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Lemley Yarling Management Co
309 W Johnson Street Apt 544
Madison, WI 53703
Bud: 312-925-5248       Kathy: 630-323-8422

30 November 2009


Model Portfolio Value As of 30 November 2009

$ 570,774

While we were away events transpired. Trading proceeded normally on Tuesday and Wednesday and then Thursday news arrived that Dubai World, the entity that has been spending billions building islands in the sun, was planning on defaulting on $60 billion in debt. Now $60 billion is not what it used to be but it was enough to get the scare bears going and markets around the world tanked. Since most traders in the U.S. were eating turkey it wasn’t until Thursday night that U.S. futures dropped 3%. By morning Friday the not to worry folks were in charge and markets in Europe rallied while U.S. markets closed down a more manageable 1.5%.

Taking heads assure that no U.S. banks are exposed. The European banks are and with derivatives who knows where the final losses are.

This week will give a much better feel for how world markets will react. We continue to believe that a correction is needed before any substantial push higher but we have been wrong for six months.

Jobless claims last week were 466,000 which were better than. Asian markets were up overnight and European markets are down at midday.

Goldman Saks sees losses of $2.1 trillion to $2.6 trillion in U.S. credit markets since the beginning of 2009. Now that is real money.

The latest Investors Intelligence had 50% bulls and 17% bears. That is worry territory as the fear of losing money has been replaced by the fear of not making it. These after the markets in the U.S. have rallied over 50%.

Russia, Greece and Ireland are mentioned as the next default possibilities.

(Bloomberg) Dubai’s government said it hasn’t guaranteed the debt of Dubai World, the state-controlled holding company struggling with $59 billion in liabilities, and that creditors must help it restructure. “The company received financing based on its project schedule, not a government guarantee,” Abdulrahman Al Saleh, director general of the emirate’s Department of Finance, said in an interview with Dubai TV, when asked whether the government was backing the debt. “Lenders should bear part of the responsibility.”

Reacting the Dubai imbroglio and our expectations of a correction we decided to improve the quality of our holdings by switching Dell, Motorola, Ciena and Health Management to AT&T, GE and The Money Center Bank ETF (KBE). We also doubled our NCR position.

(Bloomberg) -- Business activity in the U.S. unexpectedly accelerated in November as orders climbed, signaling the economic recovery will carry through into 2010. The Institute for Supply Management-Chicago Inc. said today its barometer rose to 56.1, the highest level since August 2008, from 54.2 the prior month. Readings above 50 signal expansion. Milwaukee and Texas also showed gains in manufacturing, other reports showed.

Rising sales, spurred in part by government incentives, and growing demand from abroad have led to a drawdown in inventories that will boost production and sustain the recovery. Mounting job losses raise the risk spending will retrench, one reason why Federal Reserve policy makers have pledged to keep borrowing costs low “for an extended period.”

(WSJ) Global semiconductor sales rose 5.1% in October from the previous month -- the eighth-straight month of gains -- as companies continue to build up inventories to prepare for the holidays, according to the Semiconductor Industry Association. The $21.7 billion total was down 3.5% from last year, by far the smallest decline of 2009.

Matt Taibbi: http://trueslant.com/matttaibbi/

Krugman on jobs: http://www.nytimes.com/2009/11/30/opinion/30krugman.html

In case you are interested in a new home: http://www.sheldongood.com/lionsgate.php

CNBC is reporting that the seizing of a British racing yacht by Iran caused Oil to spike $2. Yesterday Somali pirates commandeered a super tanker with no reactions from the oil markets. Go figure. Traders must think that Israel will bomb Iran to force them to free the yacht.

European stock markets fell as nervousness surrounding the debt crisis in Dubai caused investors to move away from riskier assets. The dollar strengthened and gold retreated from last week's highs.

(Bloomberg) -- U.S. bank exposure to the United Arab Emirates is “a very manageable” $9.9 billion compared with European banks that have lent almost nine times as much, according to CreditSights Inc. Citigroup Inc. is owed about $5.9 billion and JPMorgan Chase & Co. approximately $2.5 billion as of the fourth quarter of 2008, CreditSights analysts led by David Hendler in New York wrote in a Nov. 29 report. Dubai World, a state-owned holding company struggling with $59 billion of debt and other liabilities, said Nov. 25 it would seek a standstill agreement with creditors and an extension of loan maturities until at least May 30, raising prospects of losses for banks. Dubai is one of seven emirates of the U.A.E. “We believe the U.S. banks’ exposure to the U.A.E. is a very manageable $9.9 billion,” according to the report. Within Europe, the largest portion of U.A.E. exposure is held by U.K. banks with $49.5 billion followed by France with $11.3 billion, CreditSights said, citing data from the BIS. Royal Bank of Scotland Group Plc was Dubai World’s biggest loan arranger since January 2007, according to JPMorgan.

Dubai: http://www.independent.co.uk/opinion/commentators/johann-hari/the-dark-side-of-dubai

Oil gained $1.23 to $77.28. Gold gained $3 to $1178.

Stocks meandered all day with the major measures closing 0.4% higher. Breadth was flat and volume was light. The bulls won.


27 November 2009

Portfolio Update

Model Portfolio Value As of 27 November 2009

$ 570,097

25 November 2009

Portfolio Update

Model Portfolio Value As of 25 November 2009

$ 574,121

24 November 2009

Portfolio Update

Model Portfolio Value As of 24 November 2009

$ 573,078

23 November 2009


Model Portfolio Value As of 23 November 2009

$ 574,238

We will be gone the rest of the week to visit clients. Our next post will be Monday November 30.

Stocks are going to open higher this morning. Asian and European markets were higher overnights. Gold is up $16 to a new high and Oil is up over $1 with a $79 handle.

Hershey and maybe Nestle are going to enter the bidding war for Cadbury.

Ciena won the auction for the Ethernet assets of bankrupt Nortel. The deal has real risk for Ciena but if they can make it work CIEN becomes a much more significant company in the Ethernet space with customers AT&T, Verizon and Comcast. We are adding a few shares of Ciena to some accounts.


In January 2000 the DJIA made a closing high of 10610. It is currently at 10450, a decade of going nowhere for the buy and hold folks.

The major measures are up 1.5% and more on very light volume after 15 minutes of trading.

Existing Home sales rose in October thanks to the tax credit. Sales of existing homes increased by 10.1% to a 6.10 million annual rate from 5.54 million in September, the National Association of Realtors said Monday. The 6.10-million rate was the highest since February 2007. Economists surveyed by Dow Jones Newswires expected a 2.3% increase in sales during October, to a rate of 5.70 million. The NAR reported the median price for an existing home last month was $173,100, down 7.1% from $186,400 in October 2008. The average 30-year mortgage rate was 4.95% in October, down from 5.06% in September, Freddie Mac data showed.

Krugman has been and is right. The NYT and the debt doomsayers are wrong:

For the first time in a decade, more people paid their credit card bills on time in the third quarter this year than in the second quarter. The delinquency rate on bank-issued cards like those bearing MasterCard and Visa logos fell to 1.1 percent for the June-to-September period, from a rate of 1.17 percent in the prior three months, according to credit reporting agency TransUnion.

European stock markets surged Monday and gold prices climbed to a record as investors turned once again to riskier assets, including shares and commodities.

Gold gained $15 to a new all time higher of $1165. Oil was up 35 pennies to $77.66

Stocks closed higher but off their best levels of the day. The DJIA was up 135 to 10450.The S&P 500 closed at 1106 up 14 and the NAZZ gained 1% to 2170. Breadth was 3/1 positive and volume was light.

The bulls won the day.


20 November 2009


Model Portfolio Value As of 20 November 2009

$ 572,561

Asian markets were mildly lower overnight and European markets are mildly higher at midday. Dell missed on its earnings and revenues and is 10% lower in early trade. Ann Taylor beat.

Krugman: http://www.nytimes.com/2009/11/20/opinion/20krugman.html?hp

Dr. Elizabeth Warren: http://www.bloomberg.com

We bought Dell back on the break this morning. ANN popped slightly on the positive earnings news but not enough to cause us to take profits. We bought a few shares of Coldwater Creek in larger accounts ahead of next Tuesday’s earnings.

(NYT) Ann Taylor swung to a third-quarter profit amid lower restructuring expenses and higher margins, as results handily beat analysts' estimates.

The women's apparel retailer, which operates the Ann Taylor and Ann Taylor Loft brands, struggled more than some rivals during the recession because of its emphasis on professional attire. The company has placed its hopes on its autumn line for a rebound, while tempering expectations by saying sales will remain under pressure for the rest of the year.

President and Chief Executive Kay Krill said Loft's offerings "resonated with our clients," and that casual apparel performed particularly well. That chain's sales at stores open more than a year fell 9.7%. Ms. Krill also said the initial response to its respositioning of the Ann Taylor brand has been encouraging, even as it posted a 26% slump.

Like other retailers, the company has aggressively cut costs, inventory and stores count. Ann Taylor has also filled high-fashion magazines with advertisements and overhauled store-window displays to de-emphasize the association with career clothing.

For the quarter ended Oct. 31, the company reported a profit of $2.1 million, or three cents a share, compared with a prior-year loss of $13.4 million, or 24 cents a share. Excluding items such as restructuring charges and write-downs, per share earnings climbed to 20 cents from three cents. Analysts polled by Thomson Reuters most recently expected 7 cents.

Revenue decreased 12% to $462.4 million, below the company's expectations in August for a slight improvement from second-quarter sales of $470.2 million. Same-store sales dropped 14%.

Gross margin climbed to 57.3% from 48.8% a year earlier amid lower inventories and fewer promotions. The company had expected a slight improvement from second quarter's 52.4%.

Total inventory per square foot declined 21% from a year earlier.

For the fourth quarter, Ann Taylor expects net sales slightly below the third-quarter level. Analysts surveyed by Thomson Reuters projected a drop to $458 million. Also, the company sees gross margins strengthening "considerably" from a year earlier but falling sequentially amid expected increases in promotions during the critical holiday season.

(NYT) Dell’s quarterly profit dropped 54% despite recent signs of recovery in the technology sector, raising questions about the personal-computer maker's strategy of focusing on profitability at the expense of market share. The results, which also showed a 15% decline in revenue from the year-earlier quarter, contrasted sharply with strong performances in recent months from Dell rivals. Last week, Hewlett-Packard Co. reported an increase in quarterly profit from a year earlier and raised its outlook for 2010. Earlier this month, Cisco Systems Inc.'s earnings were better than expected, and Intel Corp., International Business Machines Corp. and Microsoft Corp. have also recently reported positive results. Dell's market share and profitability both went down over the quarter, even as the overall computer market was showing some revival, indicating that the company's decision to put its efforts toward improving profits, even if it means losing share to rivals, isn't working. "The PC market has been showing some nice recovery," said Rob Cihra, an analyst with Caris & Co. "Yet Dell's quarter shows they absolutely continue to lag that recovery." Dell's chief financial officer, Brian Gladden, said the results were partly due to the company's heavy reliance on the corporate computer market, which has been slower to recover from the recession than consumer PC buying. He also reiterated that Dell gave up some sales in an effort to preserve profits. "It's sort of a never ending battle to maintain cost competitiveness," said Mr. Gladden. Overall, Dell's sales to large companies were down 23% from last year and up 4% from last quarter. Sales to public-sector customers, like government agencies, were down 7% from last year and 3% from last quarter. The company also saw its consumer sales decline 10% from last year and 1% from the last quarter. Dell is in the middle of a turnaround effort that began when founder Michael Dell returned as chief executive in early 2007. Dell, which earlier in the decade was the world's largest PC maker by units, at the time was losing market share to H-P and struggling to increase its consumer laptop sales. Mr. Dell promised to remake the company by cutting costs and getting into new consumer markets.

Today, Dell is the world's third-largest PC maker by unit shipments after H-P and Acer Inc. and consumer sales are still just 22% of its revenue. With a profit margin of about 1%, the consumer business remains barely profitable. "They keep talking about cost cutting, but that didn't help profitability," said Bill Kreher, an analyst with Edward Jones. Dell's gross profit margin, a measure of profitability, fell to 17.3% from 18.8% last year, due to dropping PC prices and rising component costs. Dell is also trying to move into new markets. Earlier this month, it closed a $3.9 billion deal to acquire Perot Systems which gets Dell into a tech outsourcing market dominated by larger companies like IBM and H-P. The company has also announced plans to start selling cell phones in China and Brazil. Dell reported earnings of $577 million, or 17 cents a share, on revenue of $12.9 billion. Not including costs for one-time items like closing a factory in North Carolina, earnings per share would have been 22 cents.

The 70% Discount on Goldman's $500M Gift


...According to a review of Goldman’s program by SmartMoney in consultation with corporate tax experts, the ultimate price tag of the initiative could be far less than the heavily publicized $500 million. A big chunk of the money is destined for charitable institutions, creating potentially sizable tax deductions for Goldman, while other portions are being made as loans that Goldman confirms it expects to be repaid with interest.

All in all, tax experts say, the ultimate cost to Goldman could total roughly $136 million to $150 million—70% or more below the half-billion figure that helped generate so much publicity for the firm this week. Interest income from the loans could lower the final bill even more. Asked about the estimates, a Goldman spokesman didn’t comment on the specific figures but defended the program as a boon to small businesses, while giving Goldman “a modest economic return.” Buffett didn’t return requests for comment...


Prices nationwide have fallen 42.9% from their October 2007 peak; according to the latest Moody’s/REAL Commercial Property Price Index report issued Thursday, while Real Capital Analytics says total transaction volume for 2009 will be the lowest of the decade. The November Moody’s/REAL report, which covers transactions through Sept. 30, notes that monthly price declines appear to be leveling off, although September’s index represented a 3.9% value decline compared to August.

According to the CPPI report, which is prepared for Moody’s by Real Estate Analytics using RCA data, the four months between June and September saw prices fall by an average 3.2%. That compares with a 4.6% decline in values for the previous four-month period.

Stocks traded lower all day but the major measures again rallied into the close but still closed negative. The DJIA was down 15 to 10318. The S&P 500 closed 4 points lower at 1090 and the NAZZ dropped 10 to 2145. Gold was up $8 to $1150. Oil lost 75 pennies to $76.74. Breadth was flat and volume was low for a Triple Witching day. The only think the bulls have to complain about is the low volume over the past month.


19 November 2009


Asian and European markets we lower overnight and U.S. markets are going to open lower this morning. Gold is at $1134 and Oil has a $79 handle. Jobless claims were in line at 505,000.

BankAmerica/Mother Merrill cut their ratings on chip stocks. That has stocks moving lower with the major measures down 2% after one half hour of trading.

(Washington Post) The share of homeowners delinquent on their mortgage or in foreclosure hit a new record during the third quarter, according to industry data released Thursday, which also indicates that the problem is likely to get worse through next year as unemployment rates continue to rise.

About 9.6 percent of borrowers were delinquent on their mortgage during the third quarter, according to the survey by the Mortgage Bankers Association, and 4.5 percent more were somewhere in the foreclosure process. Overall, about 14 percent of mortgage loans were delinquent or in the foreclosure process during the quarter, according to the group.

We took a beginning position in Digital River (DRIV) in a few accounts. Digital River, Inc., together with its subsidiaries, provides outsourced e-commerce solutions in the United States, Europe, and the Asia Pacific. Its services assist in establishing an online sales channel capability and to manage online sales. The company offers design, development, and hosting of online stores and shopping carts; store merchandising and optimization; order management; fraud prevention screening; export controls and management; tax compliance and management; digital product delivery through download; physical product fulfillment; subscription management; denied parties screening; multilingual customer service; online marketing, including email marketing; management of paid search programs; payment processing services; Web site optimization; Web analytics and reporting; and CD production and delivery solutions. Digital River also provides paid search advertising, search engine optimization, affiliate marketing, store optimization, and email optimization services. It serves software, consumer electronics, and computer and video game product manufacturers, as well as online channel partners, including retailers and affiliates through the Internet. The company was founded in 1994 and is headquartered in Eden Prairie, Minnesota.

Oil was down $2 at $77.39. Gold gained $1 to $1142. European bourses closed down 1.5 % and lower.

(Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the “systemic risk” of new asset bubbles is rising with the Federal Reserve keeping interest rates at record lows. “The Fed is trying to reflate the U.S. economy,” Gross wrote in his December investment outlook posted on the Newport Beach, California-based company’s Web site today. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.”

Under what Pimco has termed the “new normal,” investors should be prepared for lower-than-average historical returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy. With unemployment at a 26-year high of 10.2 percent, Gross said the central bank is unlikely to raise interest rates until nominal gross domestic product increases 4 percent to 5 percent for another 12 months.

JP Morgan Illustrates What Banks Do When They Have Money

From http://www.ianwelsh.net/ 2009 November 19
By Ian Welsh

And it isn’t lending it out cheap:

JPMorgan will on Thursday unveil a £1bn deal to buy Cazenove, the UK broker with which it has had a joint venture for the past five years.

The bank is to pay about 535p a share in a deal in which David Mayhew, widely recognized as one of the City’s best-connected corporate advisers, will retain the title of chairman of the Cazenove brand.

Last year myself and Stirling both noted that what would be done by banks if they were bailed out is to horde their money, not lend it out cheap, and save it to buy up competitors, make leveraged plays and so on.  That is EXACTLY what has happened.  Exactly.

During a downturn, if you have money, you don’t want to lend it out for low gains when you can buy up competitors, cheap.  You don’t want to lend it out cheap, when you can make leveraged plays off the bottom of a stock and commodity market which is bound to go up because trillions are being poured into it by central banks.  You want to take that money, and buy things while they are cheap, not lend it out for 4 or 5% returns, when you can make many many times that.

Why, exactly, governments expect banks who have better ways to make money to act like retail banks who don’t have any other way to make money but lend out at prime +3 or 4 percent is beyond me.  They think they’ll do it out of gratitude for being bailed out, or some sort of sense of civic duty?  Most politicians may be stupid, venal and corrupt—but it’s that very greed and venality which means they should understand that banks will do no such thing.

Banks will do it only if they are forced to do it.  Remove retail banking from investment banking, insurance and brokerage services, and disallow any risky games on the markets for retail banks.  Remove all special facilities from non retail banks because Goldman Sachs should not be doing highly leveraged plays with free money from the Federal Reserve.  And reinstitute serious leverage limits, not just for retail banks but for everyone.

As for retail banks, if they don’t lend to the public at rates approved of by the Federal Reserve and Congress, they too should lose their access to special facilities.  Banks are given the valuable right to borrow money for almost nothing, and to, in effect, print money by lending out money they don’t have.  Those are privileges which are given to them in the expectation that they will use them to benefit the economy.  If they refuse to do so, they should lose the privileges.

None of this is rocket science.  Those of us who predicted both the crisis and what the bungling of the crisis would cause, however, are precisely the people who are not listened to by those in power.  Obama is having his jobs summit, and forget nobodies like me, he isn’t even inviting somebodies like Stiglitz and Krugman.

If you’ve been right down the line, then you are precisely the sort of person who isn’t “serious” and shouldn’t be listened to when it comes to what it takes to fix the problem.

Why?  Because everyone knows that fixing the problem will end the gravy train for a lot of very rich people.  A lot of very rich people who give a great deal of money to Democrats in general, and gave a lot of money to Obama in particular.  If the cost of keeping that gravy train and the donations it enables going is tens of millions of unemployed people, well, so be it. Because serious people know that real change isn’t going to happen under Obama or under this Democratic Congress, so there’s no point in even talking to people who might suggest it.

Plus ca change. Plus c’est la même chose.

The major measures recovered in the afternoon from down 2% but still closed 1% and more lower. Volume was light and breadth was 4/1 negative. The bears are trying but we’ll call today a tie.

November 18

Congress is trying to devise regulations to control the too big to fail banks.

As with Social Security and Health Insurance the powers that be are making the process so complicated that a solution is impossible.

To solve the Social Security crisis all that is needed is a cap on the top payout at its present level. The current top level is $2300 per month. Since the average payout is about $1100 per month none of the present recipients would be disadvantaged. Coupled with a maximum yearly increase of 2% or the inflation rate-whichever is less- the Social Security fund would be actuarially solvent.

The Cato Institute which is a very conservative organization projects: To make Social Security solvent over the next 75 years, either a permanent 15 percent increase in payroll income taxes, or a 13 percent reduction in benefits. (http://www.cato.org/pub_display.php?pub_id=3122 ).

The average increase in Social Security for the last ten years has been 3%. At a 3% rate social security benefits double every 24 years. At a 2% rate Social security benefits double every 36 years.  That means it would take an additional 12 years for benefits to reach a freeze level with a corresponding huge increase in money not spent. Coupled with the freeze on the top rate the reduction in the monies paid out by Social Security would be reduced by much more that the 13% rate the Cato Institute suggests is needed to make the system solvent.

Present recipients except those in the top bracket wouldn’t be disadvantaged and the majority of those in lower brackets would never be affected. A change in the system in the next few years would allow future recipients to plan with a dollar certain amount of what they would receive from Social Security in retirement.


The health insurance crisis could be solved by opening up Medicare to all with folks below 65 paying a premium based on income.


And the too big to fail crisis can be solved by separating investment banking and trading from commercial banking.

These solutions are all too simple for the folks whose jobs depend on keeping programs complicated.

(Marketwatch.com) Hershey’s is considering making a bid for Cadbury to counter the Kraft bid. Hershey Co. (HSY) and Ferrero International said separately that they were considering options on bidding for Cadbury (CBY) as the battle for the U.K. chocolate maker heats up. Kraft Foods (KFT) has already launched a takeover bid that the U.K. company has called "derisory." The Wall Street Journal reported Tuesday night that Hershey has been in high-level talks with Italian chocolate maker Ferrero on a possible joint bid.

(Marketwatch.com) U.S. consumer prices rose a seasonally adjusted 0.3% in October as energy prices increased for the fifth time in six months to offset another rare decline in rents, the Labor Department reported. The core CPI -- which excludes food and energy prices -- rose 0.2% in October, led by higher prices for cars and trucks, due in part to the unwinding of the government's cash-for-clunkers deal. The CPI and the core CPI were each 0.1 percentage point higher than forecast by economists surveyed by MarketWatch.

(Markletwatch.com) New construction of U.S. houses fell sharply in October to the lowest level in six months, the Commerce Department estimated. Starts fell 10.6% in October to a seasonally adjusted 529,000 annualized units, weaker than the 590,000 pace expected by economists surveyed by MarketWatch. This is the lowest level since April. Building permits, a leading indicator of housing construction, fell 4% to a seasonally adjusted annual rate of 552,000.

If you have the time:

Chico’s, the women’s retailer popped 15% on Wednesday when they beat by 10 pennies. We are buying back ANN in the hopes that we’ll get the same reaction when they beat on Friday. If they don’t....

Thoughts while watching a Hartford Insurance ad on TV last night:

(Bloomberg) -- U.S. life insurers, a group led by MetLife Inc. and Prudential Financial Inc., may lose as much as $22.6 billion on investments in commercial real estate through 2011, Fitch Ratings said.

Losses on investments in apartment buildings, offices, shopping malls and other commercial real estate will begin to increase in the next 6 months to a year as rents decline and vacancies increase, said Fitch Senior Director Andrew Davidson. Life insurer losses on commercial real estate have been “virtually nil” so far, he said.

“It will be more of a 2010 and 2011 issue,” Davidson said in an interview today. “It will put some stress on the capital positions as they realize the losses.”

Life insurers held more than $450 billion in commercial loans and mortgage-backed securities at the end of 2008, Fitch said in a related report. The delinquency rate on U.S. CMBS rose to 4.01 percent at the end of October, almost seven times what it was a year ago, Moody’s Investors Service said yesterday.

MetLife has recorded three straight quarterly losses and Hartford Financial Services Group Inc. has lost money since June 2008 as investments that include those backed by commercial and residential mortgages dropped in value. New York-based MetLife and Prudential have said commercial mortgage defaults will climb in the next year.

Matt Taibbi is the best on the Goldman Sachs soap opera: http://trueslant.com/matttaibbi/

Blankfein: We Were Dicks, We Admit It

“We participated in things that were clearly wrong and have reason to regret,” Blankfein, 55, said at a conference in New York hosted by the Directorship magazine. “We apologize.”

via Blankfein Apologizes for Goldman Sachs Role in Crisis (Update1) – Bloomberg.com.

I’m almost beginning to feel sorry for Lloyd “God’s Work” Blankfein. Could it be that the great tapeworm of conscience is beginning to eat its way northward?

Initially I thought the news story about Goldman’s apology read like this:

Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., apologized for the firm’s role in some of the activities leading to the financial crisis.

“We participated in things that were clearly wrong and have reason to regret,” Blankfein, 55, said at a conference in New York hosted by Directorship magazine. “We apologize, and in order to make this right we’re going to forgo our entire bonus pool this year and give back about $50 billion of the money we stole.”

Blankfein said that the bank’s mortgage-service subsidiary, Litton Loans, would be forgiving billions in mortgage payments and issuing a freeze on foreclosures during the Christmas season because, as Blankfein put it, “kicking people out of their houses on Christmas makes us look like assholes.”

That’s what I thought the story said. Then I went back and realized I had misread it and that while “God’s Work” had in fact apologized, he was actually keeping all of the money and going ahead with a record year of bonuses while his company went about the business of mass-evicting people during the holidays.

Well, Lloyd, we don’t know what to say. Uh… thanks for saying so? We’re glad you’re sorry?

Man, these people are amazing. Just as theater, they’re impossible to beat. Someone should make a soap opera out of them, maybe call it Billionaires Cry Too or something.


18 November 2009

Portfolio Update

Model Portfolio Value As of 18 November 2009

$ 575,766

17 November 2009

We are taking tomorrow off. Our next post will be Thursday November 19.


Model Portfolio Value As of 17 November 2009

$ 576,661

Asian markets were mixed mildly mixed overnight and European bourse indexes are lower at midday. Gold is down $7 and Oil has a $78 handle as the trading day begins. U.S. stocks are going to open a bit lower after yesterdays’ run to new highs.

We sold Ford for a 15% gain. We also sold Genzyme after we decided we didn’t want to hold it. The shares are up $1 today on news that Icahn owns shares and so we are out at a profit. We reduced our Whole Foods position in accounts at a loss. When trading it is always easier to take profits than losses.

(marketwatch.com) Home Depot the No. 1 home-improvement retailer, reported third-quarter profit fell a less-than-expected 8.9%, after the company controlled expenses to help offset consumers paring back on larger-ticket purchases. The company also raised its full-year outlook, though its implied fourth-quarter forecast fell short of Wall Street expectations. Home Depot said net income fell to $689 million, or 41 cents a share, from $756 million, or 45 cents a share, but was ahead of the 36-cent consensus forecast. Sales dropped 8% to $16.36 billion, matching expectations.

U.S. wholesale prices rose a seasonally adjusted 0.3% on higher food and energy costs, the Labor Department reported. Excluding volatile food and energy goods, the core producer price index fell 0.6%, the biggest decline in three years. Falling prices for light trucks and cars led the way lower. The producer price index has fallen 1.9% in the past year, while the core PPI has risen 0.7%. Inflation at the wholesale level for the latest month was lower than forecast by economists surveyed by MarketWatch, who looked for a 0.5% increase in the headline PPI and a 0.1% gain in the core.

Road to Recovery Still Rocky
Diane Swonk, Chief Economist, Mesirow Financial

Preliminary data for industrial production in October, which increased an anemic 0.1%, underscored the weakness of the recovery and the hurdles we face in generating much self-feeding momentum prior to Christmas. Producers in the auto industry, in particular, are complaining about problems with their suppliers, who don't have the cash or credit to get their idle capacity up and running again. (Some suppliers are operating at less than 40% of their peak capacity.) This is, at least in part, what policy makers where trying to avoid when they decided to bail out GM earlier in the year. I could say something flippant - like, so much for that $50 billion - however; the reality (as even GM's competitors will tell you) is that the damage to infrastructure would have been worse without the bailouts. The collateral damage to bank balance sheets in the Midwest would have been particularly hobbling.

That said, problems in the production pipeline are not a problem for inflation (i.e., don't worry about bottlenecks). Producer prices increased 0.3% last month - less than expected - and continued to drop on a year-on-year basis despite some rebound in food and energy prices.

On net, real GDP is still expected to rise in the 3% range in the fourth quarter, but that is truly marginal given the depth of the losses we have endured. Fed Chairman Ben Bernanke and his colleagues at the Fed are correct to be more worried about persistent weakness than runaway growth at this stage of the game.

European stock markets eased, taking a breather after recent gains. Traders said stock-market sentiment remains positive, buoyed by rising faith in a global economic recovery.

(Detroit News) Nearly 35 years after taxpayers spent $55.7 million building the Pontiac Silverdome and a year after a $20 million sale fell through, city officials have sold the arena once called the most desirable property in Oakland County. The price: $583,000. "This was a giveaway," said David J. Leitch, a broker with an Auburn Hills based realty firm. "The property alone, at $10,000 an acre, should have gone for more than that. And you have the Silverdome, its contents, and the infrastructure already in place. I had estimated it would probably go for between $1.2 million and $3 million. I can't believe it.”.... The 80,300-seat stadium opened in 1975 and has largely remained empty since the Detroit Lions left for Ford Field in 2002. The sale included 127 adjacent acres.

Oil closed up 17 pennies at $79.17. Gold lost $1 to $1138.

The major measures were minus and plus all day. Given the large jump yesterday the day goes to the bulls. At the bell the DJIA was up 30 points and the S&P 500 was up 1 point. Volume was light and Breadth was 5/4 negative.


16 November 2009


Model Portfolio Value As of 16 November 2009

$ 577,113

U.S. stocks look to open higher as markets around the world were mildly higher overnight. Gold is up $10 at $1126 and Oil has a $77 handle.

U.S. retail sales increased 1.4% in October, above the 0.9% rise projected by Wall Street. The jump came on rebounding demand for cars, a sign the economy kept recovering despite climbing unemployment. Aside from automobiles in October, other sales rose just 0.2%. Retail Sales for September were adjusted downward and were the reason for the beat in October.

On one hand, and on the other:

(NYT) Even as drug makers promise to support Washington’s health care overhaul by shaving $8 billion a year off the nation’s drug costs after the legislation takes effect, the industry has been raising its prices at the fastest rate in years. In the last year, the industry has raised the wholesale prices of brand-name prescription drugs by about 9 percent, according to industry analysts. That will add more than $10 billion to the nation’s drug bill, which is on track to exceed $300 billion this year. By at least one analysis, it is the highest annual rate of inflation for drug prices since 1992.

(Bloomberg) General Motors Co., signaling confidence in its recovery from bankruptcy, said it generated $3.3 billion in cash in the third quarter and plans to start repaying government loans early.

The biggest U.S. automaker said today it lost $1.15 billion after its July 10 exit from a restructuring engineered by the Obama administration. Cash on hand totaled $42.6 billion at the end of the quarter, and GM reported progress in cutting jobs and shutting dealers.

Billion dollar Ponzi schemes are now old hat.


We switched GE to Genzyme in most accounts Genzyme is on a five year low after having manufacturing problems in June and again this month. Seems they have foreign matter in their drug vials. We bought for a trade/hold.

Ann Taylor jumped $1 today on a buy recommendation and we sold. Earnings come Friday.

(Yahoo/Finance) Genzyme Corporation operates as a biotechnology company worldwide. The company’s Genetic Diseases segment manufactures and distributes therapeutic products, including Cerezyme as an enzyme replacement therapy for the treatment of Type 1 and Type 3 Gaucher diseases; Fabrazyme, a recombinant form of the human enzyme alpha-galactosidase for the treatment of Fabry disease; Myozyme as a therapy for Pompe disease; and Aldurazyme for the treatment of Mucopolysaccharidosis I. This segment sells its products directly to physicians, hospitals, treatment centers, and government agencies through distributors. Its Cardiometabolic and Renal segment offers products consisting of Renagel and Renvela for the control of serum phosphorus in patients with chronic kidney disease on dialysis; Hectorol, a line of vitamin D2 pro-hormone products for the treatment of secondary hyperparathyroidism; and Thyrogen, an adjunctive diagnostic agent used in the follow-up of patients with well-differentiated thyroid cancer. This segment sells its products to retail pharmacies, hospitals, and other providers of medication to patients. The company’s Biosurgery segment provides biotherapeutics and biomaterial-based products, which comprise Synvisc, a biomaterial-based product that is used to treat the pain associated with osteoarthritis of the knee; and Sepra family of products to prevent adhesions following various surgical procedures in the abdomen and pelvis. Its Hematologic Oncology segment develops products for the treatment of cancer, which include Campath for the treatment of B-cell chronic lymphocytic leukemia; Clolar for the treatment of pediatric patients 1 to 21 years old with relapsed or refractory acute lymphoblastic leukemia; and Mozobil for collection and subsequent autologous transplantation in patients with non-Hodgkin's lymphoma and multiple myeloma. It has a collaboration agreement with to-BBB technologies BV. The company was founded in 1981 and is based in Cambridge, Massachusetts.

We don’t know whether this article is correct but Zero Hedge has been correct in the past. The article is long but worth the read:


European markets kicked off the week in strong fashion amid further indications that the global economic recovery is taking hold. Gold and oil prices jumped, while the dollar wilted. Germany and London were up 2% and France up 1.5%.

Gold ended at $1142 up $26 and Oil was up $2.85 at $79.24.

Major stock measures closed up 1% and higher at 2009 highs. Breadth was 3/1 positive and volume was light. The bulls won the day.


13 November 2009


Model Portfolio Value As of 13 November 2009

$ 575,296

Asian and European markets were mixed overnight. Oil has a $75 handle and Gold is flat as the trading day begins.

(http://www.zerohedge.com/ )Not a good day for PIMCO as Calpers continues scapegoating for its deplorable performance, and today the California Pension manager decided to trim its exposure to PIMCO. In doing so, Calpers slammed the Newport Beach firm for being too risk averse (watch out Bill, you know what happened to John Mack for being too timid): "While PIMCO managed to return 35.06% [from January to September 2009], PIMCO's aversion to risk resulted in underperforming the benchmark return of 47.45% by 1,238 bp." The result: Calpers is pulling $100 million from PIMCO, however it is not firing the manager altogether and instead will consider "allocating more assets to PIMCO in the future when risk aversion is expected to produce alpha in the high yield market."

When a 35% return doesn’t meet the benchmark we would suggest that markets are not normal and that underperforming may have been the correct strategy with other folk’s money.

We raised cash taking profits in Barnes & Noble, Intel, Dell, and CVS and breaking even on KBE with a scratch loss in Sara Lee. With yesterday’s action and the low volume on the rally over the last week we are again looking for a correction over the next several weeks.

European shares ended modestly higher, as gains from recovering luxury-goods producers Richemont and Bulgari offset disappointing results from media and construction group Bouygues.

(AP) Federal health regulators have found tiny particles of trash in drugs made by Genzyme, the second time this year the biotechnology company has been cited for contamination issues. The Food and Drug Administration said Friday that bits of steel, rubber and fiber found in vials of drugs used to treat rare enzyme disorders could cause serious adverse health effects for patients.

Despite those problems, the FDA said the products would remain on the market, because there are few alternative treatments.

FDA regulators say doctors should closely inspect vials for particles before injecting them into patients. Doctors should return the product to Genzyme if they suspect contamination, the agency said. Physicians should also watch for potential allergic reactions, blood clots and other problems in patients.

Gold ended at $1103 and Oil was $77.11.

Stocks were higher with the S&P 500 regaining 1090 to finish at 1093. The DJIA was up 80 points and the NAZZ gained 1%. Breadth was positive and volume was light. The bulls won the day and the week.


12 November 2009


Model Portfolio Value As of 12 November 2009

$ 573,816

Asian and European markets were lower overnight and U.S. futures suggest a slightly lower opening. Gold is $1115 and Oil has a $78 handle. New Jobless claims for the latest week were 502,000.

Wal-Mart beat but was cautious going forward.

Goldman and Citi are going to underwrite an IPO of Dollar General which Goldman and Citi and KKR took private $8 billion in 2007 right before the collapse. The offering price is $22. The new and improved (?) Dollar General has a lot more debt and is being priced at 30 times earnings. The reason the $22 price was chosen is not to give investors a good opportunity but because that will get the leveraged buyout folks out with a profit. Of course Goldman and KKR have loaded Dollar General with debt in order to take dividends for themselves over the past two years.

Initial IPOs have not fared well this year for the buyers. We don’t understand why institutions buy these IPOs. Our guess is that the folks at Goldman promise to let them in on better deals in the future.


(Bloomberg) Intel Corp. and Advanced Micro Devices disclosed a comprehensive agreement to end all outstanding legal disputes between the companies, including antitrust litigation and patent cross license disputes. Under terms of the agreement, AMD and Intel obtain patent rights from a new 5-year cross license agreement, Intel and AMD will give up any claims of breach from the previous license agreement, and Intel will pay AMD $1.25 billion. Intel has also agreed to abide by a set of business practice provisions.

United Technologies will buy the security business of General Electric for $1.8 billion, strengthening its North America position and expanding its product portfolio.

JDSU is up 10% today on 15 million shares volume because Cramer recommended it on his show last night as a takeover. Average daily volume is a bit over 3 million shares. When the little guys and gals are buying on nothing it may be time to get worried. Of course this type of push can go on for a while.

Our understanding is that Senator Dodd is trying to obtain power for Congress to interfere in the day to day workings of the Fed. That’s nuts. The last folks we want messing with the fine points of the financial system is the Congress. They are the ones who repealed Glass Steagall. They can write laws to limit corporations but leave the Fed alone. The Fed makes mistakes, sometimes large mistakes but the Congress has no business in the daily business of the Fed.

LIZ is down 15% from our initial small purchase and so we doubled the position which now comes to about 1% in most accounts. We sold Boston Scientific for a plus scratch.

(WSJ) Economists in the latest Wall Street Journal survey, on average, expect the Federal Reserve to raise interest rates around September 2010, a politically sensitive time considering midterm elections will be right around the corner and unemployment is forecast to still be over 9.5%. The 52 surveyed economists -- not all of whom answer every question -- on average expect the unemployment rate to rise to 10.3% by the end of this year from its current 10.2%, and they expect it to stay above 9.5% through 2010.  The economists expect gross domestic product to expand around 3% at a seasonally adjusted annual rate through 2010, slightly slower than the 3.5% recorded in the third quarter.

European shares shrugged off weakness in Asia and on Wall Street, holding small gains after BT Group, Peugeot and Vopak upgraded guidance and deal speculation fueled a steep climb for several airline stocks.

H-P will acquire networking-equipment maker 3Com in a $2.7 billion deal as the computer giant looks to boost its offering of servers, storage and networking services.

Gold closed down $9 at $1107. Oil lost $2.55 to $76.76.

(http://www.zerohedge.com/ ) According to the latest Monthly Treasury Statement, the US economy continues melting away as receipts are nowhere near to funding outlays, meaning more and more debt has to be used (and more and more interest expense has to be paid as a result). The deficit last month of $176 billion was $20 billion worse than a year ago, and is the single worst October reading in US history. The number was a function of $312 billion in outlays and just $135 billion in receipts, an 18% decline YoY, and also the weakest reading for the month of October since 2002. The $176 billion deficit represents a new downward inflection point as it was worse than both the CBO's expectation ($175) and the consensus estimate of $165.9 billion. Most interesting is the amount of interest on US debt paid: in October the government paid out $17.93 billion of net interest expense, $1 billion lower than the $18.98 billion spent in October 2008. The question of what happens to this number once the Fed stops monetizing the debt and keeping rates artificially low stands open.

Goldman as underwriter and tout. http://www.zerohedge.com/

Actually the above story isn’t much different that the fact that Goldman owns Dollar General and is also underwriting the offering. Of course it will receive a fairness opinion on the price of the offering from some other dis-interested but well paid investment bank.

The price of oil? : http://www.zerohedge.com/article/guest-post-goldman

The major measures dropped 1% and more today in light trading. Breadth was greater than 3/1 negative. The bears win a day. Our guru thinks a significant break of 1090 on the downside by the S&P 500 (closed at 1087) would offer the bears hope.


11 November 2009


Model Portfolio Value As of 11 November 2009

$ 578,636

The dollar hit $1.50 to the Euro this morning. Times do change as do economies. Asian and European markets war higher overnight and Gold is at $1115 and Oil has a $79 handle.

Investors Intelligence has a drop of 4% in bulls to 44% and a rise of 2% in bears to 26% in the latest week.

Poor Robert Benmosche the CEO of AIG is annoyed at government regulators sticking their noses into AIG’s business. Imagine, the government has injected $185 billion-that’s BILLION- into AIG and they now want some say in how the executives of the company are compensated. The CEO is in a snit about this. (Benmosche’s salary is $3 million in cash, $4 million in shares at the low, and as much as $3.5 million of long-term incentive awards.)

(WSJ) Robert Benmosche has told the board of American International Group that he is considering stepping down as chief executive of the government-controlled insurer, The Wall Street Journal reported, citing unidentified people familiar with the matter. At a board meeting last week, Benmosche -- who took the job just three months ago -- told fellow AIG directors that he was "done" but agreed to think it over after other board members reacted with shock, the report said. Benmosche is said to be chafing under constraints imposed by AIG's government overseers, particularly a recent compensation review by the Obama administration's "pay czar," according to the report.

(WSJ) In a speech late Tuesday, Federal Reserve Bank of Dallas President Richard Fisher said that he is aware that the Fed's current stance of keeping interest rates low for an "extended period" was denting the dollar but that he didn't want to do anything about it, pointing out inflation is likely to remain subdued for some time.

(Bloomberg) -- Motorola Inc., the biggest U.S. mobile-phone maker, is looking for buyers for its division that makes television set-top boxes, and is seeking about $4.5 billion, the Wall Street Journal reported.

This is a native take on the proposed sale: http://digitaldaily.allthingsd.com/

European stocks closed higher. Gold was up $14 to $1116. Oil ended at $79.22.

The major measures closed mildly higher in light trading. Breadth was positive and new highs have begun to expand again. The bulls continue to hold serve.


10 November 2009


Model Portfolio Value As of 10 November 2009

$ 576,411

Yesterday’s rally was strong but markets around the world did not pick up on it. Asian was mildly higher overnight and European bourses are mixed at midday. Gold is back under $1100 and Oil has a $79 handle.

As much as we dislike health care companies we are holding our nose and buying a small amount of Health Management Associates. The new health plan will be positive for hospital revenues. HMA, together with its subsidiaries, primarily owns and operates general acute care hospitals in non-urban communities principally in the southeastern and southwestern United States. Its hospitals provide a range of services, including general surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, and pediatric services. The company also offers outpatient services, such as one-day surgery, laboratory, x-ray, respiratory therapy, and cardiology and physical therapy. In addition, it provides specialty services in cardiology, neuro-surgery, oncology, radiation therapy, computer-assisted tomography scanning, magnetic resonance imaging, lithotripsy, and full-service obstetrics. As of December 31, 2008, Health Management Associates operated 56 hospitals with a total of 8,019 licensed beds in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Washington, and West Virginia. The company was founded in 1977 and is headquartered in Naples, Florida.

We added Fifth Third, Huntington and Key Bank to accounts. All there are Ohio bank speculations and we are betting that at least two of them survive. We bought in small amounts.

From http://industry.bnet.com/financial-services/

Goldman Sachs May Be Doing "God's Work," But It Still Needed Taxpayer Help

By Daniel M. Harrison | Nov 9, 2009

In with the London newspaper The Sunday Times this weekend, Goldman Sachs’ chief executive Lloyd Blankfein pulled no punches when it came to his take on the bank’s role in the global economic landscape. Goldman is “doing God’s work,” said Blankfein:

“We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle.” To drive home his point, he makes a remarkably bold claim. “We have a social purpose.”

… He insists we should be celebrating his bank’s success, not condemning it. “Everybody should be, frankly, happy,” he says.

While these comments undoubtedly make for a lively discussion in populist political circles, it is Blankfein’s comments on the details of the various government bailout packages that are, in a sense, the most unnerving of all:

Blankfein dismisses any suggestion that Gold-man (sic) needed to be bailed out, and, by extension, rejects any notion that the firm is now profiting from public support. Sure, he took $10 billion from Washington’s Troubled Asset Relief Program (Tarp). But the bank has since repaid the cash, with healthy interest — 23%. Goldman also bene-fited (sic) from the federal bail-out of the huge US insurance firm AIG. Goldman had bought $20 billion worth of insurance from AIG and received billions of dollars — perhaps as much as $13 billion — when Washington pumped $90 billion into the stricken giant. But Blankfein insists Goldman was “hedged” against any AIG losses, in the best possible way — with cash. So even if AIG had gone under, Goldman would not have suffered.

Whatever your opinion on the issue of Goldman’s status as Almighty Creator in today’s financial environment, it is hard to see that Blankfein isn’t being a little flippant with the facts of history here. At the time of the collapse of Lehman Brothers, Goldman was forced to raise $10 billion of fresh capital by selling a 15 percent stake in itself to Warren Buffett and other investors. (At $123 per share, the sale was completed around 30 percent cheaper than today’s market price of $170 per share.)

Just days before the share sales — which directly allowed Goldman to stay afloat — the firm received around $12 billion in government aid. What is more, Blankfein was the only U.S. chief executive present at a September 2008 Federal Reserve meeting to discuss AIG’s $44.6 billion loan.

Presumably, if Goldman Sachs had been able to privately raise the initial $12 billion provided to it by the U.S. government, it would have done so. What seems much more likely is that the investors — including Buffett — who later agreed to commit an additional $10 billion only did so on the basis that the firm was reasonably supported by government aid. That way, they could be assured that their money was not merely serving as a stopgap to bankruptcy.

This point is all the more prescient in light of the recent bankruptcy filing of CIT Group (CIT), a small business lender. The whole reason share sales were not a viable capital raising option for CIT was because the government denied the firm’s application for government aid earlier in the year.

No one wants to be left holding common stock when a company is headed for Chapter 11. While Goldman’s near-bankruptcy experience was shorter-lived than for most financial firms, it cannot be denied that it did indeed once face the very real possibility of having to drag itself through the courts. Lloyd Blankfein ought to be honest about that, if only to show that he is aware of the real possibilities of systematic risk.

(WSJ) European antitrust authorities formally objected to  Oracle Corp.'s proposed purchase of  Sun Microsystems Inc., complicating a $7.4 billion deal that U.S. officials had already blessed.

(Bloomberg) Motorola probably sold 100,000 Droid phones in their first weekend on the market, a sign that the handset maker is recovering even though it still trails Apple Inc., an analyst said. Verizon Wireless, the carrier for the device, had 200,000 Droid phones on hand, and most stores sold at least half of their stock, Mark McKechnie at Broadpoint AmTech Inc. said yesterday. Including other models, Motorola will sell 1 million phones based on Google Inc.’s Android software in the fourth quarter and 10 million in 2010, he said.

Just what we were thinking:

From http://seekingalpha.com/article

The price war between Amazon (AMZN) and Wal-Mart (WMT) over best-selling books got a lot of press recently. It hasn't done Barnes & Noble (BKS) shares any good.

Never mind that Barnes & Noble is working closely with Wal-Mart and that best-sellers account for only 3 to 5 percent of BKS' sales. Conventional wisdom says that BKS is the second coming of dinosaur Blockbuster Video (BBI).

People don't read any more, right? And Barnes & Noble = Books.

The longer I'm in this business, the more I realize that most investors don't look beyond the headlines. Amazon good. Barnes & Noble bad. Simple, except the truth threatens this world-view.

Amazon has a sizable exposure to books too, yet it garners a ridiculous valuation. The case for going long BKS and short Amazon is effectively outlined in a recent Seeking Alpha article. Rather than reiterate the points of comparison, I'll focus on Barnes & Noble as a standalone investment.

Barnes & Noble is the premier brick and mortar retailer in a still fractured bookselling market. Borders (BGP) is overleveraged and struggling. Books-a-Million (BAMM) is in better shape, but is less than a tenth the size of BKS. In short, BKS has plenty of room to grow.

With 57 million shares outstanding and a recent price of $18.50 a share, the company has a market value of just $1 billion. This slight market cap results in a silly price-to-sales ratio of less than 0.20.

In recent years, Barnes & Noble has spent aggressively to upgrade its stores. Capex spending is now being throttled back and free cash is flowing. In fact, the company is expecting at least $100 million in reported free cash flow this year. Actual free cash flow should be much higher.

The company is budgeting $125 million in capital expenditures this fiscal year. Of that, $50 million is for new investments as opposed to maintenance. BKS is selling for 10 times free cash flow at most (and perhaps as little as 6 times).

The recent acquisition of Barnes & Noble College Booksellers should provide an added tailwind. In a slightly awkward (some might say incestuous) transaction, BKS bought College from the Riggio family, which also happens to run/control BKS with a stake of around 40%.

How's that for insider ownership?

Barnes & Noble paid $514 million for its corporate cousin. The transaction reunites the Barnes & Noble brand and adds an attractive, stable market for BKS. Before the deal, Barnes & Noble had annual sales of roughly $5 billion. College adds about $1.8 billion a year to the mix. So B&N College Booksellers represents about 25% of total company revenue. For this, BKS paid what appears to be a reasonable $514 million (or 5 times EBITDA).

Recall that all of Barnes & Noble (including the College acquisition) is valued by Mr. Market at only $1 billion. So College represents 25% of sales and 50% of the value? Something's wrong!

With their College proceeds, the Riggio family could conceivably take all of Barnes & Noble private. Their deal closed just weeks ago, but the market has already handed the Riggio's a gift. An aside: Leonard Riggio is the founder of Gamestop (GME) (a former BKS subsidiary). His recent sales of GME shares easily provide the extra cash needed for such a purchase.

Something is going to give. Barnes & Noble shares should trade above $30 a share.

Despite the "Booksellers" tag line on every store, Barnes & Noble is far more than a bookstore. They are a very capable retailer with a bright future.

If only the market realized it. ... BKS pays a healthy 5.5% dividend.

From http://trueslant.com/matttaibbi/

Nov. 8 2009 — 10:06 pm

Commodities Casino Keeps Rolling

HOUSTON (Dow Jones)–Sunoco Inc. (SUN) swung to a third-quarter loss on a host of charges and continued weak demand for oil-based fuels and chemicals. Those difficulties are expected to continue amid the economy’s weakness, said Chief Executive Lynn Elsenhans.

“As we consider the outlook for the rest of the year and into 2010, we do not anticipate significant improvement in the refining market,” Elsenhans said during a call Thursday with analysts.

Last month, Sunoco became the first oil company to say it will close a U.S. refinery, a ploy aimed at getting that segment to break even this year. All of the units at Eagle Point plant in Westville, N.J., ceased production this week, Elsenhans said.

So demand for crude is down so much that we’re actually closing refineries in this country, but the price of crude is up 150% since the beginning of the year. Makes sense, right?

A weak performance by the auto sector offset gains for HSBC in Europe, as the broader market failed to extend sharp gains from the previous session.

In the new world order companies investigate themselves for insider trading. It saves time and money for the company and the government.

(Bloomberg) SAC Capital Advisors LLC, the hedge- fund firm run by Steven Cohen, reviewed its buying and selling of stocks cited in the Galleon Group LLC insider-trading cases and found nothing suspicious, according to one of its investors.

SAC, which oversees $14 billion, also told the investor that neither it nor any employees had received subpoenas related to the cases. Clients have contacted the Stamford, Connecticut- based firm since prosecutors said last week that a former SAC portfolio manager agreed to plead guilty and cooperate with their probes, said the investor, who asked not to be identified because the information is private.


And now we have to worry about the end of the world on 12/12/12.



The Treasury auctions have been well bid. For example the Treasury sold 3 year maturity paper with a 1.4% yield and the bids were three times the amount of securities offered. ($120 billion bid for $40 billion offered)  Maybe Central Banks and foreign investors are betting on the dollar rebounding in the next few years to add return (though dollar appreciation versus their own currency) to the measly 1.4% yield they will be earning.

The Bear Stearns fund managers Cioffi and Tannin were found not guilty on all counts. Good for them. They made stupid mistakes. That’s all.

The major measures meandered plus and minus all day with the S&P 500 and DJIA closing slightly higher and the NAZZ slightly lower. Volume was light and Breadth was negative. The bulls held serve. Oil was $79.33 and Gold ended at $1098.


9 November 2009


Model Portfolio Value As of 9 November 2009

$ 577,565

Asia and Europe were and are higher overnight and U.S. stocks look to open 1% higher. Stocks in the U.S. have opened higher the last two Mondays only to reverse later in the day as sellers overwhelmed feel good buyers. Oil has a $78 handle and Gold has topped $1100 for the first time in history.

Kraft made a hostile bid for Cadbury over the weekend. Cadbury rejected the bid which was the same as the offered price several months ago but since Kraft price is lower the actual value is lower.

GE and Comcast have agreed to value NBC Universal in the neighborhood of $30 billion, a development that could lead to a deal this week for Comcast to take control of GE's media and entertainment arm.

1073 on the S&P 500 is the line in the sand. It is the high from September 23. That day saw a key reversal from the high with the market closing lower. In the pre-market the S&P is trading above that number. The bulls need it to hold that number through the first two hours of trading. The bears of course are hoping for the opposite.

You’ll be happy to know:

(Bloomberg) -- Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co.’s investment bank, survivors (our note- thanks to the U.S. taxpayer) of the worst financial crisis since the Great Depression, are set to pay record bonuses this year. The firms -- the three biggest banks to exit the Troubled Asset Relief Program -- will hand out $29.7 billion in bonuses, according to analysts’ estimates. That’s up 60 percent from last year and more than the previous high of $26.8 billion in 2007. The money, split among 119,000 employees, equals $250,400 each, almost five times the $50,303 median household income in the U.S. last year, data compiled by Bloomberg show.

Economic data versus economic reality: http://www.nytimes.com/2009/11/09

... The fundamental shortcoming is in the way imports are accounted for. A carburetor bought for $50 in China as a component of an American-made car, for example, more often than not shows up in the statistics as if it were the American-made version valued at, say, $100. The failure to distinguish adequately between what is made in America and what is made abroad falsely inflates the gross domestic product, which sums up all value added within the country...

Blankfein of Goldman “I’m doing God’s work”.


We stopped ourselves out of SH (S&P Short ETF) for a $1.50 per shares loss. We bought an equal number of shares of Sara Lee, Liz Claiborne and Ann Taylor for half the money. ANN is the cheapest of the women’s retailers. Eventually the big boys and girls will step up to the plate. We traded ANN off the $3 level in March for a quick profit. That price was ridiculous but so were most prices then. Sara Lee has a 3.8% yield and may be on the verge of finally getting its house in order after jettisoning a goodly number of the acquisitions made in the last thirty years. LIZ has been beaten down to nothing and is a speculation.

Gold finished up $8 at $1103. (For perspective: the move from $800 to $1100 is an $8 stocks going to $11.) Oil ended at $79.40 up $1.97.

Stocks gapped higher at the opening and never looked back. The major measures closed 2% higher. Breadth was 4/1 positive and volume was brisk. The bulls won the day.

McClatchy Washington Bureau article on Goldman which is part of a series:

URL for this article: http://www.mcclatchydc.com/100/story/77852.html

For the series of articles on Goldman http://www.mcclatchydc.com/goldman/

Why did blue-chip Goldman take a walk on sub prime’s wild side?

Greg Gordon | McClatchy Newspapers

Originally Posted on Wed, Nov. 04, 2009

Last updated: November 06, 2009 09:01:50 PM

IRVINE, Calif. — Goldman Sachs was one of the last Wall Street giants to enter the subprime lending world, but when it did, it quickly climbed into bed with profligate, highflying firms — companies such as New Century Financial Corp.

In at least nine deals from 2002 to 2007, Goldman sold bonds backed by more than $5 billion of New Century's mortgages, one even after the California lender's underwriting criteria all but disintegrated and a cash squeeze paralyzed its operation. Goldman also marketed at least three secret offshore deals bearing New Century's name.

Goldman has yet to explain why it risked its blue-chip reputation and financial health to buy and repackage at least $135 billion in loans mostly originated by companies that have since gone bust.

Goldman spokesman Michael DuVally stressed, however, that the firm "was not the largest purchaser of loans from any of these mortgage originators, and in some cases was actually quite a small purchaser."

A glimpse inside New Century's operations sheds light on how one of Wall Street's proudest and most prestigious firms helped create a market for junk mortgages, contributing to the economic morass that's cost millions of Americans their jobs and their homes.

Perhaps no mortgage lender was more emblematic of the go-go atmosphere in the sprouting industry that was seizing an outsize share of the home loan market.

Traversing the country in private jets and zipping around Southern California in Mercedes Benzes, Porsches and even a Lamborghini, New Century executives reveled as the firm's annual residential mortgage sales rocketed from $357 million in 1996 to nearly $60 billion a decade later.

To be a subprime lender at the industry's height was to join in a dash for cash, and New Century was an Olympic-caliber sprinter.

Its top five officers, who received nearly $40 million in salaries and bonuses from 2002 to 2005, could peer out the 10th-floor windows of their gleaming onyx headquarters in Irvine and see the offices of more than a dozen rivals.

"A friend of mine said you couldn't fire a .22-caliber rifle and not hit a subprime lender in Orange County," recalled a former manager of a company that reviewed subprime loan files before Goldman and other Wall Street firms bought the mortgages.

For $100 million in mortgages, New Century could command fees from Wall Street of $4 million to $11 million, ex-employees told McClatchy. The goal was to close loans fast, bundle them into pools and sell them to generate money for the next round.

Inside the mortgage company, the former employees said, pressure was intense to increase the firm's share of an exploding market for mortgages that depended almost entirely on Wall Street's seemingly unlimited hunger for bigger, faster returns.

Michael Missal, a federal bankruptcy examiner who investigated New Century's operations after it sought Chapter 11 protection on April 2, 2007, reported last year that the firm's lax lending and accounting standards "created a ticking time bomb" as it pushed for ever-higher loan production.

The incentives for high-risk behavior reached all the way to Manhattan.

Goldman and other investment banks could put $20 million in the till by taking a 1 percent fee for assembling, securitizing and selling a $2 billion pool of mostly triple-A rated bonds backed by subprime loans — and that was just stage one.

Goldman entities earned millions of dollars more by servicing many of the loans and arranging sophisticated interest-rate swaps to guard against inflation.

As profits poured in, Wall Street firms extended lines of credit to New Century — known as "warehouse loans" — totaling billions of dollars to finance the issuance of more home loans to other marginal borrowers. Goldman Sachs' mortgage subsidiary gave the firm a $450 million credit line.

As the economy slowed, the mortgage industry couldn't keep up with Wall Street's loan demands, but that actually generated leverage.

Kevin Cloyd, the New Century executive vice president who dealt with Wall Street and in 2006 also oversaw loan production, told examiner Missal that a tacit understanding developed with Wall Street firms that were trying to edge out each other for loans, said a person familiar with Missal's inquiry.

Cloyd revealed that investment banks willing to scale back their scrutiny of mortgage applications got to buy more loans, said this individual, who declined to be identified because the material is confidential.

Reached at his Los Angeles home, Cloyd declined to comment.

The former project manager who oversaw the review of tens of thousands of subprime mortgages for Goldman and other Wall Street firms said that in 2005 and 2006, subprime lenders gradually got investment banks to reduce the percentage of loans that were reviewed before deals closed.

"It went from 100 percent in the late '90s to probably less than 10 percent in 2006," said the ex-manager, who declined to be identified for fear that it would hurt his career.

By pitting firms such as Lehman Brothers, Bear Stearns, Credit Suisse and Goldman against each other for a shrinking supply of loans, mortgage bankers were able to sell loans in which borrowers' ratios of debt to income inched up to 50 percent, to 55 percent and even into the 60s, this person said. That didn't include what they owed in taxes, meaning that some borrowers could be left to live on 20 percent of their paychecks.

Mortgage lenders also extracted promises from Wall Street firms not to "kick out" as unacceptable more than 5 percent of the loans in a pool.

Goldman spokesman Michael DuVally denied that the firm felt pressure from mortgage lenders to relax its loan quality standards to win bids on pools of mortgages. He said that Goldman's standards were at least as tough in 2006 as they were in 2002, but he declined to describe them.

Goldman Sachs Mortgage, however, published guidelines in early 2007 indicating that it would accept a "stated income, stated asset" loan for a person with a subpar credit score of 600 who was borrowing 90 percent of his or her home's value. The designation meant that although the borrower had poor credit, his or her claimed income and financial background would go unchecked.

Deep in a Feb. 13, 2007, Goldman prospectus offering bonds backed by 9,800 New Century mortgages were these disclosures:

3,422 of the borrowers had credit scores below 600, levels that experts say could include applicants with past bankruptcies.

3,688 of the borrowers were required only to state their incomes, not to document them — mortgages that became known as "liars' loans."

More than a quarter of the borrowers had combined first and second mortgage balances that equaled or exceeded 90 percent of their homes' values at the time.

As was typical, 34 percent of the loans in the 2007 deal were in California, and 9 percent were in Florida, markets where home prices were rising so fast that all the players shrugged off the risk that borrowers might default. If a loan soured, they thought, they could seize and easily resell the house without a loss.

With that philosophy, from 2004 to 2006 New Century executives relaxed their lending criteria to levels previously unimagined. The shift would have huge consequences: The looser the credit, the greater would be a torrent of loan foreclosures that would sink the housing market and force downgrades in supposedly safe subprime mortgage securities.

To make matters worse, the incentives inside New Century seemed to invite trouble.

For example, account executives, whose job was persuading mortgage brokers to steer clients to them, were paid largely in sales commissions. The more loans they secured, the more money they made.

To garner more loans, some female executives sauntered into mortgage brokers' offices wearing "short skirts, cleavage showing, looking like hotties," said Christine Fidler, a former company vice president.

Roxanne Bones, a former senior underwriter at New Century, said she was told that the women "spent a lot of time schmoozing with brokers at their offices, doing stuff with them on the weekends and getting drunk at night."

Some New Century sales executives passed monthly kickbacks of $1,000 or more to company loan processers responsible for closing the loans, Bones said. It was a small tip to pay for salespeople who could earn as much as $1 million a year if their loans went to closing, she said.

The company also rewarded sales and underwriting staffs with lavish junkets. In 2004, Fidler said, as many as 300 New Century employees spent a week at the five-star Arts Hotel in Barcelona, Spain, where rooms today run from $400 to $16,000 a night.

Others scuba dived, golfed, took catamaran rides and sipped cocktails at Marriott's Ihilani Resort and Spa in Hawaii, shared a Caribbean cruise, made a summertime sojourn to Banff in the Canadian Rockies or were handed fistfuls of company cash before hitting the gaming tables during a conference at the MGM Grand in Las Vegas.

When the sales teams weren't frolicking, they were finding it easy to write loans.

New Century tossed out a requirement that every homebuyer make a down payment and began lending up to 80 percent of a property's value for a first mortgage and up to 20 percent for a second. It also lowered borrowers' minimum required credit scores into the 500s, although 700 or better is typically considered a good credit score. The nationwide average is 693, according to the consumer credit rating agency Experian.

By 2005 and 2006, ex-employees say, it got crazy.

Tim Lee, a former New Century underwriter in the Chicago suburb of Schaumburg, said his bosses relented and killed a $275,000 loan sought by a third-year kindergarten teacher who claimed a $180,000 salary. In most other cases, however, his objections led to a scene in a manager's office like this one:

Manager: "We're going to go ahead and do this loan."

Lee: "So you do it."

Manager: "No, you're gonna do it."

Lee: "I'm not going to."

Manager: "Then I'm going to write you up."

Lee said that his office processed 2,000 to 2,500 loans each month, and he could recall few that weren't approved with an "exception" waiving a key financial issue that otherwise might've torpedoed the deal.

Missal's examiner's report estimated that 40 percent of the company's mortgages were "liars' loans" because any income claim on an application was accepted as truthful. A SIVA meant "some income, verified assets," but it went downhill to the NINA — no income, no assets.

Lee said he nicknamed it "the no-doc, drug-dealer loan," because even "a street pharmacist" could qualify by listing his income but not his employer.

Top New Century officials, including the late Vice Chairman Edward Gottschall, told skeptical underwriters not to worry because "volume outpaces bad debt all day long," Lee recalled.

The loans laid out financial terms that protected investors but punished homebuyers. They offered above-market interest rates, typically starting at 8 percent, with provisions that Lee said were "rigged" to guarantee the maximum 3 percent rise in interest rates after two years and almost assuredly another 3 percent increase through ensuing, twice-yearly adjustments.

Loan prospects with higher credit scores but otherwise dicey credentials were given options such as "pick-a-payment loans" that allowed them to choose during an introductory period whether to pay the usual interest and principal, interest only or a minimum amount.

"Everybody would pick the minimum," Lee said.

When the introductory period ended and interest rate adjustments kicked in, he said, someone who borrowed $750,000 could owe $850,000 and see his monthly payment shoot from $1,000 to $7,000.

If the noose around borrowers wasn't tight enough, those seeking to refinance on safer terms faced stiff prepayment penalties.

New Century, like other mortgage lenders, would soon face its own cash squeeze, however.

Wall Street firms required lenders to buy back a loan if the borrower defaulted on his first payment or there was a major defect in the mortgage.

Missal's report said that New Century was faced with an "alarming" wave of payment defaults beginning in mid 2004 — a wave that later turned into a multibillion-dollar tsunami of loans being rejected by Wall Street. New Century desperately needed cash to buy back thousands of deficient loans it had made.

In late 2006, however, Goldman Sachs and other Wall Street firms cut off the lender's credit lines. The cash squeeze, as well as admitted misstatements on its 2006 year-end financial statement that had turned a loss into a profit, halted New Century's operations and sent it careering into bankruptcy.

The lender's demise, however, didn't stop Goldman, which unloaded a $1.7 billion pool of bonds tied to New Century loans in February 2007. In May, weeks after New Century's bankruptcy filing, Goldman started selling securities backed by New Century mortgages in a secret deal based in the Cayman Islands, a tax haven for U.S. companies.

Months after the February offering, Goldman's lawyers filed additional disclosure documents with the SEC advising investors who'd bought its subprime bonds of disturbing patterns: rising defaults on subprime mortgages and declining home prices.

New Century, Goldman disclosed, not only was bankrupt, but also had received notices to cease and desist operations in multiple states. Furthermore, Goldman said, the mortgage banker was facing Justice Department and SEC inquiries — inquiries that apparently are still ongoing.

"In response to the deterioration in the performance of subprime mortgage loans," Goldman advised, "the rating agencies have recently lowered ratings on a large number of subprime mortgage securitizations.

"... You should consider ... the risk that your investment in the offered certificates may perform worse than you anticipate."

(Tish Wells also contributed to this article.)



6 November 2009


Model Portfolio Value As of 6 November 2009

$ 571,792

The Employment Report said 190,000 jobs were lost in October and the Unemployment Rate jumped to 10.2%. Stocks didn’t like the news and are mildly lower in pre-market trading. Asian markets were higher overnight and European bourse indexes are mixed at midday. Gold is $1094 and Oil has a $79 handle.

Oppenheimer lifted its rating on General Electric to outperform from perform as the conglomerate's financial portfolio stabilizes. "We note that consumer finance's delinquencies and non-earnings have recently shown meaningful signs of stabilization and flattening out," the broker said. Sanford Bernstein also raised GE to outperform.

August and September Employment Reports war revised to 75,000 fewer job losses than previously reported. And the August number would have been 150,000 rather than the 201,000 reported. The 201,000 was a positive for the markets and a 150,000 number would have set off a huge rally. Today it isn’t even noticed. The three month average is under 200,000 jobs lost per month and six months ago the three month average was over 600,00. There is progress.

Wells Fargo analyst Matt Perry believes the negative CVS share price reaction on Nov. 5 was due to obvious disappointment in the company's 2010 outlook, but also due to broader questions about CVS's integrated retail pharmacy and pharmacy benefit management (PBM) model. He noted that since the merger with Caremark, the PBM segment underperformed its peers dramatically. Perry said CVS continues to lose PBM contracts to Medco and other industry players.

Perry thought the Nov. 5 sell-off in CVS shares was an overreaction. He does not expect the shares to recover quickly, but kept his outperform rating based on long-term value of its retail franchise and a "call option" on stabilizing or improving PBM performance in 2011.

(AP) -- Driven by strength across all its businesses, Nvidia Corp. posted better-than-expected results for its third quarter, sending shares higher in premarket trading Friday. The graphics chip maker posted earnings and revenue above Wall Street's expectations Thursday, and forecast revenue above estimates for the current quarter as well. Bobby Burleson, an analyst with Canaccord Adams, reiterated a "Buy" rating on the company's shares.

He said while all of Nvidia's businesses were strong, its GPU business performed the best, with sales up 25 percent quarter-over-quarter to $464.5 million. The company's total sales were $903 million. A GPU is a graphics processing unit, used mainly to process 3-D graphics. Burleson said Nvidia experienced some supply constraints during the quarter, as its customers saw stronger than anticipated demand for their products.

We added shares of Nvdia and CVS to accounts and also bought Dell and The Major Bank ETF (KBE). We switched Citi to Motorola. For a good story on Motorola see http://www.nytimes.com/2009/10/29/technology/companies/29moto.html.

European stocks closed lower after the U.S. unemployment rate rose by more than expected in October to 10.2%, its highest level in more than 26 years.

Gold finished at $1095 and Oil lost $2 to $77.50.

Stocks meandered all day in light trading. The major measures managed a small gain into the close. Breadth was negative. Today was a tie.


5 November 2009


Model Portfolio Value As of 5 November 2009

$ 569,848

Cisco beat last night although earnings were lower and revenues were down 18%. That has given a positive tone to tech stocks in early trading. Jobless claims dropped to 512,000 and 3rd quarter productivity was up 9% when a 5% gain was expected. Productivity gains in an economy where sales are dropping come from firing folks. Oh well, traders liked the number and stocks look to open a bit higher this morning on the news.

Gold is approaching $110 to the ounce and Oil has an $80 handle.

Whole Foods is down $3.50 (12%) on an earnings report that we thought was good. Traders thought otherwise. http://finance.yahoo.com/news/Whole-Foods-Market-Reports American Eagle is down 14% ($2) on 5% negative same stores sales when positive same store sales were expected. We traded both these stocks at lower prices in March/ April and with the benefit of hindsight we should have held on to them. But we made a profit on the trades then and we expect to do the same again as we have bought shares in accounts.

We repurchased Motorola. We sold MOT last week but are reentering because tomorrow is the first sales day on the new Droid phone which has received great press. Moreover MOT has contoured to move higher which is a good sign. We also bought Boston Scientific which is down from $12 to $8 in the last two weeks on disappointing earnings. We sold Regional Bank ETF (KRE) for the funds to buy MOT and BSX.

CVS, the drugstore chain, is down 20% after losing $2 billion in Medicare pharmacy contracts (not $2 billion, $2 billion in sales that have very thin margins). The price drop is a 20% haircut amounting to $8 billion in market cap. The shares have value at this level.

We added shares of the Short S&P ETF (SH) to accounts in which we bought CVS, WFMI, and AEO. We are hedging our increased longs by the purchase of the Short S&P 500 ETF. The longs we are adding are stocks that have corrected on news.

Trading was stopped in the Long Dollar ETF (UUP) this afternoon pending news. When the shares reopened we sold them since we really don’t understand the intricacies of this ETF. Rather than ignore the situation we eliminated UUF at a small loss.

Diane Swonk, Chief Economist, Mesirow Financial

Productivity growth surged at a 9.5% rate in the third quarter and employment costs plummeted as companies got workers to do more for less.

This helps explain the better-than-expected profit performance of the third quarter and could be a precursor to hiring. Large employers appear to be close to squeezing the maximum out of their current workers and now have the cash on their balance sheets to expand without tapping credit markets.

That said, the recovery in employment is expected to be muted as small businesses - the engine behind U.S. employment growth - are still short on cash and credit. Indeed, unemployment claims remained above the 500,000 threshold, which means we continued to shed rather than add jobs (we need to see unemployment claims move back into the low 400,000 range before employment turns around).

On net, the economy is expected to lose another 200,000 jobs in October (the employment report will be released on Friday). We could see a small gain in jobs in December or January. The unemployment rate, however, is still expected to rise well into the first half of 2010. Moreover, we are likely to see the unemployment rate remain much higher than is usual for a recovery as baby boomers delay retirement.

Hain Foods popped ahead of tonight’s earnings and we took our one day $1.25 per share profit.

European shares closed with modest gains, boosted by corporate results as the Bank of England expanded its bond-buying program while joining the European Central Bank in holding official interest rates at record lows.

Gold closed at $1090 up $3. Oil ended down 76 pennies at $79.64.

The Major measures closed up over 1.5% with the DJIA at 10000. Breadth was 3/1 positive and volume was moderate. The bulls won the day. The Employment Report comes in the morning. Anything fewer than 175,000 jobs lost should help the rally.


4 November 2009


Model Portfolio Value As of 4 November 2009

$ 569,415

The Fed speaks today and the markets wait with anticipation and trepidation. Asian markets had no trepidation and were higher overnight and European markets at midday have regained the 1% they surrendered yesterday. Gold is at $1090 and Oil has an $80 handle as the trading day begins.

Investors’ Intelligence has 48% bulls and 214% bears.

We sold AT&T and VZ for a combined plus scratch and moved the moneys back into the SH down $1.10 from our last sale. We also added HAIN to accounts.

Making the rounds:

Curtis & Leroy saw an ad in the Starkville Daily News Newspaper in Starkville, MS. and bought a mule for $100.

The farmer agreed to deliver the mule the next day.

The next morning the farmer drove up and said, "Sorry, fellows, I have some bad news, the mule died last night."

Curtis &Leroy replied, "Well, then just give us our money back."

The farmer said,"Can't do that. I went and spent it already."

They said, "OK then, just bring us the dead mule."

The farmer asked, "What in the world ya'll gonna do with a dead mule?"

Curtis said, "We gonna raffle him off."

The farmer said, "You can't raffle off a dead mule!"

Leroy said, "We shore can!  Heck, we don't hafta tell nobody he's dead!"

A couple of weeks later, the farmer ran into Curtis & Leroy at the Piggly Wiggly grocery store and asked.

"What'd you fellers ever do with that dead mule?"

They said, “We raffled him off like we said we wuz gonna do."

Leroy said, “Shucks, we sold 500 tickets fer two dollars apiece and made a profit of $898."

The farmer said, “My Lord, didn't anyone complain?"

Curtis said, "Well, the feller who won got upset. So we gave him his two dollars back."

Curtis and Leroy now work for the government.

They're overseeing the Bailout Program.

Fool me once...:

(thestreet.com) Tom Maheras, a former high-ranking Citigroup executive who oversaw billions in fixed income losses before leaving the bank in 2007, is starting a hedge fund, according to a report Wednesday by CNBC reporter Charles Gasparino. Gasparino reported Maheras, who sits on the board of Discover Financial Services has raised nearly $100 million for his new venture. Maheras could not be reached.

Maheras's move resembles that of Zoe Cruz, the former Morgan Stanley president who was ousted in 2007 following $3.7 billion in fixed-income losses in a unit she supervised. Cruz has since raised $200 million and is hiring employees to work at her fund, called Voras Capital Management, according to a report in the Wall Street Journal last month.

Fed leaves rates unchanged and says it will keep them low. Stocks go up then down then up then down and finally sort of up in the first ten minutes after the announcement.  The major measures were up 1% when the announcement was made.

Europe closes higher.

Another View of Goldman's Trading Perfection and Statistical Improbabilities


Gold was up $12 at $1097 and Oil finished at $80.60 up $1.

Stocks finished mixed and well off their best levels. The NAZZ closed in negative territory Breadth was negative as banks suffered and volume was active. Today was again a tie.


3 November 2009


Model Portfolio Value As of 3 November 2009

$ 569,794

Warren Buffet’s Berkshire Hathaway is buying Burlington Northern for $44 billion and Stanley Works is buying Black& Decker (only $4.5 billion) as Takeover Tuesday commences. Asian and European markets were and are under selling pressure (Europe because of further bank bailouts) and U.S. stocks look to open a bit lower.

If these two takeovers weren’t’ announced overnight –especially the Buffet takeover- the markets would be opening down 1% or more. One thought is that with this takeover Buffet has pretty much spent his available cash. But he is also making a long term statement about the U.S. economy recovering. Buffet is going to split Berkshire Class B shares 50 to 1 so that mom and pop investor can now own the shares. And we would guess that Mathew Ross, the 49 year old CEO of BNI is in line to become the successor to Buffet and his friend Munger, all wrapped up in one neat package.

Oil has a $77 handle and Gold is up $5 in the early going.

Johnson& Johnson is going to fire 7500 folks so it can bring more dollars down to the bottom line and Nokia Siemens is going to get rid of 6000 folks for the same reason. Whatever happened to innovate to grow sales and thus earnings? That’s why CEOs used to earn the big bucks.

The rail stocks have been under selling pressure for a month and now they are all higher this morning. Unfortunately Uncle Warren is out of money so....

U.S. factory orders increase for fifth month in six, rising stronger-than-forecast 0.9%.

We took our 1% profit in SH (Short S&P ETF) and bought AT&T and Verizon for a trade with the money. Last Friday T and VZ rose as the markets dropped 2%. We doubled our GE and Barnes & Noble in accounts that own since both are 15% lower than the original purchase level. We also added NCR, Intel and the Regional Bank ETF (KRE) to accounts and bought Ford and Citi (for a trade) in most accounts. Semis are under pressure today on a Morgan Stanley downgrade.

All these stocks have corrected 15% or more from their recent highs except Ford. Ford had a good report yesterday and we waited for it to settle to repurchase for a hold or trade.

It would be a negative if the markets close significantly lower today after the Buffet news.

(Bloomberg) Royal Bank of Scotland Group and Lloyds Banking Group will receive 31.3 billion pounds ($51 billion) in a second bailout from the U.K. taxpayer as the two banks agreed to cap bonuses. The Treasury will inject 25.5 billion pounds of capital into RBS, for a total of 45.5 billion pounds, making it the costliest bailout of any bank worldwide. The government will fund about a quarter of Lloyds’s 21 billion-pound fundraising. Both banks said they won’t pay cash bonuses to workers earning more than 39,000 pounds this year.

Berkshire had a 1.9 percent stake in Union Pacific Corp, or 9.56 million shares, as of June 30, and a 0.5 percent stake in Norfolk Southern, or 1.93 million shares, according to Thomson Reuters data. Even thought Union Pacific is higher it would seem that Buffet would have to sell both of these positions.

We have been watching UNP for an entry point hoping it gets under $50. It was $55 yesterday but popped to $58 on the BNI news. Could Warren be selling?

European shares ended lower, undercut by a rise in risk aversion ahead of key central bank meetings as well as concerns about the banking sector and a fall by auto makers after BMW reported a slide in third-quarter profit. The big three were all down over 1%.

Ford including the Volvo brand increased 3.1 percent from a year earlier, for its third gain in the past four months, according to a statement from the company. Nissan reported a 5.6 percent increase, and Toyota posted a gain of less than 1 percent. In its first year-over-year sales increase since January 2008, GM posted a 4% increase in October. Chrysler Group LLC said its sales fell 30 percent.

Ford was predicted to fall 4.4 percent, adjusted for sales days. On that basis, its sales fell 0.6 percent. More than 80 percent of Ford's sales last month came from 2010 models, which also helped the company lower its incentives.

Oil closed up $1.48 at $79.25. Gold gained $32 to $1086 as India’s bank traded dollars for 200 tonnes of IMF Gold. Gold is up 50% and the dollar is down 50% in the past three years so India is buying gold on its all time high and selling the dollar at its all time low.

(dailyhowler.com) Tonight belongs to the over-interpreters. Every four years, on this very night, these adults put costumes on too. They enter your homes with silly tales about the off-off-year elections in Virginia and New Jersey. This year, a meaningless House race is thrown in the mix, providing room for more blather. Is it possible to draw lessons about the nation’s political mood from today’s gubernatorial contests? Possibly. But it’s hard to say what those lessons might be—unless you’re watching cable “news,” in which case the lessons may be quite clear. More specifically: If Corzine wins by one percent, it will surely mean some significant thing. If he loses by one point, it will mean something different. Remember: These aren’t just the dumbest people on earth, they’re also over-paid entertainers. They aren’t just willing to feed you pap—they’re trying to make you like them.

NVIDIA announces earnings on Thursday and ahead of that report we bought a small position in some accounts. Shares are down from $16 in September to $12 on news of a patent argument with Intel and a downgrade by JP Morgan so we are guessing the bad news is priced in the shares. If not we have room to buy lower.

The big six banks as hedge funds:

The big boys and girls pumped prices into the close and so the major measures closed mixed with the S&P 500 and NAZZ slightly higher and the DJIA lower. Breadth was positive and volume was active. Today was another tie.


2 November 2009


Model Portfolio Value As of 2 November 2009

$ 569,045

Outrageous-- CIT filed bankruptcy and U.S. taxpayers lose $2.5 billion. But fear not since Goldman makes maintains its $2.3 billion loan and Carl Icahn is secure with his billions of loans. So what else is new? We can thank Geithner and former Treasury Secretary Paulson for that investment. They took an equity position in CIT instead of the loan position that Goldman and Icahn took. No bank takes an equity position when providing money to a troubled company.

Asian markets were lower overnight while Europe is mostly higher at midday. Oil has a $78 handle and Gold is up $15 as the trading day begins with futures suggesting a higher opening in the U.S.

Ford beat and is trading higher pre-opening. The UAW rejected Ford’s contract offer. Ford said it will be solidly profitable in 2011 but the next few quarters will be difficult.

(WSJ) When you suffer a very large loss, you need a gigantic gain to get back to where you started.

If an investment declines 10%, it takes about an 11% gain to break even (assuming you don't pump in additional dollars). If the drop is 20%, you need a 25% gain to recover. A fall of one-third requires a rebound of 50%. And if your investment falls by half, "you need a double," or a 100% return, says Mr. Wiener, the New York-based editor of the Independent Adviser for Vanguard Investors. The recovery percentages grow exponentially because you have so few dollars working for you after a big loss.

Last year, the average diversified U.S.-stock fund was down 37.5%—requiring a 60% advance to break even—and plenty of funds were down 50% or more. Investors looking at this year's performance listings should know that some big gainers are volatile funds that were big losers last year; thus, investors' holdings may still be worth far less than they were in late 2007.

And remember the poor (?) health insurers:

Humana Inc. (HUM) said third-quarter net income climbed 65% to $301.5 million, or $1.78 a share, as revenue rose 8% to $7.72 billion. Earnings rose more quickly than sales due to year-earlier hits on investments and sales of distressed financial institution securities. The Louisville health insurer said 2010 earnings are seen between $5.05 and $5.25 a share, compared to its 2009 view of $6.15. Analysts had expected a quarterly profit of $1.77 a share, 2009 earnings of $6.14 a share and 2010 earnings of $5.42 a share.

The ISM manufacturing index was 55 when 53 was expected, pending home sales were up 6% versus no change expected and with Ford’s news the markets are higher by 1% after one half hour of trading.

With the DJIA up 120 points we bought an SH (bearish S&P ETF) position in some accounts.

European shares ended higher as investors welcomed improved manufacturing-activity data. Markets closed before U.S. markets reversed.

Goldman and the AIG bailout aided by a NY Fed Chairman who bought 50,000 shares of Goldman at the bottom:

The Federal Reserve's top banking regulator today said banks face big losses from the still ailing economy.

Oil closed at $78.13 up $1.13. Gold gained $17 to $1057.

The major measures were up 1.5% in early trade. They then turned negative by1pm but rallied back to positive to plus 0.5 % at the close. Breath was flat. Volume was active. The bulls made a stand but we’ll call it a tie.










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