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Friday’s Upgrades and Downgrades


Upgrades
Alliance Data (ADS)= Robert W. Baird Neutral » Outperform
MIPS Techs (MIPS)= B. Riley & Co Neutral » Buy
Ryder System (R)= BB&T Capital Mkts Hold » Buy
NCR Corp (NCR)= Wedbush Morgan Buy » Strong Buy
Imation (IMN )= Needham & Co Hold » Buy
Cablevision (CVC)= Kaufman Bros Sell » Hold
Big Lots (BIG)= Wachovia Underperform » Mkt Perform
Enterprises Finl (EFSC)= Keefe Bruyette Underperform » Mkt Perform
Comerica (CMA)= Rochdale Securities Sell » Hold
Pinnacle West (PNW )= Lehman Brothers Underweight » Equal-weight
Alliance Data (ADS)= Sun Trust Rbsn Humphrey Neutral » Buy
SCP Pool (POOL)= JP Morgan Neutral » Overweight
Alliance Data (ADS)= JMP Securities Mkt Perform » Mkt Outperform
Alliance Data (ADS )= Bear Stearns Peer Perform » Outperform
Sealed Air (SEE)= Credit Suisse Underperform » Neutral
Astoria Fincl (AF)= Bear Stearns Underperform » Outperform
Nordstrom (JWN)= Bear Stearns Peer Perform » Outperform
Hess (HES)= JP Morgan Neutral » Overweight
Gilead Sciences (GILD)= Wachovia Mkt Perform » Outperform

Downgrades
Cirrus Logic (CRUS)= Longbow Buy » Neutral
Polo Ralph Lauren (RL)= Morgan Keegan Mkt Perform » Underperform
Mattson (MTSN)= Caris & Company Above Average » Average
Allstate (ALL)= Sandler O’Neill Buy » Hold
bebe stores (BEBE)= Morgan Keegan Outperform » Mkt Perform
Audible (ADBL)= Merriman Curhan Ford Buy » Neutral
Accuray (ARAY)= Soleil Buy » Hold
TriCo Bancshares (TCBK)= Keefe Bruyette Outperform » Mkt Perform
Affiliated Managers (AMG)= Keefe Bruyette Outperform » Mkt Perform
Baker Hughes (BHI)= RBC Capital Mkts Outperform » Underperform
Schlumberger (SLB)= RBC Capital Mkts Outperform » Sector Perform
W&T Offshore (WTI)= JP Morgan Neutral » Underweight
Saks (SKS)= Bear Stearns Peer Perform » Underperform
NuCo2 (NUCO)= Bear Stearns Outperform » Peer Perform
Baker Hughes (BHI)= Wachovia Outperform » Mkt Perform
Delhaize Group (DEG)= JP Morgan Overweight » Neutral
Harris Stratex (HSTX)= Morgan Joseph Buy » Hold
Century Aluminum (CENX)= Friedman Billings Outperform » Mkt Perform
Cadence Design (CDNS)= JP Morgan Neutral » Underweight
Polo Ralph Lauren (RL)= Banc of America Sec Buy » Neutral
Monster Worldwide (MNST)= Deutsche Securities Buy » Hold
Adobe Systems (ADBE)= Jefferies & Co Buy » Underperform
YUM! Brands (YUM) Deutsche Securities Buy » Hold

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52 Week Low’s 1/31


(ZRAN) Zoran Corporation
(TLGD ) Tollgrade Communicati …
(TKPU ) Polaris Acquisition Corp
(TELK ) Telik Inc
(RNOW) Rightnow Technologies Inc
(RDY ) Dr. Reddy’s Labs, Ltd.
(RCRC) Rc2 Corp
(NEWP) Newport Corporation
(MTSN ) Mattson Technology Inc
(MSII ) Media Sciences Intl Inc
(HTCH ) Hutchinson Technology Inc
(HSTX ) Harris Stratex Ntwrks Inc
(HMG ) HMG/Courtland Propert …
(HLDU ) Secure Amer Acquisiti …
(GRVY ) Gravity Co Ltd
(BCRX ) BioCryst Pharmaceutic …
(AWBC ) Americanwest Bancorpo …
(AVRX) Avalon Pharmaceutical …
(ARIA ) ARIAD Pharmaceuticals Inc
(ARAY )Accuray Inc

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Sherwin Williams Files in RI Supreme Court: BREAKING

As usual, Jane Genova is on top of this as the briefs were filed.

Read Jane’s Post here:

From NL Industries’ (NL) Brief:

“The trial court sanctioned liability without requiring the jury to find that any defendant acted negligently, or intentionally, or that any defendant knew or should have known of any alleged danger, or that any defendant ever sold lead pigment in Rhode Island or that any defendant’s lead pigment was present on any building in this State at anytime, past or present.” [page 1]

“If the trial court’s jury instructions stand, the only question is which industry will be next. What happens if hair spray is found to be a problem five years from now? What about polyurethane?” [page 6]

From Millennium Holdings’ Brief:

“If the aggregate presence of a product in the State is to be recognized as a new basis for liability, then certainly no person should be charged with responsibility beyond the extent to which that person’s product is present in the State. Yet, here each Defendant has been held liable to abate lead pigments in Rhode Island that it never made or sold, and without any evidence as to whether that Defendant’s product is in the State and, if so, how much.” [page 1]

Excerpts from Sherwin-Williams’ (SHW) Brief:

“The end result was a trial so stacked in Plaintiff’s favor that Defendants effectively were forced to defend themselves with both hands tied behind their backs, while attempting to strike at a moving target – a trial so unfair in its conception and execution as to violate the U.S. and Rhode Island Constitutions.” [page 7]

“It is impossible to know what comprises the alleged nuisance when the nuisance is an unidentified fiction over which Defendants exercise no control. It is impossible to challenge actual cause where there is no specifically identified nuisance or injury. It is impossible to argue that others are the sole or alternative cause of any harm, a key defense, when no particular injury, no specific property, and no other potential cause can be investigated. The conception of the nuisance thus relieved Plaintiff of required elements of proof and denied Defendants the ability to rebut any particular instance of the purported nuisance. It created, without fair notice and after the fact, limitless, endless liability, without proof of fault, actual causation, or proximate causation.” [page 6-7]

“The suit and the legislative approach are very different universes about to collide. Based on the recognition that well-maintained properties are not dangerous, the Lead Poisoning Prevention Act places the responsibility for lead remediation on the property owners who have control over the condition of the paint and creates incentives to encourage owners to maintain their properties.” [pages 3-4]

“A jury of six people was encouraged to issue a verdict, and Plaintiff insists that the jury has issued a verdict, tantamount to new statewide policies for public health and manufacturer liability. The common law is not filling a gap; it is trespassing on the legislative domain and creating conflicting rules.’ [page 5].

More to come …

Disclosure (“none” means no position): Long Sherwin, none

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Thursday’s Links

Lead, Cramer, Mozillo, 60 Minutes

– More lead paint hypocrisy……..

– More on Jim Cramer making investors dizzy.

This is great. A “hats off” to Joe Ponzio.

– How do we know the sub-prime story has run its course? 60 Minutes did a story on it. Do they know Kennedy was assassinated?

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Altria Earnings Call Notables

Here are the notable items from Altria’s (MO) earnings call yesterday

CEO Louis Camilleri

Regarding smokeless products”
“…Marlboro Moist Smokeless Tobacco. The latter introduction has [inaudible] much debating in ink in the recent past. While it is still early days, let me just say that we are very encouraged by the results to date, particularly in terms of the consumer response to the product and repurchase rates.”

PMI
** 70% of PMI’s top 25-income markets registered improved trends in the fourth quarter

Effect of share repurchases:
** “benefit of share repurchases in ’08 is slightly less than 1% in terms of growth, and clearly it will impact 2009’s growth rate a lot more.”
** combination of the buybacks plus the dividends equals 20% of the market cap
** Altria will start in April and PMI will start in May

Litigation risk to PMI:
“No, it’s certainly not non-existent. There has been litigation internationally as you are aware and as the disclosure showed. However, the industry has been very successful, and I think we will continue to be successful. That is not to say that there won’t be claims and litigation internationally, but it’s not something that I’m unduly concerned about.”

Most of the really big questions were deferred until the investors conference on March 11th. At that time the details of both companies will be discussed.

Disclosure (“none” means no position):Long Altria

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Wal-Mart Tinkers With Clothing Again

Wal-Mart (WMT) will move clothing merchandising jobs to New York as it seeks to narrow its focus on basic clothes its customer base wants. About time…

Word from Bentonville is that a large number of workers are bring let go as the company has decided to finally put to rest its quest for “hippness”. After trying for years to one up Target (TGT) in the style department, Wal-Mart is listening to its shoppers and rather than trying to sell them clothing, it will stocks its stores with the clothing they want to buy.

This is a good move for Wal-Mart. I do not think no matter how hard they try, Wal-Mart can ever hope to become a “fashion” stop for shoppers. You know what? That is ok. Folks still need underwear, t-shirts and the like and if they know they can get those items at Wal-Mart at a great price, they will shop there.

If nothing else, Wal-Mart will now save the millions of dollars they have invested in the pursuit of fashion and can put that cash to better use.

Disclosure (“none” means no position):Long Wal-Mart, None

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Thursday’s Upgrades and Downgrades


Upgrades
Marsh McLennan (MMC)= Credit Suisse Neutral » Outperform
Smith Intl (SII)= Citigroup Hold » Buy
Washington Mutual (WM)= Fox Pitt In Line » Outperform
Marsh McLennan (MMC)= Stifel Nicolaus Hold » Buy
CyberSource (CYBS)= Wedbush Morgan Buy » Strong Buy
Callidus Software (CALD)= Northland Securities Market Perform » Outperform
Northern Dynasty Minerals (NAK)= BMO Capital Markets Market Perform » Outperform
HF Financial Corporation (HFFC)= FTN Midwest Neutral » Buy
Walt Disney (DIS)= Pali Research Neutral » Buy
Ivanhoe Mines (IVN)= BMO Capital Markets Market Perform » Outperform
Travelers (TRV)= Sandler O’Neill Hold » Buy
NuStar GP Hldgs (NSH)= Wachovia Mkt Perform » Outperform
NuStar Energy (NS)= Wachovia Mkt Perform » Outperform
Atlas Pipeline Holdings (AHD)= Wachovia Mkt Perform » Outperform
Oil States (OIS)= RBC Capital Mkts Sector Perform » Outperform
Regal Entertainment (RGC)= JP Morgan Neutral » Overweight
Avon Products (AVP)= Bear Stearns Peer Perform » Outperform
Quanta Services (PWR)= JP Morgan Neutral » Overweight
Albemarle (ALB)= JP Morgan Neutral » Overweight
Quiksilver ( ZQK)= JP Morgan Neutral » Overweight
Kinder Morgan Prtnrs (KMP)= JP Morgan Neutral » Overweight
Red Lion Hotels (RLH)= JMP Securities Mkt Outperform » Strong Buy
Electronic Arts (ERTS)= Bear Stearns Peer Perform » Outperform
Unisys (UIS)= Jefferies & Co Underperform » Hold
Eagle Test Systems (EGLT)= Broadpoint Capital Neutral » Buy
NRG Energy (NRG)= Credit Suisse Neutral » Outperform
DTE Energy (DTE)= UBS Neutral » Buy
Nike (NKE)= JP Morgan Neutral » Overweight
Dionex (DNEX)= Robert W. Baird Underperform » Neutral
Canadian Solar (CSIQ)= Oppenheimer Perform » Outperform
Qimonda (QI)= UBS Neutral » Buy
Albemarle (ALB)= UBS Neutral » Buy
BEA Systems (BEAS)= Bernstein Underperform » Mkt Perform

Downgrades
CNX Gas (CXG)= RBC Capital Mkts Outperform » Sector Perform
Canadian Pacific (CP)= CIBC Wrld Mkts Sector Outperform » Sector Perform
Hutchinson (HTCH)= Caris & Company Above Average » Average
Centex (CTX)= UBS Buy » Neutral
Natl Instruments (NATI)= Citigroup Hold » Sell
Cymer (CYMI)= Brean Murray Buy » Hold
Hutchinson (HTCH)= Brean Murray Hold » Sell
Yahoo! (YHOO0= Citigroup Buy » Hold
Conseco (CNO)= Credit Suisse Outperform » Neutral
Cabela’s (CAB)= Wachovia Outperform » Mkt Perform
Columbia Sportswear (COLM)= JP Morgan Overweight » Neutral
T. Rowe Price (TROW)= Friedman Billings Mkt Perform » Underperform
Yahoo! (YHOO)= Oppenheimer Outperform » Perform
Hanmi Financial( HAFC )= Oppenheimer Perform » Underperform
Merrill Lynch (MER)= Oppenheimer Perform » Underperform
Scotts Miracle-Gro (SMG)= JP Morgan Overweight » Neutral
Cabot Micro CCMP (GARP)= Research Buy » Neutral

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More On Altria

Now that Altria (MO) has announced the spin details, let’s look at some numbers.

If we assume a multiple of 15 times earnings, a fair one considering MO ought to grow at 9% to 11% and 20 times earnings for PM (PMI) as it ought to grow 12% to 14% and be free of litigation.

That gives us an initial share price of $22.50 for MO and $57.40 for PM. These will adjust slightly but the exercise is to give more details to what is being announced. Currently the combined entities trade at $76 and change so the above numbers are fairly accurate.

The dividend yield at those price levels will be 5.1% for MO and 3.2% for PM

As of 9/30 there were 2.1 billion shares outstanding giving MO a new market cap of approx. $47 billion and PM of $120 billion. The share repurchases will equate to roughly 16% of MO’s outstanding shares and 11% of PM’s.

The earnings call at 1pm today ought to be interesting…

Disclosure (“none” means no position): Long MO and will be long PM

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Altria Releases Spin Details

Altria (MO) just released the spin information we have been waiting for.

PHILIP MORRIS INTERNATIONAL SPIN-OFF EFFECTIVE MARCH 28, 2008

* Identifies new Board of Directors post-spin for both Altria and PMI
* Sets spin-off share distribution ratio of one-for-one

* Announces dividend policies, initial dividend rates and share repurchase programs

— Altria dividend policy anticipates payout ratio of 75% post-spin

— Altria initial post-spin annualized dividend rate of $1.16 per common share

— Altria post-spin share repurchase program of $7.5 billion over 2 years

— PMI dividend policy anticipates payout ratio of 65% post-spin

— PMI initial post-spin annualized dividend rate of $1.84 per common share

— PMI post-spin share repurchase program of $13.0 billion over 2 years

* To commence tender offer shortly for all outstanding Altria notes

* Forecasts 2008 earnings per share growth rates
— Altria 2008 full-year diluted earnings per share from continuing operations projected to grow approximately 9% to 11% from a 2007 adjusted base of $1.50, excluding PMI, which will be accounted for as a discontinued operation for the full-year 2008

— PMI 2008 full-year diluted earnings per share from continuing operations projected to grow approximately 12% to 14% at current exchange rates, from a 2007 pro-forma adjusted base of $2.78

Disclosure (“none” means no position): Long MO

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Sherwin Williams Earnings Call: Was Anyone Listening?

There were some interesting things said on the Sherwin Williams (SHW) call.

CEO Chris Connor:
“New residential consumption was down in a high 20% range for the year. Existing home turnover declined nearly 20%; consumer spending slowed dramatically, credit markets contracted, manufacturing activity turned negative. Consumer confidence sag and GDP growth stalled. In short, it was exactly the kind of year that we anticipated 12 months ago.

We entered 2007 prepared for the inevitable slowdown in end market demand and as a result of this preparation, Sherwin turn in, what I would describe, as a solid performance last year. Consolidated net sales grew a modest 2.5% to just over $8 billion in sale. Consolidated net income increased almost 7% and earnings per share increased more than 12% to a record $4.70 per share.”

Regarding the dividend:
“I will be recommending a continuation of our policy of paying out approximately 30% of prior year’s earnings per share in the form of a cash dividend in 2008. This would result in a quarterly dividend of $0.35 per share or $1.40 per share for the year, an increase of 11.1% over the $1.26 per share we paid out in 2007.”

Sherwin will yield around 2.5% at those levels.

Earnings:
Sherwin sold off yesterday 1.7% based on this one sentence, “first quarter will be in the range of $0.72 to $0.80 per share, compared to $0.83 per share earned in the first quarter of 2007.”

It ignored what followed “Full year 2008, we expect net sales will also increase in the low to mid single digits over 2007. With annual sales at that level, we estimate diluted net income per common share for 2008 will be in the range of $5 to $5.15 per share, compared to current analyst consensus of $5.03 for 2008, and $4.70 per share earned in 2007.”

So, Q1 will fall 3 cents short but the full year looks to be above estimates and shares get whacked. This is the very reason you cannot let the market guide your investment decisions.

Had anyone bother to even listen to Connor, he explained the earnings later. “If we just look at our Stores segment which is we all know the lion share of our company. The southern divisions and Bob takes you through that on the call in terms of which parts of the Stores Group are performing the best and I think he made the comments that our southeastern division was the first performing of the geographic segments in the Stores division.

And typically it’s been the southeastern division to a lesser extent to the southwestern division carried the company to the first quarter. This is where we have a better weather, flatter sales curve throughout the year and these are the parts of the country that are being impacted the most aggressively in particularly Florida which we’ve talked about in this call in the past.

So we are not getting the lift from the southern portions of our Stores segment, early in the year to carry the first quarter. Adding to that, the two acquisitions that we’ve made this past year are northern type acquisitions. And again they have a more traditional and a profit curve with a second and third quarter or the quarters when they make most of their contribution.

So we’ve added a significant number of stores that lost money in the first quarter. So stores that have historically carried up to or something through the market environment and for that reason we guided the first quarter down to expect all those things as they typically would do to catch up in the second and third quarter and that’s why we have somewhere between 8% and just below 10% guidance for the year earnings.”

Share Repurchases:
Expect about 8 million shares in 2008 (about 6% of outstanding shares).

In Q4 repurchased 3 million shares at “around” $60 a share.

Paint Stores:
Plan to open 100 more in 2008

I would expect 2008 to be an anemic year in term of repurchases as Sherwin digested to activity of 2007. Now, should housing turn ahead of expectations and the economy rebound, Sherwin, as it is positioned should see the incremental improvement to it own bottom line as it is currently geared for a poor 2008 operating environment in the US.

That being said, expedited share repurchases would most likely be first on the list with the stock at these levels.

Disclosure (“none” means no position): Long Sherwin

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Altria Earnings: One Question, The Spin

Altria (MO) reports later today.

Expectations for Q4 EPS are 97c on revenue of $9.19B. The consensus range for EPS is 96c to $1.01, and the consensus range for revenue is $8.9B to $9.62B. Comparisons to 2006 are skewed due to the Kraft (KFT) spin last year.

The spin. That is all we really want to know. I detailed the preliminary spin plans in October.

When will it happen and when will the re-capitalize both companies. What will the dividends be and how many shares will they repurchase. Do I expect to get answers to all those, no, but we usually get some hints later on the call.

Disclosure (“none” means no position): Long MO

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Wednesday’s Links

Imus, Spears, Ethanol under $1 a gallon, Concentration

– Jesus, this stuff is just wrong….

Wealth and brains, nothing in common

– Could this the answer to oil?

– Whitney Tilson makes a great case for a concentrated portfolio.

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Dow Chemical’s Earnings Call Notes

Here are the key take aways from the recent call for Dow Chemical (DOW)

CEO Andrew Liveris:

* record equity earnings of $1.1 billion, up 17% from 2006 and topping $1 billion for the first time
* earnings reach has been lifted to well north of $3 per share and that we will not experience the trough in 2010, ’11 (this is up from $2 to $3 earlier).
* Once the PIC JV closes, we will have a very strong cash position to fuel a share buyback if we want to versus our other options. Repeat, we will do share buybacks if we cannot find accretive M&A.
* two-thirds of sales are from outside the United States
* “US economy could go further south, especially through the first half of the year. My belief however, this is more a crisis of faith and not a crisis of markets, and as I stated the last week to the media, there are no signs of a recession in our production chains.”

Liveris in response to a question about the deployment of cash to shareholders:

“Well, I think I was very clear in my prepared remarks. I think this year we are going to have to cross the river, so to speak. It really we’ve been very disciplined on the share buyback and dividend increases. We’ve had lots of organic growth that we are funding. You can see that in our expense increase. We’ve done some bolt-ons. We have targets we are interested in, but frankly if they are not at the right price, then we will just go to the deep old strategy and just keep increasing remuneration of our shareholders and that won’t be several years out, that will be this year.”

Geoffery E. Merszei – Executive Vice President and Chief Financial Officer responding to the same question:

“Well, I mean we will as we complete our current program, we will obviously, I would say, by the again depending on how rapidly we execute the existing $800 million, $850 million, so between now and middle mid-year we will announce another program. I think when Andrew was referring to our priority is as an accretive M&A in order to complete our strategy our transformational strategy, in the event that does not happen, then I think you can count on a sizeable buyback program, which you can relate to the proceeds of our asset-light ballot.”

Bottom line? the market will not commit to Dow until they say “we are doing “x” on “y” date. Then they will pile into the shares. But, has Liveris done anything up until this point that would lead anyone to believe that either a major acquisition or a massive repurchase is not going to happen this year?

Dow currently sports a $35 billion market cap and by the time they get the $9.5 billion payment from Kuwait, they ought to be sitting on almost $12 billion (assuming no large acquisition before then). That would repurchase a whole boat load of shares. Maybe a special $3 a share dividend? With under 1 billion shares outstanding, it would cost less than $3 billion dollars and still leave plenty to repurchase shares.

This is going to happen, investors in this environment are just to skittish to commit until they are told “it will happen on this date”. It is ok, I’ll just sit back, collect my 4.5% dividend in the form of more shares and wait.

If this thing dips to $35 or $36 again, I think I may be a buyer. It is just too cheap at those levels.

Disclosure (“none” means no position): Long Dow

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Lampert’s Letter To Associates: "No Direct Reports"

To: All Sears Holdings (SHLD) Associates

From: Edward S. Lampert, Chairman of the Board

“Today we announced that Bruce Johnson, currently our executive vice president for supply chain and operations, will serve as Sears Holdings’ interim chief executive officer and president, replacing Aylwin Lewis, who will step down in February.

I want to thank Aylwin for his dedication and leadership since joining as the chief executive officer of Kmart beginning in October 2004. He led the integration of Kmart and Sears and helped meld these two cultures. He has exemplified the qualities that are core to our company and its principles: hard work and ethical leadership. I have enjoyed working with Aylwin over the last three years and I appreciate his contributions to the company and the support he has provided me personally.

Indeed, we appreciate the hard work and efforts of all Sears Holdings associates. We know we are facing a difficult macroeconomic and retail environment, but we also expect to come out of these challenging times as an improved and stronger company. As we recently explained, we are implementing some significant changes to our organizational structure which will bring us to the next phase in our company’s history. In light of these changes, the Board and I believe that now is the right time to put in place new leadership to take the company forward and therefore we have begun a formal search for a new chief executive.

We are fortunate that we have such a strong interim leader in Bruce Johnson. Bruce will begin implementing the important organizational changes that will allow our business units to operate with greater independence, focus, and efficiency. Bruce is an experienced retail executive. He joined Kmart in 2003 after five years at French retail chain Carrefour, where he served as director, organization and systems and as a member of the management board. Before that, Bruce spent 16 years at Colgate-Palmolive in various positions. Bruce has worked hard not only to integrate and improve our supply chain and increase our direct sourcing of product, but in 2006 took responsibility for store operations as well. As interim CEO, Bruce will oversee the separate business units we announced last week.

I will continue to lead the Office of the Chairman and focus on identifying and attracting talented executives to our company, including the search for a new chief executive officer. I will also work to ensure that our new structure supports our objectives of greater accountability, faster decision-making, and increased profitability. I believe the reorganization will allow our leaders to be more productive and efficient and allow us to attract talented executives who are eager to take on the challenges of running their own businesses. As a result of these structural changes, I will no longer have any direct reports.

Given the number of changes that we have announced in recent weeks, I would like to provide you with some context for what is happening both at our company and within the markets generally and remind you of what we have accomplished thus far.

Most of you know from the news that the U.S. economy is facing significant difficulties and we are seeing a broad-based retail slowdown. We have also experienced disappointing financial performance in our business in this current fiscal year. However, we have significant opportunities and we must remain steadfast and resolute in our goal of becoming a great retailer.I never underestimated the enormity of the challenges facing Kmart and Sears and the hard work it would take to achieve our goal. I remain confident in our ability to ultimately succeed, even if there are steps backward along the way. We have been willing to make tough decisions and choose a different path from many of our peers and continue to do so. The leadership changes and the reorganization are examples of the important and necessary next steps to achieve our goals.

As you all know, both Kmart and Sears have been through many years of struggles. Those of you who were at Kmart before 2003 helped the company emerge from bankruptcy, despite the predictions of virtually all retail experts at the time. In fact, many of these experts predicted that the company would not survive at all. Instead, Kmart went from a company that lost over $1 billion in both 2001 and 2002 to a company that made almost $1 billion in 2004. Now, almost five years after emergence, Kmart still operates over 1300 stores throughout the United States, making it one of the largest retail companies in the country.

For the past three years, all of us have been charged with the very challenging task of integrating two very large companies. Each of you has made important contributions to this enormous endeavor. While we have a long way to go, you should take great pride in what you have accomplished to date. In fact, since May 2003, shares of what is now Sears Holdings have increased in value by almost ten times. It is easy to lose sight of how much value has been created over the past five years during a time of stock market uncertainty and tumult. Sure, our stock is off its highs, just like many department stores and other retail companies, but our shareholders have been richly rewarded over the past half decade.

While we continue to recognize and address the challenges ahead of us, we can also be proud that, thanks to our collective efforts, we saved almost 150,000 jobs in taking Kmart out of bankruptcy, a fate from which many retailers have failed to recover. Importantly, we also continue to believe that we can mold Sears Holdings into a successful, sustainable, and exciting company that will offer a compelling choice to customers. There will be many difficult decisions to come and the recent economic downturn which has affected practically all retail companies has set back our progress. However, it has not deterred us and we will continue to move forward with our strategy and take all appropriate actions to stabilize our business.

Sears Holdings is one of the largest retail companies in the world, one of the largest employers in the world, and one of the most profitable retail companies in the world. We remain focused on the creation of long-term value for our shareholders and have shown our ability to deliver since Kmart’s emergence from bankruptcy. We feel that we have been very successful so far, yet success doesn’t come without setbacks. We intend to make decisions to increase the probabilities of success in the future, although certainly not all decisions will lead to the outcomes we expect.

Our belief in our company is reinforced by the fact that we have invested over $4 billion since the third quarter of 2005 in repurchasing our own shares, while at the same time paying down debt and funding our pension plan. We have believed that investing in our own company stock has been a superior alternative to acquiring other businesses, and it has not prevented us from making investments in our stores and infrastructure. During that time we have also made significant investments in information technology as well as in building our design and online capabilities. However, making these investments requires us to believe that we will earn a return on them. We are not going to simply throw money at problems, as some have suggested and as others have done unsuccessfully. Instead, we are going to test and learn and when we find things that we believe can make a difference – such as Lands’ End shops inside Sears for example — we will roll them out aggressively and iterate along the way.

We are early in the game, and thanks to all your efforts, we have a great chance of victory. On behalf of the leadership of our company, thank you for your hard work and commitment, and we look forward to building a great company with your help.”

The basic summation of the letter around the web is that this letter is an admission of Lampert’s failure. That he will “no longer have any direct reports” somehow means that his vision has not succeeded.

What is missed is that shareholders who have been with him are still up ten-fold in their shares. Lampert and his discipline were precisely what both Sears and Kmart needed when he bought them. Let’s not forget (it seems to have been) that both of these chains were on the road to extinction 5 years ago. Now they produce $50 billion in sales.

What the letter means is that Lampert recognizes he has taken the chain as far as he can. He knows what his strengths are and also is, as Berkshire Hathaway’s (BRK.A) Warren Buffett has said, “smart enough to know what I don’t know”. Now, was this “the plan” all along? Who knows. But, if you look at how far Sears seems to be in the process already, one can only assume that this has been in the works for a while.

My gut says Lampert knew this day was coming and had the reorganization plans “on the back burner”. The current state of retail in general and the US economy as a whole probably expedited their implementation.

Far from being an admission of failure, Lampert’s move is simply a very smart man placing ego aside and doing what is best at this time for his company. Why is that a bad thing?

Disclosure (“none” means no position): Long Sears

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Wednesday’s Upgrades and Downgrades


Upgrades
Evergreen Solar (ESLR)= Janco Partners Mkt Perform » Buy
Virgin Media (VMED)= Citigroup Hold » Buy
El Paso Electric (EE)= Soleil Hold » Buy
Chattem (CHTT)= Stanford Research Hold » Buy
Sysco (SYY )= Piper Jaffray Neutral » Buy
Zoran (ZRAN)= Needham & Co Buy » Strong Buy
CGI Group (GIB)= RBC Capital Mkts Sector Perform » Outperform
Toyota Motor (TM)= HSBC Securities Underweight » Neutral
Medivation (MDVN)= Stanford Research Hold » Buy
Estee Lauder (EL)= UBS Neutral » Buy
Sonic (SONC)= Credit Suisse Neutral » Outperform
Stealthgas (GASS)= Citigroup Hold » Buy
Novell (NOVL)= Jefferies & Co Hold » Buy
Flamel (FLML)= Merriman Curhan Ford Neutral » Buy
Take-Two (TTWO)= Lehman Brothers Underweight » Equal-weight
Con-way (CNW)= JP Morgan Neutral » Overweight
Arris (ARRS)= UBS Neutral » Buy
Geron (GERN)= UBS Neutral » Buy
ArQule (ARQL)= UBS Neutral » Buy
ADC Telecom (ADCT)= UBS Neutral » Buy

Downgrades
Union Banc (UBSH)= Ferris Baker Watts Buy » Neutral
American Community Bancshares (ACBA)= Stanford Research Buy » Hold
Sterling Banc (SBIB)= Morgan Keegan Outperform » Mkt Perform
Blue Nile (NILE )= AmTech Research Neutral » Sell
Morgan Stanley (MS)= Deutsche Securities Buy » Hold
VMware (VMW)= Caris & Company Buy » Average
PMI Group (PMI)= Wachovia Outperform » Mkt Perform
Triad Guaranty (TGIC)= Wachovia Outperform » Mkt Perform
Journal Register (JRC)= Wachovia Mkt Perform » Underperform
McClatchy (MNI)= Wachovia Outperform » Mkt Perform
Molex (MOLX)= Credit Suisse Neutral » Underperform
Walt Disney (DIS)= Citigroup Hold » Sell
Westamerica Banc (WABC)= Sterne Agee Buy » Hold
McDonald’s (MCD)= Bear Stearns Outperform » Peer Perform
NYMEX (NMX)= Citigroup Buy » Hold

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