all the hand wringing out there over both entities, this solution is by far the best proposed. Now, the skeptics will say "Ackman just wants to make money". So what? Let him is he saves us all a whole lot more losses. Besides, if he comes up with the plan, why shouldn't he profit?



Disclosure ("none" means no position):None

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Fed Releases Auction Results

Rates are going up...This is the highest interest rate for the auction yet.

On July 14, 2008, the Federal Reserve conducted an auction of $75 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 2.300%

Total propositions submitted: $93.344 billion
Total propositions accepted: $75.000 billion
Bid/cover ratio: 1.24

Number of bidders: 82

Bids at the stop-out rate were prorated at 10.77% and resulting awards were rounded to the nearest $10,000 (except that all awards below $10,000 are rounded up to $10,000).

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From the Donut's Mouth: It's About Value

16 months ago I said in a post comparing McDonald's (MCD) and Starbucks (SBUX), "Of course there are the "coffee connoisseurs," they will never go to McDonald's and I am not talking about them, I am speaking of the great ambivalent masses in the middle. When all things are equal, price and convenience always win."

Listen to the CEO of Dunkin Brands Monday morning:



Starbucks like to think of itself as the "Tiffany's" (TIF) of coffee. Okay, I'll go with it. Here is the issue. Tiffany's does not have 14,000 locations. You cannot be the high priced option in a commodity business and have that many locations and survive a downturn without being severely bruised and battered.

Starbucks is responding by closing 600 location. Mark my words here....there will be more. Dunkin is getting the trade down business and even their CEO sounded cautious. If I were a Starbucks shareholder, based on this interview, July 29th would be a very nervous day for me. Q3 earnings come out and I would be highly shocked if Starbucks managed to come close to the 15 cents (down from 19 last year) analysts expect without some nifty tricks.

In what seems an eternity ago when shares sat at $37 I said they were due for a fall. When they got to $25 I said they were due for more downside and said the same at $21. Now at $14 and change, a price not seen since Sept. 2003, have they bottomed? Not by a long shot. Starbucks still trades at 17 times this year's expected earnings. That expectation, I think is too high in which case the earnings multiple is actually larger).

Starbucks is going to struggle for the next year or two because other than closing a few locations, they have not made any fundamental changes that will make them more appealing to cash strapped customers. Unless they find a way to enable customers to feel a value proposition from going there, store trafic will continue to decline.

By the time it is all over, we ought to see shares trading at $10 each.



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

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Tuesday's links

Congress, Sad, Mercer, Energy

- Oh please........

- Snow was a good guy and ignored the bomb throwing so prevalent today.

- A hell of a guy

- This guy just may be right

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Want Clarity on Financials? Ask Goldman Sachs (GS)

Is there a bank out there now who has not hired Goldman Sachs (GS) as an adviser?

Wachovia(WB) recently disclosed that it hired Goldman as an adviser to help is get out from it's huge portfolio of troubled loans. They join Royal Bank of Scotland(RBS) Washington Mutual (WM), National City (NCC) and State Street(STT) who turned to Goldman for advice and to raise money as conditions and loans portfolios have deteriorated.

Now news is out that Lehman (LEH) may be looking for a partner. anyone want to bet Goldman is involved somehow Will Fannie (FNM) and Freddie (FRE) turn to Goldman as their fortunes continue to sour? Goldman helped Freddie Mac raise $6 billion in preferred capital last year.

It is getting to the point where you have Goldman, JP Morgan (JPM) and Wells Fargo (WFC) as the cream of the crop in financials since they seem to be involved in everything when it comes to bailing or helping people out or in the case of Wells Fargo, not in the news at all and the rest of the financials mulling around looking for a handle to grab.

Goldman's earnings call at the end of the month ought to be an interesting one. If anyone knows what is sitting out there on banks books, it will be them. What they say will bear listening to.





Disclosure ("none" means no position):Long GS,WB,WFC, None

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Tuesday's Upgrades and Downgrades

Upgrades
Gymboree (GYMB)- Wedbush Morgan Buy » Strong Buy
Pinnacle Finl (PNFP)- Janney Mntgmy Scott Neutral » Buy
Key Energy (KEG)- Banc of America Sec Neutral » Buy
RadNet (RDNT)- Stanford Research Hold » Buy
Zumiez (ZUMZ)- Piper Jaffray Neutral » Buy
Fedrl Rlty Inv Trst (FRT)- Robert W. Baird Neutral » Outperform
Groupe Danone DA (UBS)- Sell » Neutral
Shanda Interactive (SNDA)- Citigroup Hold » Buy
Ciena (CIEN)- JMP Securities Mkt Underperform » Mkt Perform
Intersil (ISIL)- RBC Capital Mkts Sector Perform » Outperform
Owens Corning (OC)- Morgan Keegan Mkt Perform » Outperform
Natl Oilwell Varco (NOV)- Banc of America Sec Neutral » Buy
Kinetic Concepts (KCI)- JP Morgan Underweight » Neutral
Gladstone Commercial (GOOD)- Robert W. Baird Neutral » Outperform
Fastenal (FAST)- Robert W. Baird Neutral » Outperform
Genzyme (GENZ)- Citigroup Hold » Buy
Macy's (M)- JP Morgan Underweight » Neutral
Dean Foods (DF)- JP Morgan Neutral » Overweight
Domtar (UFS)- RBC Capital Mkts Sector Perform » Outperform
Louisiana-Pacific (LPX)- RBC Capital Mkts Underperform » Sector Perform


Downgrades
The Bancorp (TBBK)- Sterne Agee Buy » Hold
Natus Medical (BABY)- Avondale Mkt Outperform » Mkt Perform
Superior Services (SUPR)- Janney Mntgmy Scott Buy » Neutral
Rohm and Haas (ROH)- Longbow Buy » Neutral
UAL Corp (UAL)- Credit Suisse Outperform » Neutral
Continental Air (CAL)- Credit Suisse Outperform » Neutral
Air Tran Holdings (AAI)- Credit Suisse Outperform » Neutral
Alaska Air (ALK)- Credit Suisse Neutral » Underperform
Hercules (HPC)- Deutsche Securities Buy » Hold
ThomsonReuters (TRIN)- UBS Neutral » Sell
Pearson Plc (PSO)- Deutsche Securities Hold » Sell
Wachovia (WB)- UBS Buy » Neutral

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Soveriegn Wealth Funds, Not So Scary After all

Let's start the "Boogie Man" conversation with an editorial by Blackstone's (BX) Steve Schwartzman

In it Schwartzman says:

"Gao Xiqing, the president of China Investment Corporation, China’s sovereign wealth fund, spoke last week of his frustration that CIC’s attempts at investing outside China sometimes run into political opposition. He went on to add, in words that should act as a chilling wake-up call to many politicians and bankers: “Fortunately there are more than 200 countries in the world. And fortunately there are many countries who are happy with us.” "

Recently I spoke with Drosten Fisher from the Monitor Group. They recently released their comprehensive research report on Soveriegn Wealth Funds (SWF's).

Monitor Group collected and investigated data on 1,181 sovereign wealth fund transactions involving 25 funds from 1975 through March 2008 - compiling the most complete source of publicly-disclosed sovereign wealth fund transactions assembled to date. To allow for more comprehensive analysis, filters were applied to the data, leaving 17 funds, with a total of 785 deals and $251 billion of investments made between 2000 and 2008. The bulk of these transactions originated in the Middle East and Asia.

The results ought to surprise a whole bunch of people. The investment behavior of SWFs to date suggests the funds are driven primarily by financial objectives-they do not appear to be investing for political motives. While some funds are making strategic investments to hasten economic development in their home countries, Monitor found no evidence that SWFs, especially the highly scrutinized Middle East and East Asian funds, were active in ways that threaten the economic or national security of the countries where they invest. Investments in transportation, defense and aerospace, and high technology make up less than 1% of the value of deals in Monitor Group's data base

SWFs do take controlling stakes in companies. In contrast to prevailing views, half of publicly-acknowledged SWF transactions since 2000 resulted in majority-stake acquisitions. However, by far most of these transactions have occurred in domestic and emerging markets and in sectors such as consumer products and services and industrials not generally considered politically-sensitive.

Now, with all that being said, SWF's do not really help themselves. While I can buy Schwartzman's argument that "the current talk of disclosure requirements is seen by some SWFs as problematical since it often fails to take into account the political realities in some of the countries managing SWFs, where their ties to the west are best left unstated lest they arouse domestic political opposition." certain actions, are hurting them.

Abu Dhabi's SWF for example, will not even disclose the size of its fund. It gets hard for people to fully trust your motives when you will not even disclose the size of your fund.

Sheikh Khalifa told Al-Nahar, a Lebanese newspaper, that the $800bn figure does “not reflect the truth and the size of Emirati investments abroad” but would not give any further indication of how big Adia was.

“Regardless of the numbers and estimations, however, the sovereign funds, which you have referred to, operate according to economic principles, not political considerations,” Sheikh Khalifa was quoted as saying. “We have made that clear to our partners in international markets. We work in accordance to investment opportunities available to us in all markets.”

The Sheikh is asking a skeptical world to "just trust us" without giving a tangible reason to. When skeptical people cannot get answers, fear reigns and we get actions like the Dubia Ports fiasco.

It comes down to an issue of trust, while we may never, according to Drosten required SWF's to adhere to US disclosure standards, SWF's could perhaps put the issue to rest by disclosing some basic information?


Please read the full Monitor Report. It is clearly the most comprehensive report on the subject to date.


About Drosten:
Drosten Fisher is a principal with the international strategy consultancy Monitor Group. His focus is serving government and commercial clients in the areas of economic competitiveness, national security and international finance. A Middle East specialist, he speaks Arabic and has lived and worked in the region. Before joining Monitor, Drosten was a researcher for former Director of Central Intelligence George Tenet on his memoir At the Center of the Storm.

He was educated at Oxford and Georgetown and is a term member of the Council on Foreign Relations.Drosten is a co-author of a recent Monitor report into sovereign wealth fund investment and is a regular speaker and commentator on Middle Eastern investment, politics and business.

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David Einhorn's Allied Capital (ALD) Speech (video)

This is the speech that lead to the book, "Fooling some of the People"

Part 1:



Part 2:



Part 3:



Here is the book:







Disclosure ("none" means no position):

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Fed Approves New Mortgage Rules for Idiots

Is it just me or are these basically to prevent people from making stupid choices?

Here they are:

The final rule adds four key protections for a newly defined category of "higher-priced mortgage loans" secured by a consumer's principal dwelling. For loans in this category, these protections will:

* Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."
* Require creditors to verify the income and assets they rely upon to determine repayment ability.
* Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
* Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.

Full release:

I mean, if you are buying a house without the ability to pay for it or lending money to someone without verifying their ability to pay, I'm sorry but you deserve what you get. Why not put corks on the end of all forks to stop people from poking themselves in the eye. Come on guys.....





Disclosure ("none" means no position):

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Yahoo's Bostock to Icahn "I'm Rubber Your Glue"

This is great.....the perfect thing for a summer news story...

So, Icahn send the following letter the Yahoo (YHOO) shareholders after the letter below was sent by Yahoo's Roy Bostock.

Dear Fellow Yahoo! Shareholders:

Over the years I have attempted to make changes at many companies but I have yet to see a company distort, omit and twist events and facts in the manner that Yahoo! has done in their press release issued Saturday night, July 12th.

During the last week, Goldman Sachs called me a number of times asking me to relate to them any transaction that Microsoft (MSFT) might be interested in transactingwith Yahoo!

I discussed with them the possibility of doing a "Search only" deal wherein Microsoft would purchase "Search" from Yahoo! and pay Yahoo! for any searches that would originate from a Yahoo! content page. Yahoo! felt that a deal of this nature would be very interesting, but only if Microsoft would
guarantee the revenue that Yahoo! now received. This would obviously be a great deal for Yahoo! because Yahoo! would, for five years, receive a minimum of the $2.3 billion they are currently receiving as long as they continued to supply the page views and affiliate traffic they now had. Heretofore, Microsoft had been unwilling to even come close to making this guarantee. However, after I negotiated with Steve Ballmer for the better part of a week, he agreed to the guarantee. He also agreed to commit $7.7 billion dollars to the transaction (consisting of a $1 billion payment for "Search", a $2.8 billion loan and a $3.9 billion tender offer to Yahoo! shareholders). Under the transaction, Yahoo! shareholders would receive $16.25 per share in distributions (consisting of cash
and securities) and be left with a content company which would have a minimum guarantee of $2.3 billion per year of "Search" revenue from Microsoft and cost saving synergies from exiting the "Search" business that Yahoo! has publicly stated would be $750 million per year (excluding the benefits from reduction of stock compensation and other non-cash items). However, Microsoft believes the synergies from Yahoo! exiting "Search" would be far superior and that Yahoo!'s 2009 GAAP operating income would exceed $2 billion. Microsoft would be making a substantial equity investment in the remaining company at a valuation of $19.50 per share. Furthermore, Yahoo! would be spared the great expense of maintaining "Search" as well as having to spend billions in developing new technology to compete with Google and Microsoft - which it is highly doubtful they would be
able to do successfully. Additionally, Yahoo! would be able to avoid the great risk of seeing "Search" continue to lose market share and eventually melt away.

I spoke to Goldman Sachs and Roy Bostock on Thursday concerning the breakthrough with Microsoft. A call to discuss the details of the transaction was then set up among Microsoft, Yahoo! and me on Friday afternoon, July 11th. However to my surprise and consternation, on the Friday call Yahoo!, instead of being interested in the Microsoft offer, seemed to me to be focused on who would be
running Yahoo!. Finally, Steve Ballmer suggested that we not spend the rest of Friday afternoon on corporate governance. "First tell us if you like the deal," he said.

THE YAHOO! PRESS RELEASE

a. Yahoo! in their Saturday night press release makes much of the fact that they were only given 24 hours to decide on the Microsoft offer because of the time constraints relating to the proxy fight, but neglects to mention that they were offered more time if they would be willing to postpone the
annual meeting for a short period.

b. Yahoo! conveniently neglects in its press release to tell you about the extremely important above mentioned guarantees that Microsoft was willing to make;

c. Yahoo! tells you in their press release that a condition of the deal was the immediate replacement of the current board and removal of top management. Yahoo! neglected to mention we were willing to discuss keeping a number of the current board members and Jerry Yang as Chief Yahoo!

d. Yahoo tells you the Microsoft proposal precludes the potential sale of all Yahoo! however, they neglect to tell you that that train has left the station in that Microsoft is no longer willing to buy all of Yahoo! with the current board overseeing the company.

e. Yahoo!'s press release states that "this odd and opportunistic alliance of Microsoft and Mr. Icahn has anything but the interest of Yahoo stockholders in mind", raising the innuendo that I am on Microsoft's side in this manner. That is patently ridiculous. Since Yahoo! failed to consummate a
transaction with Microsoft this year, I have spent hours and hours attempting to get the parties together because I believe that it is beneficial to Yahoo! shareholders to have a deal with Microsoft and I have worked hard trying to make it happen. It is important to note that my funds and affiliates own 70 million shares of Yahoo and own no shares of Microsoft or Google while the current board outside of Jerry Yang owns only the shares they have received from Yahoo for being directors. My interests
are aligned with yours and not Microsoft and I think it is in our interest to have this transaction consummated so that we can get value much in excess of the recent and current market for Yahoo! shares.

In June, Microsoft apparently made a $33 per share offer for all of Yahoo! which was met with Yahoo countering at $37, thereby rejecting the $33 offer. Amazingly, before Microsoft decided that it would not buy all of Yahoo! with this board in place, it offered $33 and was turned down. The Yahoo! press release indicates that Yahoo!, in rejecting the current Microsoft proposal, stated that it would do a deal in which the entire company was sold to Microsoft for $33 per share. It is hard to understand why it turned down $33 and is now willing to accept it. It is the same obfuscation that is so prevalent in the rest of the press release. DON'T BE FOOLED.

I believe that, just like the $33 per share offer that was refused by Yahoo! in early June, refusing the Microsoft offer for the Yahoo! search business is also another grave mistake that will be deeply regretted. Our company is on a precipice and our Board seems ready to take the risk of seeing it topple - ARE YOU, THE REAL OWNERS OF YAHOO!, WILLING TO TAKE THE SAME RISK?

Read full letter including deal details here:


Roy Bostock had responded to Icahn latest offer withwith the following:

Dear Fellow Stockholder:
We have written to you before to explain why we believe your Board of Directors has the knowledge, experience, independence and commitment to best represent the interests of all Yahoo! stockholders. We have also told you why we believe the slate of directors advanced by Carl Icahn is not the right answer for Yahoo!.
When Mr. Icahn began his proxy contest he had no articulated plan for Yahoo! other than a sale of the Company to Microsoft. Today he still lacks a plan that makes sense for Yahoo! stockholders. On Monday, July 7, Mr. Icahn announced that he and Microsoft had engaged in conversations he claimed could lead to a transaction between Yahoo! and Microsoft if his slate is elected. In what was clearly a coordinated approach, Microsoft promptly followed Mr. Icahn’s announcement with its own press release, stating that if – but only if – a new Board of Directors is elected, it might be interested in discussing either a transaction involving only Yahoo!’s valuable search assets or an acquisition of the entire Company (something Microsoft had refused to discuss with your Board for months).
The fact that Microsoft and Icahn had indeed teamed up to serve their own ends became entirely clear the evening of Friday, July 11, when Microsoft and Mr. Icahn jointly proposed a new complex restructuring of Yahoo! that would include the acquisition of Yahoo!’s search business by Microsoft. Your Board of Directors was given less than 24 hours to accept the proposal, the fundamental terms of which Microsoft and Mr. Icahn made clear they were unwilling to negotiate. After reviewing the proposal with our legal and financial advisors, your Board of Directors determined that accepting the proposal is not in the best interests of our stockholders.
The Board’s rejection of the new proposal was based on a number of factors, including the following:
1. Yahoo!’s existing business plus its recently signed commercial agreement with Google has superior financial value and less complexity and risk than the Microsoft/Icahn proposal.

2. The Microsoft/Icahn proposal would preclude a potential sale of all of Yahoo! for a full and fair price, including a control premium.

3. The major component of the overall value per share asserted by Microsoft/Icahn would be in Yahoo!’s remaining non-search businesses which would be overseen by Mr. Icahn’s slate of directors, which has virtually no working knowledge of Yahoo!’s businesses.

4. The Microsoft/Icahn proposal would require the immediate replacement of the current Board and removal of the top management team at Yahoo!. Your Board believes these moves would destabilize Yahoo! for the up to one year it would take to gain regulatory approval for this deal.


Am I the only one who thinks Bostock kind of makes points for Icahn? Let's go with the basic premise that the business of Yahoo is deteriorating and has been for some time. I think that is undeniable. If that is true, then, why is keeping current management and the Board there something shareholders would want? Ought that be an enticement for them to vote for Icahn?

Shareholders also must think and realize that Icahn, who has 5% of the stock really does have "shareholder interests" in mind vs the Board's and management's interest in "their jobs". It will matter when they make their proxy votes.

Bostock keeps mentioning a "fair price". The $33 a share offer is 45 times the last twelve months earnings at the company of 76 cents a share. That 76 cents while up from FY 2007's 46 cents is down from 2005's $1.12. In other words, earnings really have not gone anywhere in 3.5 years now and Icahn if offering 45 times them. Bostock can't even really make the argument "thing are getting better" at Yahoo. The reality is they are just trading water, like the stock price.

The true irony here is had Bostock and Yang not held their breath and stomped their feet when Icahn came knocking, they may have been able to avoid in the end what they will end up seeing happening, their resume's being polished up.





Disclosure ("none" means no position):None

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SEC to Quell Rumors...........Right!!

Does anyone really think the SEC will be able to stop rumors? Do they really?

The U.S. Securities and Exchange Commission said Sunday that it and other regulators are firing up new examinations to prevent stock-price maniplation by short sellers and others.The agencies' goal is the "prevention of the intentional spread of false information intended to manipulate securities prices."

Now, who is to say what is "false" vs what is "wrong". We are now delving into the realm of a persons intent and when you do that, it is a losers game. On another note, why are we only looking at short sellers?

How about CEO's and CFO's of financials who said "things were ok" only to write down billions months later? Are they not just as guilty?

The SEC is up against it in this one because up until now, the shorts have been right and the firms that have come under attack are poorly managed, over leveraged and have questionable business models for down times. Reads Bear Sterns (BSC), Lehman (LEH).

If I "think Lehman has questionable loans and think management is not forthcoming enough so things must be worse", then am I spreading false rumors or just speculating? Is this going to be a rear view mirror test? We are going to prosecute people after the fact when what they have said proves wrong? Will journalists get into trouble by reporting these rumors?

Will we investigate Congress-people in an election year like this one who throw bombs about the economy and stocks in an attempt to curry votes? In effect they are hurting equities and stock prices by making the current situation seemingly worse than it is. Surely we can prove half of what is said there is "less than truthful". Is a SEC investigation into Sen. Schumer coming? clearly his letter lead to a run on the bank. any bad news is bad for Republican's in the election. Was Schumer pushing Indymac over the edge for votes?

If we are going to investigate Bill Ackman and David Einhorn, let's look at Schumer's motives also.

Rumors have and will be around forever. If you have a strong business, they may affect the share price temporarily but not impair it. If your business is weak, they may hurt it....

How about the SEC investigate all those newsletters I get in the mail pumping stocks that never go anywhere?



Disclosure ("none" means no position):None

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Monday's Links

Sears, Bankers, Buffettisms, Hydrogen

- Some interesting thoughts on Sears

- Great thoughts...

- George has a great collection of Buffett quotes

- Great.....home made hydrogen bombs

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Monday's Upgrades and Downgrades

Upgrades
Berry Petroleum (BRY)- Wachovia Mkt Perform » Outperform
Applied Signal (APSG)- Friedman Billings Mkt Perform » Outperform
China Unicom (CHU)- Deutsche Securities Hold » Buy
China Netcom (CN)- Deutsche Securities Hold » Buy
Ceradyne (CRDN)- Friedman Billings Mkt Perform » Outperform
Century Aluminum (CENX)- Friedman Billings Mkt Perform » Outperform
Jacobs (JEC)- Friedman Billings Mkt Perform » Outperform
Anadarko Petro (APC)- Wachovia Mkt Perform » Outperform
Carrizo Oil & Gas (CRZO)- Wachovia Mkt Perform » Outperform
Morgan Stanley (MS)- HSBC Securities Neutral » Overweight
Commercial Metals (CMC)- Citigroup Hold » Buy
Steel Dynamics (STLD)- Citigroup Hold » Buy
Syniverse Holdings (SVR)- Robert W. Baird Neutral » Outperform
Acergy (ACGY)- Citigroup Sell » Hold

Downgrades
Texas Industries (TXI)- KeyBanc Capital Mkts Buy » Hold
Jack In The Box (JBX)- Wedbush Morgan Strong Buy » Buy
Tuesday Morning (TUES)- B. Riley & Co Buy » Neutral
Webster Financial (WBS)- FTN Midwest Buy » Neutral
Texas Industries (TXI)- Longbow Buy » Neutral
Teva Pharm (TEVA)- FTN Midwest Buy » Neutral
Wachovia (WB)- Fox Pitt Outperform » In Line
Five Star Quality Care (FVE)- Stifel Nicolaus Buy » Hold
Applied Materials (AMAT)- Citigroup Buy » Hold
Marriott (MAR)- Susquehanna Financial Positive » Neutral
Marriott (MAR)- JMP Securities Mkt Outperform » Mkt Perform
DaVita (DVA)- Piper Jaffray Buy » Neutral
Elan (ELN)- Piper Jaffray Neutral » Sell
Emulex (ELX)- Robert W. Baird Outperform » Neutral
Rohm and Haas (ROH)- Banc of America Sec Buy » Neutral
Tuesday Morning (TUES)- Deutsche Securities Hold » Sell
Big 5 Sports (BGFV)- Deutsche Securities Hold » Sell
Fresenius Medical (FMS)- Wachovia Outperform » Mkt Perform
Royal Philips Electronics (PHG)- Citigroup Buy » Hold
MiddleBrook Pharma (MBRK)- Merriman Curhan Ford Buy » Neutral

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Fed Backhands Fannie and Freddie Shorts

Bernanke sure does like these Sunday night releases

Release Date: July 13, 2008
For immediate release

The Board of Governors of the Federal Reserve System announced Sunday that it has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary. Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities. This authorization is intended to supplement the Treasury's existing lending authority and to help ensure the ability of Fannie Mae (FNM) and Freddie Mac (FRE) to promote the availability of home mortgage credit during a period of stress in financial markets.

Release:


Now, while the move may not spare shareholder pain for the foreseeable future, it does say that the Fed will not let them fail. Both companies have had value destroyed the past two years and this move will restore some of that.

It would seem Ben just does not like to see the shorts win...


Disclosure ("none" means no position):None

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The Week's Insider Buys

Top insider purchases by dollar volume.

Stericycle (SRCL)- $10,001,000
Capitalsource (CSE)- $3,902,000
Copart (CPRT)- $3,615,000
Transmeta (TMTA)- $3,046,000
Equity One (EQY)- $2,856,000
Hovnanian Enterprises (HOV)- $1,139,000

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The Week's Best at VIN

Here are the week's top stories at Value Investing News

1. With $35bn to spare, Buffett is poised to feed off the bear

(via www.guardian.co.uk)

During the great bear market of 1974, Warren Buffett was asked by a rather staid fellow how he felt. 'Like an over-sexed guy in a whorehouse,' he replied. 'Now is the time to invest and get rich.'

2. The Roots of a Value-Investment Philosophy

(via yesandnotyes.com)

I've had the good fortune of a friend loaning to me Seth Klarman's Margin of Safety. The following are my notes on the chapter entitled "At the Root of a Value-Investment Philosophy" where Klarman writes about the three central elements to a value-investment philosophy.

3. Sir John M. Templeton, Philanthropist, Dies at 95

(via www.nytimes.com)

Sir John M. Templeton, a Tennessee-born investor and philanthropist who amassed a fortune in global stocks and gave away hundreds of millions of dollars to foster understanding in what he called "spiritual realities," died on Tuesday in Nassau, the Bahamas, where he had lived for decades. He was 95.

4. Time Warner: Worth Keeping an Eye On : Circle of Competence

(via www.circleofcompetenceblog.com)

By the end of the year, Time Warner Cable (TWC), will be a stand alone entity after being spun off from Time Warner Inc. (TWX). TWC is a publicly traded company as it currently stands, 84% owned by its parent, Time Warner Inc. The carve-out occured early in 2007, trading between $36-43, but has plummeted down into the $20’s since.

5. White Mountains Insurance (WTM)

(via www.thediv-net.com)

My posts the next few weeks will focus on what I consider to be attractive names in the Financial Sector.

6. Dividend Investing + Value Investing = Superior Returns

(via www.thediv-net.com)

Some may have wondered what is the connection between Dividend and Value Investing. The connection does not necessarily exist in all cases. For example, an investor selecting investments based solely on dividend yield, is not considering the value aspect of the equation.

7. GlobalSCAPE, incorporated research and analysis

(via goldstockanalyst.net)

New way of research. Analysis from an independent side. Both bullish and bearish points reviewed + valuation.

8. Bruce Berkowitz Files 13G/A in Mohawk Industries

(via valueplays.blogspot.com)

Todd at ValuePlays notifies us that Bruce Berkowitz just filed a 13G/A for his 10.6% stake in Mohawk Industries (MHK).

9. Learning from Sir John Templeton

(via www.streetcapitalist.com)

A look at Templeton's 10 maxims and how they fit into today's markets.

10. Buffett Talks About "Mistakes" (video)

(via valueplays.blogspot.com)

This short post by Todd Sullivan includes a video of Warren Buffett and Bill Gates being interviewed on Fox Business. The topic is missed acquisition opportunities.

11. Fortune's Best "Deep Value" stocks to retire on

(via money.cnn.com)

Fortune lists 40 stocks on which a person can retire. The list includes eight stocks they label as "deep value."

12. "Determining Withdrawal Rates Using Historical Data" - My Opinion

(via www.thediv-net.com)

recently stumbled upon this article from William P. Bengen “DETERMINING WITHDRAWAL RATES USING HISTORICAL DATA”. The basic idea behind this research is that year over year fluctuations in annual returns could drastically change the standard of living of retired individuals, who rely on their investments for income.

13. The DIV-Net: Stock Analysis: Eli Lilly and Co. (LLY)

(via www.thediv-net.com)

Stock Analysis of Eli Lilly and Co. (LLY). The analysis includes a detailed PDF.

14. Canadian grocers fall into bargain bin

(via www.financialpost.com)

Canadian food retailing stocks have gone on sale, says star value manager Gaelen Morphet, first vice-president of Canadian equities at CIBC Global Asset Management.

15. Guest Lecture Seth Klarman - Psychology of Leadership

(via undergroundvalue.blogspot.com)

16. Stock Analysis: Exxon Mobil Corp (XOM)

(via www.dividends4life.com)

Detailed Stock Analysis of the Exxon Mobil Corporation (XOM)

17. Todd Sullivan's - ValuePlays: Buffett Invests in Dow Chemical (DOW)

(via valueplays.blogspot.com)

Now will people look at Dow?

18. Warren Buffett’s Odd Sun Valley Deal

(via dealbook.blogs.nytimes.com)

Barely one day in, the Sun Valley conference has already helped to produce a multibillion-dollar merger deal — but not the kind you might expect. Dow Chemical has agreed to buy Rohm & Haas for $18.8 billion, with a big slug of financing from Warren Buffett, the legendary value investor who recently arrived in Sun Valley.

19. This Time It's the Same

(via www.gurufocus.com)

Investor Shelby Davis of the Clipper Fund used to say that the four most expensive words in investing are: "This time it's different."

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Buying More Dow Chemical for A Better Deal Than Warren Got

So, after the news of the past couple days, I have added to the position in Dow Chemical (DOW)

At prices averaging $32 even we tripled the position in Dow yesterday and today.

Current yield, 5.25% and rock solid safe. Think about it, Berkshire Hathaway's (BRK.a) Warren Buffett only got 8.5% on his $3 billion convertible and it is underwater if shares are under $41 and change (28% higher than today) in 5 years ($41 is the conversion price).

Now, Warren's 8.5% is stagnant. My dividend will grow and I will also gain the additional 28% price appreciation of the shares if they sit at $41 when Warren converts at no gain other than the interest he has received.

Dow has increased the dividend 18% over the past three years. Assuming a consistent growth, three years from now the dividend will be $1.94 for a yield on my investment of 6%. Again given the same growth, I will get $2.17 a share when Warren converts his shares and I will be yielding 6.8% on my initial investment.

The dividend growth enjoyed by shareholders may just turn out to be a conservative growth rate that I am using for comps. The reality may very well be far better than that but is very unlikely to be anything less than the current yield given the company's history. Even were the dividend to stay flat for 5 years (again, very unlikely scenario), the common at these prices offers superior appreciation prospects.

When you add the 28% share price growth I will get in order for shares to get to $41, right now, common share buyers today are getting a better deal than Warren. He will receive interest totaling a 42.5% over the five years and if the dividend on the common stays the same for 5 five years, I will receive 26.25% plus the 28% appreciation in the shares for a total return of 54.25%. Should the dividend grow as is has, the return on my invested cash goes to 58% plus.

Chances do not come around very often to get a better deal than Warren....grab it.



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

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Harley Davidson Buys Italian Motorcycle Maker

Harley Davidson (HOG) is expanding its footprint overseas. With International sales increasing 16%-20% even in the current environment, the move makes perfect sense.

"Harley-Davidson, Inc. (HOG) today announced the signing of a definitive agreement to purchase the Italian motorcycle maker MV Agusta Group (MVAG). Under the agreement, Harley-Davidson will acquire 100 percent of MV Agusta Group shares for total consideration of approximately 70 million euros ($109 million), which includes the satisfaction of existing bank debt for approximately 45 million euros ($70 million). In addition, the agreement provides for a contingent payment to Claudio Castiglioni in 2016, if certain financial targets are met. MV Agusta Group is privately held, with the Castiglioni family owning 95 percent of MVAG shares.

The acquisition is expected to close in several weeks, pending the satisfaction of contingencies and receipt of regulatory approvals. Harley-Davidson intends to fund the transaction primarily through euro-denominated debt.

MV Agusta Group has two families of motorcycles: a line of exclusive, premium, high-performance sport motorcycles sold under the MV Agusta brand; and a line of lightweight motorcycles sold under the Cagiva brand. MV Agusta’s F4-R motorcycle, powered by a 1078cc in-line four-cylinder liquid cooled engine, is rated at 190 hp. The company sells its products through about 500 dealers worldwide, the vast majority of them in Europe. In 2007, MVAG shipped 5,819 motorcycles. During 2008 MVAG has significantly slowed production due to financial difficulties.

“Motorcycles are the heart, soul and passion of Harley-Davidson, Buell and MV Agusta,” said Harley-Davidson, Inc. Chief Executive Officer Jim Ziemer. “Both have great products and close connections with incredibly devoted customers. The MV Agusta and Cagiva brands are well-known and highly regarded in Europe. They are synonymous with beautiful, premium, Italian performance motorcycles,” Ziemer said.

Harley-Davidson, Inc. plans to continue to operate MV Agusta Group from its headquarters based in Varese, Italy. Following closing, the first priority will be to appoint a leadership team to include a new Managing Director and to resume the manufacture of current models."

Full release



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

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On Shorts and Their Targets

Barry Ritholtz has a great post on the companies currently under siege by short sellers.

Here is a portion:

"We've heard from oh-so-many people how whisper campaigns have brought down so many firms like Bear Stearns (BSC) and Indy Mac (IMB) and Fannie (FNM) and Freddie (FRE) and now Lehman Brothers (LEH).

Why is it that all these rumor-mongerers and shorts are only bringing some firms to their knees? How come they always seem to be the over-leveraged, under-capitalized, unhedged, most poorly-managed companies? Isn't it funny that all of the firms that are the subject of such rumors have so many similar characteristics? Bear and Lehman and Fannie Mae and Freddie Mac and AIG and . . . the list goes on and on."



Read Full Post



Disclosure ("none" means no position):None

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Oh Yea....Wal-Mart Beats Estimates and Raises Guidance...Yawn...

I really hope no one out there is surprised by this..

Back in April I said folks ought to get used to Wam-Mart (WMT) increasing its guidance. Today was no exception.

Wal-Mart reported a 5.8% increase in same store sales for the five weeks ending 7/4. Wal-Mart US was 6.1%, Sam's Club was 4.6%. International sales held strong at 25% of the total.

Wal-Mart U.S.

All six merchandise units (grocery, entertainment, health and wellness, apparel, home and hardlines) achieved comparable store sales increases in the June five-week period. The strongest results remain in grocery, entertainment and health and wellness. Favorable weather and improved assortments helped drive seasonal sales in apparel, toys and hardlines. In addition, the economic stimulus checks contributed to increases in overall comparable store traffic results.

"Our underlying business is strong because of price leadership, clearly defined product offerings and a better store experience that continue to drive customers to our stores," said Eduardo Castro-Wright, Wal-Mart U.S. president and chief executive officer. "Customers like what they are seeing and they're shopping more of the store. Assortments and brands have improved, which bodes well for the upcoming seasons, including back-to-school."

Sales in entertainment were strong, with flat panel television sets continuing to run high double-digit comparable store increases. Within apparel, sales of swimwear and sportswear were strong.

Sam's Club

Sam's Club sales during the June period had strengths in fresh foods, dry grocery and consumables. Video games and mattresses were among the best performing general merchandise categories. House wares and jewelry were soft. Seasonal hardline sales were also behind plan.

"Both traffic and ticket continued to increase with both our Business and Advantage members in June, even excluding fuel sales," said Doug McMillon, Sam's Club president and chief executive officer. "We continue to see a shift in the overall mix toward fuel, food and consumables, as our members manage through the current environment. Small business is especially price conscious in this environment and we remain committed to delivering value for them."

Fuel sales were higher both in gallons and dollars sold, increasing comparable club sales with fuel by 3.7 percentage points. The transition of the clubs to back-to-college and fall merchandise is on schedule for later in the month.

"Our estimate for U.S. comparable store sales, excluding fuel, for the July four-week period is between two and four percent," said Tom Schoewe, executive vice president and chief financial officer. "The Wal-Mart U.S. underlying business remains strong. However, consumers and small business owners remain concerned about the economy, inflation and most of all, higher gas prices. With the last large mailing of economic stimulus checks due this Friday, it is difficult to forecast the benefit from the economic stimulus through the remainder of the year.

"Because of our improved sales results during the quarter, we have updated our guidance estimate for earnings per share for the second quarter of fiscal year 2009 to a range of $0.82 to $0.84," Schoewe said.

View full release

This all goes back to last fall when the "Save More Live Better" campaign was rolled out. At the the time I said:

"What Wal-Mart does with the ads is remind you what you can do with the money you save at their stores. Rather than the previous ad campaign that only told you they had "low prices" they are now saying "look at the fun things you can do with the money you save". The images of a family vacation with the kids is sure to spur memories in people of their childhood and the desire to create similar memories with their kids"

It has resonated as folks pinched by fuel prices are going to Wal-Mart to stretch their dollars and be able to afford those very vacations in the commercial. It was the perfect campaign at the perfect time.

You know, I was hard on Scott for a while last year and actually called for him to go. Not long after he seems to have become far more shareholder friendly.

Glad I was wrong about him...... :)


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

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Friday's Links

Klarman, Jessie, Movies, Yang

- I wish his book was not $1000

- To quote Rodney Dangerfield, "Now I know why tigers eat their young"

- This is the only thing that makes flights tolerable...

- Jerry, just go away

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Friday's Upgrades and Downgrades

Upgrades
Bank of the Ozarks (OZRK)- Janney Mntgmy Scott Neutral » Buy
RehabCare (RHB)- Avondale Mkt Perform » Mkt Outperform
OfficeMax (OMX)- Credit Suisse Neutral » Outperform
Corus Entertainment (CJR)- Credit Suisse Neutral » Outperform
Sanderson Farms (SAFM)- BMO Capital Markets Market Perform » Outperform
Canadian Natrl Res (CNQ)- RBC Capital Mkts Sector Perform » Outperform
Elan (ELN)- UBS Sell » Neutral
PetroQuest Energy (PQ)- UBS Neutral » Buy
Calgon Carbon (CCC)- Morgan Joseph Sell » Hold
Norfolk Southern (NSC)- JP Morgan Neutral » Overweight
BP (BP)- HSBC Securities Neutral » Overweight

Downgrades
Interdigital Comm (IDCC)- Hilliard Lyons Buy » Neutral
SuccessFactors (SFSF)- Canaccord Adams Hold » Sell
Columbia Banking (COLB)- DA Davidson Neutral » Underperform
Anworth Mortgage (ANH)- Sterne Agee Buy » Hold
Flow (FLOW)- Northland Securities Outperform » Market Perform
Park National (PRK)- FTN Midwest Neutral » Sell
Global Payment (GPN)- Janney Mntgmy Scott Buy » Neutral
Dow Chemical (DOW)- BB&T Capital Mkts Buy » Hold
Valero Energy (VLO)- Caris & Company Average » Below Average
Hartford Financial (HIG)- Credit Suisse Outperform » Neutral
VeraSun Energy (VSE)- Piper Jaffray Neutral » Sell
Zumiez (ZUMZ)- William Blair Outperform » Mkt Perform
Nexen (NXY)- RBC Capital Mkts Outperform » Sector Perform
Luxottica (LUX)- Deutsche Securities Buy » Hold
Opnext (OPXT)- Merriman Curhan Ford Buy » Neutral
Manpower (MAN)- Banc of America Sec Buy » Neutral
Columbia Banking (COLB)- Keefe Bruyette Outperform » Mkt Perform
Entercom (ETM)- Citigroup Hold » Sell
Cox Radio (CXR)- Citigroup Hold » Sell
Matsushita Elec (MC)- HSBC Securities Overweight » Neutral

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Liveris's Guarantee

You all know how I feel about CEO's who make guarantees. Dow Chemical's (DOW) Andrew Liveris has done it. Here is the thing, based on his track record, there is absolutely no reason to doubt it will be accomplished.

First, a brief review of today's posts on the subject (follow the links).

Says Liveris:
"We will deliver on these synergies, we will deliver on our new earnings profile. We have walked our talk with every single step we have taken. This is not yesterday's Dow Chemical, it is tomorrow's Dow Chemical, an advanced technology - high margin company that is now in pace with the Rohm & Haas deal. So frankly, a great opportunity at these numbers (Liveris was referring to the stock price).

Watch the video:


What to think? Liveris is as straight to the point as they come. There are few people out there with a BS radar as good as Buffett's. The fact that Buffett wanted to do a deal (without having anything specific in front of him) after meeting Liveris can't speak large enough volumes to the type of people Liveris is.

That being said it is time for value investors to start getting into Dow.




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

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Berkshire / Dow Convertible Details

From the SEC 8-K Filing regarding Berkshire Hathaway (BRK.A) and Dow Chemical (DOW).


"On July 7, 2008 and July 8, 2008, respectively, the Company entered into equity commitment letters (the “Equity Commitment Letters”) with Berkshire Hathaway Inc. (“BHI”) and the Kuwait Investment Authority (“KIA” and, together with BHI, the “Commitment Parties”) pursuant to which the Commitment Parties agreed to acquire 3,000,000 and 1,000,000 shares, respectively, of cumulative convertible perpetual preferred stock of the Company, having a liquidation preference $1,000 per share (the “Convertible Preferred Stock”), for an aggregate consideration of $4.0 billion. These commitments are conditioned upon the closing of the Merger and are subject to other customary conditions precedent.

Under the Equity Commitment Letters, each share of the Convertible Preferred Stock may be converted at any time, at the option of the holder, into 24.2010 shares of the Company's common stock, subject to customary antidilution adjustments and certain other adjustments, which represents an initial conversion price of approximately $41.32 per share. The conversion price reflects a premium of 20% over the average of the daily volume weighted average price per share of the Company's common stock for the period from July 7, 2008 through July 9, 2008. On or after five years from the date on which the Convertible Preferred Stock is issued, the Company may, at its option, at any time or from time to time, cause some or all of the Convertible Preferred Stock to be converted into shares of the Company's common stock at the then applicable conversion rate if, for 20 trading days within any period of 30 consecutive trading days ending on the trading day preceding the date the Company gives notice of conversion at its option, the closing price of the Company's common stock exceeds 130% of the then-applicable conversion price. Dividends on the Convertible Preferred Stock are payable at the rate of 8.5% per annum, in either cash, common stock or a combination of both, at the option of the Company.

Under the Equity Commitment Letters, each Commitment Party has agreed to be subject to certain standstill provisions and not to transfer, hypothecate, sell or hedge the Convertible Preferred Stock, any common stock of the Company received upon conversion of the Convertible Preferred Stock, or its exposure to the common stock of the Company for a period of five years following the closing of the Merger, subject to certain exceptions."

Full filing:



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

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GE to Spin Unit to Shareholders......No Buyers

GE (GE) must be getting low ball offers for the unit.

GE said it continues to explore all options for the consumer and industrial operations, but believes it makes the most sense to spin off the entire unit to existing shareholders, keeping its leadership teams and employees intact. The company hopes to complete the move next year.

"As we explored our options for appliances, it became clear that the fastest, most efficient step we could take in completing the transformation of our industrial portfolio would be to focus on a possible spin-off of the entire unit," General Electric Co. Chairman and Chief Executive Jeff Immelt said in a statement. "This is consistent with the strategy we have been executing to transform the GE portfolio for long-term growth and makes sense for GE shareholders."

The spin-off would create a separate publicly traded company owner by GE shareholders.

Immelt is between a rock and a very hard place. He made a promise and failed to deliver. He has shareholders that have been frustrated since the turn of the century. He is "the guy who followed the guy (Jack Welch)", and that is never a good place to be. In short, he now has to do something very drastic is a market that is very poor for sellers.

This is the best move for him to make now for shareholders but, it is not the move he wanted to make...



Disclosure ("none" means no position):None

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Wachovia Names New CEO

Well, at least he did not make any promises..

If I am being honest, I was pulling for JP Morgan's (JPM) Jamie Dimon to be the new head of the bank.

Wachovia (WB) introduce CEO Robert Steel but the bank provided no details about its future direction other than to call "silly" the rumors that it will sell itself to its recently hired advisor, Goldman Sachs Group(GS). Steel suggested he would provided more details about the bank's direction on July 22, when Wachovia fully reports and explains its second-quarter earnings results.

During a conference call presentation, Chairman Lanty Smith said banking regulators are "delighted" with the choice of Steel, a 28 year Goldman alumnus who left his position as under secretary of the U.S. Treasury to take the helm of the bank.

Steel has decades of experience in the banking industry, as both a banker and regulator but has no experience running a large commercial bank. Smith said during the presentation that finding a leader with extensive experience running retail banking operations, Wachovia's main business, wasn't a priority for Wachovia, which has lately found itself in the middle of both regulators and Department of Justice probes.

It would seem that possibly political and industry connection were at this point the priority.

Consider at the Treasury Department, he worked with lawmakers on legislation to strengthen the agency that regulates mortgage companies Fannie Mae (FNM) and Freddie Mac (FRE). Steel was also involved in JPMorgan Chase (JPM) spring bailout of the investment bank Bear Stearns (BSC).

If that was not enough,bank also said it has set aside $4.2 billion pretax to cover bad loans for the quarter, leading to an estimated second-quarter loss of about $2.6 billion to $2.8 billion.

The quarterly loss will equal $1.23 to $1.33 per share, excluding an expected write-down of goodwill and the bank declined to offer specifics on whether it needs more capital or might again cut its dividend

All in all, it is a mess but they got a guy connected enough to fix it. Time will tell



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

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Credit Suisse on Sears Holdings and AutoZone.....What?

So, Credit Suisse (CS) today had a piece on Sears today that left me shaking my head. Thanks to Jud for the tip..

The post said:
"CS: SEARS ISN’T AUTOZONE
Sears Holdings (SHLD) has been trading like a retailer with a pulse lately, something that its fundamentals have argued against. Despite steadily declining sales and continued investor frustration with the merchandising initiatives at the retailer - Credit Suisse called it ”one of the most vulnerable companies in the sector” Wednesday - the stock has traded up about 2% over the last month, a period in which the average retail stock has fallen about 8%. Credit Suisse suggested the outperformance reflected some misplaced expectation on the part of investors that majority holder Eddie Lampert would clone the successful strategy of another of his retail holdings - AutoZone (AZO) - and graft that onto the Sears’ frame. AutoZone recently announced plans to leverage itself up to bolster its balance sheet, while increasing its share repurchase plan. However, Credit Suisse poo-poohed the idea that Sears would follow suit. Sears’ business is much more seasonal than AutoZone’s - with the bulk of sales hitting in the fourth quarter of the year - to make such a balance-sheet move functional. Investors have been disabused of the real-estate plays that could be engineered at Sears, which owns many of the sites where its stores are located. However, the waning value of the real estate market has made the property holdings less attractive. Sears has traded down about 2%."

Okay. I think we pretty much know that Sears isn't Autozone (AZO). Although, Sears Automotive, well, pretty much is but lets not dwell on that.

I think CS just felt the need to write about Sears. I mean Sears trades either up or down 2% on almost every trading day so the fact it has done that in the past month doesn't even qualify as noteworthy much less newsworthy.

The AutoZone / Sears talk has nothing to do about Sears following the Autozone lead in leveraging up the balance sheet. It has to do with the majority shareholder of both, Eddie Lampert. The buzz is perhaps Sears Auto and Autozone get into biz together in some form. If one looks at that, there is a tremendous possibility and synergies. Lampert wants to expand his brand presence and maybe we find DieHard batteries and Craftsmen tools in Autozone? Maybe AutoZone expands by taking over some Sears Auto locations?

To be honest, I have yet to hear anyone talk about what CS claimed (Sears following Autozone by leveraging). I have heard a bunch about the auto synergies and that does make sense.

Chalk it up to a slow day at Credit Suisse?


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

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Dow Chemical's Liveris Comments on Rohm & Hass and Buffett

Let's look closer at the Dow Chemical (DOW), Rohm & Haas (RHM) deal

First the video's. Dow CEO Andrew Liveris on CNBC

Part 1:


Part 2:


Important things to note:

- Buffett wanted an investment in Dow Chemical BEFORE this deal came to the table after meeting Liveris and hearing about what is happening at Dow.
- The $3 billion convertible Berkshire (BRK.A) converts in 5 years.
- The deal, in keeping with Liveris's stated acquisition criteria is accredive withing two years.

Rohm & Hass (ROH):
Is the world's largest producer of acrylic paint ingredients and also makes chemicals used in adhesives, packaging materials and personal-care products. Dow said the unit that will include Rohm & Haas's business will have annual revenue of about $13 billion. Dow had $53.5 billion in sales last year.

The purchase will have pretax cost synergies of at least $800 million per year from increased purchasing power for raw materials, supply chain improvements and the elimination of redundant corporate services and governance, Dow said.

With the collective impact of these two deals, performance products and advanced materials will represent 69 percent of Dow’s total sales, on a 2007 pro forma basis, compared with 51 percent prior to these transactions. EDBITDA will change from 51% performance to 62%.

Debt to equity will remain under 40% after the deal. Note: Some of the proceed from the Kuwait deal will pay off initial debt used for the transaction so the 40% number is a post both transactions number. Dow has $1.6 billion in cash as of the last quarter and $9.5 billion coming. $4 billion will come from Berkshire and Kuwait meaning even without any additional pure (convertible aside) debt, Dow would retain $1 billion in cash on its books post deal.

Bottom line, Dow retains tremendous financial flexibility post deal. Look at it this way, do we really think Buffett would pony up $3 billion for a convertible that would convert flat or at a loss? Would he put up the cash of he thought the deal would cripple Dow or its earning power? Think about it... Clearly Buffett sees tremendous upside for both a Dow with and without Rohm & Hass.

In March of this year I said:


"Berkshire's (BRK.A) Warren Buffett has always said that "price is what you pay, value is what you get". It is one of my personal favorites because it reminds us that the price of a stock and what you are getting for that price are not always commensurate. There are times you pay in excess of what you are receiving in value and times you pay far less.

This is one of those times.

I have no idea what the price of Dow's stock will be in the future. I do know that, buying the stock at its current levels, yielding a growing 4.5% is a wise move long term. With earnings expectations above $3.50 for 2010 (the next expected trough), Dow currently sits at about 10 times those earnings. Should Liveris's "well north" mean $3.90 a share or higher, then we have a 4.5% yielding company sitting at 8 to 9 times earnings...

All this does not take into account the endless possibilities of $9.5 billion coming into the bank this year...."

It would appear Warren agrees....

Now, much is being said today about the premium Dow is paying. Let's look closer.
The deal is only a 47.9% premium to Rohm and Haas 60-day average price and a 28.7% premium to its 2008 closing high. Liveris did point out the the share price of Rohm dropped 16% during the month the deal came together. If it had just stayed flat, the "premium wretching" we have been hearing about would be nil. With Rohm & Haas, Dow is now committing to industry trough (2010-2011) EPS of $4 a share, up 14% from the previous $3.50 a share announced earlier this year. Let's not forget the EPS for the trough is an "in the bag" estimate, expect superior results.

View Dow pdf. presentation on the deal:

View Dow Press Release



Disclosure ("none" means no position):Long Dow, none

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Buffett Invests in Dow Chemical (DOW)

Berkshire's (BRK.A) Warren Buffett finally sees the light!!!

Dow Chemical (DOW) said today that it has agreed to buy Rohm and Haas (ROH), the specialty chemical maker, for about $18.8 billion in cash with the help of Buffett.

Dow will pay $78 a share in cash, a 74 percent premium over Rohm and Haas’s closing price on Wednesday. Rohm and Haas will continue to do business under its own name, and it will maintain its headquarters in Philadelphia.

The new company will be the nation’s largest makers of specialty chemicals, and helps both companies gain scale at a time when commodities prices are still rising.

The deal is an all-cash one. In addition to debt financing from Citigroup (C), Merrill Lynch (MER) and Morgan Stanley (MS),Dow received an equity investment from Berkshire Hathaway and the Kuwait Investment Authority paid $3 billion and $1 billion respectively for convertible preferred securities.

“The acquisition of Rohm and Haas is a defining step in our transformational strategy to shape the ‘Dow of Tomorrow’ – a high value, diversified chemicals and materials company, creating the largest specialty chemicals company in the United States with a leading global position in performance products and advanced materials,” Andrew N. Liveris, Dow’s chairman and chief executive, said in a statement.

More on this later...



Disclosure ("none" means no position):long Dow,C, none

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Now Its Eddie and Steve and Barry....

Boy, the rumor mill is working overtime on Sears Holdings (SHLD) in recent weeks... Let's look again.

The NY Times is reporting:
"The company’s management (Steve & Barry's) held discussions over the Fourth of July weekend with Sears Holdings Corporation about a possible bailout or an acquisition of some of its labels, according to people briefed on the talks.

Sears and its Kmart unit, under the ownership of Edward S. Lampert, were said to remain interested in some of the labels, but that company was struggling as well. Steve & Barry’s, which is privately owned, had been one of the fastest-growing retailers in the country, opening hundreds of stores selling clothes under the names of Sarah Jessica Parker, Venus Williams and Stephon Marbury."

It continued:
“Steve & Barry’s merchandise might actually excite the Kmart customer, but it could be very complicated to do this without paying G.E. a lot of money,” said Howard Davidowitz, the chairman of Davidowitz & Associates, a retail consulting and investment banking firm. He contrasted the situation to the bargain-priced acquisition of the struggling Fortunoff chain by the owner of Lord & Taylor in March. Steve & Barry’s does not own the celebrity brands, but licenses their names, so Ms. Parker and others will retain some control."

Now, I think it is safe to say we can rule out an acquisition or a cash infusion of the company by Sears. It really just does not seem to jive with what Lampert is doing at Sears.

What I think does make sense and would fit perfectly with Lampert's current strategy would be either selling the brands in Kmart or an outright acquisition of the rights for some of them. It would be a way to draw shoppers into Kmart without the hassle of establishing a new brand.

Let's not forget that Steve & Barry's really kind of got themselves into this mess by operating as though the good times for the economy would never end. As long as it was chugging along, they were fine. But, as soon as it hiccuped, they had no cushion for themselves. The brands are still selling at the stores, it is just that management operated as though landlord concessions would continue infinitely, when they didn't, ooops..

One also has to consider the online presence Sears has and the additional revenues that can be added through the brand sales there.

Watch the video on the announcement:


So, the brands have tremendous value for a chain looking to lure shoppers. Steve & Barry have to do something and one would think, contrary to what Davidowitz says, GE would be more than willing to make a few concession rather than right off another investment.



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

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Thursday's Links

Steelers, iPhone, Fox Biz, Gumshoe

- Art Rooney must be turning in his grave....criminal

- Disappointment

- A coup for Ruppert

- More saving investors hides.

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Thursday's Upgrades and Downgrades

Upgrades
Massey Energy (MEE)- Howard Weil Market Perform » Market Outperform
W&T Offshore (WTI)- Howard Weil Market Perform » Market Outperform
Callon Petroleum (CPE)- Howard Weil Market Perform » Market Outperform
Seacoast Banking (SBCF)- Sterne Agee Hold » Buy
MarineMax (HZO)- FTN Midwest Neutral » Buy
Mattel (MAT)- BMO Capital Markets Underperform » Market Perform
Fuel Systems Solutions (FSYS)- Broadpoint Capital Neutral » Buy
Gushan Environmental Energy (GU)- Piper Jaffray Neutral » Buy
Transocean (RIG)- JP Morgan Neutral » Overweight
Cameco (CCJ)- Friedman Billings Mkt Perform » Outperform
Alcoa (AA)- Friedman Billings Mkt Perform » Outperform
Steel Dynamics (STLD)- UBS Neutral » Buy
Nucor (NUE)- UBS Neutral » Buy
Xenoport (XNPT)- Friedman Billings Mkt Perform » Outperform
Centex (CTX)- UBS Neutral » Buy
Penn Va GP Hldgs (PVG)- Lehman Brothers Equal-Weight » Overweight
HDFC Bank (HDB)- Credit Suisse Neutral » Outperform
Sensient (SXT)- KeyBanc Capital Mkts Hold » Buy

Downgrades
EMC Corp (EMC)- Caris & Company Buy » Above Average
Premier Exhibitions (PRXI)- Dougherty & Company Buy » Neutral
Federal Signal (FSS)- BMO Capital Markets Market Perform » Underperform
Coca-Cola Ent (CCE)- Stifel Nicolaus Buy » Hold
SGX Pharma (SGXP)- Cantor Fitzgerald Buy » Hold
OfficeMax (OMX)- Piper Jaffray Buy » Neutral
Employers Holdings (EIG)- Keefe Bruyette Outperform » Mkt Perform
ACE Limited (ACE)- Citigroup Buy » Hold
Grupo Aeroportuario del Pacifico (PAC)- Citigroup Hold » Sell
NOVA Chemicals (NCX)- Citigroup Hold » Sell
Matsushita Elec (MC)- Credit Suisse Outperform » Neutral
H.B. Fuller (FUL)- KeyBanc Capital Mkts Buy » Hold

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