Prem Watsa Talks About Ben Graham (video)

Fairfax Financials (FFH) Watsa has gotten quite a bit of press lately. Here he is giving a talk at the Ben Graham Center for Value Investing.

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Roubini Still Pessimistic (video0

From Bloomberg Europe..

Part 1


Part 2






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Schiller: Crisis May Last "Years and Years" (video)

This is a good speech by Schiller and worth watching..

Part 1: Why is this a surprise and why did this happen?


Part 2: We thought "buying a house anywhere was a good investment"


Part 3: Solutions....



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GMO's Jeremy Grantham Investor's Letter Pt. 2

Part 2 is titled "Silver Linings and Lesson's Learned"

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GMO's Jeremy Grantham Investor Letter Pt. 1

The title of this part is "Reaping the Whirlwind".

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Friday's Links

Thank you, Ackman, CNN, Citi Field

- Thank you for the mention

- A good take on the General Growth Properties investment

- Why watching the MSM is no way to learn about the crisis..

- Not bad, $400 million of tax dollars to name the Mets new stadium...


Disclosure ("none" means no position):
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Fairholme's Bruce Berkowitz Press Conference

This is truly great stuff. Mr. Berkowitz talks about Lampert & Sears (SHLD), the current economy, the case for HMO's and defense companies and more. This is one of the best one of these I have ever heard.

Disclosure ("none" means no position):
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Charlie Brown Thanksgiving... (video)

Here is the full video..

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Borders and Pershing.....A Very Interesting Idea

Still have not listened to the earnings call yet but will get to it. Had to go pick up the 34lb. turkey for tomorrow. Anyway, had this great idea emailed to me today from JB..

"What would happen if Pershing Square guaranteed all of Borders (BGP) debt (maybe for a small fee). The stock would skyrocket wouldn't it? The reason the stock has been hammered in addition to the slowing consumer/macro environment is b/c of the heavy debt load. Eliminating a major concern should get the equity moving significantly. Keep in mind that all of BGP's debt is a credit facility with no restrictive covenants until they are 90% borrowed...Considering they have $518mm of an available $1,125mm outstanding it seems awfully flexible in this environment.

Why would Pershing square do this? Well I doubt that they believe that BGP will default on this debt and they would benefit from both a small fee on the guarantee as well as a significant appreciation in their equity holdings. It's not as if BGP management will stop managing the business prudently and they likely will continue to pull as much costs out of the business as possible and pay down debt on a continuing basis."

I can't poke a hole in this...anyone have any comments?


Disclosure ("none" means no position):Long BGP
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Citigroup CEO Vikrim Pandit on Charlie Rose (video)

Citi (C) CEO Pandit.....don't know. I do know this. I am glad I no longer own shares. Listening to him I just get the feeling this is not over yet..

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Tilson Talks About Berkshire's Derivative Selling (video)

Would still not be a buyer of Berkshire (BRK.A) here, i think it may go lower. That being said, the fear and sell off in the stock is ludicrous. Did Warren sell the put at the top of the market? Close...but it it does not matter. Listen to Tilson's explanation.

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Redundancy: Gate's Keeps Buying AutoNation Shares

Any guesses on when he stops buying? $$

After over a million shares last week, Gate's on Monday added another 300k shares through his Foundation and Cascade Investments

Gates now has 19.057 million shares




Disclosure ("none" means no position):Long AN
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GMO's Jeremy Grantham (video)

One of the hedge fund world's most successful managers talks and is now finally bullish on stocks.

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Sears...A Reader Submission.

Reader Justin submits: Why Sears (SHLD) is NOT going bankrupt?

In this volatile market, anyone can say anything to put downward pressure on a stock. In many cases deserved, in some cases absurd, and in the case of Sears a little of both.

Let’s start with the deserved part. Obviously, retail is doing terrible this year as an investment. However, the woes at Sears go beyond the macro environment. They have made bad decisions in some cases, suffered from management turnover, and communicated very little beyond what’s required by a public company. On top of that, they recently lost a well-respected, activist shareholder, Bill Ackman. Bill has taken an absolute beating on his investments in Sears, Target, and Borders, so he may have had about all the fun he can handle in retail. In short, it hasn’t been all that pretty, but the shares reflect much worse.

The absurd is the idea that Sears has some kind of solvency risk as some have floated. Why is this absurd? Here’s my case:

1. Last quarter Sears generated FCF (free cash flow) of over $400 million. Target, a “good” retailer actually had no FCF last quarter, they burned over $900million. In fact, Target hasn’t generated FCF in the last 3 quarters. Over the same time frame Sears generated a staggering $1.5 BILLION in FCF. So yes Sears is making money hand over fist in this environment even with mediocre execution.



2. Eddie Lampert’s investment fund ESL owns over 50% of Sears. And Sears makes up over ½ his fund. And his fund is still making investments in other equities. Now if you are thinking that ½ your fund may evaporate into insolvency or you are worried about investor redemptions then you preserve cash if not generate cash by selling positions. What you don’t do is make more investments, which is what he’s doing.



3. Sears announced the purchase of additional shares of Sears Canada in November. Why spend your cash on buybacks and now additional shares in Sears Canada if you are worried about your cash position?




4. I’ve been to several Sears and Kmarts in recent weeks and they are all hiring.



In conclusion, Sears is hiring people, buying shares in, generating FCF, and ESL continues to make investments. None of these indicate to me that there’s any solvency concern by the controlling shareholder.




Disclosure ("none" means no position):Justin is long SHLD
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Wednesday's Links

Home, Geithner, Geithner, Buffett,

- More folks eating here than ever before

- Not everyone likes the choice

- Others do

- More disclosure

-

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Bill Gates Still Gobbling Up Shares of AutoNation

This is over a million shares in a week. $$

After buying almost half a million shares last, Gates disclosed he added another added another 510K shares Friday through his foundation and Cascade Investments

The two entities now hold 18.757 million shares or 10.6% of the total.


Disclosure ("none" means no position):Long AN
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Photo of the Year...

From 1440 Wall St.

Go to 1440 Wall St.


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Borders Q3 Results

Have not had a chance to go through the numbers yet and want to wait until the conference call tomorrow but here is the news and some initial thoughts...

Borders Group, Inc. (NYSE: BGP) today reported results for the third quarter, ended Nov. 1, 2008. On an operating basis, the consolidated loss from continuing operations for the third quarter was essentially flat with the same period a year ago at $39.0 million or $0.64 per share, compared to $38.4 million or $0.65 per share in the third quarter of 2007. On a GAAP basis, the company reported a consolidated third quarter loss from continuing operations of $172.2 million or $2.85 per share compared to a year ago when it recorded a GAAP loss of $40.0 million or $0.68 per share from continuing operations. The GAAP basis loss includes non-cash, non-operating charges totaling $133.2 million in the third quarter, consisting primarily of deferred tax and fixed asset impairments. Comparable store sales for Borders superstores decreased by 12.8% in the third quarter, and with music excluded, declined by 10.6%. Same-store sales at Waldenbooks decreased by 7.7% for the period.

"Borders has successfully reduced debt, improved operating cash flow, lowered expenses, improved gross margin-excluding occupancy-and improved inventory productivity during a time of extreme economic challenge," said Borders Group Chief Executive Officer George Jones. "We stated at the beginning of this year that strengthening our balance sheet is our top priority and we are delivering results. We'll remain keenly focused on these critical initiatives, and in addition, will increase our efforts to drive further gross margin improvement. All of the changes we are making will position Borders Group to compete more effectively."

Debt, including the prior-year debt of discontinued operations, was reduced from a year ago by 34.2% or $273.1 million at the end of the third quarter to $525.4 million. This compares to debt of $798.5 million at the end of the third quarter last year. The debt reduction year-over-year was driven primarily by improved management of inventory, lower capital expenditures and proceeds from the previously announced sale of the company's Australia/New Zealand/Singapore businesses, which took place in the second quarter of this year.

Operating cash flow from continuing operations improved by $110.0 million, as the company recorded fiscal year-to-date cash flow of $9.4 million compared to cash use of $100.6 million for the same period in 2007. Borders Group reduced inventory by $304.2 million at cost-or 19.5%-at the end of the third quarter compared to the end of the third quarter a year ago.

Management is now on-track to reduce fiscal 2009 operating expenses by $140 million compared to its previous target of $120 million. As a result, the company expects to save $70 million this year versus its original $60 million target for 2008. Beyond these operating expense improvements, the company believes there is additional opportunity to improve its realized gross margin through a more effective use of promotions and discounts. Early initiatives enabled the company to generate gross margin rate improvement-excluding occupancy-of 30 basis points in the third quarter and the company believes there is substantial room for further improvement.

Strategic Alternatives Update

Management provided an update to its previously disclosed strategic alternatives process, which included the exploration of a wide range of options, among them the sale of the company and/or certain divisions, including Paperchase Products Ltd. With respect to the sale of the company, management is no longer contemplating a transaction. Regarding Paperchase, as previously disclosed, Borders Group retains its right to exercise its "put" option to sell its Paperchase business to Pershing Square Capital Management for $65 million and is also in discussions with Pershing Square regarding an alternative financing transaction. No assurance can be given as to whether an alternative financing transaction will be entered into or consummated.

Additional Consolidated Q3 Results

All earnings and loss figures presented throughout this news release are provided on a continuing operations basis, unless otherwise noted.

Borders Group achieved third quarter consolidated sales of $682.1 million, a decrease of 10.0% over 2007. Consolidated gross margin as a percent of sales on an operating basis decreased by 1.4% from 22.2% to 20.8% in the third quarter as the negative impact of de-leveraging occupancy costs more than offset the gross margin benefit of a favorable sales mix and lower shrink. Excluding occupancy, third-quarter consolidated gross margin increased by 30 basis points compared to the prior year. On a GAAP basis consolidated gross margin as a percent of sales decreased by 0.6% from 22.1% to 21.5% in the third quarter.

On an operating basis, SG&A as a percent of sales in the third quarter decreased 0.1% from 28.7% in the same period last year to 28.6% resulting from de-leveraging caused by negative sales trends that were offset by the benefit of expense reductions. The expense reduction initiatives helped reduce SG&A dollar expenses by $22.3 million in the third quarter compared to the prior year. On a GAAP basis SG&A as a percentage of sales increased 1.3% from 28.7% to 30.0%.

Non-Operating Adjustments

GAAP consolidated net loss and loss per share figures reported in this release include the impact of non-operating adjustments, which in the third quarter totaled a net after-tax charge of $133.2 million. The net after-tax charge is comprised of deferred tax asset impairments of $107.0 million, store asset impairments of $31.1 million, as well as other items totaling $12.6 million, including severance costs, store closure and relocation costs, professional fees related to the strategic alternatives process, an adjustment to the U.K. lease guarantee liability and amortization of debt issuance costs. These costs were offset by income related to the fair market value adjustment of the warrant liability and a related tax benefit of $12.7 million as well as income received from a landlord lease termination of $4.8 million after tax.

Domestic Borders Superstores

Total third quarter sales at domestic Borders superstores were $548.4 million, a decrease of 10.9% over the same period in 2007. As stated, comparable store sales decreased by 12.8% for the period compared to last year, a result significantly impacted by a steep decline in customer traffic that was most pronounced in the months of September and October. Excluding the music category, same-store sales declined by 10.6% for the third quarter compared to one year ago.

Sales through Borders.com in the third quarter totaled $11.9 million, which is below management expectations due to the challenging sales environment. As a result, Borders Group does not expect Borders.com to break even this year as previously stated.

On an operating basis, Borders superstores reported an operating loss of $37.8 million in the third quarter compared to an operating loss of $30.8 million in the same period a year ago. The loss resulted primarily from negative same-store sales, which were partially offset by expense reductions. On a GAAP basis, Borders superstores reported an operating loss of $80.3 million in the third quarter compared to an operating loss of $31.9 million in the same period a year ago.

The company opened two new Borders superstores in the U.S. during the period and ended the third quarter with a total of 519 domestic superstore locations.

Waldenbooks Specialty Retail

Comparable store sales decreased within the Waldenbooks Specialty Retail segment by 7.7% in the third quarter. Total sales in the segment were down by 16.6% in the third quarter to $91.5 million, as the number of stores was reduced from 521 at the close of the third quarter 2007 to 467 at the end of the third quarter this year.

Company expense reduction initiatives and better gross margin performance drove an improvement in the third quarter operating loss for the Waldenbooks Specialty Retail segment. On an operating basis, the operating loss was $13.2 million in the third quarter this year compared to $19.4 million in the third quarter last year. On a GAAP basis, the operating loss for the Waldenbooks Specialty Retail segment was $17.7 million in the third quarter this year compared to $20.5 million in the third quarter last year.

International

In the third quarter, sales within the International segment (which consists primarily of Paperchase) totaled $30.3 million, which is down 6.2% compared to the same period a year ago. Excluding the impact of foreign currency translation, sales would have increased by 2.7%. On an operating basis, the segment generated an operating loss of $1.6 million in the third quarter this year compared to operating income of $1.8 million in the third quarter last year. On a GAAP basis, the segment generated an operating loss of $1.8 million in the third quarter this year compared to operating income of $1.8 million in the third quarter last year.

Next Financial Release

Borders Group plans to issue holiday sales results in mid-January. Fourth quarter 2008 results will be issued March 19 after market close with a conference call for investors the following day, March 20, at 8 a.m.

So, where are we? First and foremost the #1 problem at Borders is its debt. That, is falling and has been steadily since the beginning of the year. Second was cash flow / expenses and those are also going in the right direction. Cash flow is up and Borders will exceed it stated cost saving by 17%.

One has to remember that these results are in the face of a dismal operating environment for all retailers. The really good news is that in spite of it all, they are still making progress on their goals. As a shareholder, if the macro environment is lousy one cannot expect management to pull a rabbit out of their hat but as long as they continue to progress on the stated path, progress is being made.

Two things stick out. Borders.com results fell below expectations and the mentioned "financing transaction" with Pershing. Both need to be listened to on the conference call tomorrow am. Off the top of my head Borders can put Paperchase to Pershing for $65 million but owes Ackman $45 million from the earlier in the year loan. Just guessing but I think they want to put Paperchase to Pershing and extend the repayment of the loan...just a guess.

More after the call tomorrow...


Disclosure ("none" means no position):Long BGP
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Jim Rogers on FBN (video)

Rogers is entertaining like him or not. I think hew does make some god point and do agree that the current TARP plans were not the best thing to so. I think Rogers has now completed the circuit ...no?

Part 1:


Part: 2



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Mark Faber: "Encourage Savings, Not Consumption"

Best line, "central banks have become asylums for economists that have gone insane". Second....."the global economy is imploding".

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Jim Rogers on "Night Talk" (video)

This is a nice, long interview with Rogers..the best one I have seen yet..

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Ackman Takes 12% Position in General Growth Properties

Now, is it just a coincidence with the Target (TGT) situation? Ackman now has a 12.5% total interest in General Growth Properties (GGP).

From the SEC Filing:
Item 5. Interest in Securities of the Issuer
(a), (b) Based upon the Issuer’s quarterly report on 9/30/08 10-Q, 268,314,510 Common Shares were outstanding as of November 10, 2008. Based on the foregoing, the Subject Shares represented approximately 7.5% of the Common Shares issued and outstanding as of such date.
Pershing Square, as the investment adviser to the Pershing Square Funds, may be deemed to have the shared power to vote or direct the vote of (and the shared power to dispose or direct the disposition of) the Subject Shares. As the general partner of Pershing Square, PS Management may be deemed to have the shared power to vote or to direct the vote of (and the shared power to dispose of or direct the disposition of) the Subject Shares. As the general partner of Pershing Square, L.P. and Pershing Square II, L.P., Pershing Square GP may be deemed to have the shared power to vote or to direct the vote of (and the shared power to dispose or direct the disposition of) the Common Shares held for the benefit of Pershing Square, L.P. and Pershing Square II, L.P. By virtue of William A. Ackman’s position as managing member of each of PS Management and Pershing Square GP, William A. Ackman may be deemed to have the shared power to vote or direct the vote of (and the shared power to dispose or direct the disposition of) the Subject Shares and, therefore, William A. Ackman may be deemed to be the beneficial owner of the Subject Shares for purposes of this Schedule 13D.
(c) Exhibit 99.2, which is incorporated by reference into this Item 5(c) as if restated in full herein, describes all of the transactions in Common Shares and Swaps that were effected during the past sixty days by the Reporting Persons for the benefit of the Pershing Square Funds.
(d) No other person is known to the Reporting Persons to have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the Common Shares covered by this Schedule 13D, except that dividends from, and proceeds from the sale of, the Common Shares held by the accounts managed by Pershing Square may be delivered to such accounts.
(e) Not applicable.
Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer
The Subject Shares are beneficially owned by the Reporting Persons. Furthermore, the Reporting Persons entered into Swaps for the benefit of Pershing Square, L.P. (the “PSLP Swaps”), Pershing Square II, L.P. (the “PSII Swaps”) and Pershing Square International, Ltd (the “PSIL Swaps”, collectively with the PSLP Swaps and PSII Swaps, the “Pershing Square Swaps”) on the dates described on Exhibit 99.2. The Pershing Square Swaps constitute economic exposure to approximately 12.5% notional outstanding Common Shares in the aggregate, have reference prices ranging from $0.49 to $0.70 and expire on the dates described on Exhibit 99.1.
Under the terms of the Pershing Square Swaps (i) the applicable Pershing Square Fund will be obligated to pay to the counterparty any negative price performance of the notional number of Common Shares subject to the applicable Pershing Square Swap as of the expiration date of such Swap, plus interest at the rates set forth in the applicable contracts, and (ii) the counterparty will be obligated to pay to the applicable Pershing Square Fund any positive price performance of the notional number of Common Shares subject to the applicable Pershing Square Swap as of the expiration date of the Swaps. With regard to certain of the Pershing Square Swaps, any dividends received by the counterparty on such notional Common Shares will be paid to the applicable Pershing Square Fund during the term of the Swap. With regard to the balance of the Pershing Square Swaps, any dividends received by the counterparty on such notional Common Shares during the term of the Swaps will be paid to the applicable Pershing Square Fund at maturity. All balances will be cash settled at the expiration date of the Swaps. The Pershing Square Funds’ third party counterparties for the Pershing Square Swaps include entities related to Citibank, Morgan Stanley and UBS.
The Pershing Square Swaps do not give the Reporting Persons direct or indirect voting, investment or dispositive control over any securities of the Issuer and do not require the counterparty thereto to acquire, hold, vote or dispose of any securities of the Issuer. Accordingly, the Reporting Persons disclaim any beneficial ownership of any Common Shares that may be referenced in such contracts or Common Shares or other securities or financial instruments that may be held from time to time by any counterparty to the contracts.
In addition to the agreements referenced above, the Reporting Persons from time to time, may enter into and dispose of additional cash-settled total return swaps or other similar derivative transactions with one or more counterparties that are based upon the value of Common Shares, which transactions could be significant in amount. The profit, loss and/or return on such additional contracts may be wholly or partially dependent on the market value of the Common Shares, relative value of the Common Shares in comparison to one or more other financial instruments, indexes or securities, a basket or group of securities in which the Common Shares may be included or a combination of any of the foregoing.


Full Filing

Now, General Growth Properties recently expressed doubts it could keep operating due to looming near-term debt.

The Chicago-based retail property company has $1.13 billion in debt coming due, including $900 million in secured mortgage debt due November 28 on two of its Las Vegas shopping centers and $58 million of corporate debt on December 1, the company said in a Securities and Exchange Commission filing.

It also faces another $3.07 billion due next year, according to the SEC filing.

"In the event that we are unable to extend or refinance our debt or obtain additional capital on a timely basis and on acceptable terms, we will be required to take further steps to acquire the funds necessary to satisfy our short term cash needs, including seeking legal protection from our creditors," the real estate investment trust said in the filing.

"Our potential inability to address our 2008 or 2009 debt maturities in a satisfactory fashion raises substantial doubts as to our ability to continue as a going concern."

Will Ackman provide some financing?

This is going to be good.....

If nothing else..the words Ford (F) or GM (GM) will not enter the vocabulary..


Disclosure ("none" means no position):None
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Starbucks: 2 Years of Missteps & An Overdue Admission.

Of course they slipped in an SEC filing and did not actually say it out loud. There have been few companies that I have covered that have been either as clueless as to their business environment or dishonest about it with shareholders than Starbucks (SBUX) had over the past almost two years now.

Back in Feb. 2007 the CEO Jim Donald claimed that McDonalds (MCD) then new entry into premium coffee would be a benefit to Starbucks as McDonalds' customers would then trade up to him. At the time I detailed to folly of this statement and said "I advise any potential new shareholders to avoid shares...". Shares at $34

Less than a month later then retire founder and former CEO Howard Schultz penned a memo saying, without naming, that "competition has created awareness" of themselves, the company had "got away from its roots" and that it was affecting results.

In May 2007 with milk prices soaring and flimsy earnings out I detailed how dairy price would hurt them despite the fact management denied it would affect earnings and CEO Donald said "we do not consider the competition" when asked about McDonalds. Um....can't really even add to that...Shares sit at $28

Only weeks later Starbucks switched from whole milk to 2% in all drinks for "customer service" reasons and at the time I said it was all about milk prices, then at decade highs..(2% is cheaper than whole)

Fast forward a month, Starbucks issues a profit warning and says "rising dairy costs are a challenge".....duh..

Then came the announcement of the near $6 salad. At the time I commented that for a company that Schultz had lamented had "got way from its roots" in his famous memo, nothing they had done since then was a return to them.

Then just in case you weren't convinced the ship wasn't drifting listlessly, in late July facing declining stores traffic and an increasingly cash strapped consumer Starbucks did what???? Raised prices...

Less than a week later Starbucks admits increased prices leads to less store visits by customers....yet they maintain price levels...

Finally in September Starbucks admits "dairy prices will be a negative into 2008"...Shares now priced at $27

In Jan 2008 Schultz finally did what I begged him to do for almost a year a fired Donald

In Feb. 2008 they admitted what I hope anyone who has read the blog already knew, the coming year would be a poor one. Shares priced at $18

In March things got weird. Starbucks decided that they were going to start a social site so folks who loves the place can go online and talk about it.....more of Schultz "going back to the roots" of the company?

In May we find out the fired CEO Jim Donald cannot work "for the competition"....McDonalds..but, we thought they weren't??

In July Starbucks started playing games with the earnings release to hide how bad results really were. Shares priced at $14

In August Schultz gave an interview in which he called the coffee at McDonalds and Dunkin Donuts "swill", said he won't "dilute the brand" by "going down the fast food road" and then does just that only days later with the "$2 after 2" promotion. Shares priced at $14

Current day. I have stopped following Starbucks as close as before because with the stock at $9 vs the $34 it was at when I told folks to run from it, I hope the story is clear for all to see. But, I could not let this one go by.


From the WSJ:

The filing to the Securities and Exchange Commission sheds light on how much of a threat new competition is to Starbucks, as McDonald's Corp. and other restaurants add espresso drinks and more elaborate beverages. In the filing, Starbucks says that, in the U.S., "the continued focus by one or more large competitors in the quick-service restaurant sector on selling high-quality specialty coffee beverages at a low cost has attracted Starbucks customers and could, if the numbers become large enough, adversely affect the company's sales and results of operations."

Not bad.....it took 22 months for them to either recognize or admit it......

Just terrible...




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

Shot, Massachusetts, Newt, NYT vs WSJ

- Ok, this is helpful?

- Not sure if this is good or bad, more folks need to get laid off in order for it to work, right?

- Ok..this is the guy that balanced the budget...not Clinton....we ought to listen to him..

- This is really big news...surprised about how little play it is getting


Disclosure ("none" means no position):
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Bill Gates Adds More AutoNation

Gates continues to up his stake in the nation's largest auto dealer. $$

Gates purchased another 244k shares for the Bill and Melinda Gates foundation, upping his stake in AutoNation (AN) to 8.5 million shares.

On the same day, Gates investment fund Cascade investments purchased 244k shares upping its stake to 9.66 million shares.

Gates now holds 10.3% of the outstanding shares



Disclosure ("none" means no position):Long AN
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Prince Alwaleed on Citi & Oil (video)

After I watched this I got the impression former Citi (C) CEO Chuck Prince ought to take the Kingdom off his vacation list..$$

Alwaleed has some very interesting things to say about Oil (USO) also


Disclosure ("none" means no position):none
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Target Decides To Let Stock Languish

Just do not understand this one...what are they thinking???

Press Release:
Target Corporation (NYSE:TGT) disclosed today that after a comprehensive evaluation of various real estate structure ideas proposed by Pershing Square over the past six months, it has decided not to pursue them further. Following a thorough review of the transaction outlined by Pershing Square by members of Target management, Board of Directors and outside advisors, including Goldman Sachs (GS), the company has concluded that the potential value created, if any, is highly speculative and insufficient to merit pursuit of a transaction given the costs, strategic and operating risks, and loss of financial flexibility related to executing the proposed transaction. These concerns are heightened in the current economic environment.

Analysis of the most recent Pershing Square idea revealed that concerns previously expressed by the company remain. These include:

* 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 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.

One additional earlier concern, relating to the adverse impact the company believed the proposed structure would have on Target’s debt ratings, borrowing costs and liquidity, has been partially addressed in the current version of Pershing Square’s proposal, though we believe meaningful risk remains.

“Target has a strong record of engagement and open dialogue with shareholders over many years and we respect the spirit with which Pershing Square’s real estate ideas were presented,” said Gregg Steinhafel, president and chief executive officer of Target Corporation. “We gave these ideas a full and complete review, including numerous meetings between Pershing Square and Target senior executives and a meeting between Bill Ackman, the Managing Member of Pershing Square, and several members of Target’s Board. Target does not share Pershing Square’s perspective that execution of this proposed transaction will generate measurable shareholder value over time and believes the risks, particularly in light of the serious challenges facing our retail and credit card segments in 2008 and 2009, are significant. Both our Board and executive team remain firmly committed to generating value for our shareholders and expect to achieve this objective over the next 3 to 5 years through our continued, thoughtful focus on our current strategy and core business operations.”

So, let's review. Here is Ackman's proposal:



Let's address Targets concerns:

- Market Value: Ackman specifically gives a range of potential values in the presentation based on what current retailers / REIT's are selling for today. To imply these are wrong is not logical. The market values them at what they value them at, it isn't wrong.

- Flexibility: This is why Ackman recommended to a partial 20% IPO of the REIT. This would allow management gauge how it is valued by the market and still allow management the financial flexibility having an 80% owned REIT subsidiary comes with. It also, as a REIT increases the flexibility of Target to buy real estate from current landholders

- Frictional costs and operational risks: Can anyone tell me what that means? What operational risk? You are your REIT's sole tenant. The only "risk" is if you decide not to pay yourself rent. As far as frictional costs, this is just irrelevant. If you are going to monetize a currently worthless asset (in the market's view), then of course there will be costs involved but they will be dwarfed by the asset's new value.

- Focus: Can't walk and chew gum? This borders on absurd. You are creating a REIT with one tenant, yourself. Lock the lawyers in a room for a week, let them draw up the paperwork and sign it at lunch one day. Tell me how the fashion departments purchasing manager's job will be affect by the REIT plan. Please anyone tell me what I am missing..

Here is the sentence every current shareholder ought to pay very close attention to. "Both our Board and executive team remain firmly committed to generating value for our shareholders and expect to achieve this objective over the next 3 to 5 years....". Basically, the next 2-3 years are dead money.

Think about it. When do you expect a meaningful turnaround in the macro environment. 1 year? 2? If it takes two years, Target will not turn ahead of it. If anything, one could argue Target may take longer as any ground they made on Wal-Mart (WMT) the previous 4 years was wiped out and then some in the last one.

Target is viewed as a pricey store. True or not is irrelevant. Perception is reality. Just ask Citi's (C) CEO Pandit. It takes a ton of advertising to change the perception of a retailer and in a recession and dreadful retail environment, the cash to do that is limited.

Ackman's plan allows shareholder to profit in the short run from the REIT spin and then profit down the road when retail turns around. Win win.

Target management ought to know....Ackman is not going away. Why? He is right and has more invested in the company than they do. He was right with McDonalds (MCD) when it spun Chipotle (CMG) (it should be noted that the CFO of McDonald's at the time just joined Pershing).

Mr. Ackman will take time and come out guns blazing after the new year....

Disclosure ("none" means no position):Long WMT, MCD, none
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Dow Chemical EVP Buys Shares

Dow Chemical (DOW) EVP Heinz Haller purchased another 10k shares Friday.

Haller now own over 96k shares directly. This is the fifth insider purchase in the last few weeks as execs have spent pver $1.2 million buying shares on the open market.



FULL FILING

($dow)


Disclosure ("none" means no position):Long Dow
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Fed and Treasury Comment on Citi Bailout ($c)

The term sheet is included here also...

The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital.

As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program.

With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.

We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:

* We will work to support a healthy resumption of credit flows to households and businesses.
* We will exercise prudent stewardship of taxpayer resources.
* We will carefully circumscribe the involvement of government in the financial sector.
* We will bolster the efforts of financial institutions to attract private capital.

Here is the term sheet for the Citi (C) deal..






This means that JP Morgan (JPM), Wells Fargo (WFC) and USB (USB) are essentially the only large investment grade banks left..



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Wilbur Ross on Tim Geithner

Ross likes Obama'a pick for Treasury..

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

Pacman, BUD, Imports, Admit

- Why? we all know how this story ends...

- Nice work George!!

- They are not selling either

- This is a good list

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Is "Hyper-Inflation" Ahead Of Us?

Blindly printing money in order to stop deflation might just lead us into a period on "hyper-inflation".

Part 1:The Fed's balance sheet "look like a Central American Central Bank's"


Part 2:The current crisis is a direct result of the near 0% interest rates of 2002-2003


Part 3:On "mark to market". Removing it is essentially "price controls"



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Pat Dorsey and Morningstar on Berkshire (video)

Pat Dorsey who wrote the great book "The Little Book that Builds Wealth" and his take on Berkshire Hathaway (BRK.A) and its current sell off.

\\




Disclosure ("none" means no position):None
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Behold: The "Erin Burnett Rally Monkey" $$

Thank you to reader Vlado for this.......an instant classic..

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Bill Gates Ups Stake in AutoNation to 10% ($an)

55.00002% of the outstanding shares are now held by Gates, Eddie Lampert and Todd Sullivan. :)

Microsoft Chairman Bill Gates has taken a 10% stake in car retailer AutoNation Inc., according to a regulatory filing Friday.

Gates' investment firm, Cascade Investment LLC, owns 9.4 million shares, or 5.3 percent, and the Bill and Melinda Gates Foundation Trust holds 8.3 million shares, or 4.7 percent, according to the filing with the Securities and Exchange Commission.

In July, Gates disclosed a 5.5 percent stake in AutoNation, also through Cascade and his foundation trust, which together at the time held 9.9 million shares.

AutoNation's largest shareholder is billionaire investor Edward S. Lampert who disclosed last week that his entities control about 45% company's outstanding stock.


Disclosure ("none" means no position):Long AN
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Warren Buffett on TARP, Autos, Jobs, Paulson etc.. (video)

Berkshire's (BRK.A) Warren buffett sits down with Fox Biz...

Part 1:The Market & Paulson


Part 2:Economy and Jobs & Goldman Sachs (GS)


Part 3:Auto Industry: "the model must change"


Part 4:More on Paulson




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Lazard Likes Ackman's Plan for Target ($tgt)

Bill Ackman's plan for Target (TGT) is getting good reviews out there..

Here is the Lazard Research Piece:


Here is Ackman's latest proposal





Disclosure ("none" means no position):None
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Marc Faber: "Strong Rebound Next Three Months" (video)

The "Gloom,Boom and Doom Report" editor says we are "oversold" in almost all areas...

Part 1: Very good value in corporate bond market


Part 2:



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Lee Scott Steps Down

After a very rough start, Wal-Mart (WMT) CEO Lee Scott is stepping down with his retailer again "the place to shop"...

Back in May of 2007 I said it was time for Scott to go. I said rather than concentrating on growth, he ought to cut back growth, buyback shares and invest in current locations. Less than a month later Wal-Mart announced they were cutting back expansion plans and planned a $15 billion share repurchase plan.

No, I do not think they were listening to me but it does show Scott was nimble enough to turn the tide of two decades of breakneck growth plans and change the company's focus. For that he ought to get kudos...

It wasn't too long ago we were hearing about how Target (TGT) was displacing Wal-Mart as the top retailer.......haven't heard that for a while now..

Don't think we will be either...


Disclosure ("none" means no position):Long WMT, TGT
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Why Can't Bank Execs See in The Mirror?

Recent complaints by Citi's (C) Pandit and Bank of America's (BAC) Lewis can only leave investors head shaking..

Today Vikrim Pandit said that "rumor mongering" was at the heart of the company's stock slide and yesterday called in Gov't officials to re-instate the short sale ban. It should be noted that this was tried earlier this fall, and , well, stocks fell anyway. Not sure what Pandit hopes to accomplish here. He also said the bank has plenty of liquidity and will not break itself up.

I can believe #1 but still do not understand #2 at this point. There has to be assets that can be sold to raise equity. They have $2 trillion of them. Something must be able to let go...

Now, watch Ken Lewis in Chicago Thusday..


Lewis blamed "lax regulation" for much of the problems today. Was he forced to loan money? Was he forced to pay billions for Countrywide (CFC) when he could have just stood still and watched it go into bankruptcy? Was he forced to overpay for Merrill Lynch? He bought it and paid what he did for "before someone else bought it". Now, if we listen to what Lewis said above, then his reasoning behind buying it then was flawed. If that model can no longer survive, then had he waited, he could have bought it far cheaper and no, Ken, no one else wanted it.

Ever notice how little we hear from Kovacevich at Wells Fargo (WFC) and Dimon at JP Morgan (JPM)? It seem the only time we hear from them are when Dimon is bailing out another institution or Kovacevich is complaining about being force fed TARP funds he does not want.

Whining about short sellers has never entered into the conversation.

Lewis and Pandit are seeing their company's in the positions they are in due to poor decisions. Lewis has no one to blame but himself with very poor acquisitions recently. Both the businesses he bought and the prices he paid should have never been attempted. Pandit can blame the mess he inherited on former CEO Chuck Prince but cannot excuse the near year of inaction he has since held rein over.

Don't invest in companies who blame other for the stock and performance slide...

Disclosure ("none" means no position):Long WFC, none
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Berkshire & Fairfax Buy Convertibles in USG ($usg)

Berkshire Hathaway (BRK.A) and Fairfax Financial (FFH) are investing in USG (USG) convertibles.

USG Corporation (USG) , a leading building products company, reported today that it has entered into an agreement to sell a total of $400 million of 10 percent contingent convertible senior notes due 2018, $300 million to Berkshire Hathaway Inc. and $100 million to Fairfax Financial Holdings Limited. The notes will initially bear interest at a rate of 10 percent per annum. In accordance with New York Stock Exchange rules, USG will seek shareholder approval to allow conversion of the notes into shares of USG common stock. Assuming an affirmative vote of USG's shareholders, the notes will become convertible into shares of USG common stock at a conversion price of $11.40 per share. If shareholder approval is not obtained prior to the 135th day after closing of the sale of the notes, the notes will bear interest at 20 percent per annum until after shareholder approval is obtained.
Berkshire Hathaway and Fairfax have agreed to vote all shares of the corporation's common stock controlled by their affiliates over which they have voting control in favor of the proposal to permit conversion of the notes.

Completion of the sale of the notes is subject to customary closing conditions and is expected to occur within the next several business days.
"We are gratified by the expression of confidence in USG Corporation by two premier financial institutions," said USG Corporation Chairman and CEO William C. Foote. "We consider these substantial investments by Berkshire Hathaway and Fairfax as validation of our business strategy and the company's long-term prospects. This transaction provides USG with long-term capital that significantly improves our financial flexibility as we manage through the steep recession in our primary markets."

USG intends to use the proceeds from the sale of the notes for general corporate purposes, including a partial repayment of the amounts outstanding under its unsecured credit agreement.

The company intends to hold a special shareholders meeting in the first quarter of 2009 to seek shareholder approval to allow conversion of the notes.
"We have taken numerous actions over the last 2 1/2 years to stay ahead of a declining market and optimize both our operations and our finances," said Foote. "We know that one of the keys to future success is maintaining sufficient financial flexibility to manage through this downturn. The proceeds of the sale of the convertible notes significantly strengthen our capital position and greatly enhance our ability to navigate through this recession and position the company for an eventual market rebound."

The notes will not be and have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. This press release does not constitute an offer to sell or the solicitation of an offer to buy, nor will there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state, and is issued pursuant to Rule 135c under the Securities Act of 1933.




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

Thank you...

- A thank you for the mention and a recommendation. For those who do not read Abnormal Returns daily....do so. It is one of the, if not the best blog/msm daily linkfest out there.


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Warren Buffett on Market Fluctuation & Is Berkshire A "Value" Now?

Every investor ought to be forced to read Berkshire's (BRK.A) Buffett at least once a week..

From 1997

A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To begin with, our owners are automatically saving even if they spend every dime they personally earn: Berkshire "saves" for them by retaining all earnings, thereafter using these savings to purchase businesses and securities. Clearly, the more cheaply we make these buys, the more profitable our owners' indirect savings program will be.

Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today's repurchases, made at loftier prices.

At the end of every year, about 97% of Berkshire's shares are held by the same investors who owned them at the start of the year. That makes them savers. They should therefore rejoice when markets decline and allow both us and our investees to deploy funds more advantageously.

So smile when you read a headline that says "Investors lose as market falls." Edit it in your mind to "Disinvestors lose as market falls -- but investors gain." Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: "Every putt makes someone happy.")

We gained enormously from the low prices placed on many equities and businesses in the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to those taking up permanent residence. In recent years, the actions we took in those decades have been validated, but we have found few new opportunities. In its role as a corporate "saver," Berkshire continually looks for ways to sensibly deploy capital, but it may be some time before we find opportunities that get us truly excited.

On another note, In March of this year I claimes that Berkshire shares proiced at $133,000 a share were no bargain. Then in July I said "priced at $111,000 a share, more downside is in store".

Today we sit at $81,000 a share, a 39% drop from March and 27% since July alone. Now at 2003 price levels, Berkshire looks enticing. The current environment reminds me of when I first bought Berkshire shares late in 1999 (I sold them in 2003 for a 63% gain, don't cheer, I sold before another 60% would have been realized)). Buffett then was being called "out of touch" and Berkshire shares had taken a beating as folks rushed into tech stocks.

Flash forward to today and Berkshire's situation is similar. Buffett is being questioned about investments in GE (GE) and Goldman Sachs (GS) and the market is pricing the risk of default by Berkshire higher on a daily basis. Currently the market thinks Berkshire has a higher default risk on its debt than Allstate (ALL), defying all rational thought.

Buy? Well, not so fast. It all comes down to insurance for Berkshire. We know the operating businesses will not improve during a recession. Will insurance? The operating environment will stop sliding but probably not turn. There are less homes to insure, less autos and those that are being insured are being done for for lower values. Both those add up to lower insurance results and lower earnings for a while.

I still think there is more downside to shares, maybe another 10% to 20%. We'll see....If I see that, I will be buying...


Disclosure ("none" means no position):Long GE, GS, none
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Fed Minutes: No Growth in 2009: Good? Bad?

A whole lot of reading to get to the meat 2/3 of the way through and some thoughts at the end...

From the Release

In the forecast prepared for the meeting, the staff lowered its projection for economic activity in the second half of 2008 as well as in 2009 and 2010. Real GDP appeared to have declined in the third quarter, and the few available indicators that reflected conditions following the intensification of the financial market turmoil in mid-September pointed to another decline in the fourth quarter. The declines in stock-market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to hinder household spending over the near term. Business expenditures also probably would be held back by a weaker sales outlook and tighter credit conditions. The staff expected that real GDP would continue to contract somewhat in the first half of 2009 and then rise in the second half, with the result that real GDP would be about unchanged for the year. Although futures markets pointed to a lower trajectory for oil prices than at the time of the September meeting, real activity was expected to be restrained by further contraction in residential investment, reduced household wealth, continued tight credit conditions, and a deterioration of foreign economic performance. In 2010, real GDP growth was expected to pick up to near the rate of potential growth, as the restraints on household and business spending from the financial market tensions were anticipated to begin to ease and the contraction in the housing market to come to an end. With growth below its potential rate for an extended period, the unemployment rate was expected to rise significantly through early 2010. The staff reduced its forecast for both core and overall PCE inflation, as the disinflationary effects of the receding cost pressures of energy, materials, and import prices and of resource slack were expected to be greater than at the time of the September FOMC meeting. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010.

OK. So, if any of us has paid any attention to anything Nassim Taleb has said recently or read his book "Black Swan" (if you haven't, do it), then we know any prediction past the next three months is essentially worthless. Great, so why the post then and why does that matter?

The prediction of negative GDP for the next 9 months then growth in the second half of 2009 will create a pessimistic environment. People will believe what the Fed predicts will happen. That is good for those thinking of buying stocks now.

A bad investing mood will expect bad news for the next 9 months. If the news is indeed bad, much or the downside from that news ought to be incorporated into stock prices, as Ben Graham would say "Mr. Market is depressed". Bad news will be looked at in a "we expected that" prism. Equity prices reflect for the most part that future pessimism. Note...this does not mean we have bottomed by any means, just that current equity prices reflect the pessimism of the investing public in the future.

Any news that comes out that is good, will have surprise value. "What if things are not going to be that bad" Mr. Market will think. "If things are not that bad, prices are really cheap" he will lament to himself. He may buy a little and should more good news come out, he may rush into buying stocks causing prices to surge.

The point is, with the Dow (.DJI) at 8000, a recession and negative growth expected for the next 9 months, Ford (F) and GM (GM) teetering and banks desperate for cash, there isn't much else that could happen that could really "shock" investors save a terrorist attack or another War breaking out. Another bank failure? Seen it. Bigger bailout? Yawn.

On the other hand, any good news of any kind would not be expected and could cause prices to rise...fast...

The point is that either is just as likely to happen based on the inability of economic predictions to be very accurate as we extend the time frame. If the Fed is right, we are there already with expectations. If they are wrong, current buyers could be very well rewarded.

PS. Please note the time frame....9 months. Let's not expect this to turn by Christmas and be crushed if it doesn't. Patience...


FULL MINUTES

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Thursday's Links

"Media Malpractice", Rather, Eaton, TARP

- Like i said.....the media

- Does this just reek of hypocrisy or what?

-

- Who doesn't have their hand out?



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Lampert Picks Up More AutoNation ($an)

Over a million shares of AutoNation (AN) the last 4 trading days.

In a new SEC filing Sears Holdings (SHLD) Chairman Eddie Lampert purchased just over 750k shares of AutoNation at an average price of $6.20 a share.

He now holds over 79.4 million shares or 44.9% of the total.

He now has over 50% of Sears, an almost 50% of both AutoNation and AutoZone (AZO).

There is something there.....I just feel it...


FULL FILING



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Ackman's Latest Target Proposal (video) ($tgt)

This is a video of today's presentation from Pershing Square's Bill Ackman's updated presentation that addresses Target's (TGT) concerns.

Disclosure ("none" means no position):None
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Sears Holdings Ups Stake in Sears Canada ($shld)

I just do not have a problem with Lampert shrinking the share base...Look at the billion spent by other retailers in the current environment. What has it got them? Nothing..

Sears Holdings Corporation
(Nasdaq: SHLD) announced today that its wholly-owned subsidiary SHLD
Acquisition Corp. acquired on November 11, 2008, 326,700 common shares of
Sears Canada Inc. on the Toronto Stock Exchange ("TSX") at an average price of
C$16.37 per share. This acquisition represents 0.3% of the outstanding shares
of Sears Canada. Taking into account this acquisition, other purchases made
on the TSX and other published markets and the prior holdings of Sears
Holdings and its affiliates, Sears Holdings now beneficially owns and controls
77,683,290 common shares, representing approximately 72.2% of the outstanding
shares of Sears Canada.
The purchases were made to increase Sears Holdings' interest in Sears
Canada. Sears Holdings may in the future acquire additional common shares of
Sears Canada depending upon a number of factors including, among others,
general market and economic conditions and prices and volumes of shares
available for sale. In addition, purchases of Sears Canada common shares may
be made pursuant to an automatic share purchase plan that is currently in
effect.


Full release




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Roubini: Commodities Have More Downside ($dbc)

I have been getting a bunch of email lately about commodities. This was emailed to me today..

From Roubini's RGE Monitor

Today we turn our attention to commodities, which have been badly battered by the global financial crisis, deleveraging and a worsening economic outlook, with commodity indices having lost 50% of their value since the July peak. With the G10 in recession and many emerging economies slowing sharply, further demand destruction is likely, and it may continue to outpace production cuts. Once the price adjustment filters through to producers, they may account for another source of slower aggregate output.

Despite the steep price declines so far, commodities as a group have only fallen halfway to their 2001-02 trough, meaning they may have farther to fall. Among individual commodities, those that grew the most expensive in the shortest period of time have suffered the sharpest and fastest price drops. In fact, some investors are pricing in a temporary drop in the price of oil below $30 per barrel, far below marginal production costs.

Metals and energy led recent declines, after breaching nominal and inflation-adjusted highs earlier this year. Agricultural commodities took smaller hits as their price climbs were not as excessive – their peak prices this year remained 2-3x below their inflation-adjusted highs in the 1970s. Only newsprint has yielded positive returns this year as of November but its resilience seems unsustainable in the medium-term. Across the commodities group, inventory buildup and falling demand creates conditions ripe for a continuing current bear market despite the fact that some commodities, such as oil, seem to have fallen below production costs.

WTI crude oil futures have fallen from a peak of $147/barrel in mid July to around $55/barrel, well below the 2007 average price. U.S. government data suggest that demand for oil products is about 6-7% lower than last year, with the sharpest declines in jet fuel. Despite the fact that gas prices are now hovering at $2 a gallon and energy costs fell 18% nationwide in October, demand continues to fall. Forecasts from the EIA and OPEC suggest that 2009 might mark make the largest contraction in oil demand in decades, despite the recent price correction. EM oil demand will be insufficient to offset growing declines in the OECD countries. For now, financial market trends and macro fundamentals might point in the same direction, towards weaker energy prices.

Yet, output cuts are reducing supply, removing the surplus reached earlier this year, even as OPEC’s surplus capacity increases. Non-OPEC supplies continue to disappoint. Oil production has declined in Russia, the North Sea and Mexico while new production in Kazakhstan and Brazil has yet to come on stream. In the short-term, it might take a major supply shock - say one that cuts off Iran’s oil supply or major output from the GCC - to really boost prices. The Somali pirate hijacking of a Saudi tanker might raise transport costs as insurance premiums rise and routings increase, and reminds observers of the energy supply chain’s vulnerabilities, but it may not have a major affect on oil market fundamentals. OPEC’s willingness to comply with current (and future?) production cuts may be the most significant supply side factor. Yet the elevated cost of new oil supplies may lead to future supply crunches. Canada’s oil sands are woefully expensive at today’s prices and projects are being deferred if not canceled.

Lower global energy demand, in the face of increasing supply, is also affecting current and expected natural gas prices. EIA has noted that the Henry Hub natural gas spot price projection for 2009 has fallen from $8.17 per Mcf to $6.82. The front month contract price of natural gas on NYMEX has steadily declined and the futures curve has sloped downward. Demand for alternative energy tends to move inversely to fossil fuel prices, so the deep cuts in oil and coal prices could pose a headwind for alternative energy, unless counteracted by climate change mandates. Fortunately for producers, falling grain prices will help relieve the profit margin squeeze, even if the credit crunch impairs borrowing for expansion.

Oil (USO) was insane at $147 and may fall to equally insane levels on the lower end. Long term, the trend is definitely higher, but when it happens is another story. I think the food commodities will rally first as the demand for them will not fall nearly as much due to a global recession. Wheat, corn, soy beans should all continue to rise as demand does. Folks do not stop eating in a recession.

My feeling is the way to play this is the DBC (DBC). The DBC seeks to reflect the performance of the Deutsche Bank Liquid Commodity index. The fund will pursue its investment objective by investing in a portfolio of exchange-traded futures on the commodities comprising the index, or the index commodities. The index commodities are light, sweet crude oil, heating oil, aluminum, gold, corn and wheat.

I like it because all the components of the index are high demand items. I do not see how demand for any of them drops significantly for a prolonged time. That being said, supply of all is somewhat limited. There is only so much oil and land to grow corn and wheat. That bodes well for the fundamentals of it going forward.

Would I buy it now? Not yet. I think early next year might be the time to do it. There is a glut of items now and it will take time for production cuts to take the slack out of the system. That means short term price decreases..

Long terms the story stands....short term...not so much..

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

CNBC on bold, Starbucks, Layaway, UAW

- This is cool

- Just lower the prices and stop the gimmicks

- It's back

- They ought to give up what management does

Disclosure ("none" means no position):
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Deflation....We Could Use Some...

Back in October I wrote about what I thought was a positives of a deflationary period. Here is an article that does a nice job on it.

First, my post

Doug French Writes:

There is now world-wide worrying about price deflation again. After all, real estate prices have sunk, stock prices have hit the ditch, the price of oil has the sheiks concerned, and even Las Vegas hotel room rates have plunged. Sounds like all good news for those of us who buy things, at the same time being a bit of a bummer for heavily indebted sellers.

But Ex-Federal Reserve governor Rick Mishkin told an early morning CNBC audience that "inflation could be too low." On the same program, James K. Galbraith, who teaches economics at the Lyndon Baines Johnson School at the University of Texas at Austin, chimed in that there has been "a huge deflationary shock" to the economy, and of course the government needs to step in and stabilize the markets and bail out businesses.

"The Fed did not allow the money base to expand, and we had a panic in the liquid markets," supply-side guru Arthur Laffer told a Las Vegas audience last week, "which caused this financial panic, pure and simple."

Across the pond, Ambrose Evans-Pritchard, writing for the Telegraph, warns "Abandon all hope once you enter deflation." Fine wines and white truffles have dropped in price and these price drops could "spread through the broader economy, lodging like a virus in the British and global monetary systems."

"The curse of deflation is that it increases the burden of debts," frets Evans-Pritchard, who goes on to contend: "Deflation has other insidious traits. It causes shoppers to hold back. They wait for lower prices. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop."

Yes, the current economics brain trust is worried that consumers will collectively show the good sense to delay purchases, pay down debt and increase their savings. After all, this liquidation of malinvestments will likely take awhile. The prudent thing to do in times of uncertainty is not to ramp up debt and spend money you don’t have.

But now all of a sudden saving is a dirty word. According to Evans-Pritchard, "It [savings] also redistributes wealth – the wrong way. Savings appreciate, which is nice for the ‘rentiers’ with capital. The effect is a large transfer of income from working people with mortgages to bondholders."

Of course sounder thinking economists don’t see deflation as evil, as Jörg Guido Hülsmann points out in his just published Deflation & Liberty, "it fulfills the very important social function of cleansing the economy and the body politic from all sorts of parasites that have thrived on the previous inflation."

And although Hülsmann’s definition of deflation is the proper one: a reduction in the quantity of base money, while what the main-stream blathers on about is a drop in prices, the point remains: "There is absolutely no reason to be concerned about the economic effects of deflation – unless one equates the welfare of the nation with the welfare of its false elites," explains Hülsmann.

But to say governments and their friends are concerned about deflation is an understatement. Professor Peter Spencer from York University says the Bank of England has learned many hard lessons since its founding in 1694. And with no gold standard to get in the way, that central bank is "cutting rates very fast, and if necessary they too will to turn to the helicopters," referring to Milton Friedman’s (or Ben Bernanke’s) idea that governments are capable of dropping bundles of banknotes from helicopters to stop deflation.

This printing of money "will keep the [deflation] wolf from the door," according to Professor Spencer. But creating more money doesn’t create more goods and services. There is no wolf at society’s door. "From the standpoint of the commonly shared interests of all members of society, the quantity of money is irrelevant," Hülsmann makes clear. And if the over indebted and the over lent go bankrupt, that’s fine. The fact is, these liquidations have no effect on the real wealth of a nation, and as Hülsmann stresses, "they do not prevent the successful continuation of production."

Meanwhile the Bernanke Fed has gone on an unprecedented growth spurt, more than doubling its balance sheet – out of thin air – in an attempt to bail out the financial community. Formerly the asset side of the American central bank’s balance sheet was Treasury securities with a dash of gold. Now the Fed, despite being double the size, has fewer Treasury securities, with the rest being the toxic securities that has buckled the big Wall Street banks. It’s as if Bernanke is channeling John Law, the architect of France’s Mississippi Bubble back in 1720. Law couldn’t keep his bubble inflated and neither will Bernanke and his fellow central bankers.

While central bankers furiously try to re-inflate, cheered on by the mainstream financial media, monetary authorities should deflate the money supply, pulling in their horns like consumers are doing. Deflation is a "great liberating force," writes Hülsmann, "because it destroys the economic basis of the social engineers, spin doctors, and brain washers."

Original Post

Doug French is executive vice president of the Ludwig von Mises Institute and associate editor for Liberty Watch Magazine.


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Paulson Doing What Paulson Should Have

I wish Hank had done what John is...

Let's be upfront. I wish the Treasury in its TARP program had bought loans and not provided liquidity to banks. I said before and still feel that giving them more cash will not increase lending.

Onward:
From the FT:

John Paulson, the hedge fund manager who was called before Congress last week to discuss the big profits he made by foreseeing the collapse of the subprime mortgage market, has started to buy securities backed by residential mortgages.

Mr Paulson's move marks the latest example of a famously bearish investor shifting gears to profit from depressed prices in the global credit markets.

US residential mortgage securities fell in value last week after Hank Paulson, Treasury secret-ary, said that the federal government had decided against buying toxic assets as part of its $700bn (£466bn) troubled asset relief programme (Tarp).

John Paulson, who is not related to the Treasury secretary, has told his investors that he started buying troubled mortgage-backed securities at the end of last week, hoping to capitalise on price falls that followed the Treasury announcement.

Mr Paulson, who has $36bn under management, was scheduled to hold a dinner and wine-tasting at New York's Metropolitan Club last night so that he could brief his investors on his plans.

According to Alpha Magazine, Mr Paulson made $3.7bn in 2007, reflecting the success of his strategy - begun in 2006 - of betting on a collapse of the subprime mortgage market. At the end of the third quarter of this year, his funds were up 15-25 per cent. His funds also made profits in October, his investors say.

For several months Mr Paulson has been considering investing in distressed subprime mortgage securities, financial firms and debt used to back private equity deals.

He estimated there are $10,000bn in total in such assets.

This is what the treasury should be doing. The original idea, the buy debt, the one Berkshre's (BRK.A) offered to participate in was the way to go. Still is.

Until the bad loans are off the banks books, lending will not pick back up.



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Being Wrong for 5 Years Makes You Right Now?

Here is my problem with the praise being heaped on Peter Schiff. Watch the following video.

Here is Schiff in 2007


Great right? No.

The problem? Here is Schiff in 2002: Schiff predicts Nasdaq 500 and Dow 4000


Now, had you listened to Peter in 2002, 2003, 2004, 2005, 2006 or even 3/4 of 2007, you lost your shirt. Had you placed bets based on Schiff's market calls, you lost everything you wagered.

The S&P (.INX) went from 1054 in May of 2002 (the date of the interview) to 1561 in Oct. 2007, a 48% gain and the Dow (.DJI) rose 40%.

Banking stocks, the primary victim of the housing bust, JP Morgan (JPM) up 36%, Bank of America (BAC) up 41%, Wells Fargo (WFC) up 39% , Wachovia (WB) up 31% and American Express (AXP) was up 51% during that time frame (dividends excluded which would dramatically add to results).

Bottom line? Had you listen to Mr. Schiff at anytime before Oct. 2007 you lost...big. To those who did, there is little consolation in the praise being heaped on him today.

Milton Freidman said "markets can stay dislocated longer than you can stay solvent".
For those who bet with Schiff between 2002-2007, they know the statement well.

Why is it a big deal? After all, Berkshire's (BRK.A) Warren Buffett claims he cannot time the market and often watches share prices decline in investments(like recent investments in Goldman Sachs (GS) and GE(GE)) before a rebound. How is this any different?

For one, Warren's loss is limited to his investment. He buys 1 share of stock "a" at $25. $25 is the most he can lose.

Now, if we listen to Peter and "short" stock "a" at 25, our loss has no limit. If it goes to $100, we lose $75. In shorting, we are only limited in our upside. If "a" goes to zero, "Schiffers" profit $25.

Buffett's strategy is an investing one and Schiff's is a trading and timing one.

Buffett followers can hold their shares, collect their dividend and wait for the rebound. Schiff followers collect no dividend and watched for over 5 years as their bet went wrong. How many stuck around? How many shorted into every market drop or "presumed" top over 5 years only repeatedly lose money as the market kept rising and Schiff kept pounding his message home.?

Schiff should not be getting the praise the is getting today for being "so right" after saying the same thing and being "so wrong" for the previous 5 years.


Disclosure ("none" means no position):Long GS, GE, WFC, none
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Tuesday's Links

Read vs Watch, Dominos, Steelers, Wii

- Happy folks read, unhappy watch tv

- Order from your TV

- Selling the Steelers to do business with degenerates.....sad

- Got mine for the kids


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Lampert Picks Up More AutoNation ($an)

From the timing department. Both myself and several readers have been buying shares the last few day

Eddie Lampert, through his ESL Holdings picked up another 230k shares at the end of last week, adding to his earlier .



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Phillip Morris Issues $1.25 Billion in Notes

What credit crunch?

From Phillip Morris International's (PM) SEC Filing:

On November 17, 2008, Philip Morris International Inc. (the “Company”) issued $1,250,000,000 aggregate principal amount of its 6.875% Notes due 2014 (the “Notes”). The Notes were issued pursuant to an Indenture (the “Indenture”), dated as of April 25, 2008, by and between the Company and HSBC Bank USA, National Association, as trustee (the “Trustee”).

In connection with the issuance of the Notes, on November 12, 2008, the Company entered into a Terms Agreement (the “Terms Agreement”) with Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and Goldman, Sachs & Co., as representatives of the several underwriters named therein (the “Underwriters”), pursuant to which the Company agreed to issue and sell the Notes to the Underwriters. The provisions of an Underwriting Agreement, dated as of April 25, 2008 (the “Underwriting Agreement”), are incorporated by reference in the Terms Agreement.

The Company has filed with the Securities and Exchange Commission a Prospectus, dated April 25, 2008, and a Prospectus Supplement (the “Prospectus Supplement”), dated November 12, 2008 (Registration No. 333-150449), in connection with the public offering of the Notes.

The Notes are subject to certain customary covenants, including limitations on the Company’s ability, with significant exceptions, to incur debt secured by liens and engage in sale and leaseback transactions. The Company may redeem all, but not part, of the Notes upon the occurrence of specified tax events as described in the Prospectus Supplement.

Interest on the Notes is payable semiannually on March 17 and September 17, commencing March 17, 2009, to holders of record on the preceding March 2 or September 2, as the case may be. Interest on the Notes will be computed on the basis of a 360-day year consisting of twelve 30-day months. The Notes will mature on March 17, 2014.

The Notes will be the Company’s senior unsecured obligations and will rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness.

For a complete description of the terms and conditions of the Underwriting Agreement, the Terms Agreement and the Notes, please refer to such agreements and the form of Notes, each of which is incorporated herein by reference and attached to this report as Exhibits 1.1, 1.2 and 4.1, respectively.

The big deal here is the rate, 6.8%. In this environment that is fantastic. It also speaks volumes about the balance sheet of the company. Bigger still is the fact the notes are unsecured.



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Merry Christmas, Your're Fired: Jerry Yang

If this is true, not only is he a truly incompetent CEO, he is also just an awful person..

Silicon Alley Insider Reports:

Yahoo (YHOO) will drop the axe on December 10, Kara Swisher says, smack in the middle of the holidays (earlier, Jerry said Thanksgiving).

The company is still reportedly planning to can about 1,500 Yahoos. A cut of that size would only roll the company's workforce back to Q2 levels, and, in our opinion, it would leave Yahoo in a position where it might have to make further cuts next year. This is not the way to set the company up for a clean, fresh start.

In better news, Yahoo and AOL are reportedly far apart on price in their merger negotiations: AOL's at $6 billion, Yahoo's at $3 billion. Given how little interest either side has in doing this deal, it would almost certainly be a disaster if they did it, so better to just let it go. (If Yahoo can get AOL for $3-$4 billion, however, it should take it).

So, with shares at $10, does the $33 a share offer from Microsoft (MSFT) seem so insulting now? I already documented some firsthand information about the mental state of Yahoo employees as they have watch Jerry wash their saving away in some bizarre line in the sand stand, now they have the specter of wondering if they are the ones to go before the Holidays. Nice work Jerry.

Carl Icahn and several other investors who owned shares during the Microsoft talks all have said the same thing. Upper management and the Board at Yahoo are by far the worst bunch out there. It is hard to argue this is anything but a willing destruction of shareholder value or delusional thinking...too close to call.

Every piece of subsequent news to come out since then has only reinforced that...


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The Fed Is A Trader?

What id the Fed was not an "interest rate trader"?

I was reading the following article at the CATO Institute

The incoming administration must think about that possibility because the timing of boom and bust cycles seems to be shortening. The next bust could come five or six years from now -- or about in the middle of an Obama second term. Should that happen, Mr. Obama would be unable to blame Republicans for the mess and would be tagged as the second coming of Jimmy Charter.

To avoid such a fate, Mr. Obama needs to stop the next asset bubble from being inflated by imposing a commodity standard on the Fed. A commodity standard (such as a gold standard) imposes discipline on a central bank because it forces it to acquire commodity reserves in order to increase the money supply. Today the government can inflate asset bubbles without paying a cost for it because the currency isn't linked to the price of a commodity.

With a commodity standard in place, the government would also have price signals that would alert it to the formation of a bubble. Why? Because the price of the commodity would be continuously traded in spot and futures markets. Excessive easing by the Fed would be signaled by rising prices for the commodity. In recent years, Fed officials have claimed that they cannot know when an asset bubble is developing. With a commodity standard in place, it would be clear to anyone watching spot markets whether a bubble is forming. What's more, if Fed officials ignored price signals, outflows of commodity reserves would force them to act against the bubble.

The point is not to deflate asset bubbles, but to avoid them in the first place. Imposing a commodity standard is a practical response to the repeated failures of central banks to maintain sound money and financial stability. What would be impractical is to believe that the next time central banks will get it right on their own.

It got me to thinking...

So, isn't the Fed essentially a trader now? Just about once a month (assuming no inter-meeting action) they make a "trade" on interest rates (raise, lower, hold) based on the current information. The decisions they then make set the country on an economic course.

But, what if the time frame is just too short between meetings? We know based on all evidence the shorter the time frame we make between a decision the more likely that decision is going to be flawed. Yes, I know the Fed is filled with a bunch of smart folks with PH.D's but history also tells us the number of letters following a name has no correlation to the ability to avoid making spectacular mistakes, only the ability to explain them away after (Mr. Greenspan?).

What if the Fed was only allowed to meet and make rate decisions quarterly? Berkshire's (BRK.A) Warren Buffett has famously said that if an investor was only allowed to make ten investing decision in their lifetime, he was confident the overwhelming number of them would make far better decisions and be successful. One could say that perhaps because investors now know the Fed can almost be bullied into making inter-meeting decisions, they create the conditions needed to force it.

If that ability was taken away, then would we see less volatility? I'm becoming convinced the huge volatility we have seen for the past decade and the increasing activity of the Fed during that time span not totally correlated. It is a chicken vs egg scenario. Is the Fed activity a reaction to events, OR, are the events a reaction to Fed activity? I am leaning towards the latter.

Why are we to believe that the Fed making an almost monthly interest rate decision is any better for the economy that if they were only allowed to do it quarterly? It would place far less emphasis on "today's" news. It would also lengthen the myopic focus of the market of what the Fed will do next week.

This is especially true when most of the actions from the Fed have no real effect on the economy for many months down the road. This means the Fed is then making another decision without any actual evidence whether or not the first decision was the correct one. Actually, they then make SEVERAL more decisions without knowing if #1 was correct.

We then have the scenario where the investing public in mass starts speculating on the effect of all the current decisions on the economy will be. Again, all this happens with no empirical evidence of whether or not any of the decisions were correct or not. That leads to a mass mentality and the boom/bust cycles we seem to be jumping in and out of.

I'm not sure a commodity peg would solve the problem either, but I'm pretty sure no one can make "long term decisions" on a monthly basis without any quantifiable feedback...

I do think we need to make some changes though as the booms and busts differ, but Fed activism remains the same..


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Ackman Discusses Sears Sale

From Pershing's Q3 letter.

The reason for the post is I have gotten many email over the past few weeks asking "should I sell my Sears". I have have said no, and it appears that Ackman agrees based on what was said above.

I sale reason was interesting. At the Value Investing Congress I attended at Ackman's press briefing he said in a question regarding Sears (SHLD) and any potential activism on his part, "I think when we invest in a company with a controlling shareholder it is their activism we are dependent on".

In short, Ackman has decided he does not want to invest in situations in which he is powerless to enact the change he wants in the time frame he wants it. Notice he did not say they were bad investments, just that he essentially did not want to NOT be the activist.


Disclosure ("none" means no position):Long SHLD
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Pershings Q3 Letter

From Bill Ackman..

Pershing Square Q3 2008 Investor Letter

Get your own at Scribd or explore others: Business pershing square capi william ackman

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Jim Rogers: "We are all Doomed" (video)

Not actually Mr. Rogers' quote but the unmistakable tone of the interview.

Part 1: Will again short the dollar & this recession will be the worst since second World War.


Part 2: Obama will "tax capital" and "protect workers" and both have proven by history to be disasters.


Part 3: China, "selling China in 2208 is like selling the US in 1908"


Part 4:Bernanke and Paulson have not let the market work and are making the crisis worse...The current commodity sell0off has been a forced liquidation and prices are going much higher.





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Monday's Links

Not gone, Goldman, Gas, Vitaliy

- Bigger than 9/11?

- No bonus

- Still dropping

- In Barrons....congrats


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Hedge Fund Managers Congressional Testimony (video)

Simmons, Soros, Falcone, Paulson, Griffin....Congress looks really bad here. They are asking basic tax questions of the Hedgies...Ought they know the answers?

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The End of Free Markets? (video

3 economists weight in..

Australian economist Mark Thirlwell


James K. Gailbraith


Robert Reich







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ESL's Eddie Lampert Files 13-F

Some new holdings.......

New:
Fannie Mae (FNM)= 34 million shares
Capital One (COF)= 9.3 million shares
The Hartford (HIG)= 550k shares



Full filing


The Capital One holdings were files in an Amended 13-F later


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Jim Grant on Ben Graham (video)

This is a classic.....thanks to reader John who emailed me the link. This is Jim Grant on Berkshire's (BRK.A) Warren Buffett's mentor.

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DOJ On The Side of Bills Fans

After knowing InBev wanted to buy Budweiser (BUD) for half a year now, the Dept. of Justice struck a blow to keep beer prices down at Bills and Sabres games.

From the release:

The Department of Justice announced today that it will require InBev N.V./S.A. to divest subsidiary Labatt USA, along with a license to brew, market, promote and sell Labatt brand beer for consumption in the United States, in order to proceed with InBev's $52 billion acquisition of Anheuser-Busch Companies Inc. The Department said that the transaction, as originally proposed, would likely have led to higher prices for beer in the Buffalo, Rochester and Syracuse, N.Y., metropolitan areas.

The Department's Antitrust Division filed a civil antitrust lawsuit today in U.S. District Court in Washington, D.C., to block the proposed transaction. At the same time, the Department filed a proposed settlement that, if approved by the court, would resolve the lawsuit and the Department's competitive concerns.

According to the complaint, Anheuser-Busch's Budweiser brands, including Budweiser and Bud Light, and InBev's Labatt brands, including Labatt Blue and Labatt Blue Light, are the two biggest selling beer brand families in Buffalo, Rochester and Syracuse. The original transaction would have eliminated competition between Labatt USA and Anheuser-Busch and resulted in higher prices to beer drinkers in those metropolitan areas.

Under the terms of the proposed settlement, InBev must sell Labatt USA and grant a license to the acquirer to brew and sell Labatt brand beer for consumption throughout the United States. The Department's Antitrust Division must approve the purchaser of Labatt USA to ensure that the sale will restore the competition for beer sales in Buffalo, Rochester and Syracuse that existed before InBev purchased Anheuser-Busch.

"This divestiture will ensure that consumers will continue to benefit from the significant competition between the merging companies in upstate New York," said Deborah A. Garza, Deputy Assistant Attorney General of the Antitrust Division.

In the large majority of markets in the United States, InBev accounts for less than two percent of beer sales and engages in very little competition with Anheuser-Busch. In contrast, sales of InBev's Labatt beer brands in Buffalo, Rochester and Syracuse account for a significant portion of beer sales. The Department concluded that in those markets, the elimination of the competition between InBev and Anheuser-Busch would have resulted in higher prices for consumers. The proposed settlement will allow the purchaser of Labatt USA to sell the Labatt brands throughout the United States.

It the little things the government does that make you all warm and fuzzy towards it...


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Paulson & Co. Files 13F

Arbitrage is the name of the game here...

Paulson & Co. added $1.8 billion of Budweiser (BUD), $1.4 billion of Rohm & Haas (ROH) and sold all of old Yahoo (YHOO).

Unlike most other funds reporting this week, Pauslon saw a 40% increase in holdings from $5 billion to $7 billion in value while the number of issue held stayed the same (22 to 23).


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Assured Guarantee Buys FSA From Dexia

Another coup for a Wilbur Ross investment.

The WSJ Reports

Bond insurer Assured Guaranty Ltd.(AGO) on Friday struck a $722 million deal to acquire rival Financial Securities Assurance Holdings from French-Belgian lender Dexia.

Dexia, which has struggled amid the credit crunch, will receive $361 million and 44.6 million shares in stock, giving the company a 25% stake in Assured Guaranty.

While Assured Guaranty will assume $730 million of FSA debt, the insurer won't get the toxic assets contained in FSA's asset-management business. Those will be guaranteed by the French and Belgian governments and wind down.

Assured Guaranty and FSA have remained the only AAA-rated U.S. bond insurers, as others around them have suffered amid the slumping value of structured investments such as collateralized debt obligations.

The purchase is subject, among other things, to the three major U.S. credit raters saying the takeover won't hurt either company's financial strength ratings. Moody's Investors Service and Fitch Ratings have been reviewing FSA for possible downgrade.

Assured Guaranty will sell stock to raise capital for the cash portion of the deal and has a back-up financing commitment from distressed-asset investor WL Ross & Co., which would purchase newly issued shares. The company has about 91 million shares outstanding.

Assured Guaranty has been able to thrive in recent months as rivals suffered amid reduced credit ratings. It has become a big player in municipal-debt insurance, with its market share climbing to 44% of insured activity in the direct new-issue U.S. public finance market last month. That compares with 1.1% a year earlier, according to Thomson Reuters.

When this mess is all over, one can make the argument that Berkshire Hathaway (BRK.A) and Ross's Assured will be the sole AAA rated bond insurers out there. Without competition from the Ambacs (ABK) and MBIA'a (MBI) of the world, the price they will receive for their services will rise as they pick and choose the deal they want and get the terms they want.

Bond insurance will again be a god business...for smart people..

Disclosure ("none" means no position):None
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GM / F Videopaloza ($gm) , ($f)

Paulson on the subject:


Bill Ackman:


Steven Roach comments on it:


Bay City, Michigan Mayor


GM (GM), Ford (F) and Chrysler heads groveling before Congress


Another analyst:


Some guy named Dave in his bedroom:




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Baupost Group Holdings Drop $300 Million

Just files 13HR..

From the quarter ending June to the quarter ending Sept, Seth Klarman's Baupost Group stock holdings drop from $1.9 billion to $1.6 billion.

The number of issues held fell from 69 in June to 52 in September.

Of course there is no word whether or not this was redemption based or valuation based selling.

He did add to his position in News Corp. (NWS) buy 30%. He also did large scale selling in both Wellpoint (WLP) and United Health (UNH).

In this market it is hard to tell why anyone is doing anything. Note...there is no notice as to the level of cash holdings, this is not indicative of performance, just the value of stock holdings.

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Kynikos Associate's Jim Chanos (video)

Famed short seller Jim Chanos was on CNBC yesterday. Here are the clips. The next big short opportunity he thinks is health care service companies as he thinks their margins are going to come under pressure.

Part 1


Part 2


Part 3



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Jim Grant on the TARP and US Automakers

Grant is just awesome. This is good stuff

Tarp:



Grant and Dennis Gartman on US Automakers


Here is Grant's upcoming book


My review of it is here.


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Friday's Links

1987, Sprint, NFL, The Decade, MSNBC

- The Crash in video

- Loses another 1 million subs

- Vets win one in court

- How bad has it been?

- Journalism at it finest....no wonder nobody watches it

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Lampert Buys More AutoNation

Wondered when this was going to happen

Eddie Lampert and his ESL Investors hedge fund picked up another 520k share of AutoNation (AN) @$5.96 a share this week.

Lampert now holds over 79 million shares




Disclosure ("none" means no position):Long AN
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Pershing Square's Bill Ackman Files 13F

Some real surprises here

Here is the filing

Added:
AIG (AIG)= 32 million shares plus call options on 400k shares
Target (TGT)= # of shares owned stayed the same but call options went from 12,000 to 2 million shares
MasterCard (MA)= 469k shares
Visa (V)= 2.69 million shares


Sold:
Sears Holdings (SHLD)= From 6.7 million to 500k shares
Wendy's (WEN)- From 130 million to 55 million shares


Barnes & Noble (BKS) & Borders Group (BGP) holdings stayed the same

Disclosure ("none" means no position):Long BGP, SHLD, none
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GE's Dividend: Immelt Cannot Be Silent ($ge)

Here is how it is done. "This CEO will never cut the dividend" Dow Chemical (DOW) CEO Andrew Liveris after Q3 results were released.

Rather than Immelt saying anything, GE released the following today:
* GE has paid a dividend each quarter for more than 100 years.
* On Sept. 25, GE stated that its Board of Directors had approved management’s plan to maintain GE’s quarterly dividend of $0.31 per share, totaling $1.24 per share annually, through the end of 2009. That plan is unchanged.
* GE expects cash flow to be greater than the amount needed to fund the dividend in 2009.
* GE has taken a number of steps to strengthen its liquidity plan, including participation in the U.S. Government’s Commercial Paper Funding Facility (CPFF) and FDIC’s Temporary Loan Guarantee Program (TLGP). Both of these government programs provide additional levels of security for our investors, strengthen our ability to support the planned dividend in 2009, and do not place any restrictions on our dividend policy.


Yeah, we know all that. I want to hear it out of Immelt's mouth. He needs to stand up in front of investors (not literally) and declare the dividend safe.

Until he does, doubts will remain..


PS. Nice job on the stock purchase Mr. Immelt

Disclosure ("none" means no position):Long GE, Dow
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Citi: Really? ($c)

This is hard to believe when you read it.

The WSJ Reports

The board of Citigroup Inc (C). is growing increasingly dissatisfied with the financial giant's performance, and some directors are considering replacing Sir Win Bischoff as chairman, according to people familiar with the matter.

One leading candidate is Richard Parsons, Time Warner Inc.'s (TWX) chairman and a member of Citigroup's board. Mr. Parsons ran a New York thrift in the early 1990s and is one of the few Citigroup directors with experience in financial services. He also is part of President-elect Barack Obama's transition economic-advisory board.

Richard Parsons had spent a career in banking and was CEO of Dime Savings Bank of New York when he was named president of Time Warner in 1994, a move that caught many people by surprise. Mr. Parsons is credited with stabilizing the company, mediating between fractious divisions and reorganizing top management. In 2003, the board unanimously elected him to the additional post of chairman, which he continued to hold after stepping down as CEO in 2007. Mr. Parsons said in May he was likely to resign as chairman in 2009.

The possible replacement of Sir Win comes as the New York company's board is adopting an increasingly assertive stance toward overseeing Chief Executive Officer Vikram Pandit and his tightknit team of executives. Those executives took power last December after Citigroup's previous CEO, Charles Prince, stepped down amid mounting losses. Some directors have grown concerned that Sir Win, who is based in London, hasn't been exercising adequate oversight.

It isn't clear how many of Citigroup's directors are agitating for the change, and it's possible that the board will opt to stick with its current chairman.

"I'm not sure it will happen, but it seems likely" that Sir Win will be replaced, said one person familiar with the situation.

Sir Win, who has dual British and German citizenship, was traveling in the Middle East on Wednesday and wasn't immediately available to comment.

Sir Win Bischoff was head of Citigroup's European operations and little known outside the company when he was appointed interim CEO in November 2007. To the surprise of many who expected his leadership to be temporary, Sir Win was named chairman a month later when Vikram S. Pandit became CEO. Sir Win had no hands-on capital-markets trading experience, but had cleaned up after huge losses before, advising the British government on the rescue of Barings PLC after trading losses in 1995.

"Any report that the board is searching for a new chairman is false," a Citigroup spokeswoman said Wednesday evening.

So, Bischoff is being ousted because of lack of "oversight"? Now, his replacement might be Mr. Parsons? This is the same Mr. Parson who sat there when Citi became the largest holder of mortgage assets in the world. The same Mt. Parson who defended ex CEO Chuck Prince to the very end.

This has to be a joke. You cannot under any circumstances replace the new buy for "lack of oversight" with an old guy who has been there even longer and oversaw the behavior that practically ruined the bank. It just cannot happen.

Not only should Mr. Parsons not be named new Chairman, he and the other members current board ought to be allowed to "pursue other opportunities". They are the ones who oversaw the virtual destruction of the bank, they are to blame.


Disclosure ("none" means no position):Long C, none
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Dow Chemical's Energy Plan for America ($dow)

This cover the gamut of solution and the best part is it is easily implementable.

See it here (pdf)


Disclosure ("none" means no position):Long Dow
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Baupost Group Q3 Letter

A Seth Klarman classic...

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TARP Application

Just got this emailed to me....

So here is the official application for the TARP Plan (pdf).

Six pages long. If I wasn't fairly convinced I would be arrested for applying, I would do it just to see what would happen (approved or denied). I am also fairly convinced there is someone out there who will.

I can't wait to find out what happens.



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Thursday's Links

Some hysterical "Banter"

- Starbucks

- iPhone

- DHL

- Gas

Disclosure ("none" means no position):
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Book Review: "Billion Dollar Lessons"

This is another recommended read...

Here is the boilerplate stuff:
"Paul Carroll (Big Blues) and Chunka Mui (Unleashing the Killer App) collaborate to perform an autopsy on some of the most spectacular business failures and corporate disasters in recent times, hunting down the fatal strategies responsible. The authors examine more than 750 inexcusable corporate collapses, neatly cataloguing them into eight common failure patterns: doomed practices, including the Illusion of Synergies, as illustrated by the ruinous merger attempts by Sears and Dean Witter; Faulty Financial Engineering, as conducted by Tyco and Revco; Staying the (Misguided) Course Too Long, a sin committed by Kodak, which missed the boat on digital photography; and Consolidation Blues, as depicted by U.S. Airways, which crashed as a consequence of buying up too many companies too quickly. While there are assuredly lessons in defeat and the authors' detailed analysis and bracing honesty is welcome, readers hoping for a more encouraging or inspirational business book might find Carroll and Mui's avalanche of disastrous failures, avoidable bankruptcies and destruction of shareholder value a depressing—if highly instructive—read."

My two cents:
I thought the book was excellent. You won't find a blueprint to avoid business failure, but, you will find, if you learn the lessons in the book, what red flags to look for. Bottom line, most mergers do not work out as well as proposed.

Some main reasons:
1- Consolidations: If two businesses are struggling and merge to make a "stronger company", most often the results is a larger struggling company.
2- Synergies: Back office synergies rarely develop. The reason? Folks there are smart enough to know if they do, someone is losing a job. It is in their best interest for them NOT to work.
3- Rollups: Buying many smaller businesses in an industry does not result in the market dominance the buyer assume it will.

Now those are the basics. But if we know this, why do these mistakes happen? It comes down to management not playing devils advocate with itself. They begin to only see the information they want to see to affirm the outcome they want, the merger is a good idea. Conflicting information is given less weight or completely ignored as "irrelevant".

The book is timely given the current environment we are in. Every recession leads to consolidation in industries and there are the inevitable successes and spectacular failures. Reading this book will help you hopefully look at any proposed action by a company you own shares in differently. Now, you will not be able to stop the action, but, if you see the red flags, you can exit your position without suffering what ends up being in some cases, total losses.

For that reason alone, the book is one you should read.

Here is the book:




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Julian Robertson (video)

"I look for a long tough period for the American people"...Just great..

Robertson recommends:
Google (GOOG)
Baidu (BIDU)
Visa (V)
MasterCard (MA)






Disclosure ("none" means no position):None
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Bill Ackman on Charlie Rose 11/11 (video)

Great line..."the gov't owns 35% of every corporations income and 40% of every wealthy individual through taxes and that is quite an off balance sheet asset".

Ackman goes into details on credit default swaps (CDS), hedge funds, ratings agencies, and bond insurers.

Other quotes:

"Up until recently the world was a world that believed" (in ratings)

"Regulators deferred to credit ratings agencies"

"This is the single best time in my career to invest, the spread between value and price is the widest it has been"





Disclosure ("none" means no position):
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Tilson's T2 Files 13F

Just filed

Tilson's Fund reduced holdings in:
American Express (AXP)
Sears Holdings (SHLD)
Borders (BGP)
Barnes and Noble (BKS)- position closed
Starbucks (SBUX)- position closed
Target (TGT)

He added to or initiated:
Berkshire Hathaway (BRK.B)
Echostar (DISH)
Delias (DLIA)
Anheuser Busch (BUD)
Research in Motion (RIMM)
Chesapeake Energy (CHK)


The total value of T2's holding has gone from $112 million in July to $132 million as of today's filing.

Note, this does not indicate performance, simply the amount of dollars invested in the securities listed..


Disclosure ("none" means no position):Long SHLD, BGP, none
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Sears Holdings Short Interest Falls ($shld)

Short interest in Sears Holdings (SHLD) now sits are the lowest level in almost a year.

Here is the chart:


Perhaps even the shorts are able to do the math? It does not make sense that while retail results fall, so does the short interest, unless, unless that is the shorts recognize it would not take much buying to have "Volkwagon Event".

Disclosure ("none" means no position):Long SHLD
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Dow Chemical CEO Liveris Buys Shares ($dow)

From a just released SEC filing

Dow Chemical (DOW) CEO Andrew Liveris is leading the parade of company insiders buying shares on the open market in the past few weeks.

Liveris bought 20,000 shares at $23 a share spending over $400k in doing so. That also means insider purchases have topped the $1 million dollar mark.

Liveris now owns over 367k share directly.

FULL RELEASE

So, we have insiders buying shares, Berkshire (BRK.A) and Buffett investing $3 billion in the company, a 7.6% yield that Liveris has stated "will not be cut" and an upcoming acquisition of Rohm & Haas (ROH) that will transform the earnings profile of the company.

What are you waiting for?

Disclosure ("none" means no position):Long Dow
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Amex "Taps the TARP": This Isn't The AmEx Buffett Bought ($axp)

No, it's not a dirty movie....it does leave one feeling a bit soiled though..

The investing thesis behind American Express (AXP) has always been that it has a higher quality of creditor (creditee?) and thus its defaults will be lower than the typical credit card issuer. Unlike Visa (V) and Mastercard (MA) who issue their cards through banks and collect a "toll" each time the card is used, Amex holds the credit balances and is essentially it own bank. This has enabled Amex in good times to earn a high return on equity as it collect the interest payments that go to the banks from the other card issuers.

All that seems to have changed.

It seems, being hit by slowing consumer spending and rising defaults, AmEx is seeking roughly $3.5 billion from the TARP program.

It isn't clear if the application under the Troubled Asset Relief Program (TARP) came before or after AmEx got Federal Reserve approval Monday to become a bank-holding company.

Why? Even the most affluent AmEx customers are cutting back on discretionary purchases, the company has acknowledged. A spending slowdown is particularly problematic for AmEx because its business model revolves around consumers who pull out plastic for their purchases.

That alone would not cause the problem. What would?

Delinquencies and defaults on credit cards are rising. Meanwhile, the company is virtually locked out of credit markets because investors who buy consumer loans are sitting on the sidelines.

All this is causing a liquidity problem. Again, like other institutions, not a solvency issue, but a liquidity one. It ia also the reason we are hearing stories about AmEx card holders with no credit problems getting credit limits decreased. AmEx is trying to decreased it liabilities.

Not good news for shareholders for two reasons. The decrease in consumer spending reduces the "toll" AmEx get when a customer uses it card. The credit limit decreases they are placing on customers now further reduces that effect and reduces interest AmEx wil earn on outstanding balances. When you add this to the increasing defaults, you have a trouble stew.

This is not the "salad oil" fiasco that hit Amex when Berkshire's (BRK.A) Warren Buffett bought a huge chunk of the company in the late 1970's. This is a fundamental change to the company's structure and the way it does business. The AmEx model back then was to essentially "front" customers money who would then pay it back a month later in full. Now Amex on almost all card extends payment terms and has branched out into business lending. Now, more than ever it is exposed to the consumer and his or her credit condition, not just their current spending patterns.

Previously if you did not pay your AmEx bill each month it was shut off. Now, consumers can continue to rack up debt to their limits while making minimum payments until they are tapped out. In this case, the monetary default risk for AmEx is far higher. This is causing increasing credit losses for AmEx. The old thought that "AmEx is less sensitive to a recession" has never really been tested. The last real recession we had in the US was the 1990 one (the 2000 "recession was a pothole). AmEx then was not nearly as exposed to the consumers credit condition as it is now. Only now are we going to be able to test the thesis. Based on early results, it was wrong.

It also means the old investing thesis need to be rethought as it has now become less valid.

This is not the same AmEx Buffett bought....



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

Global warming?, 401K, Thank you,

- What happened?

- Bye, Bye 401K Tax Break?

- thank you for the mention


Disclosure ("none" means no position):
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Why I'm Not a "Trader"

Check out Dennis Gartman, a well respected trader's "rules" . By all accounts Gartman is very, very good at what he does.

DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING


1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!

2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.

3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.

4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.

5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.

6. “Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.

7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.

8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.

9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.

10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here!

11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, “When they are cryin’, you should be buyin’! And when they are yellin’, you should be sellin’!”

12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.

13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow… usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.

14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year… and our profits grow accordingly.

15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a “secret” to trading (and of life), this is it.

16. All Rules Are Meant To Be Broken…. but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.

I think to be a trader you have to be wired that way, period. I'm smart enough to know I'm not. My rules are easier.

1- Buy stuff cheap
2- Sell it when its expensive


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The Crash of 1929 (video)

This is a fantastic video. It is 54 minutes long but worth every second..

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Bruce Geenwald on Where Value Is Today

U.S.News & World Report
Bruce Greenwald on Value Investing
Friday November 7, 11:43 am ET
By Kirk Shinkle

Bruce Greenwald, who holds the Robert Heilbrunn Professorship of Finance and Asset Management at Columbia Business School, is coeditor of the forthcoming sixth edition of the value investing classic Graham and Dodd's Security Analysis (McGraw Hill).

After watching stocks plummet this year, he's sizing up the opportunities seen through the lens of value greats like Warren Buffett who perceive a rare chance to start buying on the cheap. Excerpts:

What's the current environment like for a value guy?

I'll tell you the one really nice reason to be a value investor: When things like this happen, you cannot help but go nuts at the opportunity. What this looks like is the end of 1974, where good stocks are selling at three times sustainable earnings and stocks that normally wouldn't have sold at less than 20 times earnings are selling at 10 times earnings. These are exciting times. The short-term issue is that in the near term there will be a painful macroeconomic environment and we don't know how long it will last.

What should investors eyeing cheap stocks watch out for?

The craziest thing to do is take recent earnings and add a multiple to it. There are a lot of stocks, like steel companies, that have very high recent earnings and trade at only four to five times earnings. They look like a 20 percent return stock, but those earnings won't be sustainable. If you look at steel companies five years ago before this huge capacity run-up, their earnings were about a third to a quarter of what they are now. You have to stay away from those kinds of enthusiasms--things that look cheap on the basis of peak earnings. You're looking for [stocks] that are protected by assets.

How should you approach earnings predictions?

What you don't want to do is use unmoderated price-to-earnings. Never look at current or even recent earning, especially in areas like oil companies where we know they are inflated and coming down. Typically, what a value investor will do first is get a sustainable earnings number, an average PE over a business cycle. You really have to go back 10-12 years to get a feel for what average margins typically look like in these businesses. That's what you use for earnings. The second thing, when you look at a PE, you're always assuming it's sustainable. You always want to make sure it's protected either by assets or the kind of moat that Buffet talks about. Otherwise, even if it's been making lots of money, it's a business that will be competitively vulnerable.

Does the weak credit environment change the value investing proposition?

The first thing is that for value investors, you are not going to try to forecast the future. Most value investors would say if it's anything like credit crunches we've seen in the past, it will be gone in a year. That's what the betting has to be. It's a short-term problem and not something you focus on. It has, however created opportunities in debt markets. Banks are dumping senior secured debt, selling it on the market for 50-60-70 cents on the dollar. The implied returns are north of 15 percent, and because you're senior to everybody else in the event of bankruptcy, you're likely to get paid. That's where opportunities have been created by the credit crunch. If you listen to Buffet, it's where he's been investing up until now. Those opportunities are still there, but my guess is they're going to go a way.

Any advice for investors who are still nervous?

If you look at any (mutual) fund and you look at the average annual return--a dollar invested every year through the life of the fund--and then you look at the returns weighted by how much money was in the fund . . . , the difference in those two returns is 6 percent a year. That's true almost across every category of funds. What that means is investors are buying in at exactly the wrong time and dumping things at the exactly wrong time. In this environment, the people who are dumping things are getting out at almost exactly the wrong time. What you want to have is a steady, well-developed policy you stick to.

What do you think of Warren Buffett's move so far into Goldman Sachs (GS) and General Electric (GE)?

First of all, Goldman and GE are not real Warren Buffett moves. They're literally what he did at Solomon Brothers. He got paid very handsomely both in terms of a high return and protection on the downside. His preferred carries a significant interest return on it and is protected in event of a catastrophe. He got a very favorable deal. This is not the kind of real investment he's making. He has talked about accumulating further positions in one of two financial services companies. I don't know if he's had to reveal which one yet, but it's either American Express or Wells Fargo. There you can see what he's looking at. American Express is easier because it doesn't have all the complexity of a bank.

Greenwald on the best value bets in the market now:

American Express (AXP):
If you ask yourself what the average yearly earnings should be even in a fairly distressed economic environment, it's probably about $3.50 a share. Typically, they commit to pay out at least half of those earnings to you in cash, so you're getting a 7 percent cash return either in buybacks or the dividend. Then they reinvest 7 percent of your money. In the short run, where that money is going is cash to protect themselves financially against any catastrophic drop in credit card repayments, but in the long run it's going to credit card loans, and the economics of those are fairly transparent: They lend at 15 percent, borrow at 4 or 5 percent, have a 10 percent margin, and the default rate is around 5 percent. So they make 5 percent on every dollar of loans, and they leverage up because you can because it's fairly safe. Even if they do 7 to 1, which is a fairly conservative ratio, you're making 5 percent times seven on your unemployed equity capital which is 35 percent, or 20-percent-plus post-tax. And billings by American Express just grow over time. It's probably faster than GDP because they have high-income customers, and spending is skewed towards services, which are growing faster than (spending) on goods. You probably get another 5 percent even making conservative growth (projections). You're looking at returns, without any improvement in the multiple, of well over 20 percent. That's the sort of investment (Buffett) sees. It gives you an enormous margin of safety for long-lived bad economic conditions.

WellPoint (WLP):
You've got an annual earnings return of 14 to 15 percent, and mostly its going into cash. You know they're just a toll on medical expenditures in certain parts of the country, and those will be growing at 5 percent no matter how you look at that. That's a 20 percent return. Buffett's not greedy. He'll live with that all day long. These are safe companies with dominant market positions and trustworthy managements. They may go down in value before they go up, but the long-run prospects are so stable and attractive that I think he's right to be investing in these things.

Magna (MGA):
It recently traded at a market capitalization of $3.6 billion, and it's got $1.7 billion in net cash. They're not going to run out of money, so you're paying $1.8 billion or $1.9 billion for the business. That business this year, if you look at average margins--and this year it's a little lower because they're at the trough of the cycle--is going to earn about 5 percent on sales of about $26 billion, so you're talking about $1.3 billion of pretax earnings you can buy for $1.9 billion. Then, if you look at the assets and the cost of reproducing those, you have about $8 billion of assets in the business to protect you. If you just take that earnings power, after tax, of about $1 billion, and you say in a risky industry like autos you want a 12 percent return, that's an 8 multiple. That's a case where you're being very conservative about earnings, you're backed by assets, there's a lot of cash, and, even though autos are a fraught place to be, you're buying those $8 billion in assets less than $2 billion. That's got to be the kind of bargain you're looking for.

Comcast (CMCSA)

Comcast, when you take out excess depreciation, is trading at an earning return of about 10 percent. Even if everything goes to hell in a basket, the one thing we'll do is transact over the Internet. They and the phone companies have an incredibly valuable monopoly unless they screw it up. The one encouraging thing that hasn't appeared in cable company [share] prices is price wars among some companies seem to be moderating.

Microsoft (MSFT)

Microsoft, if you take out $20-30 billion in cash, is trading at about a 10 percent earnings return or so. It's a business that doesn't require any incremental capital and will grow at least as fast as global GDP.




Disclosure ("none" means no position): Long GE, GS, none
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Percent of Homes with Negative Equity

Do you wonder why Citibank (C), JP Morgan (JPM) and Bank of America (BAC) are rushing to rework mortgages and keep people in their homes? The following chart tells us why.

This chart is stunning..


The shear number of homes, 30% in many states means the banks, if the foreclose, can't resell them for anything. It is in the banks best interest to keep the people currently residing in these homes in them. The losses the banks will take holding the real estate will far outpace whatever diminished losses they take on a reworked mortgage.

Months ago, before this whole mess got started, there was a plan for banks to cut loan payments in return for a portion of the future appreciation of the home. One has to wonder if some of the price decline from the flood of foreclosed homes hitting the market could have been avoided had banks acted sooner to keep people in those homes.



Disclosure ("none" means no position):Long C, None
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Ackman on Charlie Rose Tonight

I am sure Ackman will have plenty to say about GM (GM), Ford (F) and what Congress is talking about doing. Thanks to reader Ryan for the heads up

SEE SCHEDULE HERE:




Disclosure ("none" means no position):
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Thank You Veteran's

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Tuesday's Links

Boise, Spitzer, Berlusconi, Facebook

- Not so fast

- How is this possible?

- Tanned? Really?

- Is it better?

Disclosure ("none" means no position):
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American Express Becomes Bank Holding Company ($AXP)

Following Goldman Sachs (GS) and Morgan Stanley (MS)

The Federal Reserve Board on Monday announced its approval of the applications and notices under sections 3 and 4 of the Bank Holding Company Act by American Express Company (AXP) and American Express Travel Related Services Company, Inc., both of New York, New York, to become bank holding companies on conversion of American Express Centurion Bank, Salt Lake City, Utah, to a bank, and to retain certain nonbanking subsidiaries, including American Express Bank, FSB, Salt Lake City, Utah.

FULL RELEASE


Disclosure ("none" means no position):Long GS, none
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Seth Klarman: Bailout "Makes Us Sick"

There are a handful of investors that ought to be listened to whenever they speak. Seth Klarman from Baupost Group is one of them.


In a recent article Klarman said:

Time for some sanity. Just like today we read about people who made billion shorting housing in 2006 -2007, in a couple years we will read the same of those who started buying in today's market.


FULL ARTICLE

Disclosure ("none" means no position):None
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Sears Mobile Shopping Site Live

If you have not been to Sears Holdings (SHLD) site recently, there have been huge changes.

From the release..
"Just in time for the busy holiday shopping season, Sears.com today announced the launch of Sears2go -- a mobile commerce Web site. Sears2go, which enables customers to find and buy select Sears.com merchandise from their mobile phone, is the first on-the-go technology offered by a US retailer ; pairing mobile commerce with Sears' best in class in-store pickup.

"In Sears' continued effort to innovate and serve our customers as they adopt new technologies, Sears2go makes it easier than ever to cut out the holiday shopping hassles and shop from the convenience of your mobile phone," said Ravi Acharya, Director of eCommerce at Sears Holdings. "More and more customers are using their mobile phones to shop online and Sears2go is completely geared for mobile devices with an emphasis on speed, usability and security. So, whether you're stuck on the commuter train or waiting for your child's holiday concert to begin, you can get your shopping done - ultimately leaving more time for you!"

Sears2go lets customers select products from a wide variety of categories, including apparel, electronics and computers, fitness and sports, jewelry, tools, toys and games with home delivery or in store pickup.

After purchasing an item on Sears2go, shoppers picking up their order in store will receive a text message alert when their merchandise is ready for pick-up."

We know Sears.com was one of the most trafficked site during last years Holiday Season and Lampert has alluded to their success online. Perhaps more information from Sears on results here would bring more investor excitement from it?

I have tried the site on my Blackberry and it worked great and was easy to use..



Disclosure ("none" means no position):Long SHLD
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Borders Invoice Payment Delay: The Real Story

A lesson trying to get some facts before running a story..

First, here is the story:
"GalleyCat has received a copy of a "special alert" sent from a major book distributor specializing in independent publishers to its clients, warning them that Borders, whose financial difficulties are widely recognized, "now tell us that they will not be paying us for two months due to anticipated excessive returns," a situation the company views with understandable concern. This distributor "typically carries receivables of approximately two million dollars with Borders," the memo continues. "A default of that amount would by no means put [us] out of business, but it would be painful, weaken the short-term health of the company, and would mean we would have to defer some of our plans for future growth."

Therefore, the distributor is telling its clients they need to make a decision this weekend: "Publishers must either instruct [us] not to ship their titles to Borders [or] accept the provision that [we], for Borders business only, will guarantee payment only for the publishers' historical printing cost of books that are not paid for, rather than for the whole amount of any unpaid invoices." (As the memo explains, the printing cost of a $14.95 paperback is roughly $1.50, compared to the $7.48 the distributor bills Borders.) The new policy is contrasted to what the company says other distributors do, asserting that some of its competitors are refusing to take any credit risk at all on inventory sent to the struggling chain.

The memo emphasizes, however, that this distributor does not actually recommend that any of its clients start denying Borders their titles:

"Borders has been paying [us], they are reported to have cash on hand and access to credit in the future, and the last thing anyone wants is to have only one giant chain in the retail book market. Borders may prosper, and even in the worst case, given [our] uniquely flexible policy, the value of your inventory would be preserved."

Additionally, "this policy will stay in affect only while there are serious concerns about Borders viability." Of course, given that Borders announced a new inventory display strategy earlier this year that would require cutting the stock at a typical outlet by as much as 10 percent, the overall impact of this development on small publishers may be difficult to fully ascertain at first."

I spoke to people at Borders who told me:
Since books are a returnable item (unsold inventory can be returned to the publisher for credit) it is possible as they stay with their ongoing focus on inventory productivity that they could have a credit exceed the amount of an invoice, and that explains what happened here … it comes across as Borders being unable to pay this vendor, but it is a case where the returns outpaced the invoices.

Now anyone familiar with Borders know that one of the first items on CEO George Jones' "to do" list was decrease the bloated book and music inventory in the stores.

Part of the inventory strategy does involve returns. Borders absolutely must get titles that don’t sell out of the stores to make room for titles that do sell. Toward this end, inventory teams have been doing a deep dive into the inventory of each store and removing unproductive inventory while adding productive inventory to the stores on a case by case basis where needed. In addition, they are looking at the inventory in their distribution centers and making appropriate returns.

Simply put, this is NOT a case of Borders delaying payments due to a cash crunch but simply not paying invoices that are going to be credited back to them eventually anyway.

Look at it from your point of view, would you pay an invoice sent by a vendor in full if you were returning items for a credit? Me either. This is just a common sense decision from Borders.


Disclosure ("none" means no position):Long BGP
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Citigroup To Buy Regional Bank: No Kidding!

File this under "tell me something I don't know".

"Citigroup (C) is in talks to buy a regional bank that operates in areas that overlap with the New York financial-services company's focus in the U.S. Northeast, California and Texas, people familiar with the situation told The Wall Street Journal. The move comes less than a month after Citi walked away from Wachovia (WB), which is trying to close its purchase by Wells Fargo (WFC), the Journal reported. The identity of the target bank couldn't be determined, the paper said. But it said Citi Chief Executive Vikram Pandit wants to deepen the bank's U.S. deposit base, which is a cheap and reliable funding source."

In a post last month after talking to people at Citi in regards to the then Goldman Sachs (GS) / Citi rumors "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."

Citi buying a regional bank isn't news. It just isn't...If this was a secret, then I was the last to know it was a secret...


Disclosure ("none" means no position):Long GS, none
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Politics and Investing

So, I got the following comment from a reader.

"the blog was not about politics before and now after the election you take shots at the new admin, so you starting to dilute your blog focus, which I thought was about undervalued companies and business.

As a reader i am not really interested in your political views, actually I am not interested in politics at all. so you can choose to continue to obsess about obama and whatever and I choose to stop visiting and reading."

Where to start? How about a quiz.

- Can anyone name the largest investor in US financial companies?
- Can anyone name the entity that forced shareholder dilution on US banks?
- Can anyone name the entity that has control of the US mortgage market?
- Can anyone name the entity that arbitrarily changed the basic rules of investing when it banned short selling, first in financials them a gamut of US businesses?
- Can anyone name the institution, that had it's "bailout fund" been classified as a "Sovereign Wealth Fund" would be the world largest?

The answer to all of the above is the US government.

At no time in my adult life has the day to day action of the US Government had so much effect on investors. Perhaps one could argue the election of Ronald Reagan in 1980, but since I was 12 then, we'll omit that. The reason politics rarely entered the conversation here before was that politics before had very little effect on it content.

I can understand and enjoy hearing differing views, but to ignore Washington now as a investor is to do so at your own risk. Shareholders of Fannie, (FNM), Freddie (FRE), and AIG (AIG) held by some of the greatest investor of all time and at the time called "undervalued" were wiped out by the actions of the US gov't.

I'm not sure I have been anything but vicious in my criticism of Bush appointee SEC Commissioner Chris Cox and have begged Treasury Secretary Paulson to take a "time out" and have criticized the current bank injection plan. I have even come off my earlier in the year support of Ben Bernake and said he is trying too many things right now. All these folks are product of the current administration. In that respect, my criticism easily crosses political party lines.

The reader says I "take shots the new administration". Not really. I have repeatedly trashed the media's lap dog mentality to it. As a rule if the media in mass love something, I immediately become skeptical about it. For proof one need only go back the first press conference as President Elect. We were subject to hard hitting questions like "what kind of dog will you get", "what book are you reading", "where will your kids go to school". Really? That is the best you got?

The world stands on the edge of global recession and we are wondering if Obama will get a beagle or a lab? Really?

My fear of the current administration is that we know nothing about what they will do. Why? The media did a pathetic job getting answers. Even Tom Brokaw admitted post election "I don't know" in response to a question about what Obama will do now elected. Isn't that their job in its most basic element, to find out?

If anyone read the Sunday papers this week they were full of articles guessing about what Obama will do. Guessing...Again, at no time in my adult life have these questions been asked AFTER and election. We knew where Clinton was going and we certainly knew what GW was going to do.

The reader then says I "obsess about Obama". We'll, he is the new President. He will be for the next 4 years. I think by default that requires he be top of the list? I will give Obama credit for one thing, he managed to be elected President without anyone really knowing what his plans are. Kudos..

What we do know is based on Barack's record and his words. From that we know he has never voted for a tax cuts, has had a floating "tax increase" income target and wants to spend $1 trillion more . Other than that, nada. We have some grand plans but, thank to the media, we have scant, if any details.

At least in the 1980 election Reagan had been Governor of California so people had a good idea of his plans based on how he had previously governed. That and the media then at least asked him for specifics. The media was right abo