Wayzata Investment Partners Buys 14% of Owens Corning ($oc)

From the site:
"At Wayzata Investment Partners, our experience in the alternative investment market is reflected in the structure of our investment vehicles: a family of long-term funds. A private equity and hedge fund strategy serve as the cornerstones of our investment activities.

Focusing on opportunities in undervalued debt, equity and assets, our team has brought success to institutional investors for more than 15 years. Today total assets under management are over $5 billion."

Wayzata now owns 17 million shares or 13.5% of Owens corning (OC) up from 7 million in the June SEC Filing. It is the fund's largest holding.

Why OC? Here are some thoughts


Disclosure ("none" means no position):Long OC
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Paul Krugman..........Is He Serious? Sadly, Yes..

Ok, first the Op-Ed by the NY Times resident (or heads) socialist, then a response..

First the Op-Ed:

The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.

To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.

Also, these numbers are from the third quarter — the months of July, August, and September. So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way.

So this looks like the beginning of a very big change in consumer behavior. And it couldn’t have come at a worse time.

It’s true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of their income. Lately, however, the savings rate has generally been below 2 percent — sometimes it has even been negative — and consumer debt has risen to 98 percent of G.D.P., twice its level a quarter-century ago.

Some economists told us not to worry because Americans were offsetting their growing debt with the ever-rising values of their homes and stock portfolios. Somehow, though, we’re not hearing that argument much lately.

Sooner or later, then, consumers were going to have to pull in their belts. But the timing of the new sobriety is deeply unfortunate. One is tempted to echo St. Augustine’s plea: “Grant me chastity and continence, but not yet.” For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap — a situation in which the Federal Reserve has lost its grip on the economy.

Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.

In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.

At this point, however, the instructor hastens to explain that virtue isn’t really vice: in practice, if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment. So virtue is virtue after all, unless for some reason the Fed can’t offset the fall in consumer spending.

I’ll bet you can guess what’s coming next.

For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It’s true that Ben Bernanke hasn’t yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it’s hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.

The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response.

The ongoing efforts to bail out the financial system, even if they work, won’t do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we’ve seen, Americans were overextended even before banks started cutting them off.

No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.

Where to start. First the gov't spending argument. How does gov't get the money Mr. Krugman wants to so merrily spend? Right, from either us or our employers. In the article he claims to reduction in consumer spending is the cause of the current condition we are in. He even goes as far as to say that further reductions in it will cause even more pain as it further will reduce economic activity.

So, how then will the gov't get this money to spend? Increased taxes. But wait, Paul. Didn't you just say that us consumers need to spend more in order to avoid further economic deterioration? How will taking more of our money in taxes accomplish that? What about our employers? How will taxing them at a higher rate cause them to hire more of us so we can then spend more?

Do you have a plan for the gov't to go to Sears (SHLD) to buy washers and dryers or Wal-Mart (WMT) for cleaning supplies?

Now, we all know that 2/3 of all economic activity involves you and me spending the money our employers pay us (or we make ourselves). If one wants to stimulate the economy, doesn't it make common sense to stimulate the largest portion of it?

Why would we want to stimulate the largest, slowest and most inefficient portion of the economy? If we want the largest effect from any effort, it doesn't seem like increasing taxes or increasing the deficit is the best way to go.

The problem here is that there is no easy, quick fix. If that is true, then let's do what we know works.

Capital gains taxes. The only tax action I am aware of that has a 100% effect is the lowering or increasing of the capital gains tax. Lowering it has always lead to increased tax revenue (more profits) and raising them has always lead to a decrease (lower profits). Even those sitting on large losses in stocks this year only get to write off $3k of those losses against gains. The result of this is that if an investor who had a $10k gain earlier in the year but has lost $20k in the last couple months can only write off $3k against income, meaning $7k in income will still be taxed even though there was a loss in excess of it.

Let losses be losses and gains be gains...

Raise the write-off limit to $10k or more and let them lower their taxable income, increase the returns they get next spring. Lower the tax rate on them from 15% to 5% (and have both candidates ensure it stays there) and stop the slide in stocks that is happening as investors fear it will almost double next year.

Lower it and money floods back into stocks, raising values, 401K balances, IRA balances etc. A consumer that sees their retirement savings increasing will be less prone to hoard more money for it and far more prone to spend it.

Gov't cannot spend us out of this. Gov't spending in inherently wasteful and inefficient and comes at a cost to other, more efficient forms.

Do I agree that more stimulus checks are a waste? Yes. Gov't needs to just stop....stop. This problem was years in the making and cannot, no matter what is attempted be solved quickly....it just can't.

Now, Krugman does not specifically say a tax increase is needed. He is smart enough to stop short of saying that. But, if anyone can find me an example of when he embraced tax cuts, lets me know because I have not seen it.

Just my two cents.......

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20% of Homes With Mortgages Have Negative Equity

Home prices have fallen every month since Jan. 2007...

So, what does it mean? Housing will NOT rebound until late next year at the earliest. If you are thinking about buying home builders like Centex (CTX), KB Homes (KB) or Toll Brothers (TOL), I would think twice as the fundamentals of their industry do not look to improve anytime soon. With 20% of the market effectively sidelined, it does not bode well for those hoping to sell them new homes.





Disclosure ("none" means no position):None
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Harley Davidson Shipment Details ($hog)

Harley Davidson (HOG) files it 10-Q and in it are shipment details that show an interesting story

Here is the applicable portion.


Now, the bad news is obviously sales have fallen. The good news is that the two areas the company is targeting for growth, international and sport are doing just that, growing.

While it won't cure what ails the company now, it does mean that the strategy for the future is indeed working. When the US does recover, and it eventually will, HOG will be that much further ahead that where it was when this all started.


FULL 10-Q FILING

Disclosure ("none" means no position):Long HOG
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VW Shorts: Who Goes Under? ($vow)

The FT has an article on the carnage from Volkswagon (VOW).

From the Article:

After Porsche declared it held sway, directly or indirectly, over more than 74 per cent of VW’s shares this week, fund managers have been struggling to buy back shares to cover their short positions, pushing the carmaker’s share price ever higher.

There is widespread speculation that the losses nursed by some hedge funds may be enough to force them under.

One hedge fund manager said: “Being long of VW preference shares and short of the ordinary shares was a very common trade and there may have been more than 100 managers doing it”.

Funds including Greenlight Capital, headed by David Einhorn, and Odey Asset Management have recently told clients that they had big short positions in VW.

Other managers, including Highbridge Capital Management, have sought to refute reports of big losses in VW.

Marshall Wace said its losses on VW trades “were immaterial”.

Citadel Investments, one of world’s biggest funds cited to have lost money on VW, said: “We have suffered no losses of substance on Volkswagen whatsoever.”

The losses have been exaggerated, argues Andrew Baker, deputy chief executive of the Alternative Investment Management Association.

He points out that the cost of selling VW short had become prohibitively expensive for many funds. What is more, the trade had become so “crowded” – that is, so many managers were doing the same thing – it would have warned managers of the high risks involved and “managers have become more risk averse”.

Einhorn's silence is concerning. It is so for a couple reasons. First, other managers have spoken out in regard to their losses and second, Einhorn has been uncharacteristically silent. In the past he has been very forthcoming on a range of subjects and investors must be concerned about his notable silence now.

Shorting has been hugely profitable the past year but an episode like this underscored the risk involved in it. When you "go long" and buy a stock your loss is limited to 100%, the amount you invested. When you "short", your loss in unlimited. If you short at $10 and it goes to $30, your loss is 200%. In severe short squeezes, it can do so in hours or minutes.

I think many shorts have started to operate as though things will just keep going down, no different than those who bought things assuming the price would just keep going up.

FULL FT ARTICLE

Disclosure ("none" means no position):None
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Friday's Links

Marx, Portfolio, Foreclosure, Military

- Uh......But he doesn't want to "redistribute"?

- This sucks....one of the few business mags that always has something unique to offer

- Not everyone is losing a home

- Thank goodness we need guns..


Disclosure ("none" means no position):
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Wells Fargo Files Combined 8-K ($WFC) & ($WB)

Want to know what the Wells Fargo (WFC) / Wachobia (WB) combination will look like?

9 Months Totals:

Assets = $1.4 Trillion
Total Deposits = $774 billion
Net Interest Income = $22 billion
Non-Interest Income = $21 billion
Net Income = $4.3 billion
Diluted EPS = $1.17
Dividends Per Share = $.96

Remember, these are only 9 month totals and not year end figures. The new entity is going to be a behemoth.


FULL FILING


Disclosure ("none" means no position):Long WFC
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Target Responds to Ackman's Proposal

So here is Target's (TGT) response ti Bill Ackman's proposal yesterday.

Oct. 29, 2008--Target Corporation (NYSE:TGT) confirmed today that Pershing Square has asked the company to consider the spin-off of a separate publicly-traded real estate investment trust (REIT) that would own substantially all of the land currently owned by Target. Pershing Square's views of the consequences of executing this proposed transaction were publicly disclosed in a meeting hosted by Pershing Square earlier today. As previously indicated, Target has been evaluating similar ideas proposed by Pershing Square, with the assistance of Target's outside advisors, including Goldman Sachs since May 2008.

While the company has not yet reached a conclusion regarding the merits of these ideas, its analysis raises serious concerns on a number of important issues, including:

-- The validity of assumptions supporting Pershing Square's
market valuation of Target and the separate REIT entity,

-- The reduction in Target's financial flexibility due to the
conveyance of valuable assets to the REIT and the large
expense obligation created by the proposed lease payments,
which are subject to annual increase,

-- The adverse impact that the company believes the proposed
structure would have on Target's debt ratings, borrowing costs
and liquidity, exacerbated by current market conditions,

-- The frictional costs and operational risks, including tax
implications, of executing Pershing Square's ideas, and

-- The risk of diverting management's focus away from core
business operations over an extended time period to execute
such a complex transaction, particularly in the current
environment.

Target will continue to evaluate the most recent assumptions and ideas provided by Pershing Square in today's public presentation and will provide updated perspective, as appropriate, in the near future.

Target remains firmly committed to creating value for its shareholders, as evidenced by its long-term financial performance, extensive record of strong corporate governance practices and a number of recent actions authorized by its Board of Directors and executed by management. For example,

-- For the 10-year period through September, 2008, total return
to Target Corporation shareholders averaged 11 percent
annually, well in excess of the 3 percent average annual
return on the S&P 500 Index and the 7 percent average annual
return on the S&P Retail Index for the same period.

-- In May 2008, Target announced the sale of a 47 percent
interest in its credit card receivables to JPMorgan Chase.
This agreement provided Target with sufficient liquidity to
implement its business plans, including previously announced
capital investment and share repurchase activity for 2008.

-- In November 2007, Target announced that its Board of Directors
authorized a new $10 billion share repurchase program,
replacing the previous authorization. Since the inception of
this share repurchase program through September 2008, Target
has repurchased a total of 93.3 million shares of its common
stock for a total cash investment of $4,826 million ($51.70
per share).

Target Corporation's retail segment includes large general merchandise and food discount stores and Target.com, a fully integrated on-line business. In addition, the company operates a credit card segment that offers branded proprietary and Visa credit card products. The company currently operates 1,684 Target stores in 48 states.

Target Corporation news releases are available at www.target.com.

CONTACT: Target Corporation
John Hulbert, 612-761-6627
or
Susan Kahn, 612-761-6735
or
Lena Michaud, 612-761-6796

FULL RELEASE



Disclosure ("none" means no position):NONE
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Gasparino Drinks / Smokes His Lunch....

What the hell is this? Charlie was there to talk about Morgan (MS), Citi (C), Merrill (MER) or Bank of America (BAC) or something and either drank or smoked his lunch...

Disclosure ("none" means no position):
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Ted Forstmann on Charlie Rose

For those not familaiar with Mr. Forstmann, he was made famous to the public in the movie and book "Barbarian's at the Gate". If you have not read it, it is a great story.

Key Line? Forstmann says we should work to create equality of opportunity, not equality of result. Achieving equality of result is not possible, because of differences between people.



Here is the book:






Disclosure ("none" means no position):
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Buffett Purchases More Burlington Northern

On Tuesday Warren Buffett's Berkshire Hathaway (BRK.A) purchased an additional 825K shares of Burlington Northern (BNI)

Berkshire now holds 64.6 million shares or just under 20% of the total.

This is additions to put options he has sold on the company's shares.


Disclosure ("none" means no position):None
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Ackman Wants Target to Create REIT (audio)

Here is the audio from the 2 hr presentation and Q&A..This took way too much effort as one thing after another went wrong...sorry for the delay. Best line? He calls Wal-Mart (WMT) a "flea market".

The audio is a little fuzzy in the beginning but about 1:18 min. in I was able to fix it.
Audio:


Part 2


Here were the initial plans that were discussed with management of Target (TGT) and the issues with each one.

Ultimately this is how they view the retailer::


Ackman broke down the value of the new entities this way:








Disclosure ("none" means no position):None
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ATP Natural Gas: A Fraction Worth More than The Whole?

So the boys at West Coast Asset Management in October at the Value Investing Congress posed the following idea..

What is ATP Natural Gas (ATPQ):
ATP Oil & Gas Corporation (ATP) is engaged in the acquisition, development and production of oil and natural gas properties in the Gulf of Mexico and the United Kingdom and Dutch Sectors of the North Sea (the North Sea). At December 31, 2007, the Company owned leasehold and other interests in 76 offshore blocks, 40 platforms and 127 wells, including 19 subsea wells, in the Gulf of Mexico. It operates 109 (86%) of these wells, including all of the subsea wells, and 78% of offshore platforms. It also had interests in 10 blocks and two Company-operated subsea wells in the North Sea. The Company’s average working interest in these properties was approximately 82%. ATP had leasehold interests located in the Gulf of Mexico and North Sea covering approximately 447,910 gross and 372,386 net acres, of which 276,374 gross acres were developed and 206,322 net acres were developed

Here is the guts of their presentation from the congress.





The stock also has >20% insider ownership.

Why bring it up now? I ran across this little tidbit the other day:
ATP Oil & Gas Corporation (NASDAQ:ATPG) announced last week that its Board of Directors has approved a share repurchase program of up to 3,500,000 shares or roughly 10% of the currently outstanding shares. The program, authorized through the end of 2011, will be funded by free cash flow and the proceeds of asset sales and monetizations.

T. Paul Bulmahn, Chairman and CEO of ATP, stated that “In August 2008, ATP estimated its recoverable oil and gas to be approximately 252 million BOE. With approximately 35 million outstanding shares, each share accounts for roughly seven BOE. This represents a large disconnect between our asset value per share and our trading value per share. With funds generated from our ongoing monetization program and with our internally generated cash flow, we intend to reduce debt, continue our 2008 and 2009 capital development program at levels we deem prudent and actively pursue a share repurchase program. The divestiture of a portion of two selected North Sea properties announced earlier today launches our repurchase of ATP shares. At these prices investing in our own shares is accretive to our equity owners.

Then:
ATP announced it will sell its U.K. assets in the North Sea to a subsidiary of EDF for about $430 million. The agreement transfers 80% of ATP's U.K. interest in its Tors (a 68% working interest) and Wenlock (an 80% working interest) properties to EDF. EDF has a later option to acquire the remaining ATP interests.

The sale is expected before the end of 2008. ATP's U.K. subsidiary will remain as operator of both Tors and Wenlock. ATP said Monday it will use proceeds from the sale to reduce its debt, and further its development programs.

Essentially both of these transactions we talked about as value enhancers at the Conference. The good news? In the current market sell-off, no one cares. The stock is stuck essentially where it was in the beginning of October.

One other huge point. The sale of the N. Sea assets, for $430 million? That sale is in excess of the companies current $398 million market cap.

For those looking for a buy in the gas sector, this just may be a huge winner...

Disclosure ("none" means no position):None
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Yesterday's GE Drama Underscores Market Fear

Yesterday at 3:40 aheadline passed that was contributed to a statement by GE's (GE) CEO Jeff Immelt. It sent the Dow (.DJI) down from +300 to -74 in 15 minutes...

At a dinner in France Immelt was asked what he would do it sales dropped 10% to 15% next year (2009). He simply replied that he would "ask his managers to at least keep their profits equal to last year".

That is it. It was reported that he said revenue would drop 10% to 15%. If revenues at GE did drop by that much, the effect on the overall economy would be bad as GE is involved in so much of it. But, Immelt never insinuated they would, he simply answered a hypothetical question.

Immelt said later that his statement was "taken way out of context".

What was lost in it all was that current estimates are for a fall in GE profits in 2009. So, for Immelt to say with a 10% to 15% revenue fall he would ask for the same profit numbers from his managers, it was actually a very bullish statement.

One could deduce from that that should revenues come in near 2008 in 2009, recent and proposed cost cutting move may internally at Ge be expected to lead to an earnings increase in 2009.

This is a hair trigger market with its finger on the sell button. Since we know that, if one has a long time frame, this is far from the time to panic. It is, the time to be buying quality names and sitting on them. Ben Graham, Berkshire's (BRK.A) Warren Buffett's mentor said that "in the short term the market is a voting machine, in the long term is is a weighing one".

Simply put the market on a daily basis votes on how it feels that day. The farther you go out, eventually to the fundamentals of a business eventually take precedence over the daily outlook.

Now we are in a period of extreme pessimism. That will lead to irrational action like yesterday's sell-offs. Just be ready for them because they are not over. When they happen, buy your favorites at dirt cheap prices. Long term, you'll be glad you did.


Disclosure ("none" means no position):Long GE, none
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Ackman Files 13F/A In EMC

Pershing and Bill Ackman are going tech...

Pershing and Bill Ackman control 38.9 million shares of EMC (EMC) in a just released SEC filing. That comes to roughly 2% of the outstanding total.


FULL FILING

Disclosure ("none" means no position):None
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Micheal Milken on Charlie Rose

Drexel's former "Bond King" Micheal Milken on Charlie Rose. I could get a whole hour of Milken...

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Thursday's Links

MSNBC, Donations, Derivatives, Tilson, Lay-offs

- Dems and Repubs call the network "out of control"

- Does who you give to say anything about your belief's?

- A 101 Course


- Tilson has a nice comment about fear...

- Lindzon is great here

Disclosure ("none" means no position):
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Robert Shiller Talks SubPrime (video)

Shiller predicted the 2000 market plunge and the subprime mess. What he says bears some listening to..

Here is his book, "Irrational Exuberance"




Disclosure ("none" means no position):
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Dow Chemical Insiders Buy More Shares

I said yesterday there was more buying to come...

After yesterday's insider buying announcement, today VP Greg Freiwald disclosed he purchased 16,000 at $23 a share on Tuesday spending $368k of his own money. He now holds over 103K shares directly.

That brings the two day total to almost $700k of insider money buying shares so far this week. I said yesterday "I would expect more purchases in the coming days".

I still do... When Berkshire's (BRK.A) Buffett sees the value and management is ponying up cash to buy shares...one might want to take a look..no?

Oh yea....and a 7% dividend..




Disclosure ("none" means no position):Long Dow
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PershIng Settles Longs Drug Swaps

Bill Ackman has settled his Longs Drug (LDG) total return swaps with the CVS (CVS) biuyout complete.

From the filing:
"In connection with the successful tender offer by Blue MergerSub Corp., an indirect wholly-owned subsidiary of CVS Caremark Corporation, to purchase all outstanding shares of common stock of the Issuer, certain counterparties to Pershing Square’s Swaps have terminated certain of the Swaps. As a result, these Swaps were settled in cash between such parties relating to 2,054,100 notional shares (the “Settled Swaps”). In accordance with the terms of the Settled Swaps, the applicable counterparty was obligated to pay to the applicable Pershing Square Fund any positive price difference between the initial reference price (ranging from $53.41 and $70.36) and the final valuation price ($71.50). As a result of the termination of the Settled Swaps, the Reporting Persons no longer have long economic exposure to an aggregate of 2,054,100 shares. As cash-settled total return swaps, the Reporting Persons had no discretion over the issue of any extraordinary event like a tender offer. Consistent with the International Swaps and Derivatives Association’s (“ISDA”) protocols, as the calculation agents for extraordinary events, the counterparties exercise the discretion afforded to them as calculation agents, in accordance with the ISDA definitions for equity derivatives and in good faith and in a commercially reasonable manner."

Swap Trading Data

FULL SEC FILING


Disclosure ("none" means no position):NONE
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Owens Corning Net Rises 71%

Funny what a few hurricanes will do.

Owens Corning (NYSE: OC) reported today that consolidated net sales increased 28 percent to $1.6 billion during the third quarter, compared with $1.3 billion in the third quarter of 2007. Third-quarter sales were up due to strong performance in
the Roofing and Asphalt and Composites businesses.

Excluding comparability items, Owens Corning's adjusted earnings from continuing operations were $94 million, or $0.72 per adjusted diluted share, compared with $56 million, or $0.42 per adjusted diluted share during the third quarter last year

"I'm pleased with the quarter as the results are in line with our objectives for the year," said Mike Thaman, chairman and chief executive officer. "The integration of our composites acquisition is on track. We are exceeding our year-one synergy goals. Our Roofing and Asphalt business has improved performance with a streamlined asset base, significant productivity and an improved product mix. Our Insulation business will be profitable for the year in a very difficult U.S. housing market. We've
maintained a strong balance sheet and are benefiting from a solid capital structure that provides more than adequate liquidity."

Owens Corning continues to estimate that 2008 adjusted EBIT will be at least $265 million. The company previously announced that strength in Roofing and Asphalt performance creates an additional upside of up to 10 percent in that adjusted EBIT guidance. The company excludes from this estimate items impacting comparability.

During the first quarter of 2007, Owens Corning announced a share buy-back program under which the company was authorized to repurchase up to 5 percent of Owens Corning's outstanding common stock. During the third quarter, the company repurchased 1.9 million shares at an average price of $22.23 per share. For the nine-month period ending September 30, 2008, the company repurchased 2.9 million shares at an average price of $22.70 per share. On September 30, 2008, the company had 128.8 million shares outstanding and approximately 3.6 million shares remaining
available for repurchase under the current program.

We have been saying this for a while now, after two years of no storm activity in the US, even a few moderate storms would be a boom for Owens Corning. We got a couple this year and the results reflect that.

If you look at the business of OC, they have hit a "perfect storm" (pun intended) the last couple years. Housing activity ground to a halt and there were no storms to boost the repair business. The argument can be made that OC earnings bottomed last year and early this one. It is hard to imagine the same or worse scenario happening again in the near future.

If that is true then earnings for OC have bottomed and ought to continue to rise from here..


Disclosure ("none" means no position):Long OC
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Wednesday's Links

Short Sears, Derivatives, Refiners, T. Boone

- It seems the bears are getting out

- 60 minutes did a great piece

- Why a winfall tax won't work...they'll just produce less

- T. Boone is a great interview

Disclosure ("none" means no position):
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Why Did Citi Turn Down Goldman?

So, on Monday I wondered why Citi (C) has so little interest in a Goldman Sachs (GS) deal. Hint: It starts with a "D" and Goldman does not have them.

On the last earnings call CFO Gary Crittendon said regarding potential uses for the TARP funds, "And it does present, then, the possibility of our taking advantages of opportunities that otherwise might have [inaudible] to us. Now, as we think about that, the way we approach it is in the same disciplined manner that we’ve approached these other opportunities over the last few weeks. So I think in total now we have looked in detail at the possibility of acquiring three institutions, two of which you’re aware (Wachovia (WB) and Washington Mutual (WM)) of and one that we haven’t talked about publicly in any way.

And as we approached that, we did it with a very well-defined set of parameters. There is only a certain set of circumstances which made sense for us to do that. We will think about the use of this capital in the same way. It is an attractively priced amount of equity capital, and as you correctly said, an attractively priced amount of fixed income, that can match with that."

In response to another question about the "next opportunity" he replied:

"Here is what I think we would say internally, what we are saying to ourselves. Basically we had a strategy that we outlined at Citi Day that had us focused on growing five businesses. Two of those are asset businesses, our Card business and our markets and banking business; and three of those are liability gathering businesses, deposit gathering businesses. That is our Wealth Management business, our Consumer retail business, and our GTS business.

Our focus is behind those businesses; and that remains exactly as it was before. In order to fund those businesses, we have the program underway that you just talked about. We are cutting our expenses; we are showing good traction on that. We are moving assets out of categories that don't fit with that profile. We have been selling businesses that didn't match there. We have carefully managed down our headcount.

So we have worked very hard to execute against that strategy -- and that is our strategy. Now opportunistically, we had the chance, obviously, to acquire Wachovia. For all of the reasons you are aware of, that is not going to happen.

But the net result of that is not a change in our strategy."

So, the question then becomes. Where does Goldman fit? Answer? It doesn't. Citi wants deposits and neither Goldman nor Merrill (MER) have any. Sources at Citi indicated to me if it does a deal it will be with a depository institution that has minimal branch over lap with current operations, not a broker.

So, then the next, obvious question is "who fits the bill"? In order to figure that out, let's look at what Citi was trying to accomplish with the Wachovia deal. The following image has the Red (Citi) and Blue (Wachovia) branch coverage post then proposed merger.


Who then, could give Citi this type of coverage?
With 1600 branches throughout DC, Alabama, Tennessee, Virginia, Florida, Georgia, Maryland, Arkansas, Mississippi, N. & S. Carolina, Ohio and West Virginia SunTrust Banks (STI) looks to fit the bill.

SunTrust is fresh off a $3.5B Treasury infusion. Last Thursday it reported that Q3 profit fell 25 percent, hurt by the effects of the credit environment. Net income fell to $307.3 million, or 88 cents per share, from $412.6 million, or $1.18 a share, a year earlier. Revenue rose 20.7 percent to $2.46 billion. SunTrust set aside $503.7 million for loan losses, up from $147 million a year earlier.

Earlier this year, SunTrust announced plans to dispose of its 43.6-million-share stake in Coca-Cola (KO), worth roughly $2 billion to bolster capital. It has held the soft drink maker's shares since 1919. That move would make it more appealing to a potential suitor.

Citi seems intent on doing something, Suntrust may just be the best of what is still out there..


Disclosure ("none" means no position):Long GS, C, none
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Housing's Head Fake

One month does not make a trend...

I am finding it real hard to believe that we may be bear the bottom of this housing mess.


I am solidly in the camp that it does not turn until the end of 1009 at the earliest. I have put the reasoning in this post from the Value Investing Congress.

Since then we have seen the employment picture deteriorate and banks like JP Morgan (JPM), Bank of America (BAC) and Wells Fargo (WFC) have tightened LTV levels down to 65% in many of the hardest hit markets. How does any of the situations, far from dictating a housing rebound, not infer more damage ahead?

It just doesn't add up....at all...

But, like I said before, if you are looking for that summer house, 2009 will be a great buying opportunity..




Disclosure ("none" means no position):Long WFC, none
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Jeremy Grantham: S&P To Go Lower (video)

According to Money Manager Jeremy Grantham, S&P (.INX) to Fall Below Fair Value.

He is buying though. He is focused on companies with "strong balance sheets". That seems to be the overwhelming refrain from people who are buying in the market now. A companys's balance sheet will matter more than ever.





Disclosure ("none" means no position):none
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Dow Chemical Insiders Buying Shares

Recent SEC filings today show Dow Chemical (DOW) insiders purchasing shares.

EVP Hienz Haller bought 10,000 shares Monday bringing his direct holding to just under 86K shares.

EVP Charles Kahlil bought 3,200 shares the same day bringing his direct holdings to 122k shares.

The executives spent in excess of $310k of their own money buying the shares in the first insider purchase since August. I would expect more to be filed in the coming days. I also recognize these are not huge purchases but again, I would expect more executives to step up to the plate soon.

Now Dow has the endorsement of Berkshire's (BRK.A) Warren Buffett becoming the largest individual shareholder and it executives are, as Warren likes to say "eating their own cooking".



Disclosure ("none" means no position):Long Dow, none
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Berkshire and Dow Chemical Complete Deal

Here are the final details and full SEC filing between Berkshire Hathaway (BRK.A) and Dow Chemical (DOW).

Purchase.
On the terms and subject to the conditions set forth herein, the Investor agrees that upon the furnishing of a written notice to it by the Company as set forth in Section 1.2(a) it will purchase, or will (upon giving written notice thereof to the Company) cause one or more direct or indirect subsidiaries of the Investor of which the Investor beneficially owns at least 80% of the equity interests (measured by both voting rights and value) (each, a “Permitted Transferee”) to purchase, from the Company an aggregate of 3,000,000 shares of the Company’s Cumulative Convertible Perpetual Preferred Stock, Series A (the “Convertible Preferred Stock”) convertible into shares of the common stock of the Company, par value $2.50 per share (the “Common Stock”), and having the powers, preferences and rights, and the qualifications, limitations and restrictions, as specified in the Certificate of Designations in the exact form attached hereto as Annex A (the “Certificate of Designations”), at a price per share of $1,000 (an aggregate price of $3,000,000,000).

Purchase for Investment.
The Investor acknowledges that the shares of Convertible Preferred Stock and the shares of Common Stock into which they are convertible (the “Securities”) have not been registered under the Securities Act or under any state securities laws. The Investor and each Purchasing Permitted Transferee (1) is acquiring the Securities pursuant to an exemption from registration under the Securities Act solely for investment with no present intention to distribute any of the Securities to any person in violation of the Securities Act, (2) will not sell or otherwise dispose of any of the Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any other applicable securities laws, (3) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of its investment in the Securities and of making an informed investment decision, and has conducted an independent review and analysis of the business and affairs of the Company that it considers sufficient and reasonable for purposes of its making its investment in the Securities, and (4) is an Accredited Investor (as that term is defined by Rule 501 of the Securities Act).

Lock-up Agreement.
Until the earlier of (i) the fifth anniversary of the Closing Date or (ii) the announcement of a Make-Whole Acquisition involving the Company, the Investor shall not, without the prior written consent of the Company, directly or indirectly (x) offer, transfer, hypothecate, sell, contract to sell (including any short sale), grant any option to purchase or otherwise dispose of the Convertible Preferred Stock, any Common Stock received upon conversion of the Convertible Preferred Stock or its economic exposure to the Common Stock (“Lock-up Securities”), (y) enter into any Hedging Transaction (as defined below) involving Lock-up Securities, or (z) publicly announce any intention to do any of the foregoing. The foregoing restrictions shall not apply to any (m) transfer by the Investor and its Permitted Transferees of the Lock-Up Securities among themselves or (n) any offer, transfer, hypothecation, sale, contract to sell (including any short sale), grant of any option to purchase or other disposal of any Common Stock received in the form of dividends on the Convertible Preferred Stock or received in lieu of cash for Past Due Dividends in the event of Conversion at the Option of the Holder pursuant to Section 7 of the Certificate of Designations. “Hedging Transaction”, with respect to any Lock-Up Security, means any short sale (whether or not against the box) or any purchase, sale or grant of any right (including any put or call option, swap or other derivative transaction whether settled in cash or securities) to obtain a “short” or “put equivalent position” with respect to the Common Stock, or any other agreement or transaction that reduces, in whole or in part, directly or indirectly, the economic consequence of ownership of such Lock-Up Security. For the avoidance of doubt, a Hedging Transaction shall not include a transaction that is deemed to reduce the economic consequence of ownership of a Lock-Up Security only because the Investor is acquired by, or merges with or into, or transfers all or substantially all of its assets to, another person pursuant to such transaction.

Misc.
● The Company will pay dividends on the Convertible Preferred Stock, quarterly in arrears, at a rate of 8.5% per annum, in either cash, shares of Common Stock, or any combination thereof, at the option of the Company.


● Holders of Convertible Preferred Stock may convert all or any portion of the Convertible Preferred Stock, at their option, at any time at the conversion rate of 24.2010 shares of Common Stock for each share of Convertible Preferred Stock, subject to anti-dilution adjustments as specified in the Certificate of Designations. In addition, if holders of Convertible Preferred Stock elect to convert the Convertible Preferred Stock in connection with the occurrence of certain changes in the ownership of the Company (as specified in the Certificate of Designations), they will be entitled to receive additional shares of Common Stock upon conversion under certain circumstances as further described in the Certificate of Designations.

Each preferred share has a value of $1000. At the conversion rate it equates to a $41.32 share price for Dow.

Simply put, let's compare a buyer of the stock today vs Buffett. For the example lets say in 4 years Buffett convert and the stock site at $42.

Warren has earned 8.5% per year on his yield and today's common buyer has earned 7.3% (assuming no dividend growth for 4 years, which has ever happened in almost 100 years). Warren now holds common shares that have appreciated 1%, the buyer of the common today has seen his holding appreciate 86%.

Risk?
The common share price falls. In this case the holder of the common suffers a loss and Buffett keep his 8.5%. But, Buffett is sitting on dead money in the conversion price. At this much of a discount, the common holders buying today have a far better risk reward than Buffett. Even if the common only rallies 50% from here, Buffett is still sitting on a conversion loss and the common holder is far better off.


FULL FILING

Disclosure ("none" means no position):Long Dow , None
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Ackman to Present on Target Tomorrow

Pershing's Bill Ackman has a new plan for Target (TGT). His will present it tomorrow at 1:30. I will be on the presentation and comment accordingly.

New York, NY, October 28, 2008 – Pershing Square Capital Management, L.P. announced today that it will host a public presentation on Wednesday, October 29, 2008 where it will detail a potential transaction that Pershing Square believes will build long-term value for Target Corporation (NYSE: TGT) and all of its stakeholders. All parties are welcome to attend the presentation, which will be of particular interest to investors and analysts focused on retail, real estate, fixed income and credit.

Pershing Square is a long-term investor in Target. Since acquiring its initial stake in April 2007, Pershing Square has beneficially acquired slightly less than 10% of the company’s outstanding common stock.

Target’s thoughtful and constructive approach with shareholders has been instrumental to Pershing Square’s work in developing a potential transaction. Pershing Square believes that the insights gained by sharing the potential transaction in a public forum will benefit Target and all of its stakeholders.

The presentation will be based solely on publicly available information, as well as assumptions, estimates and projections of Pershing Square.



If anyone has any questions, I will try to ask them. Just leave them in the comments





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Interesting Chart

Reader Ryan sent this to me..

Check out both the huge volume and sell-offs at the end of the day recently.

You can view it here

The lesson? Until we get a string of days that do not nosedive at the close on huge volume, buyers might want to be cautious. Now is not the time to select index funds in the S&P (.INX) or Dow (.DJI) as they will plummet along with the market.

Now is the time for stock selection.

Disclosure ("none" means no position):None
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Tuesday's Links

Obama on Radio calling for "redistribution of wealth" and the Constitution's "fundamental flaw"

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Ben Graham Testimony Before Congress in 1955

Here is a pdf. link to Ben Graham testimony before congress in 1955 in regards to a Stock Market Study he did for it.

For those not sure who Ben Graham is, he was Berkshire Hathaway's (BRK.A) Warren Buffett's mentor.

Here is the link


Disclosure ("none" means no position):None
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Doerr, Whitman, Immelt Talk to Charlie Rose at Harvard (video)

This is one of the better video's I have seen..

A conversation about leadership at the Harvard Business School centennial celebration with John Doerr - venture capitalist, Kleiner Perkins Caufield & Byers, Jeffrey Immelt - chairman and CEO, General Electric (GE), Anand Mahindra - vice-chairman and managing director, Mahindra & Mahindra, Meg Whitman - former CEO, Ebay (EBAY) and James Wolfensohn - former president of the World Bank





Disclosure ("none" means no position):Long GE, none
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Why Ben....Why?

Why is Bernanke pushing another stimulus when Paulson's banks plan has only just begun?

Last week before Congress Bernanke said the following:


Now, did you ever hear the saying "the cure is worse than what ails you"? I get that things aren't that great. I gt that thew Fed and Treasury feel the needed to do something. I get something has to be done.

But, when you have a near trillion dollar plan that has only just begun to take effect, ought not we wait just a bit and see how it works before we go pump another 1/2 trillion or so of taxpayer money into the system?

Isn't the current complaint from both the left and the right of the political spectrum of his predecessor Alan Greenspan that he interjected himself into fiscal policy? won't this backfire as foes from wither party will now use this decision against him and perhaps constrict his ability to use his powers in the future?

Bernanke has gotten broad authority from Congress in order to deal with the current crisis. One can argue whether of not he has used it wisely or should it have been granted to him but it was and he has mitigated what could have been a far worse scenario. The problem with what he is doing now is that he will become the fall guy for either party for anything that goes wrong from here. Should the stimulus not work, he will be accused of wasting taxpayer money for no result. Should its relief only be temporary (like that last one's was) he will get accuse acting for the sort term, not what is best for the country long term.

No one is saying they think a stimulus will "cure" what ails us so Ben's backing of it has no real long term positives for him.

Ever hear the saying "give a man enough rope to hang himself". Congress just did it to Ben, he took the, rope and now they have their fall guy.

Much of what the Fed can accomplish is based on what people thin of the institution and its leader. The general perception of Ben is that he has done a great job thinking outside the box recently and has saved us from much worse. That gives markets some degree of confidence we will get though this.

When Congress takes his forray into their domain and uses that as a reason the cast blame from themselves to him, his ability to calm Main St. or the Markets (.INX) ,(.DJI) in the future will be severely restricted.

That is far worse than whether or not any stimulus is a good idea.....it isn't by the way..


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Coal....Hmmm

A couple of event in the last two weeks have me thinking about coal.

Today Arch Coal (ACI) said third-quarter net income more than tripled to $97.8 million, or 68 cents a share, from $27.3 million, or 19 cents a share in the year-ago period. Revenue increased to $770 million from $599 million. Wall Street analysts expected the St. Louis coal producer to earn 61 cents a share on revenue of $772 million, according to a survey by FactSet Research. Arch's trading and optimization function reported an $18.4 million loss in the third quarter, offset by a $26.9 million income tax benefit. "Despite a near-term softening of coal demand, we remain on pace to deliver our best financial performance in company history," Arch Coal said.

Now, last week Peabody (BTU) announced a $1B buyback that at current levels amounts to 12% of its market cap. With the Arch news, it would seem the fundamentals of the business in no way relate to the current stock price action would indicate.

Third. It was reported last week that India was in the US shopping for coal deposits.

Now, while coal demand may be softening, it has not evaporated as the share price of
both would suggest (down over 60%). When we have other nations here looking for coal, we can only assume they need much more than they have. That is good for global producers like BTU.

BTU which earned $1.37 in 2007 has earned $2.37 a share through the first nine months of 2008 and will add 12% to that down the road just through the share repurchases. Peabody trades at 9 times very conservative estimates for the remainder of 2008 and just 6 times the low end estimates for 2009 (the estimates were done before the share repurchase plan was announced).

Coal is one of those things we cannot live without. More than that, the rest of the developing world wants it really bad. It is a nice business to be in, especially when the stocks are priced at these levels..





Disclosure ("none" means no position):none
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Sears to Accept Electronics "Trade-In's"

A sign of the times and a really unique idea. Thanks to Jud for the tip..

San Francisco — Sears (SHLD) is offering VenJuvo’s Trade4Credit program to Sears.com shoppers that allows consumers to earn Sears store credit in exchange for trading in pre-owned electronics that have been determined to still hold value.

The program, which offers free recycling and shipping, will accept a variety of electronics including iPhones, digital cameras and camcorders, MP3 players, GPS systems and gaming systems.

“At Sears we’re always looking for ways to help our customers maximize their spending dollars,” said Jonathan Magasanik, VP/general merchandise manager of home electronics for Sears Holdings. “The Trade4Credit program does just that by providing our customers with an easy way to transform their used electronics into store credit they can use to buy the Sears products they’ve really been wanting.”

To use the service, consumers simply have to log onto www.sears.trade4credit.com, select their item and enter the specifics about their device so the system can calculate an estimated trade-in value. Once the value is established, the user can print out the prepaid mailing label and send the device to VenJuvo. Once the device is received, VenJuvo will validate the value and within three days of that point the user will be able to collect a Sears gift card for that value.

This is a great idea. The program currently has a couple dozen brands, but is sure to be expanded. Rather than throwing away those electronic devices, the opportunity to get something for them must intrigue more than a few people. It does me. The beauty of it is that there is no cost to the consumer, not even postage, just print the label and ship...easy..

Is it a cure-all? No. But it will garner the retailer a look for those looking to upgrade or replace certain items.


Disclosure ("none" means no position):Long SHLD
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60 Minutes on Credit Default Swaps (video)

This is an excellent explanation of the issue.

Watch CBS Videos Online




Disclosure ("none" means no position):
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CitiSachs?

Word is out today that Goldman Sachs (GS) approached Citigroup (C) last month to proposed a merger .

Citigroup CEO Vikram Pandit rejected the idea from Goldman Sachs CEO Lloyd Blankfein, the FT said, citing people it didn't identify.

The deal, which was to have been structured as a takeover of Goldman by Citigroup, would have led to the firing of thousands of workers in the investment banking units of the two companies, and the loss of several senior executives, the newspaper said

However, uniting Goldman’s strengths in risk management, advisory services and proprietary trading with Citi’s large retail deposit base and huge corporate client network could have created a powerful financial giant.

Industry insiders argue that such a deal could have also benefited the US financial system by creating a counterpoint to JPMorgan Chase and Bank of America, two institutions that have significantly expanded during the recent raft of government-induced rescue deals.

The tone of the article was that Citi rejected the proposal out of hand. Now, this is odd for a couple reasons. First we know Citi has the largest exposure to the current mortgage market problem. Second, they can't be in that strong of a financial position as their proposed takeover of Wachovia (WB) was not able to be accomplished without FDIC assistance. Wells Fargo (WFC), on the other hand, walked in and did the deal on its own.

So, one has to wonder why it was not even considered? Perhaps the "culture" differences are just so great, consolidating them would have been too difficult. But, if Goldman thought it was doable, why not even consider it?

This raises even more questions about Citi. Goldman is known as the class of the industry and if Citi won't even consider a tie-up with them, then what is it about Citi that makes it so prohibitive? Is it a fear of Goldman merging and then taking over? If that is the case then wouldn't that be the best for Citi shareholders in the long run? Isn't that what Pandit & Co. are really there for?

It isn't the fact that Citi turned the overture down that ought to concern people, it is the "without consideration" of the action that ought to.

Disclosure ("none" means no position):Long GS,C
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Monday's Links

Biden, Thank -you, Reich

- Why does Obama let him talk?

- Thank you for the mention

- I actually agree with Reich....scary


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Pimco's El-Erian (video)

Pimco's Co-President talks about the current environment. He says investors should look for the high quality names that have been damaged in the sell off and pay attention to the capital structure of the company.

He also said he was encouraged by the recent activity in the credit markets.




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Seth Klarman Files 13D in RHI Entertainment

I thought the same thing.....who the hell is RHI Entertainment?

Klarman's Bauposat Group filed a 13D sayigng is now has 3.4million of 25% of the shares in the company.

RHI Entertainment, Inc. develops, produces and distributes new made-for-television movies, mini-series and other television programming worldwide. The Company also selectively produces new episodic series programming for television. In addition to its development, production and distribution of new content, RHI Payment systems Ltd owns a library of existing long-form television content, which it licenses primarily to broadcast and cable networks worldwide.RHI owns rights to approximately 1,000 titles, or over 3,500 broadcast hours, of long-form television programming, the majority of which has been developed and produced by it. The Company’s customers include a variety of domestic broadcast and cable networks, such as ABC, CBS, the Hallmark Channel, Lifetime, NBC, SCI-FI Network, Spike TV and USA Network, as well as international broadcasters, including Antena-3, M6, PROSIEBEN-SAT1, TF1, Seven Network and Sky.

FULL FILING

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It's Friday: Lampert Buys More AutoZone

I mean, it been a few days since he bought some.

Sears (SHLD) Chairman Eddie Lampert bought another 44k shares of AutoZone (AZO) at between $103 and $104 a share. He now has 23.4m shares.

How long before AutoZone, Sears and AutoNation (AN) tie up? Lampert either own over 50% or is just about there in all three.



Disclosure ("none" means no position):Long SHLD, AN, none
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National City Sold

Well, the price is $2.23 which represents an 11.5% return in 7 weeks...no where near what I thought would happen but given current market, I'll happily take the gain.

PNC (PNC) Corp. said Friday that it is buying troubled regional bank National City Corp (NCC) for $2.23 a share, or a total of about $5.2 billion on PNC stock and another $384 million in cash. PNC also said it plans to sell $7.7 billion of preferred stock to the U.S. Treasury under the TARP Capital Purchase Program. That investment by the Treasury will allow the newly combined PNC and National City entity to have a roughly 10% Tier 1 capital ratio, the company said. "The acquisition of National City will increase our core deposit base to $180 billion, making PNC the fifth largest U.S. bank by deposits. At a time when core funding is key, we see our deposit strength as an important success factor,"

Do I want to to own PNC (PNC) shares? No. I'll take the profit and move on to something else..


Disclosure ("none" means no position):Long NCC (for now), None
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Buffett Author Hagstrom on WealthTrack

This is a good one. Buffett author and Legg Mason (LM) portfolio manager Robert Hagstrom is on the show.

Disclosure ("none" means no position):none
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Jim Grant Interview (video)

I tell you, Grant is one of the best out there....In this interview he covers everything from the consumer, the Fed, short sellers and global confidence in market. In what is looking like a historic down day for the Dow (.DJI) and S&P (.INX), it bears watching..

Part 1


Part 2


Please Read his New Book:



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Dow Chemical Earnings Call: Large Buybacks Coming

Based on the comments by management, one should expect large buybacks from Dow Chemical (DOW) to begin early next year.

From the Q&A:

PJ Juvekar - Citigroup
"Thank you. And quickly, Geoff, you didn't talk about stock buyback when you talked about your financial strategy. If you look around… many industrial companies are suspending stock buybacks to conserve cash. Can you just tell us how you're thinking about buybacks?"

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer
"Well, sure. As you know… thanks for the question, PJ. As you know, during the course of the third quarter, we completed our $2 billion program and we spent about $50 million on that The only reason why we haven't announced yet another programs is because we have two very large transactions that are about to close plus, of course, your last point, which is on cash preservation.

But let me reiterate what our financial policy has been over the last two years and will continue to be is that at a minimum we're going to cover dilution. This is on an annual basis. And you can count on a new program following the two transactions that we are about to complete."

Peter Butler - Glen Hill Investments
"Andrew, wouldn't Carl Gerstacker be backing up the proverbial truck right here to buy shares cheap? Gerstacker would say, "My God, if you can buy at a 7% yield, then you're looking at good news from Kuwait and Rohm and Haas. Why wait for the stock to go higher?"

Andrew N. Liveris - Chairman and Chief Executive Officer
"Yes. Look, Peter, as Geoffery answered because we have these two or three moving parts that are close in two or three months. But I think Geoffery indicated, I don't know backing up the truck is a colorful way of explaining it. But I said this morning, the dividend is safe. This CEO is never going to cut it. I'm not going to be the first. The yield is unbelievable. The stock is undervalued by a long mile. I mean, so clearly, your analysis is our analysis.

We're just going to get through the two transactions. Let us go on the other side of it. And then obviously, stock buyback is going to be top of mind. And these values hang in there in equity markets for the next several months. I think Mr. Buffett said it, well, Buy American. Well, we're American."

Robert Koort - Goldman Sachs
"Andrew, I think you said on one of the shows this morning that you don't think a $3 trough number is reasonable anymore. I was wondering if you could tell me what the path to the trough looks like? Is it a demand erosion trough in '09? Or do still think '10 or '11 is the trough?

And then, secondly, in your performance business particularly Performance Plastics obviously a pretty horrific margin partly influenced by the hurricanes, but what do you see in terms of the progression of your performance business margins as you go through the next couple of years? Thanks."

Andrew N. Liveris - Chairman and Chief Executive Officer
"Yes, I think, Bob, firstly on the trough. We're going to spend a lot of November analyzing our view of '09, '10 and '11 given these new market conditions. Clearly, '09 now is going to be a tough demand year, everything we've just talked about. So we see an economic trough in '09. The industry trough that we were forecasting for '10 and '11 is going to be impacted by both sides of that discussion.

One is the new demand forecasts are going to speak… stop projects happening. So people who are early in their project calibrations are going to delay projects compared to… this is on the commodity stuff in particular and the petrochemical stuff. In addition, there is going to be a lot of competitors out there who don't have our leverage ratios, who are not going to make it. I mean people who are… with their debt ratios in the 90s who leveraged up in the good days are going to suffer. You pick your favorite companies, I'm sure you can find them in the commodity chain in particular.

And then, on top of that you've got frankly the other side of the coin, which is the people who have got low-cost feedstocks and now can negotiate better EPC contracts because everything is coming off… the price of steel, the price of copper, the price of engineering. You can start to bring these projects more in line with the better returns in the low feedstock cost regimen.

And so actually companies like Dow, who have put these joint ventures in place should benefit from the '010, '011 scenario compared to what we were before. And last point I'll make, in a declining oil and gas environment, we have feedstock flexibility that we can bring to bear in our developed economies now, which we didn't have up until a month or two ago.

In other words, naphtha, LPG, ethane… we've got flexi-crackers that we can bring to help us out in the '10-'11 industry trough. So these are the sorts of things we'll be discussing deeply in November and we'll come out on the other side of that and give you guys a better view. Second question, Bob?"

So, here we are in October and in the next three months (give or take) the company will be fundamentally changed. The 7% yield is safe and starting next year, assuming the share price does not rally much from here, will feature large share repurchases.

Another point that I think is being lost here was Liveris's comment about the competition and some of it falling by the wayside during the next year or two due to leverage ratios. Market share increases due to this need to start getting factored into estimates going forward. Along with the market share increase, the reduction in competition also give Dow enhanced pricing power with customers.

It is going to be a very interesting winter for shareholders...and an exciting one


FULL TRANSCRIPT

Disclosure ("none" means no position):Long DOW
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Friday's Links- Humor Edition

Funny, Funny, Funny

After the past two week's, some humor is needed

- A "bromance"?

- Joe the Plumber MBA

- Paulson

- Steve Jobs

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Altria EPS Up 15%

Highlights:
• Adjusted diluted earnings per share from continuing operations up 15% to $0.46 versus $0.40 in the third 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


• Reported diluted earnings per share from continuing operations of $0.42 versus $0.43 in the third quarter of 2007


• Altria’s proposed acquisition of UST passes federal antitrust review


• Philip Morris USA’s adjusted operating companies income up 6.3% versus the third quarter of 2007


• Marlboro delivers strong retail share gains, up 0.5 share points versus the third quarter of 2007 to 41.6%

Altria trades at it growth rate and sports a 6.8% yield.

The UST (UST) deal will cause margin expansion as the smokeless area is both high margin and a growth area for tobacco currently. Altria (MO) is getting in a the top of the heap there also..



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Andrew Liveris: "This CEO Will Never Cut Dividend"

OK....here it is..my inbox has been flooded all morning requesting for the video..

Highlights:
- Dow now has "feedstock flexibility"
- Prices are falling
- The dividend "is safe". Liveris said "this CEO will never cut the dividend"
- "It is ludicrous our stock price is where it is"
- Says Berkshire's (BRK.A) Warren Buffett made a very wise investment.

On Bloomberg:


On CNBC:





Disclosure ("none" means no position):Long Dow, none
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Whitney Tilson Talks About What He Is Buying

for those who have been depressed by Whitney Tilson for the past year (not that he hasn't been correct), it seems as thought his tuned has decidedly changed.

Whitney is saying we are "close to a bottom". He said the are "bargains galore out there". Whitney is buying blue chips like Berkshire Hathaway (BRK.A), American Express (AXP), Johnson & Johnson (JNJ), Coke (KO), Wal-Mart (WMT). He is also buying energy names that have "puked out by hedge funds" during the recent forced selling. He is buying MLP's as they are "toll road" companies like Contango (MCF).

Whitney did manage to slip a plug for in but hide his infatuation for Barack Obama.

Video:






Disclosure ("none" means no position):None
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Dow Chemical Reports:

EPS affected by $.12 from the September hurricanes. Good news? Oil prices fell. Bad news? Couldn't produce anything when it dropped.

Highlights:
- Sales for the quarter increased 13 percent from the same period last year to $15.4 billion.

-- Price increased 22 percent, with double-digit price gains in all operating segments and all geographic areas. This was the largest year-over- year percentage increase in price since the first quarter of 2005.

-- Volume was down 9 percent globally, reduced by the impact of Hurricanes Gustav and Ike, further weakening of demand, and the Company's focus on implementing price increases in the quarter. Excluding the impact of acquisitions, divestitures and the hurricanes, volume was down 5 percent.

-- Earnings for the quarter of $0.46 per share were unfavorably impacted by certain items such as the hurricanes ($0.09 per share in costs and $0.03 per share in margin on lost sales), purchased in-process research and development charges of $0.03 per share, and acquisition-related expenses of $0.02 per share (see supplemental information at the end of the release for a description of these items).

-- Purchased feedstock and energy costs surged 48 percent, an increase of $2.6 billion over the same quarter last year, the largest year-over-year increase in the Company's history and the third consecutive quarter in which these costs reached new highs. Margin expansion was not achieved in both Basic and Performance segments, as the hurricanes idled approximately 80 percent of the Company's North American capacity in September, when feedstock costs were declining.

-- Agricultural Sciences set a new third quarter sales and EBIT(1) record, with sales up 24 percent to $976 million. Price was up 16 percent and volume up 8 percent compared with the same quarter last year.

-- Equity earnings were $266 million for the quarter. This was the seventh consecutive quarter that earnings from joint ventures exceeded $250 million.

CEO Andrew Liveris: "The global economy is now feeling the full effects of the same economic issues that have plagued the U.S. for the past several quarters. These issues have now been exacerbated by the lack of credit, resulting in a drop in demand not only in the U.S., but around the world. In our view, we will likely see a global recession through most of 2009.

"Dow is well positioned, however, to weather this increasingly difficult economic downturn. We have a strong balance sheet, we have a track record of strong financial discipline and we are accelerating our focus on what we can control, namely costs and capital, asset restructuring, and other interventions. In addition, we will continue to implement our transformational strategic actions, such as closing our petrochemicals joint venture with PIC of Kuwait and closing our announced acquisition of Rohm and Haas (ROH)."

Here is how it breaks down. Ag and Performance Chemicals saw earnings increases. Basic Plastics, Chemicals, and Performance Plastics saw decreases. Those divisions also saw $76 million in hurricane related costs.

It is frustrating but we have to play the game for another quarter. Then the Kuwait and the Rohm deals close and the earnings profile is forever altered. Will it be an immediate panacea? No. It will remove oil (USO) as the immediate concern on the mind of investors.

Recession. Will it hurt? Yep. A global recession will hurt, well, the globe (hence the name). But, what do we have? A 7% plus dividend yield that is not going down, Berkshire's Warren Buffett (BRK.A) as a fellow shareholder (the largest individual one) and company with a global footprint both in manufacturing and sales. It manufactures the basic building blocks for virtually every industry.

When it all shakes out the $.60 before charges did beat what the guys and gals on Wall St. expected ($.58) so we may see a bump in shares. I would also say we ought to see some Q4 expectations increase as it appears price increases are holding and oil continues its nose dive.

Also:
- The European Commission Monday cleared the creation of a joint venture between Dow Chemical Co. (DOW) and a unit of the Kuwait Petroleum Corporation. Dow and Petrochemical Industries Company will jointly control the new company, which will manufacture and market polyethylene, ethylenamines, ethanolamines, polypropylene, and polycarbonate.

- Dow AgroSciences has added 350 jobs around the world so far this year-200 of them at its Indianapolis headquarters-and the CEO of the agricultural-chemical company expects to continue expanding the work force into next year. "Global demand for food, feed, fiber and fuel reinforces the need for agricultural productivity, and Dow AgroSciences is well positioned as a technology leader to provide solutions," CEO Jerome Peribere said in a statement.

The company in recent years has been evolving from a maker of herbicides and pesticides into a biotechnology firm using genetics to develop products that protect crops and improve yields.


Disclosure ("none" means no position):Long DOW, none
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Yang's Real Problem Now?: His Own Employees

Not only has Yahoo's (YHOO) Jerry Yang cost investors a small fortune by his rebuttle of Microsoft's (MSFT) overtures, he he cost his own employees a bundle. They, like shareholders are less than pleased.


From the WSJ:

Now that Jerry Yang is planning to cut 10% of Yahoo's work force, he might want to contemplate saving a bit more money by firing some of his advisers.
[Yahoo's daily share price]

Not only did the Yahoo CEO end up turning down Microsoft's $33-a-share offer for his company, a price that now feels like a distant memory, but he paid through the nose for advice on doing so.

Yahoo disclosed late Tuesday in its third-quarter earnings release that it spent $37 million on advisory fees in the third quarter -- a million dollars more than it had spent on advice over the previous two quarters combined.

The amount was big enough to make a significant impact on Yahoo's operating income, which fell 53% to $70 million in the quarter. Without the fees, Yahoo's operating income would have been down only -- yes, only -- 28.6%.

I know a couple Yahoo employees who are, to put it nicely, disillusioned. News of layoffs now have them looking for other employment. This summer's hopeful mood had gone by the wayside and turned into distrust.

Yang has lost any credibility he had with employees and they, en mass, are looking elsewhere. News that he paid people to help him lose them money and cost them jobs has many laughing is disgust. They now, too a person have lost faith in their leader to resurrect the company and its stock price.

Watch the brain drain begin...


Disclosure ("none" means no position):None
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Wal-Mart's Lee Scott: Gas Prices Determine Spending

Wal-Mart's CEO Lee Scott(WMT) ought to know.

If he is right, then the current drop ought to bode a bit better for the upcoming holiday season that a lot pf people are thinking.




Disclosure ("none" means no position):Long WMT
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Rohm & Haas Beats Estimates

Dow Chemical's (DOW) upcoming acquisition beat estimates this quarter.

Highlights:

* Sales up 12 percent from the prior-year period, primarily driven by timely pricing actions and growth in Rapidly Developing Economies.
* Adjusted earnings per share, excluding special items, up 3 percent versus the prior-year period.
* Proactive cost control and pricing actions coupled with effective financial strategies more than mitigated the impact of deteriorating business conditions.


Rohm and Haas Company (ROH) today reported third quarter 2008 sales of $2,471 million, a 12 percent increase over the same period in 2007, driven by timely pricing actions, favorable currencies, acquisitions, and growth in Rapidly Developing Economies, partially offset by decreased demand in North America and Western Europe. The company reported third quarter 2008 earnings from continuing operations of $129 million, or $0.66 per share, compared to $129 million, or $0.61 per share, for the third quarter of 2007. This quarter's results include special items totaling $0.24 per share: $0.09 per share in costs associated with the proposed merger with The Dow Chemical Company announced in July; $0.07 per share in costs resulting from the impact of hurricanes on the company’s operations in the quarter; and $0.08 per share in asset impairments and costs resulting from restructuring actions announced in June. Adjusted earnings per share, excluding the special items noted above, were $0.90, up 3 percent compared to $0.87 in the prior-year period.

“The economic and operating environment deteriorated further this quarter, yet we were able to deliver respectable financial performance in the face of these challenges,” said Raj L. Gupta, chairman and chief executive officer of Rohm and Haas Company. “Our coordinated and prompt response to rapidly changing conditions and our timely pricing and cost reduction actions gained significant traction in the quarter allowing us to largely offset rising raw material and energy costs.”

Gupta added, “Our confidence in a bright future for Rohm and Haas Company remains high, and we fully expect to deliver outstanding results for all our stakeholders as we look forward to the merger with The Dow Chemical Company.”

Rohm is the perfect buy for Dow in the current environment. I am convinced beyond any shadow of a doubt the market does not fully understand that the Dow Chemical that reports tomorrow will resemble the Dow Chemical that reports next year (Q2). Gone will be 50% of the highly cyclical and petroleum dependent commodity business and in its place will be the predictable and growing specialty chemical business that is Rohm.

Currently yielding over 7%. How safe is it? Consider this is the 388th consecutive cash dividend issued by Dow. Since 1912, Dow has paid its shareholders cash dividends every quarter and has either maintained or increased the quarterly dividend amount throughout that time. Safe enough?

If it dips after earnings tomorrow, I am buying more..


Disclosure ("none" means no position):Long DOW, ROH
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Phillip Morris International EPS Grows 23%

If I told you you could buy a business that had a 5.4% dividend yield, was growing earnings 20% a year, buying back billions in stock for only 13 times earnings..you would???? I also promise not to use anymore smoking related adjective to describe results like "on fire", "smoking", "lights up" etc...

Phillip Morris International (PM) Reported today:

Highlights
* Diluted earnings per share of $1.01, up 23.2% from $0.82, including the items detailed on Schedule 7
* Adjusted diluted earnings per share of $0.93, up 19.2% from the 2007 pro-forma adjusted earnings per share of $0.78
* Reaffirms its forecast for 2008 adjusted full-year diluted earnings per share, 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
* Increased its regular quarterly dividend during the quarter to $0.54, up 17.4% from its inaugural regular quarterly dividend of $0.46
* Spent $2.4 billion to repurchase 44.8 million shares of its common stock in the quarter
* Completed its previously announced acquisition of Rothmans Inc.

Philip Morris International Inc. (PM) today announced diluted earnings per share of $1.01 in the third-quarter of 2008, up 23.2% from $0.82, including the items detailed on Schedule 7.

“Our excellent third-quarter results clearly underscore our ability to deliver against our financial targets despite anticipated currency headwinds and the current global economic turbulence,” said Louis Camilleri, Chairman and Chief Executive Officer.

“We continue to witness robust business momentum, demonstrated by a strong increase in organic volume and solid net revenue and income growth, all of which lead us to reaffirm our annual earnings guidance”.

Dividends and Share Repurchase Program

PMI increased its regular quarterly dividend during the third quarter of 2008 to $0.54, up 17.4% from its inaugural regular quarterly dividend of $0.46. The increased dividend represents an annualized rate of $2.16 per common share. PMI has a dividend policy that anticipates a payout ratio of approximately 65%.

During the third quarter, PMI spent $2.4 billion to repurchase 44.8 million shares of its common stock. Since May 2008, when PMI began its previously-announced $13 billion, two-year share repurchase program, the company has spent a total of $4.5 billion to repurchase 86.2 million shares.

2008 Full-Year Forecast

PMI reaffirms its forecast for adjusted diluted earnings per share, reflecting strong business momentum, to a range of $3.32 to $3.38 for the full-year 2008, representing a growth rate of approximately 19% to 21%, from a revised pro-forma adjusted base of $2.79 per share in 2007.

Shares have fallen during the current panic 25% to $40 a share and represent a stunning buying opportunity..stunning...

Analysts on average had forecast 89 cents, according to Reuters Estimates. Sales, excluding excise taxes, rose 17.5 percent to $7 billion, helped by price increases and the weaker dollar. Analysts were expecting $6.6 billion. The number of cigarettes the company shipped also rose 4 percent to 225.9 billion.


Disclosure ("none" means no position):Long PM
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National City Earnings Call Notes

Some notes from the National City (NCC) earnings call.

From the presentation, here is a look at the current credit portfolio performance:

Home Equity portfolio is remaining stable:


Non-Prime mortgage exposure has dropped dramatically:


Q&A Merger Talk:
Kevin St. Pierre – Sanford Bernstein Co.
"Peter, just to address some of the issues the last two callers asked from a different perspective, it looks like your stock is going to open down again today, market price of about $3 per share and a bit below and tangible book value of just over $6 so the market is clearly pricing in a non-zero probability that National City has to either fail or partner up in a take under.

With the performance improvement initiative and with deposits apparently stabilizing since the end of September, you don’t sound to me like a company in a panic mode or running to a partner to rescue you. Could you comment on that assessment?"

CEO Peter E. Raskind
"Well, I guess I’d say the following, first I would profess to comment on what the market is or is not thinking about with respect to pricing our stock. Secondly, we are doing what we think are all the right things to take this company forward in to the future as we have described this morning including the performance improvement initiative of course.

All that said, as we have always said and I’ll repeat again today, this will always be the case, we will always do what’s best for our shareholders. In any given point, if there’s a transaction that makes more sense for our shareholders than continuing on, of course our board will fulfill its obligations by considering that and acting upon it if appropriate. That has always been the case, it remains the case today."

Nancy Bush – NAB Research, LLC
"My other question here would just go back to the previous question and obviously with your stock at $3 or whatever, there are concerns about viability and I would just reflect that at the time that Wachovia failed they were also telling us that they had adequate capital but the issue seemed to be debt downgrades and these silent runs by corporate customers.

Do you think that the environment has changed sufficiently now that a) the Moody’s indicated that they might downgrade your debt that the rating agencies will look at you differently and are you fairly sanquant that corporate customers are a little more comfortable now than they were a month ago?"

Peter E. Raskind
"Well, it’s hard to forecast what Moody’s will or won’t do. You’re quite right, they do have us in review for downgrade and we’re in very, very close contact with Moody’s and the other rating agencies on a regular basis as we have always been. As it relates to corporate customers, we’ve tried this morning to be as trans as we can be about what we’ve experienced over the last quarter.

We do think that the actions taken last week specifically the FDIC guarantee now of all transactions accounts without limit is a very powerful mechanism to calm corporate customers who may be concerned whether it’s for National City or any other institution in the country. As I think Tom mentioned in this remarks, I mean we have already seen in the early going a greater sense of calm on the part of our customer base whether they be corporate or consumer.

So, we’ll see how that plays out over time. I would remind you that while the share price is $3 as you point out, in terms of market cap, that translates to over $6 billion of market cap given our new share count after the conversion of the Series G preferred in September. Those are all the comments I would offer. We stand by our comments this morning."


Full Transcript

Audio (MP3)

Full Presentation (PDF)

Disclosure ("none" means no position):
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The Changing Auto Dealership Model

We are underway is a vicious shakeout. Who survives, will be far stronger in the end.

A recent study by consulting firm Grant Thornton showed that for average dealer sales to match last year’s average, about 2,000 dealers need to close. With sales imploding, the firm has raised the number to 3,800. About 600 of the 2000 new car dealership in the US have closed to this point. In September alone, that number was 61.

Paul Melville, a partner at Grant Thornton, says they “badly need retail consolidation” to have healthy dealers. “Significant consolidation is necessary, especially among Ford (F), General Motors (GM) and Chrysler retailers,” he says, “because U.S. sales already have declined more than 1 million units this year.”

The domestic automakers want their dealer numbers to be more like those of Toyota (TM) or Honda (HMC). Toyota has fewer than 2,000 U.S. dealers while Ford has almost 4,000. That means your typical Toyota dealer sold 1,628 vehicles in 2007 while Ford stores averaged 236. GM dealers averaged 202. The average for all new car dealers was 322.

Domestic manufacturers want their store counts and revenue counts to look like Toyota and Honda, because many less dealerships means selling more per dealership.

“The business model of huge, irrational inventories and huge, irrational marketing budgets with razor-thin margins, à la the Bill Heard model, is obsolete,” says Mike Jackson, CEO of AutoNation (AN), the USA’s largest chain of dealerships. “It’s dead. It will not survive this downturn.” Bill Heard, which sold over 7% of Chevy's nationwide recently closed.

Jackson says the future of car sales — coming soon — will be fewer dealerships having less need to wheel and deal. They can hold the line on price, pumping up the profit per car, and focus on customer service.

“At the dealer level, a shakeout needed to happen,” he says. “It will be painful. It will be ugly. But it is also long overdue.”

This would explain why Berkshire's (BRK.A) Warren Buffett and Sears (SHLD) Eddie Lampert are buying shares of both AutoNation and CarMax (KMX). It is clear both will be left standing after the shakeout is over and both will have substantially increased market share through the attrition of rival dealers.

In my interview with AutoNation's Jackson recently he said he was content to sit back and watch the industry shakeout happen as it "was necessary".

When will things begin to turn? Clearly late 2009, perhaps into 2010 for the industry as a whole. But, as Jackson also said, when it happens there will be "significant postponed demand for autos". What that means is that fewer dealers will be selling cars for higher profit to a surge of car buyers.

That means Jackson and his shareholders stand to profit handsomely.


Disclosure ("none" means no position):Long AN, none
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Wednesday's Links

Flip, Taleb, Crammer, under water

- Can't wait to try this out..

- Doing well in a disaster

- This is cool

- 1 in 6

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Hank Paulson Interview with Charlie Rose Tonight

This is good stuff....is there anyone better than Charlie?




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Wells Fargo Teetering On 10% Deposit Limit

Just how big will the new Wells Fargo (WFC)be?

The Fed Commented tonight:

Based on data as of June 30, 2008, which represent the latest adjusted deposit data available from all insured depository institutions, the total amount of deposits of insured depository institutions in the United States was approximately $7.195 trillion. The data indicate that, on June 30, 2008, Wells Fargo controlled deposits
of approximately $298.2 billion, and Wachovia controlled deposits of approximately
$429.6 billion.

As of that date, the combined firm would have controlled approximately 10.116 percent of the total amount of deposits of insured depository institutions in the
United States on consummation of the proposal. Wells Fargo and Wachovia provided data on their respective adjusted deposit totals as of September 30, 2008. These data indicate that, on a combined basis, Wells Fargo would control approximately $731.1 billion in deposits on consummation of the proposal.

Deposit amounts for other insured depository organizations are not available because institutions are not required to file Call Reports for the third quarter until the end of October, and such data will not be available for review until later in November.

The prohibition in the BHC Act, by its terms, applies if “upon consummation of the acquisition (emphasis added)” the applicant would control more than 10 percent of the total amount of deposits of insured depository institutions in the United States. While the June 30, 2008, deposit data are the most recent data currently available on a uniform basis, the Board believes that other evidence indicates
that the June 30, 2008, data do not reflect the current situation nor would those data accurately reflect the deposit ratio at the time required by the statute, which is the time of consummation of the acquisition.

Other data sources indicate, for example, that the total amount of deposits
in the United States has significantly increased since June 30, 2008. Deposit data
collected by the Federal Reserve in its survey of domestically chartered commercial
banks and reported on the Board’s H.8 Release (Assets and Liabilities of Commercial
Banks) for September 2008 indicate that total deposits of insured commercial banks in
the United States increased by approximately 3.9 percent during the third quarter of 2008.

Estimated nationwide deposit growth in excess of 3 percent is corroborated by other
deposit data sources. If total deposits reported on June 30, 2008, are adjusted to
account for this level of growth, the combined deposits of Wells Fargo and Wachovia
as of September 30, 2008, would be below 10 percent of nationwide deposits. Indeed,
Wells Fargo’s percentage of total nationwide deposits would be less than 10 percent if adjusted deposits for all insured depository institutions in the United States grew by at least 1.62 percent since June 30, 2008, which would result in a total amount of adjusted deposits all for insured depository institutions of at least $7.311 trillion.

Based on all the information available to the Board, the Board concluded that the combined organization would not control an amount of deposits that would exceed the nationwide deposit cap on consummation of the proposal. To ensure compliance with the deposit limits on acquisitions, Wells Fargo has committed that, on consummation, the combined organization would not exceed the nationwide deposit cap based on the data reported by all depository institutions as of September 30, 2008. This commitment includes a commitment that Wells Fargo will reduce its deposits by any amount that exceeds the nationwide deposit cap based on Call Report data as of September 30, 2008, by no later than December 31, 2008.

More followed:

The Board has carefully considered the proposal under the financial factors. The proposed transaction is structured as a share exchange. The subsidiary depository institutions of Wells Fargo and Wachovia are well capitalized and would remain so on consummation of this proposal. Wells Fargo is well capitalized and has announced that it intends to raise additional capital. In light of its capital-raising efforts,
Wells Fargo would remain well capitalized after consummation of this proposal.

The Board has also considered the other financial factors noted above in light of information provided by Wells Fargo and Wachovia and supervisory information available to the Federal Reserve through its supervision of these companies and from the primary supervisors of the depository institution subsidiaries of these companies. Based on its review of the record, the Board finds that Wells Fargo has sufficient resources to effect the proposal.

Now, it is just me or does the Fed seem to be making some assumptions on deposits here to make sure Wells Fargo comes in under the 10%? I thought bank's troubles were that people were taking out money? Wasn't that what we were told? But according to the Fed, banks are being flooded with cash from depositors.

Here is the number to watch. If "deposits" have grown by less than 1.62% since June, then Wells is over the 10%. Anything more, they squeak under the limit.

Either way, shareholders for Wells ought to sleep better knowing we have such a massive deposit base to work off..


Full release

Disclosure ("none" means no position):Long WFC
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Arb Spreads Huge

Here is an interesting arb. spread analysis. current potential profit is more than twice historical average.



Yesterday we went long Rohm & Hass (ROH) in their upcoming buyout by Dow chemical (DOW).

There are a bunch of other opportunities out there, just be very wary of those involving bank debt..it may not be there.


Disclosure ("none" means no position):Long ROH, DOW
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Help A Kid

A request to help a child..

Adam Warner is doing a fund raising walk for the "Fellowship Circle" on Nov. 2.

Please help out and contribute any amount to the effort. They have almost reached their goal...

You may contribute directly from here.


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Stossel on the "Bailout" and "Change" (video)

Not sure who saw it but ABC's John Stossel did a great piece on 20/20. He takes on politicians from both parties.There are 6 parts total but I only posted the more relevant part for us.

Part 1


Part 2



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Jim Grant Op-Ed: "Wall Street Will Be Going on Sale"

This is mandatory reading for those who did not see it.

From the WSJ:

In disclosing plans to buy a quarter-trillion dollars of bank stock in the name of the American taxpayer, Treasury Secretary Hank Paulson harped on confidence. "Today, there is a lack of confidence in our financial system, a lack of confidence that must be conquered," he said on Tuesday.

What Mr. Paulson did not get around to mentioning was the excess of confidence that preceded the shortfall. Under the spell of soaring house prices (and before that, of stock prices), Americans trusted the things they ought to have doubted. But markets are cyclical, and there is always a new day. In compensating fashion, people will eventually doubt the things they ought to have trusted. Investment opportunity follows disillusionment. It's complacency that precedes bear markets.

If the confidence deficit seems so high, it's because the preceding confidence surplus was full to overflowing. People suspended critical judgment. They accepted at face value the pretensions of central bankers and the competence of investment bankers. Not one professional investor in 50, probably, doubted that wads of subprime mortgages could be refashioned into bonds that were just as creditworthy as U.S. Treasurys.

Federal Reserve Chairman Ben S. Bernanke and his predecessor, Alan Greenspan, were fine ones for believing impossible things. They propounded them, too. Never mind asset bubbles, they said. Not only can't you predict them, but you can't even recognize them after they've swollen to grotesque maturity. Better just to tidy up after they burst. Now Mr. Bernanke is likening our present troubles to those of the 1930s. The comparison is more confidence-sapping than he seems to realize. From peak to trough, 1929 to 1933, the gross domestic product was almost sawed in half, before adjusting for changes in the purchasing power of the dollar. No such mitigating fact helps to explain today's set-to. It's a crisis of competence of our financiers, of bankers and central bankers alike.

To the self-satisfied elders of the Fed, the past 25 years were a sweet validation of the art of central banking and of the efficacy of paper money. "The Great Moderation," some of them called this interlude of low inflation and subdued economic activity -- neither too boomy on the up side nor too recessionary on the down side. For these manifold blessings, the officials thanked, in good part, themselves, i.e., "the credibility of monetary policy," as the president of the Federal Reserve Bank of San Francisco, Janet Yellen, put it earlier this year.

But it wasn't the vigilance of monetary policy that facilitated the construction of the tree house of leverage that is falling down on our heads today. On the contrary: Artificially low interest rates, imposed by the Federal Reserve itself, were one cause of the trouble. America's privileged place in the monetary world was -- oddly enough -- another. No gold standard checked the emission of new dollar bills during the quarter-century on which the central bankers so pride themselves. And partly because there was no external check on monetary expansion, debt grew much faster than the income with which to service it. Since 1983, debt has expanded by 8.9% a year, GDP by 5.9%. The disparity in growth rates may not look like much, but it generated a powerful result over time. Over the 25 years, total debt -- private and public, financial and non-financial -- has risen by $45.1 trillion, GDP by only $10.9 trillion. You can almost infer the size of the gulf by the lopsided prosperity of the purveyors of debt. In 1983, banks, brokerage houses and other financial businesses contributed 15.8% to domestic corporate profits. It's double that today.
Related

Attaching a face to an issue, as the presidential candidates did in the latest debate, has a history of success and plenty of backfires. Read Forbears of 'Joe the Plumber.'

The modern financial economy requires a certain minimum leap of faith. The paper dollar is an example. There is nothing behind it except the government's good intentions, yet we hoard it as if it were gold. However, we collectively outdid ourselves in credulousness in the runup to the financial crisis. People believed the Fed's good press, as, evidently, the Fed did itself. Then there was the ever-flattering dollar. Warts and all, the American scrip is the world's top monetary brand. It is this country's leading export -- and the agent of not a little of today's financial dislocations. It is the dollar -- the world's reserve currency -- that has allowed this country to consume much more than it produces and to put the deficit on a mammoth annual running tab, about $700 billion in even this year of a much improved trade picture.

Over the past few months, the dollar has found favor as a safe haven. But it was a drug on the market for years before. Asian central banks would buy up greenbacks by the boxcarful. Few profit-seeking entities seemed to want them. The central banks did not obtain their dollars for free, of course. They bought them from local exporters, paying with the local currencies that the bankers themselves printed. Since the close of 2002, developing-country central banks have absorbed more than $2 trillion in this fashion. This is debt that, under a gold-based monetary system, the United States could probably not have incurred. Living so grandly beyond our means, we would have raised the suspicions of our creditors, who would not unreasonably have begun to exchange their paper dollars for the gold that stood behind them. The loss of gold would have cut short our high living.

Our foreign creditors accepted dollars in payment for their goods and services -- and then obligingly invested the same dollars in America's own securities. It's as if the money never left the 50 states. If Americans seemed an unusually complacent lot before the roof fell in, it was no wonder. Owning the reserve currency franchise, any other people would have been just as fat and just as happy.

So, brimful of confidence, we ran down our savings and ran up our debts. Among the myriad varieties of 21st-century debts we incurred were mortgage contraptions so complex as to baffle even the people who invented them. Yet professional investors snapped them up at interest rates only a few tenths of a percentage point higher than Treasury-bill yields. It bolstered the investors' confidence that the structures -- residential mortgage-backed securities and variations on the same -- were appraised triple-A.

When unfounded confidence was still supporting excessive leverage, private equity promoters bought up whole companies. They borrowed most of the purchase price at negligible interest cost and with few of the legal safeguards customarily afforded to senior creditors. The confidence of the creditors was even more ill-founded than that of the promoters -- and far less explicable, because there was so much less potential profit in it for the lenders than for the equity investors. When the music finally stopped, some investors were still in mid-deal. Cerberus Capital Management had not yet consummated its proposed purchase of United Rentals, for instance. Neither had General Electric Capital Corp. and Blackstone Group bought PHH, nor Kohlberg Kravis Roberts & Co. and Goldman Sachs Capital Partners acquired Harman. Next thing you knew, the transactions were being canceled.

The would-be acquirers prided themselves on the thoroughness of their due diligence and on the conservatism of their financial forecasts. Each announced an acquisition price that, supposedly, gave full value to the selling shareholders while still affording the prospect of a not-so-distant payday for the leveraged acquirer. But, without willing lenders or a rising stock market, the buyers withdrew.

The share prices of the target companies thereupon pulled back. One had expected it. But the former takeover candidates' prices have plunged by 70% or more. Reddy Ice, the No. 1 manufacturer and distributor of packaged ice, is cheaper by 92% than it was on the day last summer when its falsely confident suitor, GSO Capital Partners, bid to take it private at 50 times earnings. Interestingly, no new buyer has appeared now that the shares are quoted at less than seven times earnings. Confidence in the judgment of our private equity titans is belatedly being marked to market.

Such is the way of markets -- and of the fallible investors who operate in them. High prices boost our confidence, low prices sap it. We seek out bargains in Wal-Mart, but run away from them on the New York Stock Exchange. The proliferation of investment bargains brings us no joy. Share-price volatility is testing all-time highs. The debt markets are inconsolable. The triple-A rated mortgage bonds that once yielded only a small increment over the basic wholesale money-market interest rate today fetch 12% and up. And those are the securities that, as Grant's Interest Rate Observer does the numbers, appear to be money-good -- barring another 20% or 25% decline in house prices. Yet if the risk of true apocalypse in real estate is great enough to warrant these towering mortgage yields, there can be no easy explanation of the relatively low yields still attached to the unsecured debentures of some big American retailers. Lowe's Cos., the giant home-improvement chain, would surely feel it if house prices dropped -- again -- through the floor. But an issue of unsecured Lowe's debentures, the 5s of October 2015, are quoted at a price to yield just 5.8%.

In investment markets, confidence and coherence tend to restore themselves. The hardy souls who lead the way back derive their confidence not from the Treasury Secretary but from the pages of "Security Analysis," by Benjamin Graham and David L. Dodd, the value investor's bible.

But these are frightening times, and there is no very large constituency favoring the natural restorative processes of free markets. "A new form of capitalism is needed, based on values which put finance at the service of business and citizens, not vice versa." Nicolas Sarkozy, the president of France, recently said that, but the sentiment is on the lips of heads of state the world over.

In the past two weeks, governments in Asia, Europe and the U.S. have effectively nationalized vast swaths of banking. Central banks have ramped up their money printing. In the past week alone, the Fed's balance sheet swelled by $179 billion, to a grand total of $1.77 trillion. In announcing such radical measures, intervening governments never fail to invoke confidence. They say they must restore it.

Destroying confidence, however, is what governments do best. And the confidence they can restore is usually the kind that got us where we are today. Inflation and moral hazard led directly to the immense overvaluation of equities and residential real estate -- and of the bloating of the leverage that sustained those prices. Yet, to cure what ails us, credit creation and the public guarantee of banking liabilities are the policies today most favored.

Perhaps the world has gone so far down the path of socialized finance that there's no turning back. However, the doughty remnant of capitalists should be under no illusion about the risks and opportunities they confront. They can't miss the risks. Mr. Paulson pledges that the government's bank investments will be passive and apolitical, but the record of the Depression-era Reconstruction Finance Corp. suggests that the federal government is a shareholder that can throw its weight around. Besides, would Mr. Paulson's apolitical intentions bind his successor?

For the false confidence that played so important a part in the creation of the late excesses, the government should decently bear its share of blame. It accepts none of it, however, at least none that Messrs. Paulson or Bernanke have admitted to. Not that a federal confession of sin would expunge the financial errors of the debt-financed upswing. But it would, at least, clear the intellectual air and help the country and its creditors find a way to do better next time. For a start, the Fed might foreswear the Greenspan-inspired conceit that it can put the economy back together again after a debt bomb explodes.

And the opportunities? For the first time in a long time, stocks, tradable bank loans and mortgages are becoming cheap. The bear market is truly a value restoration project. Wall Street will be going on sale -- if the government will let it. For the entrepreneur, the silver lining in the federalization of finance is obvious. Start a bank or broker-dealer to compete with the institutions that will soon be smothered in Mr. Paulson's quarter-trillion dollar embrace. There's oxygen, still, in the free market.

James Grant, the editor of Grant's Interest Rate Observer, is the author of the forthcoming "Mr. Market Miscalculates: The Bubble Years and Beyond."

The book is great also. You can read my review of it and pre-order it here.




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National City Posts Loss: Tier 1 of 11%

Yes it is a loss, yes it was expected. What do we care about? Deposits are growing, Tier 1 remains high and operating income is up.

The Headlines:
• Net Loss of $729 Million Driven by Continued Actions to Build Reserves; Loan Loss Provision Declines 25% from Second Quarter

• Pre-Tax Pre-Provision Operating Earnings of $636 Million Up 17% Year-Over-Year

• Tier 1 Capital Ratio of 11% Among Highest of All Major U.S. Banks and $6.6 Billion Above Regulatory “Well-Capitalized” Minimum

• Retail Deposits Stable in Quarter and Grow Year-Over-Year, Reflecting Steady Household Growth and Expansion

• Net Charge-offs Flat with Second Quarter Excluding Writedowns from Reclassification of Marine Loans to Held for Sale

• $8.4 Billion of Exit Portfolio Loans, Representing 8% of Total Loans, Account for 40% of Total Charge-Offs; Remaining Exit Portfolio Shows Stable to Improving Trends

• Performance Improvement Initiative Targets Total Annual Savings of $500-$600 Million by 2011; $240 Million to be Realized in 2009

Details:
National City Corporation (NYSE: NCC) reported a net loss for the third quarter of 2008 of $729 million, driven primarily by continued actions to build loan loss reserves. This compares to a net loss of $1.8 billion in the second quarter of 2008, and a net loss of $19 million in the third quarter a year ago. On a year-to-date basis, the net loss was $2.7 billion in 2008 compared to net income of $647 million in 2007.

Diluted net loss per common share was $5.86 for the third quarter of 2008 and $9.51 on a year-to-date basis, inclusive of a $4.4 billion one-time noncash preferred dividend recorded in September 2008 on convertible preferred stock issued as part of National City's $7 billion capital raise completed in April. The non cash dividend had no impact on total capital or net income. Excluding it, diluted net loss per common share would have been $.85 in the third quarter of 2008 and $3.60 on a year-to-date basis based on weighted average common shares outstanding of 877 million and 745 million, respectively. As of September 30, 2008, post conversion of preferred shares, the Corporation had approximately 2.0 billion common shares outstanding. Had those shares been outstanding from the beginning of the period, diluted net loss per common share would have been $.37 for the third quarter of 2008, exclusive of the noncash preferred dividend.

The provision for loan losses was $1.2 billion, down $408 million, or 25%, from the preceding quarter. Net charge-offs were $844 million in the third quarter of 2008, up $104 million from the preceding period due to $134 million of writedowns from reclassifications of loans to held for sale.

Pre-tax pre-provision operating earnings were $636 million in the third quarter of 2008, about equal to the preceding period, and up $93 million from the third quarter a year earlier. On a year-to-date basis, pre-tax pre-provision operating earnings were approximately $1.9 billion in both 2008 and 2007.

As of September 30, 2008, the Corporation’s Tier 1 risk-based capital ratio was 10.98%, $6.6 billion in excess of the well-capitalized minimum. Total risk-based capital was 14.86% and tangible equity to assets was 8.93% at September 30, 2008.

The "Exit Portfolio" is responsible for the majoirty of losses and it is shrinking:
The Corporation’s Exit Portfolio (formerly termed “Liquidating Portfolio”) was formed so that loans remaining from exited businesses and discontinued products could be managed separately from National City’s core retail banking, corporate banking and wealth management businesses. This $21 billion portfolio consists of broker-originated home equity loans, nonprime mortgages, non-agency mortgages, residential construction loans, and automobile, marine and recreational vehicle loans originated through dealers.

These loans, which are in run-off mode, have been declining about $500 million per month, and are actively managed to mitigate losses by a dedicated team headed by recently appointed Executive Vice President James LeKachman, an experienced risk management executive. Significant resources and talent are devoted to this effort, which includes ongoing evaluation of potential strategic alternatives. Undrawn home equity lines have declined $2.9 billion since year end.

“A limited number of segments within our Exit Portfolio generated the majority of net charge-offs for the quarter,” said Mr. Raskind. “Specifically, $8.4 billion of Exit Portfolio loans, representing 8% of the company’s total loans, accounted for 40% of total net charge-offs. The remainder of our Exit Portfolio showed stable or improving trends. Importantly, we have no exposure to Option ARM-type mortgages. We are actively managing down and mitigating losses from the Exit Portfolio and have the capital flexibility to consider a variety of alternatives for these loans.”

Loans 90 days past due were $1.1 billion at September 30, 2008, down somewhat from June 30, 2008, primarily due to a lower level of delinquent residential real estate loans within the Exit Portfolio. Average core deposits, excluding mortgage escrow and custodial balances, were $83.3 billion in the third quarter of 2008, up $5.7 billion compared to the third quarter a year ago.

So, has the reasoning for buying National City fallen? No. Remember we bought National City because its core business was stable and growing, was adequately reserved and the loan portfolio was, while challenging, not worsening.

We are NOT seeing a Wachovia (WB) or WaMU (WM) situation where we are having either a run on deposits or loan losses overwhelming the bank. What we do have is a stable bank in a miserable environment. Will they take money from the gov't? Will there be a buyer? I think the answer to both of those is maybe.

The good news, the real good news is that the bank has the option of gov't money as back stop should they think they need it. That being said, we know the bank will not go under and loan writedowns are not an infinite proposition. There is an end.

If the bank is still independent when that comes, substantial profits will comes. My guess is though that once the Treasury begins handing out multi-billion dollar checks to banks, National City becomes part of another bank...


Disclosure ("none" means no position):Long NCC, none
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Tuesday's Links

Deflation, $$, Hypocrisy. Omerosa

- Now, let's not move from one self induced panic to another..

- Best candidate money can buy

- I love it when stuff like this is pointed out

- Wasn't her 15 minutes up 5 years ago?


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Buffett Continues to Sell Burlington Northern Puts

Before this recent transaction, Berkshire's (BRK.A) Buffett had sold put options on 4.3 million Burlington Northern (BNI) shares.

Buffett on 10/16 added another million shares to the total selling $76 strike 12/2008 puts for $6.20 a piece.


Disclosure ("none" means no position):none
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4th Update...Lampert Buying More Autozone

Sears Holdings (SHLD) Chairman Eddie Lampert bought more AutoZone (AZO).

In just released SEC filing, ESL Partners bought another 63.1k share bringing Lampert ownership to 23.3m shares.

This follows heavy buying last week.



Disclosure ("none" means no position):Long SHLD, none
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Mark Faber Pours Cold Water on Today's Rally

This is a long clip but worth watching. Faber says govt's "have no other option in the long term but to print more money and that will lead to inflation."



He makes the point that gov't's are trying to "ensure lending" when the reality ought to be the opposite. He says what they ought to be doing is encouraging saving and lower consumption, "but that is painful".

He says in a recession that "ordinary" American's will not get hit that bad but the owners of the assets will.

I tell you, the the more I look at it, the more I am thinking we are in for a period of "restrictive economic times". Now, the argument should be made that this is good because we have been "too loose for too long". While that may be true, like Faber says, getting back to normal will be painful and unpleasant especially for those too exposed.

It also argues against simple index funds as the major markets may go nowhere for a while but there ought to be plenty of individual winners in the mix.


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Lehman Execs. Subpeonaed..Finally

What took so long?

Here are the basics..


Now this basically goes back to June when (LEH) Lehman CFO Erin Callan, being thrown to the wolves by CEO Dick Fuld said:


The whole time investor David Einhorn was saying the opposite:


The option Fuld and Callan have here simple
1- We are grossly incompetant
2- We lied.

Simple. The firm went under. So either they were lying to try and buy it time or, they just did not really know what was going on. Callan can at least say she was "following marching orders". Fuld...not so much.

Now, if you watch Fuld's recent congressional testimony, it was scary. One could think that perhaps Fuld has not yet accepted is firm is gone.


There is always a fall guy(s) / gal(s) when we have these events. Fuld and Callan are going to have a real hard time, real hard, convincing a jury there were being 100% honest and that they are just incompetent....Fuld, for one, seem to prideful to take the ugly option in front of him. It just may be his downfall.


Disclosure ("none" means no position):none
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Antonin Scalia on Charlie Rose

No matter what your politics, this is a great, very thoughtful interview. Hats off to Charlie Rose for the job he did.



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Circuit City to Act Bankrupt to Try To Avoid It

Just because CEO Phil Schoonover is gone, it doesn't mean the people who hired him and kept him there can't continue to bury this thing...

The WSJ Reports:

Circuit City Stores Inc. is considering a plan to close at least 150 stores and cut thousands of jobs, as an alternative to filing for bankruptcy-court protection, said people familiar with the company.

Earlier this month, the nation's No. 2 electronics retailer by sales hired Skadden, Arps, Slate, Meagher & Flom LLP -- the law firm that oversaw the Chapter 11 reorganization of Kmart -- as its bankruptcy counsel, according to several people familiar with the matter.

Circuit City also retained FTI Consulting Inc. to develop a turnaround plan and investment bank Rothschild Inc. to guide talks with banks and secure emergency financing, these people said.

What bank in their right mind right now would loan them a penny? Who?

In June of 2007 in a post that speculated on the possibility of a Circuit City (CC) bankruptcy, I said "if the economy slides any further....see ya'.."
In Sept. of 2007 I said they were on the "Bankruptcy Express"

Now, Circuit City did try to help the management that ran it into the ground by lowering the price points on their stock options in a move to keep this incompetent bunch happy. Stunningly, the performance of the company did not improve. Please note the sarcasm..

Nothing has changed from either post. The good news? The company still does have a good brand and whoever buys it in bankruptcy has a great opportunity to revitalize it. The price that will be paid will be minimal as the competition for it in the current environment will be minimal. That gives a buyer a tremendous opportunity for success. The bad news? If you are a current shareholder you will get nothing. Sorry...




Disclosure ("none" means no position):none
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Buying Rohm & Haas

This is a short term arb play.

Dow Chemical will purchase Rohm & Haas (ROH) for $78 a share and the deal will close in early 2009.

Berkshire Hathaway (BRK.A) is investing $3b in the deal and it is an all-cash transaction. Currently shares trade at $70 a share under the current credit environment. Purchasers of shares today will get a 10% 4 month return (30% annualized). Downside is minimal.

What could go wrong?
Kuwait, who is buying 1/2 Dow's commodity business for $9.5b could back out of the deal. That cash is being used for funding the ROH transaction. How likely is this? Well, when one considers that the newly formed JV is in the process of hiring personnel and setting up shop in Michigan, not very.

Berkshire could back out. Again, can anyone come up with a scenario when this has happened? Me either.

Since no debt is being used for the transaction and Dow has already received the bridge loan necessary to complete it, credit market conditions are irrelevant here.

Why did the price fall? Simple. During mass sell-offs like we have had, everything falls, whether is should or not. That gives us tremendous opportunity for very safe situational investing. What this trade is essentially is a way to park some money for 4 months with a very high probability of a 10% payoff with very little downside risk (not none, but very little).

The deals today that are at risk are the ones that depend on bank's lending for the financing, looks for the all cash or all stock ones.



Disclosure ("none" means no position):Long Dow, none
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Portfolio Tracking on Marketocracy

I've decided to use Marketocray to track picks.

Marketocray give you a mythical $1 million to invest (if you only have $10k, then just reduce share purchases commensurately). What I like about it is that if you are fully invested (no cash balance) you have to sell something in order to buy another.

The "ValuePlays Mutual Fund (VMF)" can be seen here. It has no securities yet but I have buy orders in for GE (GE), Dow Chemical (DOW), Wells Fargo (WFC), Borders Group (BGP), Sears Holdings (SHLD), AutoNation (AN), Altria (MO), Phillip Morris International (PM), Goldman Sachs (GS), Harley Davidson (HOG) and Archer Daniel's Midland (ADM).

They will be executed this morning. I have omitted some holdings like Sherwin William (SHW), Wal-Mart (WMT) and Citigroup (C) because I would not be buying more of them today at current prices and current conditions. There is no way to go back and add stocks bought previously (for good reason, it would be far too easy to cheat on results). What I have added are stocks I would be a buyer of today at the prices they sell for today.



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Monday's Links

Drunk email, 25yrs., Cramer, Selling low

- This is great....a way to stop you from sending drunk email by making you do math problems first

- 25 years since the first cell phone

- Another example to different opinions on the same day

- Cramer


Disclosure ("none" means no position):
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Weekend Humor

We could all use some....this is one of the funniest video's yet... "Little Bill vs Barney Frank"



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Whitney Tilson "Never Been More Bullish"

One bear finally turns...

Whitney is buying more Berkshire Hathaway (BRK.A), MLP's (natural gas pipelines), Target (TGT). He also said Altria (MO), J&J (JNJ), Coke (KO) were "amazingly cheap".



Disclosure ("none" means no position):Long MO, none
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Lampert Makes 3rd AutoZone Purchase This Week

Here they are, #1, and then #2, and finally this one.

On Wednesday. Sears' (SHLD) Chairman added another 105K shares at $102 to $104 a share of the auto part retailer AutoZone (AZO).



Disclosure ("none" means no position):Long SHLD, none
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The Mother of All Goodbye Letters

A hedge fund manager who made 866% last year betting against real estate goes out with a bang....

The letter from Andrew Lahde of Lahde Capital.

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, "What I have learned about the hedge fund business is that I hate it." I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don't worry about my employees, they were always employed by Mr. Springer's company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life -- where I had to compete for spaces in universities and graduate schools, jobs and assets under management -- with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man's interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft's near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won't see it included in BP's, "Feel good. We are working on sustainable solutions," television commercials, nor is it mentioned in ADM's similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant -- marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let's stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best,

Andrew Lahde

FULL PDF OF LETTER


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McCain and Obama Crack Jokes: This Is Funny

Some Friday levity...

John McCain
Pt. 1


Pt. 2


Barack Obama



Disclosure ("none" means no position):
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Warren Buffett's Editorial 2008 and 1974..A Bottom Called?

Berkshire's (BRK.A) Warren Buffett penned the following Op-Ed in today's NY Times.

From The NY Times
"THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities."

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Interestingly enough, the last time Buffett opined about the general market was 1999 when he said they were over priced (soon after the tech bubble popped). Before that one has to go back to 1974 and a Forbes Op-Ed he did in which he said the market, like today was vastly undervalued. Ironically enough, that market bottomed soon after and the Dow never again touched those levels....

Buffett's final words in 1974: "Now is the time to invest and get rich."

Anyone who invested with Buffett and Berkshire in 1974 surely did....many times over.


Here is the 1974 Forbes Interview


Disclosure ("none" means no position):None
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Friday's Links

Brawl, Festival, Gphone, Margin, Twitter, Late Bloomers

- If anyone has video of this, pleas email it to me...it would be hysterical

- The latest Festival of Stocks

- I will look at this phone..

- Makes sense...but millions of folks did it

- For those who do not Twitter, you are missing some very informative material

- Are you one?


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Lampert Adds Again to AutoZone Holdings

It is only a matter of time before he has 50%.

After adding 165k shares earlier this week, Lampert added another 177k on the 14th at $106 a share.



Disclosure ("none" means no position):Long SHLD, none
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Altria Cleared To Purchase UST

Altria's (MO) purchase of UST (UST) has passed regulatory review.

Altria today announced that the Federal Trade Commission has granted early termination of the initial waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and therefore no further regulatory review by the federal antitrust authorities is required in connection with Altria’s acquisition of UST for $69.50 per share in cash.

Completion of the transaction remains subject to UST shareholder approval and certain other customary closing conditions. UST is in the process of scheduling a special shareholder meeting for on or about December 4, 2008, during which UST’s shareholders of record as of the close of business on October 23, 2008 will vote upon the proposed transaction. Details of the shareholder meeting will be contained in the proxy statement which UST expects to mail during the week of October 27th. If approved and all other conditions to closing are satisfied, the transaction is anticipated to close no later than January 7, 2009.

for those who have not noticed, buying Altria shares now will give you a 6.7% (and growing) yield on your invested money. Earnings, about as stable as they come will grow 10% plus through product sales and share repurchases.

No matter what the economy, folks are still lighting up and chewing.

Disclosure ("none" means no position):Long MO
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National City CEO: "Quite Optimistic"

At an event in Cleveland:

National City Bank (NCC) CEO Peter Raskind said Wednesday that it’s “simply too soon to say” if the bank will avail itself of government assistance — and if it did, what the impact of that help would be.

“We’re closely studying the potential implications, you bet we are,” Mr. Raskind said. “We’re deeply engaged in that process, that analysis. We’re going to take a little more time than that.”

Mr. Raskind spoke to a crowd of nearly 200 people at a weekly lunch for chartered financial analysts sponsored by the CFA Society of Cleveland. Organizers said the meetings usually attract about 70 people and that Mr. Raskind’s talk was the best-attended event the group has held.

It continued:

In his speech, Mr. Raskind also addressed rumors that the bank will be sold by saying that while he would not comment about speculation, he is “quite optimistic” about the future of the company.

National City has been steadily reducing its exposure to products sold through brokers and Mr. Raskind said “significant changes” to the bank’s businesses and leadership teams give him reason to be confident.

Still, he said, National City’s board of trustees understands its responsibility to shareholders and would seriously consider selling the bank if that was in shareholders’ best interest. The board considered selling National City in March but decided that the capital infusion was the better choice. Mr. Raskind said that decision has turned out “quite clearly” to be the case.

I bought NCC shares at the beginning of the month for $2 (read why here). The reasoning behind the buy still hold.

Buyout talk. There is something there. Now that Wells Fargo has Wachovia (WB), Citigroup (C) which needs to expand its capital base has no dancing partner. They remain the most likely candidate as JP Morgan (JPM) and Bank of America (BAC) busy digesting recent acquisitions.

What is it doesn't happen? I still think shares are worth $6 short term and much more long term. I also think that perhaps the reason a buyout has not happened is because NCC is not in the same position both Wachovia and Washington Mutual (WM) were. Because of that, the bargain basement price buyers of those institutions got will not be had for NCC. It may be something a potential buyer has to get over.

NCC is the "best of what's left" as far as takeover candidates. If it happens or it doesn't, shareholders (recent ones) will do just fine.


Disclosure ("none" means no position):Long NCC, WFC, C, none
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The Wells Fargo Tug of War

There are some real dichotomies out there when it comes to Wells Fargo (WFC).

Here is a WSJ Article on it

So why isn't the San Francisco-based lender doing more to beef up its cushion against loan losses as the country slips into a recession?

As investors sift through banks' third-quarter numbers, they will be focusing on the strength of their loan-loss reserves, which exist to absorb losses from defaulted loans. Wells allowed a key measure of reserve strength to drop considerably.

If it had held that measure at its second-quarter level, Wells's third-quarter earnings would have been half the 49 cents per share it reported Wednesday. At a time when bad loans are expected to continue rising, it makes sense to compare a bank's loan-loss reserve with past-due loans.

Many of those won't return to health and will lead to a loss.

In the third quarter, Wells's $7.87 billion reserve was 1.57 times as big as its $5 billion in past-due loans. That's down from 1.81 times in the second quarter. Maintaining that ratio at 1.81 times in the third quarter would have taken an extra $1.18 billion out of earnings.

After tax, that would work out to 24 cents a share.

Wells's defenders might argue that some loan portfolios are not deteriorating as fast as they had been, allowing the bank to ease up a bit on this reserve measure. But that's a bold step in a faltering economy.

Even after getting $25 billion under the government's financial-rescue plan, Wells still wants to raise another $20 billion of capital on its own to support its planned purchase of Wachovia (WB).

Here is CFO Howard Atkins on the results and Wells capital situation:


So, who to listen to? I am not overly concerned about this an don't see it a the big deal some are trying to make it out to be. The tone is that Wells is doing something sneaky in its reserves. I think to many folks are trying to be Perry Mason.

Wells is saying that it has taken the most of the losses on the worst of the loans and that while loan losses will continue to grow as the economy worsens, the size of those losses will not significantly grow. The home equity portfolio, where most of the losses are has portions being liquidated and Atkins did say that liquidation is "going orderly"

Now, Atkins did say that the Wachovia deal will "double the size of the bank" and that they "didn't need the $25 billion from the gov't".

So, in August Berkkshire's (BRK.A) Warren Buffett, Wells largest shareholder he was either buying shares in Wells or American Express (AXP). At the time I speculated it was Wells (still feel that way) and soon enough we will find out. Wells Chairman at first refused the TARP money from Treasury until Hank Paulson force fed it to him.

What can we discern from that? One of three things. Management is either:
1- Spectacularly stupid
2- Slyly dishonest
3- On top of the situation.

We can eliminate #1 as it is clear Wells Fargo and JP Morgan (JPM) are the class of the industry. Buffett has little patience for #2 and unless he believed management was being totally upfront, he would not have even alluded to increasing his stake in the company.

That leaves #3. Based on results for the past two decades, until proven different, I got to go with that...


Disclosure ("none" means no position):Long WFC, none
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Sherwin Williams Results: What Housing Collapse?

Sherwin Williams (SHW) beat "analyst" expectations by 23 cents a share or 18%.

- Sales increased 3.3% to a record $2.269 billion in 3Q08 and 2.1% to a record $6.280 billion in first nine months
- EPS was $1.50 in 3Q08; $.05 above the 3Q08 guidance range of $1.20 to $1.45
- Net operating cash in the first nine months was $592.6 million; an improvement of $28.8 million over the first nine months last year
- EPS guidance range of $.40 to $.60 for 4Q08 and raising full year guidance range to $3.97 to $4.17

All segments experienced sales increases:
* Net sales in the Paint Stores Group increased $9.5 million, or 0.7%, to $1.410 billion in the quarter and decreased $20.6 million, or 0.5%, to $3.797 billion in the first nine months. The sales increase in the quarter was due primarily to increased sales from acquisitions of 1.5% and selling price increases that were partly offset by sales volume reduction
* Net sales of the Consumer Group increased $6.2 million, or 1.8%, to $355.7 million in the quarter and decreased $20.8 million, or 2.0%, to $1.026 billion in the first nine months. The sales increase in the quarter was due primarily to selling price increases and an increase in sales of 0.4% related to a 2007 acquisition.
* The Global Finishes Group's net sales stated in U.S. dollars increased $55.8 million, or 12.5%, to $500.8 million in the quarter and $170.1 million, or 13.3%, to $1.452 billion in the first nine months due primarily to volume gains, selling price increases, favorable currency translation rate changes and acquisitions.

The Company acquired 793,135 shares of its common stock through open market purchases during the quarter and 7.0 million shares during the first nine months. The Company had remaining authorization at September 30, 2008 to purchase 20.0 million shares.

CEO Christopher Connor said, "During the fourth quarter of 2008, we anticipate consolidated net sales growth, in percentage terms, will be plus or minus in the low single digits from last year's fourth quarter. We expect diluted net income per common share for the fourth quarter will be in the range of $.40 to $.60 per share compared to $.80 per share last year. For the full year 2008, we anticipate consolidated net sales will be slightly higher than 2007. At that sales level, we are raising our expectations for diluted net income per common share for full year 2008 to a range of $3.97 to $4.17 per share compared to $4.70 per share earned in 2007."

Would I be a buyer of Sherwin shares here? No. Not because they are not a great company or their shares are not undervalued, it is just that I think there are some extreme values out there currently and Sherwin is not an extreme value. The dividend yield at 2.8% is good, but again, far below the 7% at Dow Chemical (DOW), 6% at GE (GE) and 5.8% at Harley Davidson (HOG). Now, should share dip into the mid 40's ($45) then I would have to take a close look.

Also, despite the title of the post, Sherwin is tied to housing and that is not going anywhere but flat or down for at least a year, maybe more. That being said, Sherwin's results will remain stable due to fantastic management and it's brilliantly timed international expansion so the downside from here is limited. Should shares be sitting here at these levels 6 months to a year from now, perhaps they then warrant a buy.

There are just to many truly magnificent bargains out there now...



Disclosure ("none" means no position):Long SHW, DOW, HOG, GE
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Harley Davidson Reports....

We had clues yesterday this might be the case..

On average, analysts were expecting Harley Davidson (HOG) to record a 79 cents per share on revenue of $1.42 billion. HOG had exceeded analysts' profit estimates in three of the last four quarters.

Shipments are down are credit has further tightened.


Today Harley Davidson confirmed the news:

Milwaukee, Wis., October 16, 2008 — Harley-Davidson, Inc. (NYSE: HOG) today announced its results for the third quarter ended September 28, 2008. Revenue for the quarter was $1.42 billion compared to $1.54 billion in the year ago quarter, a 7.7 percent decrease. Net income for the quarter was $166.5 million compared to $265.0 million in the third quarter 2007, a decrease of 37.1 percent. Third quarter diluted earnings per share were $0.71, a 33.6 percent decrease compared to last year’s $1.07.

“In the U.S., dealer retail sales of new Harley-Davidson motorcycles in the quarter were in line with our expectations,” said Jim Ziemer, Chief Executive Officer of Harley-Davidson, Inc. “Although Harley-Davidson retail motorcycle sales in international markets overall continued to grow double digits in the quarter, unit sales in several European countries slowed more than we anticipated during September as a result of deteriorating economic conditions. We continue to carefully monitor all markets in light of the potential impact of the current economic realities.”

For the full year 2008, the Company has narrowed its shipment expectations to 303,500 to 306,000 Harley-Davidson motorcycles. The Company has narrowed its expectations for diluted earnings per share for the full year to $3.00 to $3.10 from the prior range of $3.00 to $3.18.

“We also have been able to maintain Harley-Davidson Financial Services’ position as a stable, consistent source of financing for dealers and retail customers during these turbulent conditions in the credit markets,” Ziemer said. “Prudent management and customer access to credit will continue to be priorities at HDFS.”

“During the third quarter, we completed our acquisition of Italian motorcycle maker MV Agusta Group, expanding our opportunities in Europe. Our 105th Anniversary Celebration at the end of August drew tremendous, highly enthusiastic crowds. And we opened the Harley-Davidson MuseumTM, with its broad appeal to riders and non-riders alike. So even in the midst of economic uncertainty, we continue to broaden our appeal, plant seeds for the future and give people unparalleled experiences and reasons to ride,” Ziemer said.

“Going forward, we expect the global economy and consumer concerns to continue to create challenges for Harley-Davidson through the end of the year and in 2009. I remain confident about our future as we continue to manage and reinvest in the business,” said Ziemer.

Motorcycles and Related Products Segment – Third Quarter Results

Revenue from Harley-Davidson motorcycles was $1.05 billion, a decrease of $131.7 million or 11.1 percent versus the same period last year. Shipments of Harley-Davidson motorcycles totaled 74,704 units, a decrease of 11,831 units or 13.7 percent compared to last year’s third quarter.

Revenue from Parts and Accessories (P&A), which consists of Genuine Motor Parts and Genuine Motor Accessories, totaled $259.0 million, an increase of $7.5 million or 3.0 percent over the year-ago quarter. Revenue from General Merchandise, which consists of MotorClothes® apparel and collectibles, totaled $84.0 million, an increase of $0.8 million or 1.0 percent over the year-ago quarter.

Gross margin for the third quarter of 2008 was 34.0 percent of revenue compared to 38.4 percent for the third quarter last year. This decrease is primarily due to higher product costs and the allocation of fixed costs over fewer units than last year’s third quarter. Third quarter operating margin decreased to 16.4 percent from 23.2 percent in the third quarter of 2007. Operating margin for the third quarter of 2008 includes the impact of a one-time $16.6 million expense related to the value of acquired in-process research and development at MV Agusta Group.

Motorcycle Retail Sales Data

During the third quarter, worldwide retail sales of Harley-Davidson motorcycles decreased 9.6 percent compared to the third quarter of 2007. U.S. retail sales of Harley-Davidson motorcycles decreased 15.5 percent for the quarter. The heavyweight motorcycle market in the U.S. decreased 3.1 percent for the same period.

Retail sales of Harley-Davidson motorcycles grew 11.3 percent in the Company’s international markets during the third quarter of 2008 compared to the third quarter of 2007. Third quarter retail sales increased 12.4 percent in Canada; the Europe Region was up 2.9 percent; the Asia Pacific Region was up 17.5 percent; and the Latin America Region was up 41.6 percent.

During the first nine months of 2008, worldwide retail sales of Harley-Davidson motorcycles decreased 6.0 percent compared to the prior year. In the U.S., Harley-Davidson motorcycle retail sales decreased 11.9 percent for the first nine months of the year while the U.S. heavyweight market was down 4.0 percent for the same period. International retail sales increased by 12.6 percent for the first nine months of 2008.

Third quarter and year-to-date data are listed in the accompanying tables.

MV Agusta

On August 8, 2008, the Company completed the purchase of the privately-held Italian motorcycle maker MV Agusta Group. The Company acquired 100 percent of MV Agusta Group shares for total consideration of 68.3 million euros ($105.1 million), which includes the satisfaction of existing bank debt for 47.5 million euros ($73.2 million). As a result of the acquisition, the Company recorded $87.9 million of goodwill and the $16.6 million one-time expense related to the value of acquired in-process research and development. These results are included in the quarterly financial data.

Financial Services Segment

Harley-Davidson Financial Services (HDFS) operating income for the third quarter was $35.6 million, a decrease of $13.9 million or 28.0 percent compared to the year-ago quarter. The decrease is primarily due to a $9.4 million write-down of finance receivables held for sale to fair value. In addition, last year’s third quarter included a $3.5 million securitization gain compared to no securitization transaction during the third quarter of 2008.

Income Tax Rate

The Company’s third quarter effective income tax rate was 38.2 percent compared to 35.5 percent in the same quarter last year. The third quarter increase was due primarily to a non-deductible in-process research and development charge for MV Agusta Group and the expiration of the federal research and development tax credit as of December 31, 2007. In October 2008, the federal research and development tax credit was reinstated for two years retroactive to January 1, 2008 continuing through December 31, 2009. The Company expects its full year effective income tax rate in 2008 will be approximately 35.5 percent.

Harley-Davidson, Inc. — Nine Month Results

For the first nine months of 2008, revenue totaled $4.30 billion, a 0.9 percent decrease from the year-ago period. Diluted earnings per share were $2.45, a decrease of 16.9 percent compared to the same period last year.

Through the first nine months of this year, shipments of Harley-Davidson motorcycles were 226,898 units, a 9.0 percent decrease compared to last year’s 249,413 units. Harley-Davidson motorcycle revenue was $3.26 billion, which is down 2.2 percent compared to last year’s $3.33 billion. P&A revenue totaled $706.6 million, a 0.5 percent increase over last year’s $703.1 million. General Merchandise revenue totaled $244.8 million, a 5.5 percent increase compared to $232.0 million during the same period in 2007.

HDFS operating income was $107.7 million, a 38.0 percent decrease from last year’s $173.6 million.

Cash Flow

Cash and marketable securities totaled $504.9 million as of September 28, 2008. Cash used by operations was $221.2 million, and capital expenditures were $153.7 million during the first nine months of 2008. For the full year of 2008, capital expenditures are still expected to be between $235 million and $250 million.

Stock Repurchase

The Company repurchased 2.5 million shares of its common stock at a cost of $100.1 million during the third quarter of 2008. On September 28, 2008, the Company had 232.8 million shares of common stock outstanding.

As of September 28, 2008, there were 16.7 million shares remaining on a board-approved share repurchase authorization. An additional board-approved share repurchase authorization is in place to offset option exercises.

So, the bottom line is that if you are selling anything that requires credit to purchase it, things are going to be tough. The question then is, what is management doing to position the company for the inevitable improvement? CEO Zimmer is buying back shares at depressed prices, making international acquisitions at reduced prices and expanding the company's product line.

All these are great moves while the company remains solidly profitable. Merchandise and parts revenue continue to grow. International sales are growing double digits. The drag is US domestic sales and HDFS. Eventually we get an improvement here. Even if 2009 just manages to be stagnant in the US, the other segments will propel EPS growth for the year.

Another point, at current levels ($24 and change), the shares carry with them a 5.38% yield that is very safe. The company will spend roughly $310 million next year on dividends and are buying back about $400 million a year of stock. The buybacks will be stopped before the dividend is threatened. Let's not forget they also trade at 8 times earnings...8....


Disclosure ("none" means no position):Long HOG
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Marty Whitman on WealthTrack (video)

Third Avenue Value's (TAVFX) Matry Whitman and Bernanke co-author Mark Gertner were on Wealth Track. It is a great watch..




Disclosure ("none" means no position):Long TAVFX
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Sears Holdings "On Sale"

Justin Siegel writes:


Sears (SHLD) is a Blue Light Special!

When I look for investment opportunities, I look primarily for 3 things:

1. Management
1. Are they aligned with shareholders?
2. Are they smart, proven?
3. Do they run the business like an owner?

2. Business
1. Is it a good business?
2. Is it easy to understand, for me at least?

3. Valuation
1. How much do I think it’s worth and how much below that value is it selling for?

How does Sears stack up?

1. Management
1. Effectively Eddie Lampert through his hedge fund, ESL, controls Sears, through a majority stake of common shares. In short, he’s staked his personal fortune, his hedge funds fortune, his reputation, etc. on the Sears common shares, which by the way represent the majority investment of his hedge fund portfolio.
2. Yes, Eddie Lampert is smart. Ivy league graduate, self-made billionaire, etc. Is he proven? He has racked up decades of 20%+ returns, so he’s a proven investor. Even a proven retail investor, but not necessarily a proven operator. A yellow flag in my opinion.

2. Business
1. Retail is a decent business. Not rocket science.
2. Retail is easy to understand, though Sears has many facets, which I think are often overlooked, or at least currently by the market.

3. Valuation
1. The short answer is I think Sears is worth A LOT more than $8 billion dollars. Why? Well, here are some of the juiciest parts:
1. Brands – Kenmore, Craftsman, LandsEnd, Diehard, and even Sears itself have very solid brand equity. Even after years of being ignored and poorly run, these brands are respected and valued throughout North America.
2. LandsEnd – Beyond the brand, this is a good business in its own right that has been churning out record years with one of the highest converting retail websites in the country. Sears bought it a few years back for shy of $2 billion. Probably worth at least that much.
3. 70% stake in Sears Canada, which has been doing very well.
4. Cash - $1.5 billion last quarter on its balance sheet
5. Sears.com – one of the largest, fastest growing, and improved websites of any major retailer. Still work to be done, but improvements galore.
6. Servicing network – Largest appliance and lawn equipment repair service in the country. I like a business where they sell you the washer and dryer once, and then get paid to maintain and repair to too.
7. Eddie Lampert – You get one of the world’s best capital allocators for free. Over time this will matter significantly, as it does in all businesses.
8. Real Estate – This frankly is the least interesting asset to me because it only becomes valuable if the rest of the business is failing, which it isn’t. Sears is profitable on a reported earnings and cash flow basis. However, Sears does own somewhere between $7-$20 billion in real estate depending upon who you believe.

And as a kicker, today you can buy Sears for LESS than Bill Ackman, Monish Pabrai, Bruce Fairholme, Bill Miller, and several other brilliant investors. It’s tied to the economy like everything and everyone, so it may not being going anywhere fast, but… What are some potential catalysts? Eddie Lampert making a great acquisition, earnings surprise, faster economic recovery. I think it’s a Blue Light special, but it’s up to you to cast your own votes.



Disclosure ("none" means no position):Justin is Long SHLD
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Now People Realize: Paulson Can't Make Banks Lend

As the hours go by people are starting to realize perhaps just giving the banks money wasn't the best plan..



Here is an interesting chart from a Portfolio.com article on the subject:


In short....this not the thing to do...


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Latest Soveriegn Wealth Fund Report: US Not The Favorite

This is a follow-up to a post from July. Isn't it funny how when we need the money the politicians are not screaming about this anymore? In fact, one could make the argument they are begging for SWF Investment now.

File this under "be careful what you wish for, you just might get it". The good news? SWF's are not investing large sums in US businesses. The bad news? SWF's are not investing large amounts in US businesses.

The latest Monitor Group analysis is an update to its June 2008 report: “Assessing the Risks: The Behaviors of Sovereign Wealth Funds in the Global Economy.” Key findings of the latest analysis include:

§ In the second quarter of 2008 (Q2 2008), funds in the Monitor SWF transaction database executed 43 deals totaling $26.5 billion. In contrast those funds executed 42 deals totaling $58.3 billion during the previous quarter (Q1 2008).

§ SWFs continued to invest actively in emerging markets. In Q2 2008, more than half the deals and funds invested were in emerging markets (vs 40% in Q1). SWFs carried out 26 deals and invested $15 billion in BRIC and non-OECD countries.

§ Investment in North America dropped dramatically. In Q2 2008, four deals totaling less than $1 billion were received by North America. In contract, this region received seven deals totaling $23 billion during the previous quarter (Q1 2008).

§ Half of the deals by value in Q2 were in real estate (shopping centers and real estate management companies). Real estate had the largest number of deals (12) and the highest investment ($13.7 billion) in Q2 2008.

§ During Q2 2008, investment has shifted away from financial services. SWFs carried out 10 deals and invested $4 billion in the financial services sector during Q2 2008. In the previous quarter (Q1 2008), funds carried out 13 deals totaling $43.4 billion.

“Our transaction data show that SWFs have focused recent equity investment away from volatile geographic markets and sectors, like North America and financial services, and are instead seeking more attractive returns in emerging markets and other sectors, including real estate,” said Drosten Fisher

The country taking the lion share of the business? India. There was heavy investment in the healthcare, consumer and aerospace sectors in India in Q2. This also follows the trend they exhibited in other nations. This is particular distressing to those who are looking for funds to flow to the US. Those are not sectors in the US that lend itself to foreign investment (thing Wal-Nart (WMT), Target (TGT), GE (GE) or United Health (UNH).

But, for shareholders of wither Wal-Mart (WMT), GE (GE) or even Dow Chemical (DOW) who are aggressively expanding into the region, it is good news. A steady flow of funds to the region raises the standard of living for all and by default the sales prospects for those doing business there.

Bill Ackman at the Value Investing Congress commented on "opportunistic capital" (hedge funds and SWF's). He said that "opportunistic capital is always the first in" when it comes to investment (listen to press conference here). It should be noted that Russia has receive zero deals. For those thinking of investing overseas, if those with the money are avoiding a country, perhaps you ought to think twice before committing funds there? Based on their activity, India and Brazil seem to be the nation's of choice both for opportunity and safety of capital.

Now, for those afraid of SWF's, please note the following graph.


A disclaimer: This is my chart and Monitor Group in no way implies the "Bailout" equates the US to a SWF. This chart is purely for comparison purposes.

What is the point? SWF's are a nice boogey man for people intent on stirring things up but they really are dwarfed not only buy US Mutual funds but what our gov't itself. Let's not forget, $250b of the US investment in banks wasn't an option for the banks....that is not an issue with SWF's.

Q2 report available by email akrull@racepointgroup.com
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.



Disclosure ("none" means no position):Long WMT, GE, Dow , none
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Thursday's Links

Freedom of Speech, Rumors, Prediction, 2003, S&P PE

- Why isn't anyone talking about this?

- If they come true, are they rumors?

- This is true

- Warnings abounded

- Is the recession already price in?

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Lampert Buying More AutoZone

Been a while but you had to figure if the market tanked, Sears' (SHLD) Eddie Lampert would be there buying.

Lampert and ESL Investments added another 165k shares in AutoZone (AZO).

Lampert paid between $95.50 and $103 a share.

He now holds almost 24 million shares.

Here is some background on the recent agreement between Lampert and AutoZone regarding his ownership.



Disclosure ("none" means no position):Long SHLD, none
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Wilbur Ross on TARP, The Economy and What He Is Buying

Anyone who has been an even semi-regular reader knows what a fan of Wilbur Ross we are here. Wilbur has been spot on in regards to the current crisis. Both in leading up to it and what has happened during it.

Ross is looking at companies that are commodity based that are going to profit from the fall in those prices (although he says oil will not go below $70). Specifically he mentioned carbon based chemical companies (Dow Chemical (DOW)?). He also is continuing to buy mortgage servicing companies. He is buying more shares of many of the companies he already owns ad many trade 505 below recent prices and that there is "nothing fundamentally wrong with them".

Stimulus checks???"A terrible waste, only about 30% of the last batch got spent"

Watch the video.....there is a commercial in the middle and the interview picks up after it.



Disclosure ("none" means no position):
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How Tight Has Home Lending Got? Try 65% LVT

Check this out from the JP Morgan (JPM) earnings call

In response to a question on tightening lending standards:
"People have gone back to old-fashioned 80 percent L.T.V. (loan to value). Real verified income. More disciplined appraisals. And in some areas, we won’t even go to 80 percent L.T.V. because of expected home decreases. We are not at 80 percent in California, Nevada and Florida — we are at 65 percent.”

The loan-to-value is simply value of an asset to the amount of the loan given out by banks. So, if Joe wants buy a house for $200,000, an $160,000 mortgage would equate to 80 percent L.T.V. ratio. Under some of the newer standards in the above mentioned states, Joe would only be able to get a loan for $130,000 and would have to come up with $70,000 himself.

At the height of housing euphoria, some banks were giving loans with an L.T.V. of 105 percent to customers, meaning the loan covered the entire price of the asset — plus more, to cover closing costs. In this scenario, Joe would walk up and sign and be given the keys without a dime coming out of his pocket...

Any wonder we are where we are??? More later..



Disclosure ("none" means no position):none
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Wells Fargo Forced Into TARP Plan

I can't get behind a plan that forced private companies to make the gov't a partner when they actually do not need it....Remember, this is just weeks after had said that injecting capital directly into banks would appear to be a sign of "failure."

From the WSJ:\

During the discussion, the most animated response came from Wells Fargo (WFC) Chairman Richard Kovacevich, say people present. Why was this necessary? he asked. Why did the government need to buy stakes in these banks?

Morgan Stanley (MS) Chief Executive John Mack, whose company was among the most vulnerable in the group to the swirling financial crisis, quickly signed.

Bank of America's (BAC) Kenneth Lewis acknowledged the obvious, that everyone at the table would participate. "Any one of us who doesn't have a healthy fear of the unknown isn't paying attention," he said.

It continues:

Mr. Paulson said the public had lost confidence in the banking system. "The system needs more money, and all of you will be better off if there's more capital in the system," Mr. Paulson told the bankers.

After Mr. Kovacevich voiced his concerns, Mr. Paulson described the deal starkly. He told the Wells Fargo chairman he could accept the government's money or risk going without the infusion. If the company found it needed capital later and Mr. Kovacevich couldn't raise money privately, Mr. Paulson promised the government wouldn't be so generous the second time around.

Essentially this is like Don Corleone "making the banks an offer they can't refuse". The message was "make me your partner now, if you don't and need me down the road, we will crush you".

I can't get behind this and shame on both Barack Obama and John McCain for for blessing it based on a 1 day stock market reaction. Their blanket acceptance of it means that one not ought to expect significant improvement when either takes office. Remember, they both backed the previous plan also. These plan are polar opposites of each other, I would think one ought to have a preference.

Now, are there bank who this will save? Yes. Are there bank for whom this is necessary? Yes. They ought to have access to it. But to in no uncertain terms should they threaten a bank (Wells Fargo) that just took the gov't off the hook for Wachovia (WB) with what, based on all accounts, was a AIG (AIG) action should their help be needed down to road, is wrong.

Let's not forget that that the people running the show in Washington (both parties) ran Fannie Mae (FNM) and Freddie Mac (FRE), both of whom are at the epicenter of this whole mess. I am hesitant to say they know what is best.

We keep hearing that the "world is flush with liquidity". So, if that is actually true, why hasn't it worked so far? It isn't a question of needing more. It is the fear of the unknown that is seizing markets. Giving banks more money does not eliminate these fears. What is does do is let them sit back more comfortably. Now, if your goal is to just allow them to feel good, then this will work.

But, if your goal is to have them go out and lend and take a certain level of risk, it won't. The current environment is too risk adverse. If you want that behavior, then you must reduce the fear of the unknown by removing as much if it as possible.

Then, the banks will begin to loan again...


Disclosure ("none" means no position):Long WFC, none
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Nassim Nicholas Taleb Vents....

"Black Swan" author Taleb has been trying for years to get people to listen...can't blame him from being frustrated. Folks still are not listening.



You must read his book:




Disclosure ("none" means no position):
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JP Morgan & Wells Fargo Defy Analysts

Both JP Morgan (JPM) and Wells Fargo (WFC) lapped earnings estimates this morning.

Here are the pre-earnings predictions


Wells Fargo Reported:
-- Strong business momentum continues:
-- Year-to-date revenue up 11 percent
-- Average loans up 15 percent from prior year and 13 percent (annualized) from prior quarter
-- Average earning assets up 15 percent from prior year and 13 percent (annualized) from prior quarter
-- Core deposits up 10 percent from September 30, 2007, and 30 percent (annualized) from June 30, 2008
-- Cross-sell of 6.3 for wholesale customers and a record 5.7 for retail bank households
-- Credit reserve build of $500 million ($0.10 per share), bringing allowance for credit losses to $8.0 billion
-- Previously announced impairment charges for investments in Fannie Mae, Freddie Mac and Lehman Brothers totaling $646 million ($0.13 per share)
-- Revenue up 5 percent from prior year despite impact of investment write-downs
-- Tier 1 capital of 8.58 percent, up from 8.24 percent in second quarter 2008

Regarding deposits:
“We saw a tremendous inflow of deposits in the latter part of the quarter, especially at the end of September reflecting what we believe is a significant flight to quality,” said Chief Financial Officer Howard Atkins. Core deposits increased $23.7 billion, or 30 percent (annualized), from June 30, 2008. Average core deposits of $320.1 billion increased $13.9 billion, or 5 percent, from a year ago and $1.7 billion, or 2 percent (annualized), linked quarter. Average mortgage escrow deposits were $21.2 billion, down $1.2 billion from third quarter 2007 and down $1.5 billion linked quarter. Average retail core deposits increased $13.2 billion, or 6 percent, from third quarter 2007 and increased $3.8 billion, or 7 percent (annualized), linked quarter. Average consumer checking accounts grew a net 6.1 percent from second quarter 2007, with 8 percent growth in California, the largest increase in net new checking accounts in California in almost four years. Wealth Management group average core deposits of $22.7 billion increased $7.7 billion, or 52 percent, from third quarter 2007.

JP Morgan Reported:
* Acquired Washington Mutual’s (WM) banking operations on September 25:
* Significantly strengthened consumer franchise, with more than 5,400 branches
* Results included estimated1 losses of $640 million (after-tax) for Washington Mutual merger-related items: $1.2 billion charge to conform loan loss reserves and a $581 million extraordinary gain
* Reported net markdowns of $3.6 billion due to mortgage-related positions and leveraged lending exposures in the Investment Bank
* Maintained #1 rankings for Global Investment Banking Fees and Global Debt, Equity & Equity-related volumes for the quarter and year to date
* Grew revenue by 16% and increased branch production at Retail Financial Services
* Achieved double-digit net income growth at both Commercial Banking and Treasury & Securities Services
* Reported the following significant after-tax items:
* $927 million benefit from reduced deferred tax liabilities
* $642 million loss on Fannie Mae and Freddie Mac preferred securities
* $248 million charge related to offer to repurchase auction-rate securities
* Increased credit reserves by $1.3 billion firmwide to $15.3 billion, resulting in loan loss allowance coverage of 3.18% for consumer businesses and 2.11% for wholesale businesses, before Washington Mutual
* Maintained strong Tier 1 Capital of $112 billion, or 8.9% (estimated); raised $11.5 billion of common equity during the quarter

Regarding Deposits:
# Checking accounts totaled 11.7 million, up 1.0 million, or 10%.
# Average total deposits grew to $210.2 billion, up $4.9 billion, or 2%.


Now, this goes back to my post yesterday on the TARP plan. Money is flowing into the surviving banks at an incredible rate. Those surviving all have strong Tier 1 ratios. The problem they all have is, growing loan losses. Growing loan losses will offset the effect of capital injection from the gov't. If you remove the bad loans, you get a double boost as incoming deposits are then augmented by loan loss reserves being decreased.

My concern and doubt is just how much this plan will actually increased lending. Until banks see loan losses ebb, the intended lending effect of the TARP plan will be muted at best.

Now, if Treasury follows this will the second tranche of the $700b being used for loan purchases, then you've got something as you both raise equity and lower loan losses.

Until details are unveiled, I am skeptical..

Now that does not mean these bank will not make money. On the contrary they are taking in deposits at rock bottom rates and still getting loan payments 4% to 5% higher. There are also fewer fish in the pond.

Morgan and Well will do just fine. Just don't expect the TARP plan to do wonders for the rest of the economy.

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