Fairholme Funds 2008 Report $$

Hot off the press, Bruce Berkowitz's Fairholme Funds (FAIRX) 2008 Annual Report. Read it and enjoy, Berkowitz is one of the best...

2008ar

Publish at Scribd or explore others: Reports Periodicals & Report investing stocks fairhome funs

Disclosure ("none" means no position):None

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Must See: Nassim Taleb Explains "Black Swan" at DLD (video) $$

This is the single best video I have ever seen of Nassim Taleb. He explains in precious detail the Black Swan theory.

Here is the book:



Disclosure ("none" means no position):

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A Reader Response to My Pessimism

In the interest of fairness, my optimistic reader friend has sent me this. Since he make his points extremely intelligently without saying "your an idiot" for thinking different, and because of his position in the investing world, for the benefit of readers I am obliged to post his thoughts. I hope this elicits conversation on the merits of either argument. I am reprinting verbatim, there is no editing of his comments on my part.

Todd,

I am not as pessimistic as the current interest in gold as a harbor of safety. The hosts of historical precursors to market improvement are overwhelming. The fact that no one believes them at this time is typical of a market bottoming process. Positive economic change has never been accepted by investors until it has been on a clearly defined trend for some period. This is why “Value” investors hold such status in our society for being able to see through the “fog of fear” and still make successful investments.

I can say that this is a time to be very bullish, but no one wants to listen. At the moment those who are gleeful of the values they see at present are often treated negatively in the press as Buffett has recently because his investment activity and positive commentary has not relieved investor pain with an obvious market turn for the better quickly enough to satisfy the need for instant gratification.

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Both of these indicators are viewed as reflecting the investment behavior of individuals who are thought to have an above average sense of investment valuation. These indicators are believed to reflect both that future changes in the business climate are perceived to be positive and that the current levels of business valuations are attractive. In essence these indicators are believed to measure the value perceptions of individuals who are better informed than the average investor.

It is important to point out that neither tops nor bottoms are indicated precisely, nor can this information be used with precision at the individual security level. However, even without the desired precision, I view these indices as very useful in supporting a contrarian approach.

Currently, the readings from these indices remain quite bullish and are typical of the market being in a bottom formation period.

Don Hays describes the Smart Money Index as:
“This is an index that is prefaced upon the principal that the trading during the first 30 minutes of each day is very emotionally based, and depends so much upon the fresh "hype" of the morning news and media "talk." That is considered "dumb" money. But the trading in the last one-hour of trading is not very news motivated at all, in fact it is based solely upon the overall reasoned out logic and analysis. That is considered "smart" money. So the cumulative index simply subtracts the performance of the Dow during that first 30 minutes, and adds the performance of the last one-hour. The signals come when the "Smart Money" index does not confirm the new highs or lows of the Dow Jones Industrial Average's.”

The Gambill Insider Buy/sell Ratio (below the Smart Money Index) is a simple moving avg of insider buys/insider sells of the Russell 3000.







He finishes with the following quotes:

Warren Buffett, "Be fearful when others are greedy and greedy only when others are fearful"

Bruce Berkowitz,"Ignore the crowd!"


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A Classic Exampe of "Putting Lipstick on A Pig"

I had to read this four times to be sure I wasn't crazy (I may be.but not because I read this wrong).

Here it is:

Even with a down economy in 2008, United States railroad volumes for the year were the fourth highest on record behind 2005, 2006, and 2007, according to data released by the Association of American Railroads (AAR).

OR could be have just as accurately said "rail volumes were the lowest in 4 years"?

Here is the rest of the article:

The AAR said U.S. freight railroads originated 16,752,709 carloads in 2008, representing a 2.2 percent—or 380,805 carloads—decline from 2007. Intermodal loadings at 11,517,240 trailers and containers were down 4.2 percent—or 509,391 units—for the year. And combined U.S. carload and intermodal units for the year were 28.09 million.
And estimated ton-miles for 2008 came in at 1,728.7 billion, a 1.3 percent drop off from 2007.
Yearly totals would have been stronger had economic volume tailed off at such a hectic clip during the fourth quarter of 2008.

“During the first nine months of the year, there were some real strong spots with certain commodities like grain, and coal which was strong all year,” said AAR Director of Editorial Services Tom White in an interview earlier today. “There were a few areas that helped make up for those that were down [like autos and housing-related commodities]. As we got into the fourth quarter, particularly in November and December, things really began to deteriorate more so than earlier in the year.”

Commodity breakdown: Motor vehicles and equipment loadings were down 219, 603—or 21.2 percent—at 817,744 for the year. And crushed stone, sand, and gravel loadings were down 95,270—or 8.8 percent. Only grain, metallic ores, coal, and “all other” carloads saw annual increases, according to the AAR.

When asked about the railroad industry’s overall health at a time when the economy is sluggish, White noted that 2007 was the industry’s best year in history in terms of revenue, and earnings, coupled with the first three quarters of 2008 being fairly strong.

“The railroad industry is much better positioned to take the negative impacts of a deep recession than it ever was in the past 50 years,” said White. “That is because over the past number of years railroads have been able to invest a great deal of money into infrastructure [and other efficiencies] and things that strengthen the industry long-term. That is all very positive, as well as the fact that balance sheets headed into the recession were very strong. This speaks well to the railroad industry’s ability to weather the recession and be in a strong position once the economy does really turn around.”

So, we now know business for rail shippers like CSX (CSX), Norfolk Southern (NSC) and Burlington Northern (BNI) is dropping, hard.

When one also adds that International Air Freight fell 22% in December we would not expect any improvement anytime soon. Air freight matter because in order to get goods to or from the airport, rails are used heavily.

This is bad news for rails (and the economy as a whole), there is no sugar coating it no matter how bad the AAR wants to try..

Disclosure ("none" means no position):None

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Hedge Fund to Measure Returns in Gold ...NOT Currency

This is a pretty stunning move. What is even more alarming is the reasoning given.

From the FT:

A hedge fund has begun offering investors the chance to have their investment denominated in gold, as worries grow over governments debasing their currencies by printing money.

Osmium Capital Management, a $178m hedge fund manager based in Bermuda, is launching a new share class allowing investors to hold shares measured as troy ounces of the fund, rather than US dollars, sterling or euros.

The move follows a surge in investor demand for small gold (GLD) bars and coins held by individuals and gold-backed exchange-traded funds that are holding a record amount of bullion.

Chris Kuchanny, Osmium chief executive and a former London ABN Amro trader, said he was putting almost all his personal wealth into the new share class: “Investors have voiced concerns that they’re overly exposed to the major fiat [paper] currencies in an environment where the fundamentals of those currencies are clearly deteriorating with governments assuming more debt and having lower revenue and more expenditure

This shows a stunning lack of confidence in currencies. It also says that the fund is anticipating inflation to rear its ugly head in a scary way. When it does, the value of the currencies will plummet and gold will rise.

What is to watch now is whether or not other funds begin to follow. If this becomes a movement rather than an individual act, the crash in currencies could be expedited in a nasty way.

Stay tuned...

Disclosure ("none" means no position):None in gold.....yet

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Friday's Links

Press, Press, Press, Buffett

- Too hard on Obama

- Too easy on Obama

- "Even the Seagulls were in awe"

- Kass, as always make some valid points
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Wachovia on Gold & Housing $$

Video via Wall St. Media

Some very interesting thoughts from Wachovia's Rich Gordon on Gold (GLD) and housing



Disclosure ("none" means no position):None

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AutoNation Reports Powerful Quarter $$

Considering the credit markets and the economy, this earnings report from AutoNation (AN) is simply fantastic.

AutoNation, Inc. (NYSE: AN) , America's largest automotive retailer, today reported 2008 fourth quarter net income from continuing operations of $70 million, or $0.40 per share, compared to $51 million, or $0.28 per share, in the prior year. In the quarter, the Company had a net benefit from certain items of $48 million or $0.28 per share, including a net positive tax adjustment of $0.18 per share and a gain on the repurchase of the Company's senior notes of $0.14 per share. Additionally, other items had an unfavorable impact of $0.04 per share. After adjusting for these items as disclosed in the attached financial tables, net income from continuing operations for the 2008 fourth quarter was $22 million or $0.12 per share.

Fourth quarter 2008 revenue totaled $2.7 billion, compared to $4.1 billion in the year-ago period, driven primarily by lower vehicle sales. In the fourth quarter, total U.S. industry new vehicle retail unit sales declined 49%, based on CNW Research data. In comparison, in the fourth quarter AutoNation's new vehicle unit sales declined 40%.

Commenting on the fourth quarter, Mike Jackson, Chairman and Chief Executive Officer, said, "The fourth quarter was negatively impacted by the credit panic triggered on September 15 by the bankruptcy of Lehman Brothers. Automotive retail sales collapsed from one day to the next as credit for our customers was withdrawn from the market. This panic continued to erode consumer confidence and accelerated the decline in the U.S. economy and auto retail market. In the fourth quarter, AutoNation continued to remain profitable even with a U.S. SAAR near 10 million new vehicle units, a 27 year low." Jackson also stated, "When we saw the auto retail market deteriorate in the beginning of 2008, AutoNation began to identify cost reduction opportunities. In July we announced our plan to reduce cost by $100 million on an annual run rate basis and have successfully achieved this goal - a significant accomplishment in its own right. With the collapse of sales in the second half of September, additional actions became necessary in the fourth quarter to further reduce costs. We have successfully implemented additional cost reduction actions totaling approximately $100 million on an annualized run rate basis. Taken together, AutoNation's total annualized cost savings of $200 million demonstrates our Company's ability to effectively address the challenges created by the credit panic."

Jackson added, "Despite the severely depressed sales environment, AutoNation continues to generate solid cash flow which allowed the Company to reduce its non-vehicle debt by $155 million during the quarter and close the fourth quarter with a strong cash position of $110 million. Full-year debt reduction totals approximately three-quarters of a billion dollars, consisting of $517 million of non-vehicle debt and $195 million of vehicle floor plan debt. As a result, the Company remained in compliance with all financial covenants in its debt agreements as of December 31, 2008 with a leverage ratio of 2.45 versus 2.78 a year ago."

Looking forward, Jackson also stated, "We agree with industry projections that the 2009 SAAR will be in the range of 11 million new vehicle units with obvious weakness in the first half of the year. In this environment, we believe we will be able to manage within all financial covenants."

AutoNation provides additional detail on its three operating segments: Domestic, Import, and Premium Luxury. The Domestic segment is comprised of stores that sell vehicles manufactured by General Motors, Ford, and Chrysler; the Import segment is comprised of stores that sell vehicles manufactured primarily by Toyota, Honda, and Nissan; and the Premium Luxury segment is comprised of stores that sell vehicles manufactured primarily by Mercedes, BMW, and Lexus.

Segment Results for the Quarter

-- Domestic -Domestic segment income (1) was $14 million compared to year-ago segment income of $36 million. Fourth quarter Domestic retail new vehicle unit sales declined 44%. In comparison, U.S. industry Domestic retail new vehicle unit sales declined 52% according to CNW Research.

-- Import -Import segment income was $20 million compared to year-ago segment income of $52 million. Fourth quarter Import retail new vehicle unit sales declined 39%. In comparison, U.S. industry Import new vehicle retail unit sales declined 44% according to CNW Research.

-- Premium Luxury -Premium Luxury segment income was $39 million compared to year-ago segment income of $59 million. Fourth quarter Premium Luxury retail new vehicle unit sales declined 35%. In comparison, U.S. industry Premium Luxury retail new vehicle unit sales declined 34% according to CNW Research.

(1) Segment income is defined as operating income less floor plan interest expense

For the full year ended December 31, 2008, the Company reported net loss from continuing operations of $1.23 billion or $6.89 per share, compared to net income from continuing operations of $289 million or $1.44 per share in the prior year. After adjusting for the impairment charges and certain other items as disclosed in the attached financial tables, net income from continuing operations for the full year ended December 31, 2008 was $181 million or $1.02 per share, compared to $277 million or $1.38 per share in the prior year. The Company's revenue for the year ended December 31, 2008 totaled $14.1 billion, down 19% compared to $17.3 billion in the prior year.

So, we are in the 10,000 years flood and the company is still making money. Competitors are closing their doors at a breakneck pace. The company is cash flow positive and paying off debt. AutoNation is going to emerge from this stronger than ever and in a far more dominant market position.

Shareholders ought to be thrilled...

Speaking of shareholders, AutoNation also signed an agreement with Eddie Lampert and ESL Investments. Read it here

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

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ESL and Lampert Sign Voting Agreement with AutoNation, Toyota and Honda $$

Lampert currently owns 45% of AutoNation (AN)

First, here is the agreement with Honda (HMC) regarding the ESL voting agreement.

American Honda Motor Co., Inc.
1919 Torrance Boulevard
Torrance, CA 90501
Attention: Dealer Development
RE: AutoNation, Inc. Framework Agreement
Dear Mr. Colliver:
Reference is made to that certain Framework Agreement, dated as of June 9, 1998 and as amended from time to time (the “Framework Agreement”), by and between American Honda Motor Co., Inc. (“American Honda”) and AutoNation, Inc. (formerly known as Republic Industries, Inc.) (“AutoNation”).
American Honda hereby consents to the acquisition by ESL Investments, Inc. and any person, entity or group that directly, or indirectly though one or more intermediaries, controls, or is controlled by, or is under common control with, ESL Investments, Inc. (for the avoidance of doubt, other than AutoNation and its subsidiaries) (collectively, the “ESL Parties”) of fifty percent (50%) or more of the outstanding common stock, par value $0.01 per share, of AutoNation (the “Common Stock”) (the “Acquisition”), upon the following terms and conditions which shall only apply at such time and for so long as the ESL Parties own fifty percent (50%) or more of the then outstanding Common Stock:
1. At each meeting of the stockholders of AutoNation, whether an annual meeting or a special meeting, however called, and at each adjournment or postponement of any such meeting (a “Stockholders’ Meeting”), and in all other circumstances in which a vote, consent or other approval (including, without limitation, by written consent) is sought by or from the stockholders of AutoNation (any such vote, consent or approval, a “Stockholders’ Consent”), the ESL Parties shall appear at such Stockholders’ Meeting or otherwise cause all shares of Common Stock owned by the ESL Parties to be counted as present for the purpose of establishing a quorum.
At each Stockholders’ Meeting and in connection with the execution of each Stockholders’ Consent, in either case at such times that the ESL Parties own in excess of fifty percent (50%) of the then outstanding Common Stock, all shares of Common Stock owned by the ESL Parties in excess of fifty percent (50%) of the then outstanding Common Stock on the applicable record date (the “Additional Shares”) shall be voted on each matter proposed in the same proportion as all outstanding shares of Common Stock not owned by the ESL Parties are actually voted on such matter (it being understood that, in connection with any Stockholders’ Consent, shares of Common Stock not owned by the ESL Parties that abstain or are not present will be treated as shares abstaining or not present, as the case may be).

2. AutoNation shall use best efforts to provide that its board of directors shall be comprised of a majority of directors who qualify as “independent” directors under the listing standards of Rule 303A.02(b) of The New York Stock Exchange (the “NYSE”) Listed Company Manual, as in effect on the date hereof, and who would qualify as “independent” directors of ESL Investments, Inc. under the listing standards of Rule 303A.02(b) of the NYSE Listed Company Manual, as in effect on the date hereof, if ESL Investments, Inc. was an NYSE-listed company; provided, however, that if AutoNation should fail to comply with the foregoing requirement due to (i) a vacancy on its board of directors or (ii) a member of its board of directors ceasing to meet such independence standards due to circumstances beyond AutoNation’s reasonable control, AutoNation shall regain compliance with the foregoing requirement by the later of (A) its next annual stockholders’ meeting or (B) 180 days from the occurrence of the event that caused the failure to comply.

3. The parties hereto agree to the following:
(a) No ESL Party shall knowingly acquire any direct or indirect ownership interest in any Honda or Acura dealership except through or in conjunction with AutoNation (which acquisition will be subject to the Framework Agreement), provided that the ESL Parties may make or acquire passive investments in public companies, mutual funds and similar entities where such investments by the ESL Parties represent cumulative less than five percent (5%) interest in any Honda or Acura dealership in which such entity is so invested. For purposes of this Section 3(a), any acquisition of a direct or indirect ownership interest in any Honda or Acura dealership by Edward S. Lampert or any person who is in the Immediate Family (as such term is defined in the American Honda Motor Co., Inc. Policy on the Ownership of Multiple Honda and Acura Dealerships) of Edward S. Lampert shall be attributable to the ESL Parties.
(b) The ESL Parties, AutoNation and American Honda agree that any dispute arising under this letter agreement shall be resolved by the dispute resolution procedures set forth in Section 8 of the Framework Agreement.

(c) The ESL Parties acknowledge and agree to abide by the limits on representation of AutoNation on any Honda and Acura Dealer organizations as set forth in Section 3 of the Framework Agreement.

(d) The terms of this letter agreement shall be governed by and construed according to the laws of the State of New York without applying is conflicts of law principles.

(e) The ESL Parties may not pledge or grant a security interest in the Common Stock owned by the ESL Parties except as provided in the following sentence or with the consent of American Honda in accordance with the “American Honda Motor Co., Inc. Policy on the Granting of Security Interest in the Shares of Any Entity That Owns an Interest in a Honda or Acura Dealership,” a copy of which is attached as Exhibit A hereto. American Honda hereby agrees that the ESL Parties may grant a security interest in the proceeds of the sale of the shares of Common Stock owned by the ESL Parties, provided that the grantee agrees as follows:
(i) that it will never attempt to vote such shares (except to approve an American Honda-approved transfer of such shares) or exercise managerial control over any Listed Dealership; and

(ii) that its interest in such shares shall be limited to the proceeds derived from the sale of such shares to the extent of the outstanding balance of the note secured by such shares.
(f) The ESL Parties agree to abide by the remedies set forth in the Framework Agreement and, with respect to any ownership interest they may have in a Listed Dealership that becomes subject to any such remedies, they will cooperate in the execution of such remedies (for example, the purchase of a Listed Dealership by American Honda as ordered by an arbitrator) and not oppose any such remedy except as part of AutoNation’s participation in arbitration pursuant to Section 8 of the Framework Agreement.

(g) The ESL Parties shall be jointly and severally responsible for compliance by each ESL Party with the provisions of Section 3 of this letter agreement.

(h) The ESL Parties that currently own Common Stock are listed on Exhibit B hereto.
4. AutoNation and American Honda hereby reaffirm the terms and conditions of the Framework Agreement, which they agree shall continue in existence without modification. This letter agreement (a) may not be amended, waived or modified except by an instrument in writing signed by American Honda, AutoNation and the ESL Parties and (b) may be executed in one or more counterparts, each of which when executed shall be deemed to be an original but which when taken together shall constitute one and the same letter agreement.

5. In light of the consent given pursuant to this letter agreement and in consideration of the continuing adherence of AutoNation and the ESL Parties to the terms hereof, American Honda will not exercise any rights pursuant to Section 1.3.5 and/or Section 7 of the Framework Agreement that it might otherwise have as a result of the Acquisition. Nothing in this letter agreement shall be construed as consent to a “Rule 13e-3 transaction” as that term is defined in Rule 13e-3 of the Securities Exchange Act of 1934.

6. All communications and notices pursuant to this letter agreement shall be in writing and be given in person or by means of facsimile or other means of wire transmission, by overnight courier or by mail and shall be addressed as follows:

If to American Honda:
American Honda Motor Co., Inc.
Honda Division
1919 Torrance Boulevard
Torrance, CA 90501
Attention: Dealer Development
Facsimile: (310) 222-7065

with a copy to:
Associate General Counsel
Honda North America, Inc.
Law Department
700 Van Ness Avenue
Torrance, CA 90509-2206
Facsimile: (310) 781-4970

If to AutoNation:
AutoNation, Inc.
110 S.E. 6th St.
Fort Lauderdale, FL 33301
Attention: President
Facsimile: (954) 769-4666

with a copy to:
AutoNation, Inc.
110 S.E. 6th St.
Fort Lauderdale, FL 33301
Attention: General Counsel
Facsimile: (954) 769-6340

If to the ESL Parties:
ESL Investments, Inc
200 Greenwich Avenue
Greenwich, CT 06830
Attention: William C. Crowley
Facsimile: 203-861-9834


Read the letter to Toyota (TM)

ESL Voting Agreement


ESL Investments, Inc
200 Greenwich Avenue
Greenwich, CT 06830
Attention: William C. Crowley
RE: ESL Voting Agreement
Dear Mr. Crowley:
Reference is made to that certain letter agreement, dated as of the date hereof (the “Honda Consent”), among American Honda Motor Co., Inc. (“American Honda”), AutoNation, Inc. (“AutoNation”) and the ESL Parties (as defined in the Honda Consent) and to that certain letter agreement, dated as of the date hereof (the “Toyota Consent”), among Toyota Motor Sales, U.S.A., Inc. (“Toyota”), AutoNation and ESL (as defined in the Toyota Consent).
For the period provided in Section 3 below, notwithstanding any provision to the contrary contained in the Honda Consent and Toyota Consent and at such time as ESL Investments, Inc. and any person, entity or group that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, ESL Investments, Inc. (for the avoidance of doubt, other than AutoNation and its subsidiaries) (together with ESL Investments, Inc., the “ESL Affiliated Parties”) own forty-five percent (45%) or more of the outstanding common stock, par value $0.01 per share, of AutoNation (the “Common Stock”):
1. At each meeting of the stockholders of AutoNation, whether an annual meeting or a special meeting, however called, and at each adjournment or postponement of any such meeting (a “Stockholders’ Meeting”), and in all other circumstances in which a vote, consent or other approval (including, without limitation, by written consent) is sought by or from the stockholders of AutoNation (any such vote, consent or approval, a “Stockholders’ Consent”), the ESL Affiliated Parties shall appear at such Stockholders’ Meeting or otherwise cause all shares of Common Stock owned by the ESL Affiliated Parties to be counted as present for the purpose of establishing a quorum.
2. At each Stockholders’ Meeting and in connection with the execution of each Stockholders’ Consent, all shares of Common Stock owned by the ESL Affiliated Parties in excess of forty-five percent (45%) of the then outstanding Common Stock on the applicable record date (the “Additional Shares”) shall be voted on each matter proposed in the same proportion as all outstanding shares of Common Stock not owned by the ESL Affiliated Parties are actually voted on such matter (it being understood that, in connection with any Stockholders’ Consent, shares of Common Stock not owned by the ESL Affiliated Parties that abstain or are not present will be treated as shares abstaining or not present, as the case may be).

3. This letter agreement shall commence as of the date first set forth above and shall continue in full force and effect until January 28, 2010 unless the parties mutually agree to extend the agreement. The termination of this letter agreement shall have no effect on the Honda Consent or the Toyota Consent.
The terms of this letter agreement shall be governed by and construed according to the laws of the State of Delaware without applying its conflicts of law principles.

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

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David Einhorn: "Bernanke is an inflationist"

Because of the Fed's actions, Greenlight Capital's David Einhorn is buying gold (GLD)

From his recent letter:

This jives with what I have been saying here. Point to note, these swings are usually long term trends. Be patient. The macro-events that will cause gold to rise will take a while to unfold. just tuck it away..

Remember Allied Capital (ALD), the target of Einhorn's Book "Fool some of The People"? Allied may just default ot was announced yesterday.

Disclosure ("none" means no position):None

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Thursday's Links

What?!?, Defaults, Deflation, Schiff,

- Proof that no business idea is really that crazy

- Just keep rising

- If you hated Act 1, Act 2 ought to really scare you

- 'Bout time more folks are figuring this out
Disclosure ("none" means no position):

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David Einhorn's Q4 Letter

Einhorn had a rough year but the letter is a very honest one, not filled the usual BS some through to excuse away performance..

Visit MarketFolly to download the letter


Disclosure ("none" means no position):

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Fed Decision and a Desperate Statement $$

So, it is official, the Fed is out of bullets and is throwing stones.

The decision:

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

OK, so what does it all mean? The Fed is limited to what it can do and has resigned itself to sitting back and waiting things out. Lower rates (essentially zero) have not spurred lending or much economic activity and they are possibly about to purchase to worst assets on bank's books. The Fed now has a 2 trillion dollar balance sheet and that looks to grow. Now, growing it with quality assets is one thing, but to grow it now with banks junk, well, that isn't good.

The big banks, JP Morgan (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citi (C) has received their TARP funds and will most likely not want more. This means the strings Congress want to impose on them to force lending will be toothless.

So now the Fed is forced to buy Treasuries to expand the money supply. What they will do then is add to the bubble already existing in them. The collapse of that bubble will cause interest rates to spike (that's really bad in a recession). Since the Fed is already essentially at zero, it can do nothing to stop the rise, except, buy huge amounts of Treasuries and maintain the bubble itself.

See where this goes? The Treasury will issue bills the Fed will buy while the Fed is buying the toxic assets on banks books.......yeah....this will end well, no problem..


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

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Bolling on Oil and Natural Gas

Some very interesting information on natural gas (UNG) use and the weather this winter.

Disclosure ("none" means no position):None

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American Recovery and Investment Act

As of 1/20/2009. To fully understand what a disaster this will be , go to page 12 line 6. It is clear the protectionist trade policy failures of the Great Depression have not been learned. The video is the Senate "Mark -Up" of the bill.

American Recovery and Investment Act

Publish at Scribd or explore others: Government Business & Legal american recovery an Barack Obama

Senate "Mark-Up"

Disclosure ("none" means no position):

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Linens N' Things Not Gone Forever

This will probably go down as a brilliant buy down the road.

From peHUB

Linens ‘n Things, the home goods retailer which shut its doors late last year, may live on as a brand name after two investment groups agreed to purchase the retailer’s name and logos for about $1 million.

At a bankruptcy auction earlier this month, Hilco Consumer Capital and Gordon Brothers Brands, won the rights to the company’s intellectual property, including software, technology and marketing material, according to a Hilco spokesman. The deal was expected to close on Monday, the spokesman said.

Hilco Merchant Services and Gordon Brothers Retail Partners were members of a group of six liquidators that ran the going-out-of business sales at the home goods retailer last year.

Hoping to cash in on consumer attachment to forlorn brands, in the past few years liquidator groups have bought up trademarks of bankrupt companies like gadget seller The Sharper Image, and furniture retailer Bombay Co.

Since Hilco bought The Sharper Image brand at a bankruptcy auction in May, it has signed licensing deals for heated blankets, iPod cases and health gadgets — all of which are sold emblazoned with The Sharper Image logo.

Linens ‘n Things, once the no. 2 U.S. home goods chain after Bed Bath & Beyond Inc (BBBY) was bought out for $1.3 billion by Leon Black’s buyout firm Apollo Management in 2006.

The company filed for bankruptcy protection in May, citing a drop in consumer spending. It had operated 589 stores in North America at the end of 2007, but liquidated late last year after it was unable to find a buyer.

Linens went under not because they had no customers, but because when the economy slowed, they could not get enough to service the crushing debt load. Had they never been bought out, one could argue, and probably be accurate in saying they would still be around.

The buyers have a respected and liked name and a whole bunch of real cheap real estate out there owned by desperate landlords......a nice combination..
Disclosure ("none" means no position): none

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Wednesday's Links

Dykstra, Oil fields, Cuba, Hedge funds, A Rant

- Before anyone out there listens to a single word fron "Nails".... read Adam

- Replacing what is being lost

- Are we there?

- Follow them here

- FUNNY


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Siemens Putting Screws to Immelt

This is whom people compare GE (GE) to. If they are doing fine, ummm, Jeff, what the problem?

Siemens (From the FT):

Siemens (SI) beat analysts’ estimates and appeared to have outshone its rivals when it announced on Tuesday a sharp rise in quarterly operating profit and reaffirmed its forecast for 2009.

For the first quarter of fiscal 2009, which ended in December, Europe’s largest engineering group saw an 8 per cent decline in orders compared to the same period in the previous year. However, Peter Löscher, Siemens’ chief executive, said that in the absence of major order cancellations or price erosion, the group would adhere to its full-year forecast.

“We got off to an excellent start this fiscal year,” he said.

The market was cheered by Siemens’ announcement, which came on the heels of a string of bad news from main competitors such as General Electric and Philips, which both reported disappointing quarterly figures in recent days. The news also coincided with an unexpected rise in German business confidence.

Siemens shares were up as much as 5.2 per cent on Tuesday against a fairly flat European market. The German conglomerate said total sectors profit – which excluded one-off events – climbed 20 per cent year-on-year to more than €2bn.

Order income fell by 8 per cent to €22.2bn, mainly hit by a double-digit drop in the more cyclical industry sector. Siemens, which makes everything from nuclear power plants and train carriages to hearing aids and light bulbs, said it was still aiming to post a total sector profit of €8.0bn-8.5bn this year.

Markets were stunned in November when Mr Löscher reaffirmed this profit goal amid a sharp downturn of the global economy. Most analysts forecast an operating profit well below Siemens’ own target.

Contrast this to the train wreck that was GE's most recent quarter.

Fourth-quarter 2008 earnings from continuing operations of $3.9 billion, or $.37 per share before preferred dividend, or $.36 per share attributable to common shareowners. Results included $1.5 billion of after-tax restructuring and other charges, including increased reserves in current environment, which are above the Company’s original plan and the restructuring will lower costs for 2009 and beyond.

For the year, revenue was $183 billion, up 6%, and earnings were $18.1 billion, down 19%. This was the third highest earnings year in GE history.

“In a very tough environment, we delivered fourth quarter business results in line with expectations we provided in December,” Chairman and CEO Jeff Immelt said. “We grew Infrastructure and Media by 3% in the quarter and 10% for the year. Energy Infrastructure led the way in the quarter with 11% segment profit growth driven by continued global demand. Technology Infrastructure grew earnings by 1%, led by 21% growth in Aviation. NBC Universal segment profits declined 6% in fourth quarter as strong cable earnings were offset by declines in the local stations.

“Capital Finance earned $1 billion in the quarter and $8.6 billion for the year,” Immelt said. “We had several negative impacts to earnings in the quarter including increased loss reserves, negative marks and impairments. These charges, along with global benefits, generated a tax credit that more than offset our pre-tax loss. We also originated $48 billion of new assets in the quarter at solid margins.

Immelt recently has hia AAA rating backed and the market sold off GE shares. Translation? "We still do not believe ratings agencies". He says the dividend is safe "for 2009". Ok, we'll see.

Siemens is immelts real problem. If they can do it, why can't he?

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

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Thoughts & A Solution to Dow Placing Dividend Cut "On Table"

No other words to describe it other than "totally unacceptable".

First watch the video of Dow Chemical (DOW) CEO Andrew Liveris:


So, what to think.

First:
Mr. Liveris, the market is not telling you the dividend is too high, the market is telling you we are in a very mean global recession. You make the building blocks for almost anything sold in the global economy. Because of that, the market is saying they expect your earnings to suffer, greatly. The market is telling you that the reason to invest in your stock now is the dividend of which you have said "this CEO will not cut the dividend". Remember Dow's 96 years of uninterrupted and uncut dividends? If I do the math that takes us back to the 1929-1935 years which were far worse than anything we face today. This why the news of the action has had no effect on the stock today.

Second:
Rohm & Haas (ROH). Yes we all expect it to get done also, the only people who want it done more than you are the Rohm & Haas shareholders. Without your bid, their $78 offer becomes a $30 stock. Trust me, they want this....bad. Tell them "go sit down and wait your turn", they will.

Third:
Things will get better, take a breath. Walk away for a few days, go to an island and clear your head. You have not slept much obviously from the video and need a fresh outlook. Oil (USO) prices will rise significantly in the second half this year and currently tentative Arab nations will have renewed and stronger desires to diversify their revenue streams, and will have the cash to do so. You offer them that opportunity.

Fourth (here is the solution part):
You cannot cut the dividend and ever have the trust of shareholders ever again. You can't. You swore up and down all fall it would not happen, so it can't. I understand economic conditions have changed but using that excuse simply means you and your management team were not prepared, still bad. How can you do it and still save face? Put it in arrears for current shareholders.

This would take Board approval (you are the Chairman) but it could be done. Simply put, for shareholders of "x" date, the current dividend level is maintained but 50% of it will be paid in arrears 1 year from now. The current rate for new shareholders after "x" date is 50% lower. This will stabilize the shareholder base as current shareholder are not likely to sell and forgo the 50% in arrears. If it means anything, I wouldn't.

No you can't just cut it now say you will raise it next year, if you cut it now, we will not believe you and we already now dividend increases come much slower than reductions do.

I know the details are more complicated than that but it could be done. This gives you the financial flexibility you need now and while not destroying shareholder trust in you.


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

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Tueday's Links

Dumb is Smart?, iPhone sales. Obama's speech, MSM

- As crazy as it sounds....yes..

- Does any of this sound familiar?

- Did any of it sound, like, you heard it before?

- Great commentary on the MSM's role in all crisis and their lack of accountability in it.

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Changes Made

Made layout changes to the blog as I thought it was getting stale looking ands there were still complaints from IE (internet explorer) users that it was not showing properly...

Hopefully this is better, as always, please email or comment and requests or problems..


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Dow and Rohm Deal Delayed...for Now

Some thoughts on today's Dow Chemical (DOW) and Rohm & Haas (ROH) news.

The Release:

The Dow Chemical Company (NYSE:DOW) confirms it has informed Rohm and Haas that Dow will not close the proposed acquisition on or before January 27, 2009.

Dow has determined that recent material developments have created unacceptable uncertainties on the funding and economics of the combined enterprise. This assessment is based on several macro-economic factors such as the continued crisis in global financial and credit markets combined with the dramatic and stunning failure of Petrochemicals Industries Company of Kuwait (PIC) to fulfill its obligation to complete the formation of the K-Dow joint venture in late December 2008.

"Our long term strategy remains unchanged and the proposed acquisition of Rohm and Haas is consistent with this strategy," said Andrew N. Liveris, Chairman and CEO. Since Dow learned in late December of PIC's failure to close the K-Dow transaction, Dow has been aggressively engaged on multiple paths seeking ways to enable the Rohm and Haas transaction. Dow remains interested in discussions to find a solution to complete the acquisition of Rohm and Haas, but recent events have made closing untenable at this time.

"Dow Chemical has a long history of resiliency in responding to changing market conditions, and that resiliency continues," said Liveris, "but the world has changed significantly and we still do not see the bottom of this unprecedented demand destruction which only accelerated through the fourth quarter and brought December operating rates to historic lows. The Company's commitment to remain financially strong is part of the DNA of this 112-year old company."

Dow previously announced a series of wide-ranging actions to address global economic conditions and is accelerating those actions based on continued deteriorating demand. "We are well-prepared to take the appropriate steps to ensure we retain our options and financial flexibility to see our way through what we anticipate will be an extremely challenging year,"
said Liveris.

Rohm & Haas Replied:

Rohm and Haas Company (NYSE: ROH) announced today that it has been advised by The Dow Chemical Company that Dow does not intend to close the pending acquisition of Rohm and Haas on or before Tuesday, January 27, 2009. Rohm and Haas and Dow have received all required approvals for the closing and the merger agreement requires that Dow close by such date.

Rohm and Haas stated that it intends to pursue all available alternatives to protect its shareholders' interests.

What does it all mean in the end? Nothing really. The deal will still get done, just not now. The deal in in Dow's best interest and even a 10% price reduction is more money than Rohm shareholders are going to see for the rest of this decade so they will want it done. If the Haas family really wants to protect shareholders (being the largest, lets assume they do), they will work to get the deal done. It just comes down to financing.

By delaying the deal, Dow is also setting up a damages claim against Kuwait for their upcoming litigation.

Now that oil (USO) prices are creeping back to $50 a barrel from $30, Kuwait may be rethinking its decision to pull out, simultaneously ruining its international reputation and come crawling back. Dow will have other bidders for some or all of the commodity business's it wants to sell, again, just a matter of time.

Liveris promised to keep the balance sheet at Dow in tact and this move is doing just that. Now if you are trading the deal this news may be awful, but id you are a long term Dow shareholder enjoying a 10% dividend, this is good news.

Yes I know the merger agreement is rather "iron clad" as folks like to say for dramatic effect but lets be honest, by the time anything winds its way through court, this will all be settled anyway. Both side are simply posturing, and both side need the deal to get done...

It will, eventually and it will be done in a way that does not pout the company in a perilous position.

Disclosure ("none" means no position):Long Dow, Long Oil (DXO, not USO), none
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A Currency War with China?

Here is what to buy if Geithner's "Obama believes China is manipulating its currency" statement causes tensions..

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Jim Chanos on Madoff, Banks, TARP and More (video) $$

This is a great interview. I love these guys who do hedge their statements and are brutally honest with their thoughts.

Pt. 1


Pt 2





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Monday's Links

Barney Frank, Mexico, Oil Myth, Sherwin Williams, Adam's Options

- Was the headline really necessary? "Barney Frank Goes to Bat for Lender, and It Gets an Infusion"

- Peaked in 2004

- So, is it the Arabs or Canadians we help the most?

- Gets reimbursed from Rhode Island ....finally

- Thank you for the mention

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Barron's on Ackman and Gates Recent Purchases

Barron's talks about Ackman's purchases of General Growth (GGP) and Gates's of Otter Tail (OTTR)

Disclosure ("none" means no position):Long GGP, none
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CICB on Oil and The Next Price Spike $$

This is truly great stuff. The report covers reflation, oil and stimulus.

The portion you need to read is on page 4 titled "Oil Prices: Another Spike Ahead"

Authors Rubin and Buchanan lay out how while demand has fallen, the cost of new oil finds has not. What that means in its simplest terms is that much of current production shuttered, will not return until prices rise near $100 again. Any resumption of demand then all but guarantees rapid price increases. Please read this..

CICB Economics & Strategy

Publish at Scribd or explore others: Economics Research oil obama

Disclosure ("none" means no position):Long Oil
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GMO's Jeremy Grantham's Q4 Letter

This is a must read...

Jeremy Grantham Letter_4Q08

Publish at Scribd or explore others: Newsletters Periodicals & Report obama banking

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What To Buy? What Doesn't Need Credit?

As I look at the universe of stock I watch, one thing keeps coming to mind, who's business does not rely on consumer or corporate credit?

Today GE (GE) reported:

Fourth-quarter 2008 earnings from continuing operations of $3.9 billion, or $.37 per share before preferred dividend, or $.36 per share attributable to common shareowners. Results included $1.5 billion of after-tax restructuring and other charges, including increased reserves in current environment, which are above the Company’s original plan and the restructuring will lower costs for 2009 and beyond.

For the year, revenue was $183 billion, up 6%, and earnings were $18.1 billion, down 19%. This was the third highest earnings year in GE history.

“In a very tough environment, we delivered fourth quarter business results in line with expectations we provided in December,” Chairman and CEO Jeff Immelt said. “We grew Infrastructure and Media by 3% in the quarter and 10% for the year. Energy Infrastructure led the way in the quarter with 11% segment profit growth driven by continued global demand. Technology Infrastructure grew earnings by 1%, led by 21% growth in Aviation. NBC Universal segment profits declined 6% in fourth quarter as strong cable earnings were offset by declines in the local stations.

“Capital Finance earned $1 billion in the quarter and $8.6 billion for the year,” Immelt said. “We had several negative impacts to earnings in the quarter including increased loss reserves, negative marks and impairments. These charges, along with global benefits, generated a tax credit that more than offset our pre-tax loss. We also originated $48 billion of new assets in the quarter at solid margins.

“We run the company to have a Triple-A credit rating, and we have significantly strengthened our liquidity position,” Immelt said. “We generated $16.7 billion of industrial cash flow from operations, up 5%. We ended the year with $48 billion in total cash, after paying down our commercial paper balance to $72 billion from $88 billion at the third quarter. We used $5.5 billion of our equity offering to meet our stated GE Capital debt-to-equity leverage goal of 7:1 by the end of 2008. Through today, we have been able to fund $29 billion of our $45 billion long-term debt needs for 2009.

Also, Harley Davidson (HOG) reported:

Decreased revenue, net income and earnings per share for the fourth quarter of 2008 compared to the year-ago quarter. The Company said it plans lower motorcycle shipments in 2009 and made public its overall strategy to deal with the current economic environment.

“We have a strong core business anchored by a uniquely powerful brand, but we are certainly not immune to the current economic conditions,” said Jim Ziemer, Chief Executive Officer, Harley-Davidson Inc. “We have a clear strategy to not only deal with the economic conditions, but also strengthen our long-term operations and financial results. We are executing that strategy with confidence and conviction.”

Fourth-Quarter and Full-Year Results

Revenue for the quarter was $1.29 billion compared to $1.39 billion in the year-ago quarter, a 6.8 percent decrease. Net income for the quarter was $77.8 million compared to $186.1 million in the fourth quarter 2007, a decrease of 58.2 percent. Fourth quarter diluted earnings per share were $0.34, a 56.4 percent decrease compared to last year’s $0.78.

Revenue for the full year 2008 was $5.59 billion compared to $5.73 billion in 2007, a 2.3 percent decline. Full-year net income was $654.7 million, compared to $933.8 million in 2007. Diluted earnings per share were $2.79, a decrease of 25.4 percent compared to $3.74 in 2007. The full-year results are below the previously provided company guidance.

For the full year, wholesale shipments of Harley-Davidson® motorcycles were 303,479 units, an 8.2 percent decrease compared to 330,619 units in 2007.

2009 Shipment Plan, Gross Margins

In the first quarter of 2009, the Company plans to ship between 74,000 and 78,000 new Harley-Davidson motorcycles, a 3.0 percent to 8.5 percent increase versus the first quarter of 2008. However, for the full year 2009, the Company plans to ship between 264,000 and 273,000 new Harley-Davidson motorcycles, a 10 percent to 13 percent reduction from 2008.

“We reduced our production levels prudently in 2008, helping our dealers achieve lower inventory levels,” said Ziemer, “and we’re going to show similar discipline in 2009. That’s not only critical for the health of our business, but for our dealers’ businesses, as well.”

For the full year 2009, the Company expects gross margins to be between 30.5 percent and 31.5 percent, which compares to 34.5 percent for the full year 2008. The decrease is primarily due to an expected unfavorable shipment mix versus 2008, the allocation of fixed costs over fewer units, and expected unfavorable foreign currency exchange rates versus 2008. Given the volatility of the current economic environment, the Company also indicated it would not provide EPS guidance for 2009.

Strategy for the Current Economic Environment

The Company is executing a three-part strategy that includes a number of measures to deal with the impact of the recession and worldwide slowdown in consumer demand, with the intent of strengthening its operations and financial results going forward.

“Our strategy is focused on three critical areas: to invest in the Harley-Davidson brand, get our cost-structure right, and obtain funding for HDFS to help our dealers sell motorcycles and our retail customers to buy them,” said Ziemer.

They both run the gamut of customers, GE more corporate and HOG pure consumer. Both are great companies and both are struggling while still profitable. Long term both will be just fine. BUT, this year, I think significant downside is possible. Now, that only means a fantastic buying opportunity later, not the end of the world.

One of the best traders I follow sees GE hitting $7 or $8 in Q2. Here is UpsideTraders site. Should GE be forced to cut the dividend or lose its AAA rating, this is all but assured (that and Immelt is out of a job).  As much as GE says it will not, they also said full year earnings were "in the bag" when they were not. Until they fix the credibility problem, anyone saying anything from Fairfield will be look at very skeptically.

That being said, even if they cut is 50% to $.62 annual, at $8 a share that is a nice 7% yield, still a screaming buy. I just cannot commit new money there now until I get some evidence to the contrary.

HOG is the consumer, simple. The consumer is not going to be bailed out this year. So, because of that, we should not expect HOG to be. BUT, should it continue to drift into single digits, not buying it for an IRA to tuck away would be very difficult. They still are the best at making a one of a kind item and have brand loyalty like to other (until I see the Apple (AAPL) logo tattooed on folks, HOG has them beat). That being said, once credit issues are resolved, one can expect good results to follow immediately.

So then, what? Stuff in the ground, oil (USO), (DBO), (DXO), gold (GLD), (UGL) and silver (SLV). We need all three, they do not need credit for their value (one could argue tighter credit is a positive here, miners cutting back due to lack of credit decreases supply, bullish for prices), and are necessary.

Yes, as the economic recession has slowed demand for all, BUT, supply is also being taken off the market almost as fast  AND demand will resume well before the current production being taken off the market can catch up. That means a spike in prices.

For all three there is also the specter of corporate and government debt and possible worldwide defaults. Mish says that there is a crisis looming and that currencies will take the fall. Gregor McDonald says that when that happens, money will flow to currencies without borders or governments, gold, silver and (maybe) oil.

Cash is not such a bad thing to have right now. Think of it this way, if deflation is running 2%, and you can get 2% on a CD, that is a real return of 4% in purchasing power. That and locking it up for 6 months might stop us from doing something dumb with it...

Either way, I think one has to think that something dramatic is coming....one way or another..

Disclosure ("none" means no position):Long GE, DXO, none
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Buffett on PBS (video)

Berkshire's (BRK.A) Chairman talks about buying back his own stock for the first time.

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Friday's Links

Obama Crash, What Matters , Energy, Oil

- Howard makes some great points

- Woodrow nails it

- Hello?!?

- Trading information on USO

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The Rise and Fall of US Mortgage and Credit Markets

Of the approximately 80 million houses in the United States, 27 million are paid off, while the
remaining 53 million have mortgages. Of those households with mortgages, 5 million (or 9 percent)
were behind in their payments and roughly 3 percent were in foreclosure as of mid-2008.

From the Milkin Institute:
Rise and Fall of US Mortgage and Credit Markets Excerpt

Publish at Scribd or explore others: Economics Research credit milkin institute

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US Real GDP Regression Analysis

Before we get too depressed about the future, a reader reminds of where we have come from and of past difficulties.

Reader Submits:

In the chart of the US Real GDP which covers the Great Depression period 1930-1939 we had 4yrs (1930-1933) of sub-zero growth but then swung to 4yrs of strong growth (1935-1937). I believe that this history is a useful guide to the resilience of the American economy in response to highly negative financial events of our own creation.

How this correlates to the market can be seen in the chart of the Dow Jones chart below spanning 1928-1935.(The BLACK ARROW represents the inauguration of FDR)

We do fix the problems and we do recover. Those who buy in the current market and can hold till recovery will most likely do quite well even without timing the bottom.

Lower Prices = Less Risk. In my opinion this is a time to be very bullish!

Personally, I think we have another leg down. I do not see a housing rebound in 2009 at all and until that begins to straighten out, I think we meander with risk to the downside. The reader does have a good point in those calling for demise of the US are wrong, period. We have faced worse time than this (it was worse when Reagan took office, 10% unemployment, 12.5 inflation, double digit interest rates) and come through just fine.

I still say avoid financials like the plague as gov't bailouts come with a very steep price (massive shareholder dilution) and the future for many is very cloudy at best. If they do not know how to value what they hold, how can an investor.

Those looking 10 years down the road will look back on current conditions very favorably one day.



Disclosure ("none" means no position):Long USA
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Munger on Psychology of Human Misjudgement 1995

This is a Charlie Munger classic. For those who do not know Munger, he is essentially (for lack of a better term) Warren Buffett's partner at Berkshire Hathaway (BRK.A)

Munger on Psychology of Human Misjudgement 1995

Publish at Scribd or explore others: Academic Work charlie munger berkshire hathaway

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Thursday's Links

Using Stops, Homework, 895 Promises, Contango

- Andy Swan has a nice post about why these are a waste

- Always check your kids homework!!!

- Track Obama's campaign promises here

- Market Folly tells us what it is and how it effects returns

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Wal-Mart's Lee Scott on Charlie Rose

The first half of the piece deals with Steve Jobs health and Lee is the second half..

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AutoNation's Mike Jackson Video and World Congress Presentation

Let's put the noise aside. AutoNation (AN) and CarMax (KMX), a Berkshire Hathaway (BRK.A) holding are picking up market share daily as smaller dealerships close by the bucket-full. When auto buying resumes (it will, they do not last forever) both will profit handsomely as buyer will have fewer option to buy from.

On CNBC


Mike Jackson CNBC 1-21-2008 from http://marccannon.vox.com/

On Bloomberg..


The following is a must see...
Jackson's World Congress Presentation:
AutoNation's Mike Jackson at World Congress

Publish at Scribd or explore others: Business Presentations & Slid lending Chrysler

Disclosure ("none" means no position):Long AN
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Apple = Starbucks & Whole Foods $$

When folks are flush, they will spend for status, but when things get tight and quality low cost competitors enter the market, buying habit change...fast. This also has nothing to do with Steve Jobs' shareholder deception, what is happening now at Apple started last summer.

So, the Apple (AAPL) nuts will send me more hate mail and call me names. Oh well...

Remember when WholeFoods (WFMI) was the only place in town to get organic food and Starbucks (SBUX) was the only place the get anything other than a standard cup of coffee? Remember? It seems like and eternity ago especially when I can get organic food at the 7-11, Wal-Mart (WMT), Costco (COST), BJ's (BJ) and every local supermarket and a cappuccino can be had at any one of a dozen local coffee houses, McDonalds (MCD) and Dunkin Donuts.

If WholeFood's $5 a pound organic potato the best? Is Starbucks $6 cappuccino appreciably better than an offering from anyone else at a fraction of the price? No.

Is the iPhone ($199) that much better than Research in Motion's (RIMM) Blackberry Bold or Storm that can be had for 1/2 the prices ($99 through discounts)? No

Is a Mac computer really worth 2x the amount I can get a similarly functional product from Dell (DELL) or Lenova? No.

Now for all the above, for the coffee devotee, the person searching for the "one of a kind" generic item and the computer lover who wants a top of the line item or a devoted Apple user, all of the above will continue to generates sales and profits from these folks.

But, for the "unwashed masses" (yours truly is one of them) that is not married to a brand, a cup, need a computer for basic functionality and does not need organic-hand-picked-free-trade-union-only beets, we will alway drift to the lower cost comparable item. The problem with the above three is that they lack an item for us.

The Blackberry Bold and the iPhone are both comparable items. Both have pro and cons vs each other and both have loyal followers that will tell you either is better. But for 1/2 the price, the Bold has the most important advantage over the iPhone.

I am reading Howard Lindzon's upcoming book "The Wallstrip Edge ". For the record I am not a trader but the book is very good as it does force you to look at things a different way and it challenges "common knowledge". Lindzon has been in the game for decades now and anytime you can get insight from someone as brutally honest as Howard, that has tremendous value. Enough about the book, I'll have more when I publish the review next week.

As I read it I realize the trend in Apple is over like the others. Shareholders are not going to see a $180 stock price in the future and like the other two, a stable or declining price is more likely. The iPod was revolutionary and had such a lead on the others there was no answer (the real advantage was iTunes, not the player). The iPhone is a great product but was immediately matched by competitors that offer some things it doesn't at a far lower price point. Unlike the iPod, there is no iTunes for the phone that makes using a competitor's product impossible. Cell networks are as interchangeable as toilet paper thus the advantage the iPod has is not found on the iPhone. Now price rules.

With US sales down 24% in Q4, Apple is left with only more price cuts to stimulate sales. That will cut into margins and profits.

Are any of the above three going away? No. Are they in danger of losing money? Apple no, the others, for a while, yes. It does mean the glory days for the stock are over, unless they can tap back into the mass market that has left them. But that will require dramatic pricing alterations and all three up until this point have been painfully reluctant to do so. Starbucks and WholeFoods really have not significantly altered it and Apple only did so on the iPhone (from $599 to $399 to $199) after sales of the product ground to a pedestrian level and even at its current level, the phone is overpriced vs the market.

What's worse is all three now have the reputation of "expensive". That will be the hardest thing to overcome, convincing a newly thrifty bargain hunting consumer you are not what they say you are...


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

More Apple /Jobs / CNBC fallout, Cell Phones, CDS's, Texas Oil

- From the NY Times

- How could you not know your phone did this?

- A great explanation of them

- What a shift might mean

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Berkshire Buys 4.2 Million Burlington Northern Shares $$

Warren Buffett loves Burlington Northern (BNI) and now has 22% of the shares.

Berkshire Hathaway (BRK.A) now controls 74,452,029 shares of the company after picking up over 4 million more between $61 and $62 a share 1/15.
SEC Filing



Disclosure ("none" means no position):None
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Pershing Square Files 13D/A In Borders Group $$

The good news for shareholders is that Ackman is in this thing (Borders (BGP))for the long haul...

From the filing:
As of January 16, 2009, as reflected in this Amendment No. 9, the Reporting Persons are reporting beneficial ownership on an aggregate basis of 25,297,880 shares of Common Stock (approximately 33.62% of the outstanding shares). This includes warrants covering 14,700,000 shares of Common Stock, which represents 9,550,000 warrants received on April 9, 2008 and 5,150,000 warrants received on October 1, 2008 (each, as previously disclosed). The Reporting Persons own cash settled, total return equity swaps covering 4,805,463 notional shares of Common Stock (as previously disclosed). The notional shares that underlie such swaps are not included in the totals set forth in the charts earlier in the Schedule 13D. The aggregate economic exposure of the Reporting Persons to shares of Common Stock, including the aggregate shares of Common Stock beneficially owned by the Reporting Persons plus the aggregate notional shares underlying such swaps, represents approximately 40% of the sum of the outstanding shares of Common Stock and the shares of Common Stock underlying such warrants.

Item 4. Purpose of Transaction

Item 4 is hereby supplemented, as follows:
On December 22, 2008, Pershing Square, certain of its affiliates and the Issuer entered into an agreement (the “First Amendment to the Senior Secured Credit Agreement”) to extend the deadline for repayment of the $42,500,000 senior secured term loan owed under the Credit Agreement by the Issuer to Pershing Square, from January 15, 2009 to February 16, 2009.

On December 22, 2008, Pershing Square and the Issuer entered into an agreement (the “Extension of Purchase Offer”) to extend Pershing Square’s backstop purchase offer on behalf of certain funds managed by Pershing Square, set forth in the Purchase Offer Letter, from January 15, 2009 to February 16, 2009. On January 16, 2009, Pershing Square and the Issuer further agreed to amend the Purchase Offer Letter (the “Amendment of Purchase Offer”), such that at the election of the Issuer and subject to certain terms and conditions, certain funds managed by Pershing Square will be obligated to purchase all, but not less than all, of the issued and outstanding capital stock of Paperchase Products Ltd. and its subsidiaries (together, “Paperchase”). In advance of the acquisition of Paperchase, the Issuer (or certain of its affiliates) will either acquire any issued and outstanding capital stock of Paperchase currently not owned by the Issuer (or certain of its affiliates), or cause any third party holders that own capital stock of Paperchase to become parties to the stock purchase agreement for the sale of Paperchase to certain funds managed by Pershing Square. Pursuant to the terms of the Purchase Offer Letter, as amended by the Amendment of Purchase Offer, funds managed by Pershing Square are no longer obligated to purchase the Issuer’s approximately 17% interest in Bookshop Acquisitions, Inc. The Purchase Offer Letter remains subject to its original terms and conditions, except as expressly amended or modified by the Amendment of Purchase Offer.

The foregoing summary of the First Amendment to the Senior Secured Credit Agreement, the Extension of Purchase Offer, the Amendment of Purchase Offer and the transactions contemplated thereby is not complete and is subject in its entirety to the First Amendment to the Senior Secured Credit Agreement, the Extension of Purchase Offer and the Amendment of Purchase Offer, which are filed as Exhibits 99.1, 99.2 and 99.3 hereto and are incorporated herein by reference.

The Reporting persons have been and continue to be in discussions with the Issuer regarding financing transactions, including the backstop purchase offer, set forth in the Purchase Offer Letter, as extended and amended pursuant to the Extension of Purchase Offer and the Amendment of Purchase Offer, and alternative commitments and transactions (collectively, “Financing Transactions”). Notwithstanding anything to the contrary in this Schedule 13D or otherwise, the Reporting Persons may cease these discussions at any time and can make no assurance that any Financing Transaction will be successfully negotiated and/or consummated.

FIRST AMENDMENT TO THE SENIOR SECURED CREDIT AGREEMENT

AMENDMENT OF PURCHASE OFFER

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The Scariest Chart Ever $$

If this does not give you pause...nothing will...

From East Coast Economics

Here is a chart of federal borrowing through Dec. 2007.


Now, same chart through December 2008.




Anyone still think thee are not some rough patches down the road?


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Circuit City: An Inexplicable Chart

Just looking at this chart, it mystifies the imagination how Circuit City (CC) ended up liquidating..

Take a look...


How does a company that has 20% market share of internet traffic, NOT dominate its industry? How?

Former CEO Phil Schoonver should be imprisoned at Abu Grab, at the very least...

The harsher penalties ought to go to the Board that oversaw his willful shareholder obliteration.

I'm think the prison in "Midnight Express"


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Harley Davidson Seeks Loan Guarantee's from FDIC

This is just too much...

Sen. Bob Casey Jr. (D- Penn) has asked a federal agency to find Harley-Davidson (HOG) eligible for funds handed out under a federal bailout for financial institutions. In a Jan. 16 letter to Federal Deposit Insurance Corp. chairman Sheila Blair, saying Harley-Davidson recently inquired whether its financing company and subsidiaries -- Harley-Davidson Credit Corp. and Eaglemark Savings Bank -- are eligible for the Temporary Liquidity Guarantee Program, or TLGP.

"Without access to TLGP, Harley-Davidson may be forced to make tough decisions that will impact workers in Pennsylvania, jeopardize the local economy ... and negatively impact the state economy," Casey wrote in the letter. Casey said he wants to do everything possible to make sure Harley's financial arm has access to help if it's eligible.

He said the problem with the economy is related to credit, and Harley's participation in the program would allow more people to get Harley loans to buy motorcycles. "Without the determination (of eligibility) made, it puts their financing company in a much more precarious situation," he said.

In October, in an attempt to improve confidence in the banking sector and to improve liquidity for banks, the FDIC started the program to guarantee newly issued unsecured debt of qualifying institutions and guarantee certain noninterest-bearing accounts.

Guarantee debt: Harley spokesman Bob Klein said the program would guarantee unsecured corporate debt against default; Harley would only get federal funds if a customer defaulted on his or her motorcycle loan.

Klein said the TLGP is one of several options that Harley-Davidson's financial arm is pursuing "to ensure continued funding of its lending activities" in a challenging economic environment. Lower consumer confidence has affected the motorcycle industry, he said.

The Wisconsin-based company told elected officials in Pennsylvania and Wisconsin about its plans to seek inclusion in the program, Klein said. The company appreciates Casey's support, he said.

A recent dealer survey shows that year-over-year retail sales appear to have softened from the third quarter, when Harley-Davidson reported a 15.5 percent drop in U.S. retail sales. The company is expected to report fourth-quarter results Friday.

Now, this is government programs run amok. It is one thing to backstop the debt of the compnay to lower borrowing costs, but to backstop its customers? Insane...

Do we really expect corporations to increase lending standards in an effort to avoid another fiasco like we are going through when taxpayers are backing the loans they are making now? Do we really?

What's next, guaranteeing the debt we use for dishwashers at Home Depot (HD) or Sears (SHLD)?

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Peak Oil Update...

There is a real interesting discussion about the recent oil (USO), (DBO), (DXO) price activity of the past year and governments reaction to it.

I highly recommend the ASPO Newsletter

From the December 2008 Issue:

In years ahead, analysts may look back on the current crisis and identify its causes. They may conclude that oil demand had begun to outpace supply around 2005, when the production of Regular Conventional Oil passed its peak.

The shortfall was however relatively small and was partly met without undue difficulty by a modest reduction in demand. But as prices began to firm, oil traders and other speculative financial institutions began to take a position in the market, which had the effect of driving up the price. Gradually the process built momentum as huge notional profits were reaped from the appreciating asset. In a conventional market such movements would soon be countered by increased production, but in the case of oil, there was no spare capacity to release, and the speculative surge fed on itself leading to an extreme escalation in price which reached about $150 a barrel by July 2008.

However as this peak was approached, the traders began to conclude that a limit was close and began to buy future options at lower prices, which began to undermine the price in a self-fulfilling process. In parallel the high prices began to undermine many other aspects of the economy with for example airlines and motor manufacturers facing difficulties. They themselves relied heavily on debt, which itself was traded between banks without adequate genuine collateral, and were forced to unload their speculative oil positions in order to try to shore up their failing businesses. Gradually the whole edifice collapsed, and oil prices fell to around $50 a barrel, although nothing particular had changed in the actual supply/demand relationship. The flaw in the system was to treat a finite resource whose production was largely controlled by the immutable physics of the reservoir as if it were a normal commodity capable of responding to ordinary market pressures. If the price of potatoes increases, farmers can grow more and the market responds, but oil is different.

Governments responded to the crash by pouring yet more money, itself lacking genuine collateral, into the system in the mistaken belief that this would restore the position of assumed eternal growth, and quite possibly the stock market will respond positively as traders sense a new upward direction. They have no real interest in reality: their job being to try to reap rewards from short term movements. But if there is an economic recovery, that would serve to increase the demand for oil, which is in a sense the bloodstream of the modern world, and oil prices would again begin to surge. Probably, it will take several such vicious circles before governments and, more important, people at large at last come to grasp the reality of the situation, which will likely prompt radical changes in the human condition.

Here is the report:
Association for Peak Oil Dec. 2008 Newsletter

Publish at Scribd or explore others: Economics Research crude oil peak oil

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

$200 oil, Fingers, Landing

- A convincing case

- Weird

- US Air flight

-

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Hyper-Inflation Survival Guide

This is interesting...

Hyper Inflation Book

Publish at Scribd or explore others: Business eBooks Business-Economics inflation gold feder

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Marc Faber on Latest Round of Bailout in US & UK (video) $$

Interview from 1/19/2009

Part: 1.... The shoe to drop in 2009 will be the doubt in investors eyes for governments to meet bulging obligations.


Part 2:..... Policy intervention will make current downturn longer..




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Buffett on Dateline (video) $$

Berkshire Hathaway's (BRK.A) Warren Buffett talk about his support for Barack Obama, the economy and what needs to be done..

So, the first half of the interview was obviously written by the Obama Press Team and is little more than a "isn't our guy great" puff piece, only missing Brokaw and Buffett hugging and kissing as tears of unbridled joy steam down their faces. The middle two minutes of it actually has some value in economic terms. For those only interested in that, go to 2:50 of the interview. The last minute is more of the first.

It is unfortunate though that Brokaw had Buffett on and all that was gleemed from the interview was a recitation of what we have been hearing about Obama and two minutes of the current economic climate..

An opportunity missed...




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The Future of Print Newspapers

Washington Post Media CEO Katharine Weymouth speaks with Aspen Institute President Walter Isaacson about the future of The Washington Post and the news industry. Warren Buffett's Berkshire Hathaway (BRK.A) is a majority shareholder of the Post.

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Monday's Links

Bitches, Circuit City, Madoff, Leveraged ETF's

- I can't stand these two...


- Liquidation agreement
Circuit City Liqudation Agreement

Publish at Scribd or explore others: Contracts Business & Legal bankruptcy circuit city

- SEC Complaint
SEC complaint against Bernard L (Bernie) Madoff

Publish at Scribd or explore others: Informational Other fraud bail

- Here is a list


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Wilbur Ross Gets His Bank

As he said he would...

Privately held, clean bank and done in order to allow Wilbur to participate in the FDIC acions that are anticipated..

Bloomberg:


Fox Biz:




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More Oil Production Cuts

More evidence global oil production is being shuttered.....

ConocoPhillips (COP), the third-largest U.S. oil company, said Friday it's cutting 4 percent of its overall work force, reducing the number of contractors it works with, cutting capital spending by 18 percent and writing off $34 billion in noncash assets because of plummeting energy prices. These are the first announced job cuts by an oil major, about 1,300 in this case. ConocoPhillips said it has approved a capital spending program of $12.5 billion for 2009, down from the $15.3 billion it projected to spend in 2008.

Just last week, Schlumberger (SLB), the world's largest oilfield services company, said it would eliminate up to 1,000 jobs in North America, or about 5 percent of its work force, and is looking at cuts elsewhere globally. Halliburton (HAL). also said it would begin laying off workers but didn't say how many or when.

"We are positioning ourselves in the current business environment to live within our means in order to maintain financial strength," ConocoPhillips Chairman and Chief Executive Jim Mulva said in the statement. "We're doing this by reducing our cost structure, addressing our balance sheet and continuing to manage the company through prudent capital discipline." Translation, "we aren't drilling anywhere near what we were before."

In November, ConocoPhillips and the state-run Saudi Arabian Oil Co. postponed construction of a multibillion-dollar refinery in Saudi Arabia because of the deteriorating global economic situation, which has eaten away at energy demand.

Oppenheimer & Co. analyst Fadel Gheit has said he expects spending cuts to average 10 percent for large producers and 30 percent for smaller companies.

Chevron (CVX) spokesman Don Campbell said Friday the company had no plans to cut its work force. Exxon Mobil (XOM) hasn't announced any work force changes either.

In addition, ConocoPhillips said it likely would replace only about 25 percent to 30 percent of its 2008 production with new reserves. Reserve replacements represent the ratio of reserves found over production for a given period. Analysts typically say a company's reserves replacement should average more than 100 percent over a three- to five-year period to indicate growth.

This is very bullish for oil prices longer term. When demand returns (you have to believe we are in a global depression for it not to) prices will spike as excess supply dries up and this shuttered production lags the upturn.

If you want to play oil other than the individual companies, the ETF symbols are (DBO), (USO) and (DXO)


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"America's Great Depression": A Book

By Murray Rothbard, founder of the Mises Institute

America's Great Depression - Rothbard

Publish at Scribd or explore others: Published Research Academic Work

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GAO Report on TARP 12/2008

Read it and weep...

GAO TARP December 2008

Publish at Scribd or explore others: Periodicals & Report 2008 tarp

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Time for Microsoft's Balmer to Make Way For Ozzie?

This reader idea has real merit for Microsoft (MSFT)

Reader submits:

"I have avoided MSFT for some time as too expensive. If you do the math, owner’s earnings have been 2-4% even though revenues have grown since 1997 and the stock was very flat. However, since 2006, they have been buying back stock and Net Income has risen so that 2009 is forecasted to be ~$2.20. With the stock under $20shr I began looking about for information and found that Ray Ozzie wants to remake MSFT into a start-up mode.

Ozzie looks like a man on a mission. The issue will be if Ballmer lets Ozzie have his way. Will Ballmer even be there? If I were a Board member I would be seriously concerned with Ballmer’s actions re: Yahoo. Offer $40Bill then back away with what appear to be immature negotiations."

Just who is Ray Ozzie and what is the deal?

From Wired in November 2008

At Microsoft, he says, there must be a shift from the traditional model of software to what he calls software plus services. As slogans go, it's not particularly catchy. But the sentiment is clear: Just packaging software, collecting the money, and then producing a new version a few years later (whether people want one or not) is no longer a sustainable business plan.

The relationship with customers must be constant and continuous. Instead of discrete onetime transactions, the money—whether from subscription fees or advertising—will flow constantly. For the user, everything will happen when it's needed, as if pulled down from a cloud. The metaphor has been around for years, along with the more recent spinoff, cloud computing. But the phenomenon is anything but ethereal. Billions of dollars are at stake.

According to Microsoft, one example of a successful service is Windows Update, which automatically installs patches and bug fixes on users' operating systems. Hotmail, like all Web-based mail applications, is also a service. Virtual Earth? A service. Software, but not from a box. Still, Ozzie draws the line at the idea that you can do anything and everything in the cloud, that every application can become Web-based, that the desktop is dead. Some things, he says, still require local computation, offline persistence, and the control that only one's own desktop processor offers.

This defense of the desktop dovetails nicely with Microsoft's historic strengths. So, while Ozzie actively evangelizes for the disruptive move to services, he's also saying that for many purposes the ideal software model is a hybrid: a heavy-duty application (known as client software) combined with an ongoing Internet service. A great example is Apple's iTunes, which you install on your computer and use as an offline media organizer but which also serves as an Internet app that lets you buy songs, stream music, and get recommendations.

In Ozzie's view, Microsoft must make this model the centerpiece of all its future efforts. The company must transform itself from a manufacturer that dumps out a big product every couple of years to a customer-obsessed enterprise devoted to continually producing, updating, and supporting a full panoply of services. In his speech, Ozzie puts it this way: "When packaged software ships, services go live. What was our end is now the beginning. The gold disk"—from which all retail copies of a new piece of software are made—"is now the grand opening."

At that point, Ozzie unveils the new products that he's been laboring over for more than two years: a top-secret set of initiatives designed to make Microsoft as dominant in the cloud era as it was in the days of the desktop. First up is a new operating system for Web-based applications, codenamed Red Dog—it's Windows for the cloud. (See Editor's update below.) Then comes a demonstration of Live Mesh, which will allow people to seamlessly synchronize all their information with as many people and places as they want, across as many devices (computer, phone, camera) as they want. Finally, another engineer demonstrates how Microsoft will make even its legacy apps accessible via the cloud. It's a shocker. After years of Microsoft insisting that the desktop is the only proper place for its crown-jewel applications—the venerable Office suite—it appears that Word, Excel, and PowerPoint will levitate from the desktop and become services as well. In this demo, an Excel spreadsheet is running in the cloud with almost all its functionality intact, including features like auto-complete and auto-formatting as well as built-in collaboration and a way to link the spreadsheet results to emails and Web pages.

Now Balmer has been in charge at Microsoft for a while now and the time has come to take a real close look at things. The Yahoo (YHOO) deal was a fiasco for Yahoo but had the deal been accepted, it would have meant Microsoft paid $40 billion for a company worth $15 billion today. Not good..

The desktop software model is dying thank to Google (GOOG) and Balmer is being dragged into. Ozzie is already there, why not let him run the show?

It is a question the Board must begin to consider...


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Circuit City To Be Liquidated..

35,000 folks will lose their jobs..they can thank former CEO Phil Schoonover. What is sad is that it did not have to happen, there were many opportunities to save it. What Schoonover did should be criminal.....criminal...

The News:

Circuit City Stores Inc. says it has reached an agreement with liquidators to sell the merchandise in its 567 U.S. stores after failing to find a buyer or a refinancing deal.

The second-biggest electronics retailer in the nation says in court papers it has appointed Great American Group LLC, Hudson Capital Partners LLC, SB Capital Group LLC and Tiger Capital Group LLC as liquidators.

Calls to the Richmond, Va.-based company and the liquidators were not immediately returned.

Circuit City filed for Chapter 11 bankruptcy protection in November. U.S. Bankruptcy Judge Kevin Huennekens gave the company permission to liquidate if a buyout was not achieved.

In June of 2007 I said:
"As a trade, any good news could vault shares up immediately. But, I do not see the conditions that could create that good news anytime soon. Maybe they could get bought out and that would cause shares to jump, but, I am reluctant to invest on the prayer someone rescues them. An Eddie Lampert, based on past history would just be as likely to wait for these buffoons to run it into bankruptcy and buy it there even cheaper than now. Why pay a premium to the current price when in bankruptcy he could get it for a fraction of it?

At their current rate CC will be out of cash before Thanksgiving and then the fun really starts. This assumes they do not start ramping up debt to pay for operations and also assumes no further economic slowdown. Should the economy slide even more, see ya..."

Then CEO Schoonover then fired good employees to save costs causing sales to plummet, ramped up debt, lowered bonus levels for his hand picked executives, Spurned a possible takeover, spurned an official offer from Blockbuster (BBI), was actually interviewed by the WSJ about "how to execute a turnaround", tried some new platforms and had one of the most visited web site during the 2007 holiday season but due to high prices could not convert them to sales.

Today is the result....sad for those losing jobs..


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IEA Report Shows OPEC Supply & Production Decline for Crude

Highlights of the latest OMR
dated: 16 January 2009

**Forecast global oil demand in 2009 is revised down by 1.0 mb/d, following a halving of assumed GDP growth to 1.2%, given the worsening outlook. Global oil demand is now projected at 85.3 mb/d in 2009 (‑0.6% or -0.5 mb/d year-on-year). The 2008 estimate is revised down 70 kb/d to 85.8 mb/d (-0.3% or -0.3 mb/d versus 2007). The expected two-year contraction in oil demand would be the first since 1982 and 1983.

**Global oil supply was flat in December at 86.2 mb/d, with curbed OPEC output offset by gains elsewhere. Non-OPEC supply for 2008 and 2009 is forecast at 49.5 mb/d and 50.0 mb/d, lowered by 60 kb/d and 30 kb/d versus last month’s report. 2008 output declined by 150 kb/d, partly due to the first fall in Russian supply since 1996. 2009 growth is forecast at 0.5 mb/d, in addition to a 0.6 mb/d increment in OPEC NGLs.

**December OPEC crude supply was 30.9 mb/d, down 330 kb/d versus November. This was 1 mb/d below September 2008 levels, and nearly 2 mb/d below mid-2008 highs. OPEC agreed a new target of 24.8 mb/d from January, equivalent to OPEC-13 output of 28.2 mb/d versus a reduced 2009 ‘call’ of 29.5-30.0 mb/d.

**1Q09 global refinery throughput is forecast at 72.3 mb/d, 1.2 mb/d lower than last month’s report. Weaker global demand and poor economics continue to hamper crude runs. Evidence of more structural changes to the refining industry is emerging in addition to reduced plant operation rates.

**OECD industry stocks fell by 2.0 mb to 2,658 mb in November, as a US build was offset by lower European crude and Pacific distillates. Despite a downward revision to October data, end-November forward demand cover remains high at 56.4 days on lower OECD demand. Preliminary December data indicate an OECD draw of 8.0 mb.

**Crude oil prices rose to nearly $50/bbl in early January, supported by cold weather, the Russian/Ukrainian gas crisis and fighting in Gaza. Subsequently, weak global refinery demand and an increasing crude overhang have pressured Brent futures to currently around $45/bbl, while WTI was at $35/bbl, distorted by record-high Cushing stocks.

So, the key here is that despite the global recession currently underway, supply demand is still about equal. That means any increase in economic (particularly manufacturing or infrastructure work) activity will tilt the balance and any geopolitical event could cause a run on oil (DBO), (USO), (DXO).

Is oil going back to $147, not without a major event (but, is that so far out of the question?). But to think it could double from here this year is within the realm of reasonableness. Global gov't stimulus is going to be tilted towards "shovel in the ground" projects and that means oil demand rises. Supply is down and both OPEC and Non-OPEC production has been curtailed also. Production increases will lag and demand increase so price pressure will be upwards.

Regarding production the report says:
"Forecast non‐OPEC production is trimmed by 290 kb/d for 4Q08 and 345 kb/d for 1Q09, then by
around 150 kb/d for the remainder of 2009. Longer‐than‐expected outages affecting the GOM and
Azerbaijan curb early 2009 supply, as do weaker expectations for the North Sea and Australasia.
Forecast 2009 production from Russia and Canada is trimmed on fiscal and investment barriers and
field underperformance, while weaker expectations also now prevail for Malaysia and Vietnam."

"OPEC‐11 production, excluding Iraq and Indonesia, fell by 825 kb/d in November, representing apparent compliance with the 1.5 mb/d cuts in target output agreed on 24 October of around 55%. However, as noted above, further reductions are also scheduled for December supply. OPEC Ministers gathered in Cairo on 29 November, ahead of their next scheduled meeting in Algeria on 17 December. In the end, no further decision on output policy was taken, due apparently to uncertainties over upcoming winter weather and the fact that it was too early to judge the impact of production curbs only put in place from 1 November."

The December meeting resulted in further production cuts..

FULL REPORT:
1/16/2009 IEA Report

Publish at Scribd or explore others: Periodicals & Report crude oil iea

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Friday's Links- After This Week, Some Laughs

New Mac, Bin Laden, Geithner,

-
Apple Introduces Revolutionary New Laptop With No Keyboard

- Boosts sales of cassette players

- Bootleg Turbo Tax

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The blog has just been added to the kindle store at Amazon (AMZN). Follow this link to get it

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Is Ulrich's Move at Target Good for Bill Ackman? $$

A new CEO always makes some changes. Will Steinhafel look closer at Pershing Square's proposal?

Here is the news:

The WSJ Reports:

Target Corp. said chairman Bob Ulrich will retire at the end of the month, and will be succeeded by Chief Executive Gregg Steinhafel, completing a transition that began when Mr. Steinhafel was tapped for his current post a year ago.

Mr. Ulrich will become chairman emeritus, the retailer said.

The 53-year old Mr. Steinhafel joined Target in 1979 and became president in 1999. Target announced last January that he would succeed Mr. Ulrich as CEO, although he didn't take the reins until last May. He was named to the board two years ago.

Mr. Ulrich has spent his entire 41-year career at Target and its predecessor company, Dayton's, starting as a merchandise trainee. He became its president in 1984 and chairman and CEO three years later. Mr. Ulrich is credited with creating Target's "cheap chic" marketing strategy some 20 years ago.

Like so many other retailers, Target has been struggling with slackening sales as shoppers rein in discretionary spending in the face of the housing-market collapse, the financial-markets meltdown, gyrating gasoline prices and tight credit. Last week Target said its December same-store sales fell 4.1%, in line with its expectations. But it said that markdowns "pressured profits."

In addition to slowing sales, Target's profits have suffered as an increasing number of its shoppers default on credit-card payments.

"As we look to the future, we are completely confident in Gregg's leadership and his ability to build on Bob Ulrich's legacy by continuing to deliver a superior guest experience," said Vice Chairman Jim Johnson.

Now, let's look back at the proposal from Ackman:



The plan was endorsed by Lazard.

Target (TGT) is facing increasing credit card losses on it portfolio. It should be noted that these losses are smaller that would have been had they not listened to Ackman and sold 1/2 the portfolio to JP Morgan (JPM).

What the transaction proposed by Ackman does (listen to the presentation for more detail) is frees up a very valuable commodity right now for any retailer....cash. It lowers land acquisition costs for expansion, increases cash flow to the retailer, lowers capex costs and more.

What is not clear was why the Ackman deal was really declined. Here is the press release put out at the time.

Here is the interesting part. When this was issued, Ackman's reply was that he would "wait until after the holiday's to address concern's with management". Now we see Ulrich retire. Are the two actions related? Was Ulrich standing in the way of the deal and did he hold sway over management and the rest of the board? Did Ackman know this was coming and was this the reason for his dropping the issue for the time being?



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Apple: MSM vs Bloggers

Jim Goldman had a tough (deservedly so) 24 hours. Watch. After essentially mocking and condescending blogger's reports Apple's (AAPL) Steve Jobs was sick, Goldman now has explaining to do.

CNBC's own Dylan Ratigan takes him to task.


"Fake Steve Jobs" says he got "punked" by the Apple spin machine. The comment got Fake Steve banned from the network.


Notable Statements:
Dennis Kneale says "The dirty secret of journalism is that you have to believe most of what you are told"

There was a very interesting exchange later in which Goldman says "Until I am privy to Steve Jobs' medical record all I am telling you is what my sources tell me who I trust and what the company tells me."

Then Kneale pipes back in and says "Goldman reported what he was told and that's what a good journalist does".

Fake Steve make the best point when he says "If your just going to repeat press releases, why have the press, why not just let Apple put out press releases and why have a Bureau out in Silicon Valley?"

Here is the problem. If you had just listened to Goldman for the past 8 months you would have believed until last week everything with Jobs was fine. Had you read blogs, doubt would have crept into your mind. What you did with that information would have been up to you. The point is that you would have had more information to make a decision.

The same could be said of CNBC's Phil LeBeau in his coverage of the automakers Ford (F), GM (GM) and Chrysler.. Both Goldman and LeBeau are careful to protect their access to those they cover by not being overtly critical of them. When they are critical is is posed as "there are those who say......" and then "how do you respond to that......"

Fake Steve was right in saying why have the press there and why not just let them put out press releases. The only purpose Goldman and LeBeau serve in their respective jobs is to publicly disclosed those release and allow those they cover to strategically leaked information they want out in the public. They are information conduit for the company's they cover, they are not doing a public service to viewers.

LeBeau's coverage is especially aggregious as he covers an industry that one would be hard to find has been more mismanaged for the past three decades the US automakers. Yet, if one goes back and looks at the coverage of Detroit from LeBeau, it is painfully apologetic to them and his defense of theory need for bailout funds could only have come from the PR departments of the auto makers.

Now, if that is what they are supposed to be then that is fine, but let's not pretend we are doing something else and more importantly, lets not talk so dismissively about those who are not acting in that role and who are raising questions that ought to be answered.

If the MSM wonders why they become less relevant on a daily basis, they need only look at these examples...


for ore on the Jobs angles, please read The Ponderings of Woodrow

Disclosure ("none" means no position):None
Visit the ValuePlays Bookstore for Great Investing Books

2008 Foreclosures Jump 81%, Dimon Sees Loan Demand Fall

From Realty Trac....

RealtyTrac®, the leading online marketplace for foreclosure properties, today released its 2008 U.S. Foreclosure Market Report™, which shows a total of 3,157,806 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 2,330,483 U.S. properties during the year, an 81 percent increase in total properties from 2007 and a 225 percent increase in total properties from 2006. The report also shows that 1.84 percent of all U.S. housing units (one in 54) received at least one foreclosure filing during the year, up from 1.03 percent in 2007.

Foreclosure filings were reported on 303,410 U.S. properties in December, up 17 percent from the previous month and up nearly 41 percent from December 2007. Despite the spike in December, foreclosure activity for the fourth quarter was down nearly 4 percent from the previous quarter but still up nearly 40 percent from the fourth quarter of 2007.


RealtyTrac publishes the largest and most comprehensive national database of foreclosure and bank-owned properties, with over 1.5 million properties from over 2,200 counties across the country, and is the foreclosure data provider to MSN Real Estate, Yahoo! Real Estate and The Wall Street Journal’s Real Estate Journal.

“State legislation that slowed down the onset of new foreclosure activity clearly had an effect on fourth quarter numbers overall, but that effect appears to have worn off by December,” said James J. Saccacio, chief executive officer of RealtyTrac. “The big jump in December foreclosure activity was somewhat surprising given the moratoria enacted by both Freddie Mac and Fannie Mae, along with programs from some of the major lenders and loan servicers aimed at delaying foreclosure actions against distressed homeowners.

“Clearly the foreclosure prevention programs implemented to-date have not had any real success in slowing down this foreclosure tsunami. And the recent California law, much like its predecessors in Massachusetts and Maryland, appears to have done little more than delay the inevitable foreclosure proceedings for thousands of homeowners.”

The California law (SB1137), which required lenders to provide written notice of their intent to initiate foreclosure proceedings 30 days prior to issuing a notice of default (NOD), resulted in a reduction of NODs from 44,278 in August to 21,665 in September. Notice of Default filings then surged by 122 percent, to over 42,000, in December. Similar patterns have occurred in other states, such as Massachusetts and Maryland, where similar types of foreclosure prevention legislation has been enacted.

Nevada, Florida, Arizona post top state foreclosure rates in 2008
More than 7 percent of Nevada housing units (one in 14) received at least one foreclosure notice in 2008, giving it the nation’s highest state foreclosure rate for the year. A total of 77,693 Nevada properties received a foreclosure filing during the year, an increase of nearly 126 percent from 2007 and an increase of nearly 530 percent from 2006.

Florida registered the nation’s second highest state foreclosure rate in 2008, with 4.52 percent of its housing units (one in 22) receiving at least one foreclosure filing during the year, and Arizona registered the nation’s third highest state foreclosure rate, with 4.49 percent of its housing units (one in 22) receiving at least one foreclosure filing during the year.

Other states with Top 10 foreclosure rates for 2008 were California, Colorado, Michigan, Ohio, Georgia, Illinois and New Jersey.

California, Florida, Arizona post highest 2008 foreclosure totals
A total of 523,624 California properties received a foreclosure filing in 2008, the nation’s highest state total. Foreclosure activity in the state increased nearly 110 percent from 2007 and nearly 498 percent from 2006.

With 385,309 properties receiving a foreclosure filing in 2008, Florida documented the second highest state total. Florida foreclosure activity increased 133 percent from 2007 and nearly 412 percent from 2006.

Arizona’s 2008 total of 116,911 properties receiving a foreclosure filing was third highest among the states. Foreclosure activity in Arizona increased 203 percent from 2007 and 655 percent from 2006.

Other states with Top 10 totals for 2008 were Ohio, Michigan, Illinois, Texas, Georgia, Nevada and New Jersey.

Sunbelt cities plus Detroit land on top 10 metro foreclosure rates list
With 9.46 percent of its housing units (one in 11) receiving a foreclosure filing during the year, Stockton, Calif., registered the highest foreclosure rate among the nation’s 100 largest metropolitan areas in 2008. Other California cities in the top 10 were Riverside-San Bernardino at No. 3 (8.02 percent, or one in 12 housing units); Bakersfield and No. 4 (6.17 percent, or one in 16 housing units); and Sacramento at No. 9 (5.20 percent, or one in 19 housing units).

Las Vegas documented the second highest metro foreclosure rate in 2008, with 8.89 percent of its housing units (one in 11) receiving a foreclosure filing during the year.

More than 6 percent of Phoenix housing units (one in 17) received a foreclosure filing during the year, giving the city the fifth highest metro foreclosure rate in 2008.

The foreclosure rate in Fort Lauderdale, Fla., ranked No. 6, with 5.95 percent of the metro area’s housing units (one in 17) receiving a foreclosure filing in 2008. Other Florida cities in the top 10 were Orlando at No. 7 (5.48 percent, or one in 18 housing units) and Miami at No. 8 (5.21 percent, or one in 19 housing units).

With 4.52 percent of its housing units (one in 22) receiving a foreclosure filing during the year, Detroit registered the tenth highest metro foreclosure rate in 2008.

On today's earnings call, JP Morgan (JPM) CEO Jamie Dimon said they saw "loan demand slowing". this is bad for housing as it means refinancing and purchases are also slowing. It may be a function of people waiting for lower interest rates, it may be a function of tighter lending standards, it may be a function of job losses or the fear of them, and it is most likely a function of all three.

Either way and no matter how it is divided, it is not good news going forward.



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

3 scary things, Palm Pre, Hedge funds, 60 Minutes

- Oh boy

- Everyone loves this phone

- Track them

- More reaction to the piece

Disclosure ("none" means no position):
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Why A Second Housing Wave is Inevitable $$

I just do not see how we avoid this...the numbers are just too big..

Veneroso Why the Second Wave is Inevitable 6/2008

Publish at Scribd or explore others: Presentations & Slid mortgages recession. banking

Disclosure ("none" means no position):
Visit the ValuePlays Bookstore for Great Investing Books

World Bank Commodity Presentation 6/2007 $$

Regarding oil..."If a tsunami of rabid investment and speculative commodity derivative demands hits the commodity markets, it must drive the forward price more above marginal cost than in a
normal bull cycle. The higher the price is driven above marginal cost the more new supply will be encouraged. These high prices will also lead to a more assiduous effort by commodity consumers to economize and substitute, thereby rationing demand. If unusual commodity derivative demands take prices very high and on a sustained basis, the resulting surpluses that will eventually take down these prices will be all the larger."

Here is the presentation on Oil, Metals & Gold
Veneroso Frank-World Bank Presentation Commodity Bubble Metals Manipulation-6!14!2007

Publish at Scribd or explore others: Business Presentations & Slid kuwait bubbles

It is a thesis I agree with. Oil was in a bubble in 2008, and the downside now is the overreaction to that bubble popping. Somewhere is the middle is a good price. Fortunately, the middle is about 100% higher than current levels. We'll see..

Tickers to play oil: (USO), (DBO), (DXO)

To play gold: (GLD)


Disclosure ("none" means no position):Long DBO, DXO, none
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garding oil

Wal-Mart CEO Downbeat on 2009 $$

Why does it matter? Wal-Mart (WMT) is the proxy for the US economy now.

From Reuters

The chief executive of Wal-Mart Stores Inc (WMT) said on Monday he expects the U.S. economy to remain extraordinarily challenging in the first half of the year and that he was not expecting a quick turnaround.

Lee Scott made the comments at the National Retail Federation's annual conference being held in New York. He described it as his last public speech as head of the world's largest retailer before retiring on February 1. Scott said the U.S. government's efforts to stimulate the economy should have "some impact," but added: "I don't see anything that tells me it's going to turn around quickly."

"The second half of the year, you would hope, would be better," he said. "We all hope by next Christmas it certainly isn't any worse." Wal-Mart, the discount giant, has been gaining market share in the last year as consumers seek out its low prices on items such as food and medicine to stretch limited budgets.

But a year-long recession, mounting job losses and tighter access to credit combined to produce the worst holiday sales season in nearly four decades, according to the International Council of Shopping Centers. Wal-Mart was not immune to the harsh climate and last week posted lower-than-expected December sales and cut its fourth-quarter profit forecast.

FUNDAMENTAL SHIFT IN SPENDING

Scott said this downturn may fundamentally change people's spending habits.

"I'm not necessarily convinced that just when all this liquidity and things hit, if you're going to have the same immediate desire to go back to consumption and debt," he said, referring to a potential U.S. government stimulus plan. "There are a lot of young people who have learned what it's like when you are living on the edge and the bad times come."

Here is the thing. After years of irrational debt, American reacted very rational when they were issued stimulus checks this summer. They paid bills and paid off debt. No matter what comes out of Washington this spring, there is no reason to think US consumers are going on a spending spree anytime soon. There has been a fundamental shift in behavior and the reaction to those summer checks proves it. That means anemic growth at best this year.

None of this takes into account the upcoming Alt-A mortgage train wreck barreling down on a staggering housing market, the possibility of inflation due to the flooding of the market with US dollars, foreigners losing interest in US debt causing a rise in interest rates, etc.

This is just the consumers behavior....

Are we doomed? Hell no. Are we going to enter a depression? No. None of that means the next year or two are going to be pretty or easy though. Just do not expect too much..


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

Bolling, Obama's Stimulus, Math, Shaq

- Gold and Platinum

- Doomed to fail

- Try again Prez?

- How much could he possibly have to say?

Disclosure ("none" means no position):
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My Dire 2009 Outlook, A Rebuttal

So, after my post yesterday I received the following email (reprinted with permission) from a money manager. I am posting it verbatim (only company names added to tickers) and readers can judge who they think is correct...please comment..

First, my post from yesterday.
1- Financials:
Will not be touching them and are currently waiting for Wells Fargo (WFC) to rally a bit to sell out of it. Why? I no longer know the rules of investing in them. TARP and its requirements change almost daily. Going forward, the term (interest) the Gov't demands and the shareholder dilution that accompanies them will become more onerous. That is bad news. Also, the second body blow from housing is due this year and next. That means more suffering for financials and shareholders.

Now, this does not mean I will never invest in them again, just that I think in 2010 we will still be able to buy them at these levels or lower. Is there value in financials? I just cannot quantify it as long as we have shifting rules from the Gov't.

2- The Market
Up to 9000, then back to 8000 all year. The market will bounce like a ball but never really go anywhere. I think the risk is to the downside as the recession worsens. Unemployment ought to pass 10%, GDP will be negative for the year and credit is still drying up. So, given those, how do we go to 10,000?

That being said, it is a traders market. If you sell options you can make some money here. If you trade the rang you can also. If you are not a trader, don't try to be one. Be who you are

3- Oil
Have written a lot about it recently. Why? Demand has fallen true, but the unreported story is production has fallen off a cliff also. Oil is not like a faucet. It cannot just be turned back on. A drilling project shuttered because of low prices today cannot just be flipped back on when prices recover. There is a tremendous lag. As crazy as prices were at $147, they are equally as crazy at $47. US production continues to fall, Mexico's has plummeted and OPEC is more in power than ever. That only serve to heighten the Geo-Political risk of oil. Translation? One wacko can cause a global oil price spike.

I see the most value here now, or at least a market unfettered by arbitrary Gov't intervention. Yes, I know that most foreign oil companies are govt't owned, what I am saying is that if you buy oil today, your ownership cannot be diluted by the gov't like it can and is in equities today.

4- The dollar and inflation....
Has anyone ever seen a scenario when massive supply of an item has not caused a devaluation of it? How can the current US Gov't's "running the dollar printing presses full tilt" like they are now NOT lead to a devaluation of the dollar? Here is the problem. The gov't WANTS inflation to return. It will increase home prices, increase to prices manufacturers get for their goods, increase equity values etc. The problem is, gov't always overdoes it. That means that they will pump too much into the system and inflation will get away from them.

That genie, once out of the bottle is only pot back in by inflicting more pain on the economy. It then becomes a vicious circle...



The reader email:

"The history from the 1930 shows a Real GDP that has been quite steady when you average out the results of 3.9% in 1930 to 3.17% at present. You can see the annual fluctuations in the chart of Real GDP-below, but we are not investing for 12mos but for ~5yrs. So….my advice is to trust the history and expect 3.0%-3.2% for the next 5yrs-10yrs as well. Certainly there is an inflation risk that Bernanke needs to offset with a vigorous reduction in liquidity as monetary velocity recovers, but my guess is that he will be sensitive to this and that we are more likely to see inflation at less than 2% THAN see it soar to 7%+.

In my view to be able to buy GE (GE) at the current level assuming a future 20% ROE and a 1.4xBV I calculate that I am getting a 14%+ Owner’s Earnings. Since the market capitalizes earnings back to the core inflation + Real GDP = Current Market Rate of Return when psychology improves (I expect this to be at the 5% level in 2yrs-3yrs), THEN an investment in many issues today with GE’s pricing could easily triple.

The only time the market was last priced so that stocks were showing such high earnings yields and owner’s earnings was during high periods of inflation 1974 and 1982 during which 11% core inflation + Real GDP = ~14%. THIS IS NOT THE FACT TODAY WITH INFLATION AT 2.4% AND FALLING!!



I see much to like at present. Oil (DBO) will rise. Many good issues like EOG Resources (EOG), Canadian Natural Resources (CNQ), Suncor (SU) and etc look as attractive as GE. Remember oil cannot rise above its economic value or its value to the economy. Oil at too high a price causes the economy to slow and price then self corrects. Oil can only rise to a level that benefits economic growth.

Higher oil prices spurs investment in alternatives and alternative technologies. We are in a transition period during which weak oil supply will force invention and result in other energy sources not yet deemed viable or even discovered. My favorite economic text is Julian Simon’s “Ultimate Resource II” in which he wrote that the greatest misunderstanding investors seem to have is our own inventive force and its hidden hand within the economy to wring sea change. As OB1 said, “Trust the force!”

I am more bullish than you."

This is what I love about this stuff. One of us will be right. For the record, I hope the reader is as my long portfolio will do VERY well (I am not short anything). I just do not think he is, for 2009. 2010 may be a different scenario but we need to get through this year first. If 2008 did not teach you a lot can change in the course of a year, nothing will.

So readers, who is right? Please comment and keep it constructive...


Disclosure ("none" means no position):Long DBO, GE, none
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Pershing's McGuire Named Borders Chairman $$

So, we now know what the delay was for in the Pershing / Borders financing agreement.

Borders Group (BGP) today announced that Richard "Mick" McGuire, 32, has been appointed non-executive Chairman of the company's Board of Directors, effective today. He replaces Larry Pollock, 61, who has been non-executive Chairman since July 2006 and has been a Director since August 1995. Pollock will remain on the Board as a Director.

McGuire joined the Board in January 2008 in connection with his role as a partner at Pershing Square Capital Management, L.P., which is Borders Group's largest investor. At Pershing Square, McGuire served as a member of the investment team exploring investment opportunities in industries including retail, consumer products, business services and financial services. He is now departing Pershing Square to pursue entrepreneurial interests. Prior to Pershing Square, McGuire held positions at private equity funds J.H. Whitney & Co., and Stonington Partners, Inc. He holds a master's degree in business administration (MBA) from Harvard Business School and a bachelor's degree from Princeton University.

"Mick is extremely smart and capable," said Pershing Square founder and Chief Executive Officer Bill Ackman. "As a major shareholder of Borders, I am delighted with Mick's appointment to Chairman. I look forward to the company's progress under Mick's and CEO Ron Marshall's stewardship."

"In the short time that I have worked with Mick, I am impressed with his constructive input, sound judgment and overall support of the company," said Borders Group Chief Executive Officer Ron Marshall. "I look forward to working more closely with Mick in the expanded role of Chairman and with Mike Archbold in his new role as Lead Director. On behalf of the entire Board and management team, I also want to thank Larry for his years of service as Chairman and am pleased that he'll remain with the Board as a Director."

As noted, Michael G. Archbold has been named Lead Director. Archbold, 48, joined the Board in December 2007. He is Executive Vice President, Chief Operating Officer and Chief Financial Officer of The Vitamin Shoppe, a position he has held since 2007. Previously, Archbold served as Executive Vice President, Chief Financial and Administrative Officer of Saks Fifth Avenue. Prior to Saks, Archbold was Executive Vice President and Chief Financial Officer of AutoZone and earlier served as Vice President and Chief Financial Officer of the Booksellers Division of Barnes & Noble, Inc.
Pollock, who as noted remains on the Board, is Managing Partner of investment firm Lucky Stars Partners LLC. Previously, he was President, and later Chief Executive Officer, of Cole National Corporation, which operates retail vision and gift stores and was sold to Luxottica Group SpA in 2004. Prior to Cole National, Pollock served as President and Chief Executive Officer of HomePlace, Inc., and earlier was President, Chief Operating Officer and a Director of jewelry retailer Zale Corporation.

It's Ackman's ball now. Largest shareholder, Chairman and Chief Financer all in one (two actually but one sounds better).

It will be real interesting to watch..


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

Starbucks, Blackberry, Credit, Ayn Rand

- A new jet to celebrate massive shareholder destruction

- Turn it into a remote

- More problems coming

- What happened?

Disclosure ("none" means no position):
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Ackman Files 13D/A in General Growth Properties $$

Ackman now has an interest in nearly 25% of General Growth Properties (GGP) shares

On 12/8 Ackman disclosed a 18% economic interest.

In today's filing he has boosted that to 24%

"This Amendment No. 2 (this “Amendment No. 2”) amends and supplements the statement on Schedule 13D, as previously amended to date (the “Schedule 13D”) by (i) Pershing Square Capital Management, L.P., a Delaware limited partnership (“Pershing Square”), (ii) PS Management GP, LLC, a Delaware limited liability company (“PS Management”), (iii) Pershing Square GP, LLC, a Delaware limited liability company (“Pershing Square GP”), and (iv) William A. Ackman, a citizen of the United States of America (collectively, the “Reporting Persons”), relating to the common stock, par value $.01 per share (the “Common Shares”), of General Growth Properties, Inc., a Delaware corporation (the “Issuer”). Capitalized terms used herein but not defined herein shall have the meaning set forth in the Original 13D.

As of January 9, 2009, the Reporting Persons beneficially owned an aggregate of 22,901,194 Common Shares (the “Subject Shares”), representing approximately 7.4% of the outstanding Common Shares. The Reporting Persons also have additional economic exposure to approximately 52,000,000 Common Shares under certain cash-settled total return swaps (“Swaps”), bringing their total aggregate economic exposure to 74,901,194 Common Shares (approximately 24.1% of the outstanding Common Shares). Although this Schedule 13D filing reflects additional purchases of Common Shares and Swaps, the Reporting Persons total beneficial ownership percentage and aggregate economic exposure has decreased due to the dilutive effects arising from the conversion of 42,350,000 common partnership units held in the Issuer’s operating partnership into 42,350,000 Common Shares, as announced by the Issuer on January 5, 2009."

Here is the trading data:


Disclosure ("none" means no position):None
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Larry Summers 1/12 Letter to Congress

So, I wrote a post this am about TARP and how those receiving funds are going to be faced with mush more onerous restrictions. A few hours later Larry Summers from Barack Obama's Team obliged with details..

Larry Summers Letter to Congress

Publish at Scribd or explore others: United States Politics

Disclosure ("none" means no position):
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Reader Emails Answered: Oil, Financials, Recession, Dollar etc..

Been getting a slew of emails the last months and rather than say the same things over and over, thought I would address them in a post since the themes are all similar..

1- Financials:
Will not be touching them and are currently waiting for Wells Fargo (WFC) to rally a bit to sell out of it. Why? I no longer know the rules of investing in them. TARP and its requirements change almost daily. Going forward, the term (interest) the Gov't demands and the shareholder dilution that accompanies them will become more onerous. That is bad news. Also, the second body blow from housing is due this year and next. That means more suffering for financials and shareholders.

Now, this does not mean I will never invest in them again, just that I think in 2010 we will still be able to buy them at these levels or lower. Is there value in financials? I just cannot quantify it as long as we have shifting rules from the Gov't.

2- The Market
Up to 9000, then back to 8000 all year. The market will bounce like a ball but never really go anywhere. I think the risk is to the downside as the recession worsens. Unemployment ought to pass 10%, GDP will be negative for the year and credit is still drying up. So, given those, how do we go to 10,000?

That being said, it is a traders market. If you sell options you can make some money here. If you trade the rang you can also. If you are not a trader, don't try to be one. Be who you are

3- Oil
Have written a lot about it recently. Why? Demand has fallen true, but the unreported story is production has fallen off a cliff also. Oil is not like a faucet. It cannot just be turned back on. A drilling project shuttered because of low prices today cannot just be flipped back on when prices recover. There is a tremendous lag. As crazy as prices were at $147, they are equally as crazy at $47. US production continues to fall, Mexico's has plummeted and OPEC is more in power than ever. That only serve to heighten the Geo-Political risk of oil. Translation? One wacko can cause a global oil price spike.

I see the most value here now, or at least a market unfettered by arbitrary Gov't intervention. Yes, I know that most foreign oil companies are govt't owned, what I am saying is that if you buy oil today, your ownership cannot be diluted by the gov't like it can and is in equities today.

4- The dollar and inflation....
Has anyone ever seen a scenario when massive supply of an item has not caused a devaluation of it? How can the current US Gov't's "running the dollar printing presses full tilt" like they are now NOT lead to a devaluation of the dollar? Here is the problem. The gov't WANTS inflation to return. It will increase home prices, increase to prices manufacturers get for their goods, increase equity values etc. The problem is, gov't always overdoes it. That means that they will pump too much into the system and inflation will get away from them.

That genie, once out of the bottle is only pot back in by inflicting more pain on the economy. It then becomes a vicious circle...

5- What to buy?
Right now? I am buying nothing but oil. Why? As much as we have sen the rules of the game change in the past year, still more is due. TARP requirements are, the tax code is, a stimulus is coming (we do not know the composition of it) and a Democratic Congress has plenty on its agenda. What looks good today may not tomorrow. Does this mean you should not buy anything? No. There of course will be plenty of equities that do wonderful in the next year. I just think there will be plenty more that do not.

Management now matters more than ever. Keep it in mind when buying.

Am I selling? Only the financials (sold most in the fall). I still like what I hold, Dow Chemical (DOW), AutoNation (AN), ADM (ADM), Borders (BGP), Oil (DXO), (DBO), Phillip Morris International (PM), Sears Holdings (SHLD) and GE (GE). I do have misgiving about Immelt at GE but am willing to wait as I think they will be a big beneficiary of infrastructure stimulus.

All dominate their businesses (except Borders and Sears, they are plays on the majority shareholders Ackman and Lampert) and are picking up market share. Dow will lead us out of recession as whatever needs to be made, they make the stuff that makes it and it yields 10%.

Wait and see....

This is the environment that one can make purchases that make one look like a genius for decades, it just takes a keen eye....



Disclosure ("none" means no position):
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Bill Gates Continues Buying AutoNation Shares $$

It's been a few weeks since the last purchase of AutoNation (AN) shares for Gates' Cascade Investments and the Bill and Melinda Gates Foundation.

On 1/7 Bill Gates, through his Foundation a and Cascade Investments each added another 50,000 shares of the auto retailer.

Total holdings now come to 21.7 million shares or 12.2% of the total.


Disclosure ("none" means no position):Long AN
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Monday's links

Curve, Inflation, Shiller on housing, Lampert

- A New one

- It's coming

-

- Interested in H&R Block?

Disclosure ("none" means no position):
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60 Minutes on Oil...Did Anyone Actually Do Any Checking? $$

So, 60 minutes did a piece on oil last night and, well, oops..

First here is the piece.


For those who do not want to watch it here are the crib notes. A Wall St. cabal controls oil markets that Enron set up to manipulate prices. There is a little more but not much...

Let's look at some of the claims...


Production: Here is the EIA world oil production chart:


For those who want it, here is the link

One thing you'll notice, production, unlike the claims of the piece, did indeed fall. In fact, as price rose during 2007, both US, Persian gulf and worldwide oil production was below 2006 levels. As the super spike began in 2008, the Pershing Gulf region increased production roughly 10% to capture the high prices. What is alarming is that US production again fell (could not capture high prices) and worldwide production gained only 6%.

Let's look at demand: (million of barrel per day world demand)
2004 - 82.41
2005 - 83.82
2006 - 84.95
2007
Q1- 85.84
Q2- 84.88
Q3- 85.54
Q4- 86.94
2008
Q1- 86.07
Q2- 85.27

Again, here is the link

So, despite what the 60 Minutes piece said, world demand for oil waned only slightly during the spike period and production was only then ramping up. Let's not forget, in Q2 2007 demand fell only to accelerate again to record highs 6 months later.

What happened after? Demand destruction. The global recession we are entering eviscerated demand and with the recent increase in production, the price that peaked in July 2007, collapsed. The problem is production has also, but that is a story for the next oil spike.

What did the EIA say in June 2008?


Here is how the EIA modeled oil prices based on "fundamentals", again in June 2008.




Now, was oil priced correctly at $147 a barrel in July 2008? No. There was some speculative excess but to suggest that what happen in 2007-2008 was "speculators" lacks in any basis of fact. Is oil priced correctly at $40 a barrel today? No. Far too low. Good, I'm buying...

For 60 Minutes to imply that supply /demand had very little to do with the oil price increases in 2007 and early 2008 is counter to what the EIA was saying. It does make a nice little story to blame it all the villain of the day, Wall St. and to bring back to ghost or Enron, but it is still shoddy work on their part. Now, it isn't as bad as forging documents to try to steal a Presidential Election, but is is just as dishonest..

Here is the most recent outlook from the EIA (12/9/2008)


Disclosure ("none" means no position):Long oil through DXO, DBO
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Holy Cow.....

Some weekend non-investment entertainment..Carrie Underwood at the PCA's.....WOW.....

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Jim Cramer Rally Monkey

t plenty of requests so here it is...Have g

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Ackman and Pershing Square Dump Barnes and Noble Shares

Ackman who as of the 11/20 filing held over 6.4 million shares has sold out of his Barnes and Noble (BKS) position.

Todays's filing SEC Link.




Disclosure ("none" means no position):
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A Reader's Take on Management

This reader has a great point on Berkowitz and Buffett...

From a Reader...

Kiplinger asks what went wrong at Dodge&Cox. Why did Fairholme (FAIRX) sidestep the mess at AIG (AIG) and some others? Pabrai has discussed Berkowitz as a manager that places great importance on the financials, but also importantly on the management skills.

I sold my AIG in the mid-$30’s because I gradually became aware of Martin Sullivan’s shutting off the credit risk reviews as unimportant to the business while I knew that Greenberg was on top of risks daily. Managers who simply review the #’s missed this change in risk monitoring including Davis even though Davis in particular felt that they had special insights to their companies.

In my view there is no such thing as a “Moat” often touted by value managers because of your market position. Many have taken up the “Moat” banner, i.e. Morningstar with a “Moat” rating.

AIG is a clear example of a company’s management style causing the companies virtual extinction. The only “Moat” a company has vs. competitors is a qualified management and culture. Lose this and the company can lose everything. Investment managers who do not understand this will have markets in which their shallow, numbers only methodology will fail to protect their clients.

Berkowitz and Berkshire's (BRK.A) Buffet have the learned to distinguish between good and bad management as well as calculate buy and sell valuations.

The Kiplinger question has missed the “management quality” just like 99.98% of investors. We do not teach “How to identify good management?” Most people simply look at the historical financials and assume a new manager’s record will continue in the same direction. NOT NECESSARIALY!!!!

Berkowitz looks more deeply than any other mutual fund manager I know and it shows in his results.


Here is the Kiplinger Piece.



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Marty Whitman Profiled

This is a pretty cool video...

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Sovereign Wealth Funds: "Santiago Principles"

Here are the GAPP guidelines Sovereign Wealth Funds from 23 nations have agreed to adhere to, called the "Santiago Principles".

Sovereign Wealth Funds: "Santiago Principles"

Publish at Scribd or explore others: Globalization Business investing swf

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Watch Wal-Mart's Growth

This is one of the coolest things I have seen. Watch Wal-Mart (WMT) grow.

Disclosure ("none" means no position):Long WMT
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Simmons & Co. on China's Energy Needs

A must read.....there is huge value in energy right now

Simmons on China Energy

Publish at Scribd or explore others: Trade and Commerce Business matthew simmons crude oil

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Friday's Links

Berkowitz, Coulter, Oil, Do a Good Deed,

- "Prices are as attractive as I have ever seen"

- Sorry but Ann is funny...

Watch CBS Videos Online

- You must read Gregor

- Help out




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Quote of the day

"There was certainly no pay-to-play involved, because I don't have no money,"
Roland Burris on his Senate nomination (WSJ Page 1 article)

hmmm...interesting logic. Also, can't he at least use proper english? Seems like he will fit in well with everyone else in the Senate.


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Sovereign Wealth Funds: "We'll Invest At Home Thank You"

This is a follow up to previous interviews... View them here and here

We have gone from trying to push them away in Q1, to begging for their money in Q2, to them just ignoring the rest of the world on Q3. Funny how events unfold...

Q3 Highlights:
Monitor Group Research Reveals Sovereign Wealth Funds

Alter Investment Strategies during Worsening Global Financial Crisis, Funds Focus on Joint Ventures and Home Market Investments

Cambridge, Mass. – December 17 – In Q3 of 2008, as the global financial crisis continued to worsen, SWFs sought to limit their exposure to the riskiness of OECD markets. At the same time these funds sought to put more capital to work in their domestic economies which were becoming increasingly strained. These developments are highlighted by Monitor Group, one of the world's leading advisory and consulting firms in its July-September 2008 quarterly analysis of global SWF investments.

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

§ SWF recent behavior shows a marked shift toward domestic and emerging markets deals. 46 percent of reported deals in Q3 were domestic transactions, the highest percentage since 2003. Also, 54 percent of Q2 and Q3 deals by value ($23 billion out of $42 billion) were in emerging markets, the highest share of total deal value since 2005
§ Investment in OECD countries has declined sharply during 2008, from $37 billion in Q1 to $9 billion in Q2 and $8 billion in Q3. In Q3, North American targets were involved in 7 SWF deals totaling $2.4 billion. In contrast, there were 7 North American deals totaling $23 billion during Q1 2008.
§ Investment in financial sector targets has fallen off significantly since Q1; real estate investment, which spiked up in Q2, also dropped sharply in Q3. Financials comprised $43.4 billion of deal value in Q1, compared to $4 billion each in Q2 and Q3. Real Estate deals were $3.2 billion in Q3 (16 percent of the total), compared to $13.7 billion (52 percent) in Q2 2008.
§ SWFs from the MENA region were the most active in Q3, carrying out some 90 percent of the deals by value. Asian SWFs were much less active in Q3 2008 than in previous quarters.
§ In Q3, funds in the Monitor SWF Transaction Database executed 46 deals totaling $15.4 billion. This is a decline from $58.3 billion in Q1, and $26.5 billion in Q2, although the total number of deals per quarter was similar in all three quarters.

I spoke to Drosten Fisher today, a principal with the international strategy consultancy Monitor Group. His focus is serving government and commercial clients in the areas of economic competitiveness, national security and international finance. A Middle East specialist, he speaks Arabic and has lived and worked in the region. He is a co-author of a recent Monitor report into sovereign wealth fund investment and is a regular speaker and commentator on Middle Eastern investment, politics and business. Educated at Oxford, LSE, and Georgetown, Drosten is a member of the Arab Bankers Association of North America.

He feels that SWF's are going to be very selective going forward, especially in the financial services area when investing. Domestic pressures, both from the fall of oil and the falling trades surpluses are forcing SWF's to focus internally in their investment choices. This paradigm does not show any reversal until the global economy, especially the US (#1 trade partner) improves. Further, continued weakness in oil prices will depress foreign investment from SWF's indefinitely.

Here is the Full Report:
Monitor Group SWF Q3 Report

Publish at Scribd or explore others: Money/Wealth Business investment monitor group

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Kuwait Admits: "We're a Laughing Stock Now"

Like I said repeatedly, I don't think Kuwait thought their decision to cancel the Dow Chemical (DOW) deal all the way through and are only now beginning to recognize the damage they have done to themselves.

From the Arab Times

MP Jamaan Al-Harbash on Tuesday asked his colleagues to conduct a thorough investigation on the Dow Chemical project, especially after the company announced its plan to take legal action against the state-owned Kuwaiti company which, sources say, might be asked to pay a fine of $2.5 billion for pulling out of the deal. Al-Harbash also urged the MPs to look into allegations that some people have earned commissions amounting to $750 million from the deal, conflict of interests, and unfair penalty clause. He also stressed the importance of determining the actual reason behind the decision of the Supreme Petroleum Council (SPC) to sign the deal only to withdraw from it later.

Proposing the formation of an investigative committee to look into the alleged violations, Al-Harbash stated “we have to find the truth to take the right decision on the issue. We must identify the people behind the violations and hold them liable for their acts as Kuwait has now become the laughing stock of the whole world due to this deal.”

No kidding.....

As for proof Kuwait still does not get it, Reuter reported yesterday,

"The state of Kuwait has undertaken all necessary measures to counter the case Dow Chemical is pursuing against KPC for not concluding a deal by Petrochemicals Industries Co with Dow," al-Watan quoted Commerce & Industry Minister Ahmad Baqer as saying.

Baqer did not elaborate.

Several Kuwaiti officials have told Reuters that under the agreement Dow would need a court ruling proving that Kuwait had violated the deal to qualify for a break fee.

Dow is not suing for a "breakup fee" but for damages due to breach of contract as CEO Andrew Liveris stated several times over the last two days. The two are very different things. Dow only needs to prove monetary damages due to the Kuwait action (will be easy enough) to be awarded a settlement. Although I think the real reason for the suit is to force the deal.




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Sears Holdings Surprises $$

Given what is happening in the retail universe right now, this is an outstanding report from Sears (SHLD).

HOFFMAN ESTATES, Ill., Jan. 8 /PRNewswire-FirstCall/ -- Sears Holdings Corporation (the "Company", "we", "us", or "our") (Nasdaq: SHLD) today announced domestic comparable store sales for the five-week ("December"), quarter-to-date ("QTD") and year-to-date ("YTD") periods ended January 3, 2009 for its Kmart and Sears stores as follows:

Kmart's December comparable store sales benefited from a year over year increase in sales made through our layaway program. Sears Domestic December comparable store sales reflect reduced sales across most hardlines and apparel categories. We believe that comparable store sales were affected by unfavorable economic conditions, including the weak housing market and consumer credit issues.

Gross margin rates for the quarter-to-date period improved slightly from last year as higher margin rates at Kmart were somewhat offset by lower margin rates at Sears Domestic. We currently expect that net income for the quarter ending January 31, 2009 will be between $300 million and
$380 million, or between $2.44 and $3.09 per fully diluted share. Our expectation of fourth quarter net income and earnings per share excludes the potential impact, if any, related to store closings, restructuring activities including severance, mark-to-market gains and losses on hedge transactions executed by Sears Canada and impairment of goodwill and other intangible assets as prescribed in Statement of Financial Accounting Standards No. 142. In the fourth quarter of the prior year, the Company reported net income of $426 million, or $3.17 per fully diluted share.

For the full year ending January 31, 2009, the Company expects net income to be between $163 million and $243 million, or between $1.27 and $1.90 per fully diluted share, which also excludes the potential fourth quarter impact, if any, related to store closings, restructuring activities including severance, mark-to-market gains and losses on hedge transactions executed by Sears Canada and impairment of goodwill and other intangible assets as prescribed in Statement of Financial Accounting Standards No. 142.

During the month of December 2008, we repaid all borrowings under our revolving credit facility as working capital needs declined as expected (although we do expect to borrow under the revolver again in January 2009 due to the seasonal increase in working capital). We currently expect to end the fiscal year with approximately $1.3 billion in cash and cash equivalents (of which approximately $600 million will be domestic and $740 million will be Sears Canada). The expected cash and cash equivalents balance indicated does not give effect to any share repurchase activity after January 7, 2009. In addition, we currently expect to end the fiscal
year with approximately $8.5 billion of domestic inventory, down from $9.1 billion last year, despite the addition of approximately $135 million of Kmart footwear inventory. Kmart began operating its footwear department on January 1, 2009. Prior to that time, Kmart's footwear department was operated as a licensed business by another party.

Also during the fourth quarter, we repurchased 2.9 million common shares at a total cost of $119 million (or $40.82 per share) under our share repurchase program. As of January 7, 2009 we had remaining authorization to repurchase $506 million of common shares under the previously approved programs.

It is looking like Sears' decision to be first in launching their layaway program was a real winner with consumers and a coup for the company. Also, how happy are shareholder there is still $1.3 billion in the bank and the debt repaid? With the destruction of balance sheets happening all over retail, Sears' is holding strong, very strong....

This is really good news folks...really good...

Like the auto retailers, those who end up standing tall after this carnage will be the winners and emerge stronger. Sears is levered heavily to the home. With Linen's N Things "sleeping with the fishes", that leaves one less place for folks to buy those items. Given that many of them are in the same malls as Sears, that means by default these shoppers will wander in Sears for these items.


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