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Apple’s Intentional iPhone Destruction: Illegal

Apple’s (APPL) quest to keep total control over its iPhone seems to have caused it to break the law.

Ever heard of the Magnuson-Moss Federal Warranty Act? It would seem those at Apple’s HQ have not either but when they put out an iPhone update this week that disabled hacked iPhones, they broke this law.

The site Phone News.com details how Apple did do. The act says that Apple cannot void a warranty for a product with third-party enhancements or modifications to their product. The only exception to this rule is if Apple can determine that the modification or enhancement is responsible damaging the product in question. Since it was Apple that intentionally caused the damage to the iPhone, the phones are still technically still covered under the warranty. Apple has a problem because they are refusing to honor the warranty on the hacked phones.

Once ownership of the phones was transferred from Apple to the buyer at purchase, the new owners have the right to do whatever they want with the phone. Kind of like buying a car and customizing it. Now, if your customization of the car (phone) causes it not to work, the auto maker (or Apple) need not honor the warranty, but, and this is a key point, the car maker (or Apple)cannot come out and take the transmission out of the car because they do not like the modifications you made. This is essentially what Apple did. They said “if you change the phone, we will break it on you”. Illegal.

If nothing else this come as another PR pothole for Apple who has gone from wearing the lovable underdog label to corporate bully in the course of a few weeks. First there was the unexpected (not to ValuePlays readers) $200 price drop on the phone less than 3 months after it’s release that had those who waited in lines for two days to get the initial phones outraged. Apple attempted to sooth them by offering them a $100 rebate which still leaves them $100 short but it was better than nothing.

The iPhone hype has subsided and sales are not as hot as Apple would like them. they are running short of their 10 million unit by the end of 2008 goal and negative press like this will not encourage those folks on the fence to make the plunge and pony up the $399 necessary to get one now.

Apple could miss a quarterly earnings expectation and still keep the aura around itself. The stock would take a hit but a good quarter following it would repair that. Expectations are way too high currently for the company and its products and it would seem Apple may be letting that guide its decision making process. If they alienate those who are buying it’s products with moves like this that make them feel like the enemy, that damage will take much longer to repair.

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Friday’s 52 Week Low’s

Ethanol makers still going lower, someone will start snapping them up soon.

SMRT Stein Mart Inc 7.66
SCSS Select Comfort Corp 13.95
RUTH Ruths Chris Steak Hse Inc 14.31
RT Ruby Tuesday, Inc. (G … 18.37
PTRY Pantry Inc 25.69
USBE US Bioenergy Corp 7.65
UFPI Universal Forest Products 29.65
SPF Standard Pacific Corp 5.49
MGPI Mgp Ingredients Inc 10.24
MED Medifast Inc 5.58
MAXY Maxygen Inc
HMX Hartmarx Corporation 4.94
HHS Harte-Hanks Communica … 19.83
GMTN Gander Mountain Co 5.45
LZB La-Z-Boy Incorporated 7.50
DSW Dsw Inc 25.55
DEIX Directed Electronics Inc 3.97
CRC Chromcraft Revington, Inc 4.67

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Friday’s Links

9/25, Housing, Natural Gas, Cheap Music Downloads

– I did not know Sept. 25th was such a notable day.

– According to this. As goes housing, so goes the economy. I hope it is wrong.

– Why would you build a plant in the US with these Natural gas prices.

– Here is how Amazon (AMZN) is selling songs for your iPod cheaper than Apple (APPL)

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Greenspan the Odds Maker

I Greenspan jockeying for a job on Vegas?

Before the summer began he made waves with the first understandable statement of his career. “The US has a greater than 30% chance of a recession this year”. Whoa, it is actually a coherent blathering from the former chief. Since that prediction seems to be wrong, Greeenie decided to follow it up yesterday.

“The danger of recession has obviously risen but in my judgment … is still less than 50/50. It’s less optimistic than one would like,” Greenspan told BBC Radio 4. So, I guess that means we are about 30% to 45% chance? If only he were this clear when he was in office.

Oh yea the reason for the interview? He was peddling his new book overseas. Funny how the almighty quest for a fast buck clears ones thought process.

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Bank of America Piles on Starbucks

Just in case Starbucks thought the bashing was finally over…

Banc of America (BAC) downgraded Starbucks (SBUX) to Sell from Neutral, and lowered their target to $23 from $27, as they see downside risk to estimates due to slower growth. The firm is concerned that expectations for a near-term recovery are too high.

The analyst, Mr. Barrish wrote, “Although we believe that the company controls a very strong brand and can continue to grow, we believe the pace of growth will be slower [with international business still too small to make significant contribution to operating profits, and could be several years away from such a contribution], and that expectations are too high for a short-term recovery.”

He added, “We also believe that store operations have ‘slipped’ and longer lines, more complexity and less-than-stellar-looking assets could be causing a modest decrease in sales in this challenging consumer environment.”

I guess the first question isn’t “is he right” but “where have you been”? I mean, none of this stuff is an enlightened opinion and those of you who read ValuePlays have been seeing the same sentiment since Fenruary when shares were sitting at $35 each. Shares were down some 2% yesterday and there isn’t really anything to stop the fall on the horizon. If anything, the upcoming earnings release may do more harm than good as it is looking more apparent everyday that meeting their number is becoming less and less likely. What took the analyst almost 10 months to see what the rest of us already new? Also, the fact that shares dropped so much despite all this shows how much “hope” is still baked into the current price.

Starbucks may give us a valueplay soon enough. But shares will fall further first..

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ADM and ConocoPhillips In Pact

Well that did not take long. In the morning I pondered what was up with ADM (ADM) and their recent restructuring along the lines of an energy company and only a few hours later get an answer.

Archer Daniels Midland and CononcoPhillips (COP) announced that they agreed to collaborate on the development of renewable transportation fuels from biomass, creating a partnership between the biggest U.S. ethanol producer and one of the biggest oil refiners. The collaboration will research and seek to commercialize two components of a next-generation biofuel production process:

* The conversion of biomass from crops, wood or switchgrass into biocrude, a non-fossil substance that can be processed into fuel; and
* The refining of biocrude to produce transportation fuel.

ADM will provide “biomass,” or organic material left over from crops, wood or switchgrass and ConocoPhillips will convert the materials into “biocrude” fuel for transportation.

“ConocoPhillips believes that the development of next-generation biofuels is a critical step in the diversification of our nation’s energy sources,” said Jim Mulva, chairman and chief executive officer, ConocoPhillips. “We are hopeful that this collaboration will provide innovative technology toward the large-scale production of biofuels that can be moved efficiently and affordably through existing infrastructure.”

Patricia Woertz, chairman and CEO of ADM, added, “As we advance our global bioenergy interests, this alliance with ConocoPhillips represents an important next step. Innovative collaboration like this will identify and bring to market feasible, economic and sustainable next-generation biofuels.”

This is very interesting. There has been a ton of talk out there about “cellulostic ethanol” and while ADM is developing that technology, what they seem to be doing here is creating “cellulostic crude”. The ramifications of the agreement between the two are far reaching. Big Oil has thus far rejected the biofuel industry and this agreement serves as that needed recognition. It also diversifies ADM’s earnings profile away from ethanol and farther into the biodiesel and now biocrude areas that are growing at staggering rates.

Consider that just three years ago, only 25 million gallons of biodiesel were produced in the US. That number will top 250 million gallon this year and it is expected to double next year. Biodiesel burns cleaner and is 30% MORE mileage friendly than it’s pure petroleum brethren.

What ADM and Conoco are doing is jumping into a thus far untouched market head first to dominate it. The fact they are even setting up the refining of the finished product says it is close to a reality.

Sound good shareholders? Me too.

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Sherwin Williams: Persistant Rumors

More rumors, true?

Sherwin-Williams (SHW) shares have been trading higher on buyout rumors. The paintmaker and retailer, which has a market cap of $8.5 billion and long-term debt of $292 million, has been the subject of rumors for the better part of a month now. The coatings industry is undergoing rapid consolidation the past 6 months and Sherwin, with its name recognition and pristine financials would be a delicious target for someone. Companies like Dow Chemical (DOW) have publicly announced their intentions to grow their coatings business by billion dollar increments and that can only be done through acquisitions. The recent Akzo Nobel buyout of ICI chemical served to further heat up the rumor mill. Dow had an interest in ICI but not at the price Nobel paid. Now that ICI is gone, could a bid for Sherwin be coming?

However, Sherwin may not be a takeout candidate, but instead an acquirer,based on recent actions. The company recently bought Spokane, Wash.-based Columbia Paint & Coatings Co. after completing the purchase of Philadelphia based MA Bruder & Sons. The purchases followed Sherwin-Williams’ CEO Christopher M. Connor’s comments earlier in the year that the company would continue to expand in the “do-it-yourself” market through acquisitions.

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Friday’s Upgrades and Downgrades

UPGRADES

Fresenius Medical FMS Bernstein Mkt Perform » Outperform
EchoStar DISH Oppenheimer Neutral » Buy
SAVVIS Comm SVVS Lehman Brothers Equal-weight » Overweight
Oriental Fincl Grp OFG Keefe Bruyette Mkt Perform » Outperform
Rightnow Tech RNOW RBC Capital Mkts Underperform » Sector Perform
SiRF Technology SIRF Credit Suisse Neutral » Outperform
KKR Financial KFN Bear Stearns Peer Perform » Outperform
Wal-Mart WMT Rochdale Securities Hold » Buy
Westell Tech WSTL Robert W. Baird Neutral » Outperform
Kindred Healthcare KND Wachovia Underperform » Mkt Perform
Prudential Plc PUK Bear Stearns Peer Perform » Outperform
Magna MGA CIBC Wrld Mkts Sector Perform » Sector Outperform

DOWNGRADES

Signature Bank SBNY Sterne Agee Buy » Hold
PetroChina PTR Bear Stearns Outperform » Peer Perform
Healthways HWAY Credit Suisse Outperform » Neutral
Statoil ASA STO Credit Suisse Outperform » Neutral
Alesco AFN Bear Stearns Outperform » Peer Perform
Fluor FLR Morgan Joseph Buy » Hold
Starbucks SBUX Banc of America Sec Neutral » Sell
ResMed RMD UBS Buy » Neutral
Gamestop GME UBS Buy » Neutral

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"Fast Money" for Friday

Friday’s Picks

Jeff Macke recommended getting long Yahoo (YHOO) Open $26.27 and Palm (PALM). Open $16.40

Guy Adami liked KB Home (KBH). Open $24.71

Karen Finerman preferred Seacor Holdings (CKH). Open $93.83

Pete Najarian said Nordic American Tanker Shipping (NAT) is a buy. Open $38.60

Thursday’s Results

Jeff Macke said sell Bear Stearns (BSC). Open $123 Close $121.15

Guy Adami liked NYSE Euronext (NYX). Open $78.60 Close $79.78

Karen Finerman thought BEA Systems (BEAS) is a buy. Open $13.33 Close $13.65

Pete Najarian preferred Isis Pharmaceuticals (ISIS). Open $15.10 Close $15.35

Since my tracking began on 6/21 (1-1 means one up pick and one down pick and no results from my vacation weeks). The percentage is the percentage of successful picks

Guy Adami= 27-18 = 60%
Eric Bolling= 10-11 = 48%
John Najarian= 13-3 = 81%
Jeff Macke= 32-23 = 58%
Pete Najarian= 20-17 = 54%
Tim Seymore= 3-2 = 60%
Karen Finerman= 12-6 = 67%
Stacey Briere-Gilbert= 2-0 = 100%

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Today’s 52 Week Lows

RUTH Ruths Chris Steak Hse Inc 14.60
PTRY Pantry Inc 27.20
MGPI Mgp Ingredients Inc 11.18
LENB Lennar Corp 20.72
CYH Community Health Sys … 30.71
CRFT Craftmade Internation … 12.40
CMRG Casual Male Retail Gr … 9.10
CHIC Charlotte Russe Hldg Inc 14.79
HB Hillenbrand Industrie … 54.52
GSAT Globalstar Inc 7.48
GOT Gottschalks Inc 4.21
GMTN Gander Mountain Co 5.70
BLG Building Matls Hldg Corp 10.87
ARP American Reprographics Co 18.98

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Thursday’s Links

Financials, Sarcasm, The election, “Bloggystyle”

– Not sure if investing in financial is right for now? Looks like governments around the world do..

– I love sarcasm and this made me spit my coffee out..

– Here it is. The deciding issue of next years elections.

– I figured out what I like about Adam’s blog aggregation. It is done with a topic in mind so you get reading from several different sources rather than just a shotgun article. For my money this is the best one out there currently

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Third Avenue Shareholder Letter

I have money invested in only one mutual fund (actually my son does, in a coverdale) and that is in Martin Whitman’s Third Avenue Value (TAVFX). Here is the most recent shareholder letter, well worth the read as it talks about “credit-worthiness”.

Portions of the most recent letter are reprinted below.

“At July 31, about 21% of the Fund’s assets were in what are considered cash and equivalents (excluding the 1.3% represented by the investment in Nuveen Common). Of
this 21%, almost 58% was invested in United Kingdom Government issues, and a little over 42% was invested in U.S. Treasuries and similar instruments. Third Avenue has weighted its cash holdings toward the U.K. rather than the United States because TAVF obtains a better yield on U.K. instruments, and because of my belief that important parts of the U.S. economy, including the Federal Government, are likely to face a continued deterioration in credit-worthiness.

Absent violence in the streets (i.e., terrorism) and the continued existence of political stability, the U.S. will continue to be an attractive and relatively safe place for Outside Passive Minority Investor (“OPMI”) investment. But deteriorated credit-worthiness may well mean higher interest rates and a weaker dollar over the
long term. Thus, the Fund’s weighting toward U.K. cash equivalents.

At July 31, approximately 78.1% of Fund assets were invested in common stocks. Within the common stock portfolio, 54% of the market value were in non-North American issues, and only around 46% were in issues of companies whose princcompanies; 10% was a South Korean company; and 8% were Western European companies. An explanation as to
why the emphasis on overseas investments ought to be informative to TAVF shareholders.

Put simply, the Fund has invested in the equities of overseas companies with super strong financial positions for two reasons. First, the overseas common stocks, based
on TAVF’s cost basis, appear to be much cheaper than U.S. issues, measured by estimated discounts from readily ascertainable NAVs. Second, the overseas
common stocks appear to have much greater growth potential than their domestic
counterparts, measured by the probabilities that over the next five to ten years, it will be easier for the foreign companies to increase readily ascertainable NAVs by at least 15% compounded annually.

As bottom-up investors following a “safe and cheap*” approach, Third Avenue Management has always focused on credit-worthiness much more than almost any other
OPMIs. Thus, there exists for TAVF the strict discipline of not investing in any common stock knowingly unless the issuing company enjoys a super strong financial
position. This is in contrast to almost all conventional investors who emphasize a primacy of the income account, i.e., principal weight in an equity valuation goes to earnings from operations and/or cash flow from operations. Almost all other OPMIs seem to denigrate the importance of strong financial positions.

This tendency to downplay the importance of creditworthiness is prevalent also on the macro-level, probably even more so than for bottom-up investors. This attitude has been well summarized by Vice President Dick Cheney who is quoted as saying, “Deficits don’t matter”.

For the vast majority of people, the important economics statistics are Gross Domestic Product, employment and unemployment levels, corporate earnings, and productivity increases. Credit-worthiness is pretty much ignored.

Credit-worthiness is, in the final analysis, a function of two factors. First, how much indebtedness is being incurred via balance of payments deficits, other governmental borrowing, corporate borrowings and borrowings by consumers. Of itself, increasing indebtedness is not a huge problem, provided the use of funds created by the borrowing is used productively, i.e., to create wealth. Insofar as the use of proceeds do not result in wealth creation, or it creates only modest increases in wealth, i.e., there exists a negative multiplier, or a modest multiplier, the borrowing entity, sooner or later, has to face diminished credit-worthiness (except if the entity can sell assets on a massive scale).

The U.S. is incurring massive debts. By and large, the use of proceeds from incurring this debt seems to be only modestly productive or even counter productive. These
uses of proceeds seem to have non-positive, or even negative, multipliers. Non productive uses of proceeds include the following:

• By the U.S. government: massive expenditures in Iraq.
• By Consumers: massive expenditures for consumer
goods that depreciate rapidly.
• By Corporate America: Leveraged Buy Outs where
most of the proceeds from debt incurrence are used to
make cash payments to stockholders, rather than to use
the cash to build or acquire productive assets.

Given the gradual deterioration in U.S. creditworthiness, I think it is important to encourage foreign entities to acquire control of U.S. assets and U.S. companies. Foreigners can use the proceeds from providing finance to the U.S. in three ways:

1) Buy and hold U.S. debt instruments.
2) Acquire U.S. equities or assets as passive investors.
3) Acquire control positions in U.S. equities and
assets.

Insofar as increased amounts of debt instruments are held by foreigners, this seems likely to detract from U.S. credit-worthiness, sooner or later. This would not be the
case if the proceeds from U.S. borrowing were recycled into equity investments. Given the massive amounts of U.S. debt held off-shore, passive investing is probably of
limited use to creditors located in China and Japan.

Rather, those creditors ought to be encouraged to acquire control of U.S. companies and U.S. assets. If so, this might prove to be a bonanza for Third Avenue. Many of
the domestic companies in the TAVF portfolio appear to
be ideal take-over candidates.

Again, put simply, the U.S. has so far in the 21st Century achieved prosperity and paid for prosperity with a steadily deteriorating credit-worthiness. Macro factors point to a less optimistic outlook for the U.S. than for, say, Hong Kong or Mainland China. In spite of this, the U.S. remains the best place in the world to invest in individual securities for a bottom-up investor such as TAVF, other things being close to equal. These other things encompass businesses having strong financial positions; prices of common stocks reflecting meaningful discounts from NAVs, and that for the long term, there exists reasonably good prospects that such NAVs will increase by no less than 10% per annum compounded.”

Marin J .Whitman

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Does the GM Deal Reshape Healthcare?

Getting the UAW to take control of it’s healthcare may be the turning point for the US. Good for GM (GM)

GM is going to fund a $35 billion health care fund that will finally take all present and future health cost away from the auto maker. Why do you care? Right now $3,000 to $5,000 of the cost of an auto you buy from GM is the cost of it’s healthcare program. Can you imagine what type of value or additional options or improved quality we may get now that the cost is gone? Is it any wonder they cannot provide the types of autos to Japanese do whose similar costs are just a fraction of that?

More importantly, GM may have started a sea-change without knowing it. What company sponsored health plans have done is taken the free market out of the equation. When that is done, waste and inefficiency reign. If GM is not footing the bill, anyone want to bet the UAW will take a much closer look at where the money is going? Do we really doubt that “concern” will inevitably trickle down to the rank and file?

Why are we not able to shop for health insurance like we are for auto insurance? Why do us healthy people who have almost no claims pay as much as those who are 300 pounds overweight, smoke, eat lousy drink too much and have astronomical medical bills? Ought it not be more correlated to the frequency of our claims? Why does a company pay as much for insurance for a couple as they do for a family of 5, just because they are both a family?

If we want to get healthcare costs down, let the market in. It works everywhere else and this GM deal may have opened that door, at least we can hope.

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Wal-Mart and India: Big

Events are happening in India with Wal-Mart (WMT) that folks seem to be not noticing and if you are buying shares to accumulate, that is good because once the scope of this is recognized, shares may never look back.

Bharti Enterprises and Wal-Mart are confident their Indian joint venture is supported in the country and say it will help usher in the future of Indian retail. “I think it’s a big change for India, the move from mom-and-pop to organized retail,” said Raj Jain, head of Wal-Mart’s India operations. “I think most people understand that it is a necessary evolution which has to go through for everybody to benefit from and for the economy.

Bharti Chairman Sunil Bharti Mittal echoed those comments. “Farmers want this, the customers want a better experience and to save money. They want it — which means the country wants it.”

The joint venture called Bharti Wal-Mart Private Limited, is scheduled to open its first store by the end of next year. It will sell groceries, consumer appliances and fruits and vegetables to retailers and small businesses.

The question is, what is the potential? Consider that large retail companies make up only 3% of India’s $350 billion retail market. India allows foreign single-brand retailers to hold up to 51 percent in local joint ventures, while multiple-brand retailers like Wal-Mart are limited to cash-and-carry and franchise deals.

Wal-Mart is in good company and has strong support internationally as suppliers ranging from Unilever (UL) and Procter & Gamble Co (PG) who “know the game”, to small local suppliers that make only one product are eager to work with the joint venture, Mittal said.

In essence, Wal-Mart is positioning itself to be the portal for goods going into the country. Once the JV is operating, the economies of scale Wal-Mart and distribution abilities can and will employ will instantly transform them into the preferred retailer for the nation. International sales for Wal-Mart are growing 16% this year and this partnership will cause that to explode.

It is a year out which is why is not getting much notice now. The thing is, if you wait until it does, you will be paying much more for a share of that growth than you are now.

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Thursday’s Upgrades and Downgrades

UPGRADES

Tempur-Pedic TPX Stifel Nicolaus Hold » Buy
Celanese CE BB&T Capital Mkts Hold » Buy
Pixelworks PXLW Jefferies & Co Underperform » Hold
American Eagle AEO Wachovia Mkt Perform » Outperform
Office Depot ODP JP Morgan Neutral » Overweight
CIT Group CIT Credit Suisse Neutral » Outperform
CVS Corp CVS JP Morgan Neutral » Overweight

DOWNGRADES

Vonage VG Stanford Research Hold » Sell
Tesoro Petroleum TSO Credit Suisse Outperform » Neutral
Resources Connect RECN Stifel Nicolaus Buy » Hold
Health Care Ppty HCP UBS Buy » Neutral
Resources Connect RECN Robert W. Baird Outperform » Neutral
Alon USA Energy ALJ Credit Suisse Outperform » Neutral
CNOOC Ltd CEO Bear Stearns Peer Perform » Underperform
Resources Connect RECN Bear Stearns Outperform » Peer Perform
Agrium AGU CIBC Wrld Mkts Sector Outperform » Sector Perform
Statoil ASA STO JP Morgan Overweight » Neutral
Resources Connect RECN JMP Securities Mkt Outperform » Mkt Perform
Resources Connect RECN Piper Jaffray Outperform » Market Perform
Health Care Ppty HCP Friedman Billings Outperform » Mkt Perform
Under Armour UA UBS Buy » Neutral
VeriSign VRSN Credit Suisse Outperform » Neutral
Walgreen WAG JP Morgan Overweight » Neutral
Staples SPLS JP Morgan Neutral » Underweight