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Today’s Upgrades and Downgrades

Here are this mornings analyst calls

UPGRADES

MicroStrategy MSTR First Analysis Sec Equal-Weight » Overweight
Goodrich GR Credit Suisse Neutral » Outperform
Ashworth ASHW B. Riley & Co Neutral » Buy
Kinder Morgan Prtnrs KMP AG Edwards Hold » Buy
Leapfrog LF Wedbush Morgan Sell » Hold
Atheros Communications ATHR AG Edwards Hold » Buy
Turkcell TKC Bear Stearns Peer Perform » Outperform
Transalta TAC RBC Capital Mkts Underperform » Sector Perform
Exxon Mobil XOM AG Edwards Hold » Buy
McAfee MFE WR Hambrecht Hold » Buy
American Axle AXL Soleil Sell » Hold
Fortune Brands FO Barrington Research Mkt Perform » Outperform
XM Satellite XMSR Janco Partners Mkt Perform » Buy
FNB CORPORATION (VA) FNBP Janney Mntgmy Scott Sell » Neutral
Granite Constr GVA Davenport Neutral » Buy

DOWNGRADES

Symbion SMBI RBC Capital Mkts Outperform » Sector Perform
QLogic QLGC Needham & Co Buy » Hold
Chartered Semi CHRT JP Morgan Neutral » Underweight
Children’s Place PLCE Susquehanna Financial Positive » Neutral
American Home Mortgage AHM JMP Securities Mkt Perform » Mkt Underperform $8
American Home Mortgage AHM RBC Capital Mkts Outperform » Sector Perform

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US Market Cheapest vs Earnings Since 1991: A Lot Of Irony Here

Here is one for those of you who like irony. The S&P 500 currently trades for 15.4 times future earnings according to a Bloomberg report. That means that on a earnings basis (and isn’t that what really counts?), the US market has not been this cheap in 16 years!!

I guess that explains why Berkshire Hathaway’s (BRK.A) Warren Buffett has been initiating and adding to positions left and right recently. Now, about the irony part?

1991- We had a Bush family member in the White House
1991- We had a housing “bust”
1991- We were in a war in Iraq
1991- In April 1991, the Dow Jones Industrials crossed 3,000 for the first time ever. In 2007, the Dow crossed 14,000 for the first time ever.
1991- A Clinton announces their intention to run for the White House.
1991- Dick Cheney served the President (Secretary of Defense)
1991- The S&P crossed 400 for the first time ever. The S&P hit a record 1555 in July of 2007
1991- Court bars Jack Kevorkian from assisting in suicides. 2007, Kevorkian released from prison
1991 -Exxon (XOM) agrees to pay $1 billion to clean up after Exxon Valdez spill. In May, 2007, Exxon said it will appeal to Supreme Court a $2.5 billion punitive damage award from the spill.
1991- Pete Metzelaars is in a Super Bowl as tight end for Buffalo Bills. In 2007. Metzelaar is a coach for the Indianapolis colts

The good news? The bargain prices investors paid in 1991 lead to barrels of profits over the next decade and stocks embarked on a historic steady climb. What is interesting is that even though stocks in 1991 were at “all time record highs” and there was a war going on, because they were cheap relative to their earnings, they proved to have plenty of room to run to the upside and they did just that.

I have said it here before many times, ign ore the “noise” out there and just focus on earnings, buy cheap stocks, and hold on to them. It is a winners game.

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Starbucks at $22? Maybe lower….

I got a great question to my recent Starbucks (SBUX) post last week.

Here is the question: Matthew asked, “Earlier you wrote that SBUX is a matter of price for you, and you mentioned the $22 level as the highest you’d pay. Does this news make your price go lower? Or were you already discounting the fact that having screwed up already, they’re likely to screw up some more?”

This got me to thinking, is my $22 target actually too high? To date, none of the moves Starbucks had made since the beginning of the year have worked and I strongly feel the recent price increase will backfire on them in a major way. The bottom line for them is store traffic and that is falling fast. I cannot think of a retail situation in the past in which raising prices increased foot traffic to a location.

$22 may end up being just a way point downward from here. I know Starbucks fans out there are coughing up their latte’s but they did the same thing early this year when the stock was trading north of $35 and I said it was just way overpriced. If anything, things have only deteriorated for the company since then and I cannot see any light at the end of the tunnel right now. Costs are rising and look to stay there, the competition is getting more fierce, people are becoming very price conscious and the lack of convenience Starbucks offers is becoming a larger issue now that the competition offers a quality substitute with the convenience. All these add up to more headwinds to earnings going forward.

What should Starbucks do? Much like many people feel Citigroup (C) shares would jump if CEO Chuck Prince was let go, I would expect the same from Starbucks shares should CEO Jim Donald be ask to seek “other opportunities”. Founder Howard Schultz’s support of the CEO is noble but it is a bit like standing next to the captain of the Titanic and telling him “things will be ok”.

They are not and do not look to get better any time soon.

Supporters will point to the recent announcement with Hershey (HSY) as proof the company is moving in the right direction. But, my opinion is that this is just another move further in the wrong direction. They only industry that is seeing prices skyrocket and industry fundamentals deteriorating faster is the chocolate business. They have gotten so bad that makers have petitioned the FDA to let them call a substantially cheaper substance called “mocklet” chocolate. Does this means we will be buying a “double mocklet latte”?

They will then point to the “overseas” expansion but to date is has been a bit of a mess. Plans into India were shelved this week and their entry into China’s “Forbidden City” was a unmitigated disaster and a huge PR flop for the company. We need to scale back our expectations here. Just because they are huge in the US does not mean a billion tea drinking Chinese will run to them. Just ask WalMart (WMT) about expansion in other countries, it is not alway just a matter of “if you build it, they will come”.

Now, stop frothing and relax, Starbucks is not going under nor will it become irrelevant, nor am I saying “it sucks”. I actually think it is a great company but even great companies go astray and make moves (or have CEO’s) that hurt performance. That being said, earnings growth is going to slow dramatically and paying 35 times that slowing growth, well, will be a losing game.

Starbucks reports earnings Wednesday, August 1st. Want a prediction? They will miss, or, if they hit, it will be due to some creative number crunching (nothing illegal, or another huge unsustainable share repurchase like in Q1)If they meet expectations and that is a major “if” I would expect them to guide earnings lower or at the very bottom of estimates for the rest of the year. Now for those of us who do not own shares, a miss and a decimation of shares into the high teens might just be the catalyst to get changes made that turn this thing around.

The earnings call will be infinitely more important than the numbers they release in telling us plans or at least the though process they have. A word of caution, Starbucks has not been very forthcoming or honest with shareholders up to this point so to expect much may leave you disappointed. Stay tuned..

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Interview With The Legal Blog "Law and More"

I recently did an interview with Jane Genova for here blog “Law and More” . As far as I am concerned Jane’s blog is at the forefront of anything lead paint. Interested parties could easily spend an entire day there educating themselves on the lead paint and public nuisance areas of law. Our interview focused on the investing aspects of the litigation on companies like Sherwin Williams (SHW), DuPont (DD) and NL Industries (NL). The full text is below and can be read on her blog here. The interview was also referenced by Walter Olson at the Manhattan Institutes’s blog “Point of Law”.

It’s the stock price, stupid – along with hits to brandname, the distraction from operations, and the actual legal expenses of being ensnared in a lawsuit. These are the reasons business in the U.S. and increasingly now in Europe factor in liability risk into everything from their accounting to where they will locate a new facility [think Nissan and Toyota’s eventual decision to build plants in a tort-reformed Mississippi].

Because of the importance of this matter, I am providing readers with an exclusive interview with financial-markets expert Todd Sullivan. In addition to being a frequent commentator on this blog, Sullivan contributes his financial assessments to, among others, THE WALL STREET JOURNAL and FORBES. He publishes VALUE PLAYS, which is morphing into the go-to site for investors and the investment community.

JG: In myriad ways, the threat of litigation itself costs public companies. Do you know how some of these costs can be reduced? Does settling rather than going to court tend to put a lid on those costs?

TS: When the federal government is involved, it seems that settling may be the only option if for no other reason than the limitless pockets and the ability to pursue the litigation from all angles until it is exhausted. When we drop to the state government and individual plaintiffs, the only recourse is to fight.

Had the lead paint litigation happened prior to the asbestos cases, we may have avoided bankruptcies at USG, Owens Corning, WR Grace and dozens of others due to that litigation. The resources of state government and private plaintiffs can be exhausted or future litigation can be discouraged by the ferocity of the fight by defendants. This is what we are seeing currently with lead paint. After the Rhode Island victory it would seem that the plaintiffs had a false sense of future victories and that the defendants stiffened their resolve, as well as learned from their defeat and honed their strategies. As I assess the lead paint public nuisance litigation situation, I see that the tide has turned.

JG: As a value investor, are you attracted to or turned off by public companies which have a record for settling?

TS: Had the lead paint defendants even broached the word “settlement,” an avalanche of suits would have followed that would have bankrupted them. I have no doubt about that. The ferocity of their fight has essentially discouraged additional suits being filed and has lead to several localities dropping suits.

Jane, settling local or private litigation is an admission of guilt in the eyes of the public. The only time settling is acceptable is to stop federal charges as there is really no limit to how far the government can push a case. In this instance, settling is not seen as an admission of guilt but as “a cost of doing business” because, as a group, the government seems to be trusted less than business.

Many people have had dealings with federal, state or local government over myriad issues and settling usually seems to be the best resource for most individuals. For business it is no different. There is a sense of being powerlessness against the government when it decides you are guilty. So, businesses are usually not penalized in public perception for acting in a way that depicts these feelings and putting the issue to bed, so to speak.

JG: In your opinion, how was Sherwin-Williams able to protect its share price during the prolonged lead paint public nuisance litigation?

TS: Sherwin-Williams separated its situation from the tobacco and asbestos mass tort cases. Comparisons were drawn immediately by the investment community and Sherwin-Williams was careful to distance itself from that litigation. It did so by educating the public about the differences in the kinds of litigation. Moreover, it explained in detail and kept reinforcing the local government’s roles in the “nuisance.” In addition, it downplayed the potential significance of the litigation.

Sherwin-Williams was careful in its earnings calls to ever so briefly summarize the litigation and then continue on to its results and plans for the future which included expansion and growth. There was no talk of “setting aside reserves” for the litigation of anything that would have lead people to believe they anticipated either ultimately losing or settling. At no time did Sherwin-Williams act as a company which even believed for a minute it may ultimately be liable.

JG: What advice would you give public companies about preventing being sued or what to do when sued?

TS: Fight, fight, fight. The tide is slowly turning against mass tort litigation and the longer and harder the fight, the odds are greater that other potential litigates will stay away.

Read more about Jane Genova here

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"Fast Money" Picks For Monday

Here are tomorrow picks and Friday’s results

Stacey Briere Gilbert recommended buying Intel (INTC) Open $23.54

Guy Adami liked NVIDIA (NVDA)Open $44.25

Pete Najarian preferred shares of NASDAQ Stock Market (NDAQ) Open $31.18

Jeff Macke told investors to get long Disney (DIS) Open $33.74

FRIDAY’S RESULTS

Jeff Macke recommended buying Costco (COST),Open $59.09 Close $58.57 Loss $.52

Pete Najarian likes Myriad Genetics (MYGN). Open $39.43 Close $38.46 Loss $.97

Guy Adami preferred Dell (DELL) because their PC shipments are up 12% year over year.Open $28.49 Close $27.81 Loss $.68

Eric Bolling said Goldman Sachs (GS) is a buy, Open $194.77 Close $192.65 Loss $2.12

Records:

Since my tracking began on 6/21 (1-1 means one up pick and one down pick and no results from my vacation week)

Adami= 8-8 Gain $24.99
Bolling= 8-8 Loss $4
John Najarian= 13-3 Gain $15.54
Macke= 15-9 Gain $5.49
Pete Najarian=4-4 Gain $17.38
Seymore= 1-1 Gain $.01
Finerman= 1-2 Gain $.68

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Top Stories This Week AT Value Investing News

Here they are. please visit the site at www.valueinvestingnews.com

1- Today’s Biggest Market Losers

2- Should You Follow Marty Whitman Into Handelman?

3- Mohnish Pabrai- Additional Answers


4- Expedia Tender Offer


5- Getting Ready To Strangle Apple

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The Lunacy of Regulators

At the end of last year Owens corning (OC) and St. Gobain announced a joint venture for the production of composite materials. It was going to be 60 /40 owned by OC and either company had the option to buy out the other’s interest in 4 years and OC indicated that they would most likely eventually exercise that option.

The plan ran into hurdles with EU regulators and both companies withdrew their application earlier this year. The objections of the regulators was never really made clear.

So, in order to satisfy them, OC is selling it’s siding business to St. Gobain for $371 million and then turning around and buying St. Gobain’s composite business for $640 million. Can anyone tell me what has been accomplished? How is this any different than before and why are regulators now satisfied?

It seems that EU regulators just needed something to do so they thought they would make the two companies alter an agreement to do the same thing another way. At the end of the day OC got rid of a siding business they have been trying to sell for almost a year now and with those funds they were able to finance the purchase of a composite business they had every intention of buying anyway. The regulators must have wanted to accomplish something, I just for the life of me cannot figure out what. It need to be point out that neither business was a world leader in either siding or composite so it did not have a monopoly issues attached top it.

Maybe just a slow Monday at the EU regulators office?

Who knows, but the deal is good for OC. composite sales are exploding around the globe and this deal ads 40% to OC composite sales that are growing organically at double digit rates. “This is a transformational acquisition for Owens Corning,” said Dave Brown, Owens Corning president and chief executive officer. “This acquisition expands Owens Corning’s footprint around the world and strengthens our position in key markets such as Russia, China, India, Mexico and Brazil. It also brings talented people and proven technology to Owens Corning, and it balances our exposure to the cyclical downturns associated with the residential construction market in North America. Composite Solutions is a core business at Owens Corning and we are committed to its continued growth.”

“Glass fiber markets are global, diverse and growing at two-times global GDP,” said Mike Thaman, Owens Corning chairman and chief financial officer. He continued, “This strategic acquisition extends our global reach to commercial and industrial markets of interest and expands our global presence in a capital- efficient way that adds near- and long-term value to shareholders.”

Chuck Dana, the president of Owens Corning Composite Solutions business, said, “This acquisition will accelerate the ability of Owens Corning to grow with our customers in both developed and high-growth emerging markets.

It is a great deal for OC, just a mystifying regulator intervention.

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Interesting ADM Purchase

Much has been said about what might be the next move for Archer Daniel’s Midland’s (ADM) US operations. We got a very interesting answer Friday.

There has been speculation that ADM maybe after another ethanol producer like Verasun (VSE) or Aventine (AVR) or even a jump to the west coast and a partnership with Bill Gates and Pacific Ethanol (PEIX). On Friday ADM may have given us a glimsp at their direction. Rather than adding more production (ADM already produces more than twice it’s closest competitor), ADM entered into an agreement to acquire the Fasco Mills Company in Illinois.

Fasco Mills is a family-owned grain and feed company operating one of the largest networks of grain elevators and rail shipping terminals in Illinois. Their thirteen grain elevators will dramatically increase ADM’s footprint tributary to the prime farm production areas of northern Illinois. The grain from these elevators will flow into ADM’s domestic and global processing and marketing network.

Matthew Jansen, president of ADM’s Grain Group, said “these elevators allow ADM to offer increased marketing alternatives to farmers in northern Illinois while securing the commodity flow for ADM’s biofuel, food and feed needs.”

Richard Zimmerman, chairman of Fasco Mills, said “our management team at Fasco has built significant value into these operations, and we feel that ADM’s diverse resources will further enhance their value to the farmer.” The parties expect the transaction to close on September 1, 2007.

To be honest I am a bit miffed at myself for not looking in this area sooner. Rather than go after another producer, what is ADM doing? Securing the corn! The recent high prices must have convinced ADM that the single most important move for them now is expansion to cheaper production areas abroad and securing feedstock at home. ADM is moving into Brazil very soon and this move, to be honest is brilliant. With the other, less diversified producers struggling now to cope with temporary high corn and low ethanol prices, only ADM is in a position to do deals like this.

What they have effectively done is secure lower cost inputs for their ethanol than their rivals and other grain products from the upper Midwest. This move basically corners the region for ADM. This is like Exxon (XOM) making a huge oil find in the US.

ADM is moving to control it’s corn cost for decades to come and at the same time, act a a toll bridge for the corn coming out of that area to other companies.

Nice. In the end what will be the most important, producing the most ethanol or controlling the corn that makes it? If you control the corn, you dictate ethanol profits, at least for the other companies. It at least guarantees you significantly remain the low cost producer of the stuff.

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Notable Dividend Hikes

Here are this weeks dividend increases

Noble Corp (NE) = 100%

Republic Services (RSG) = 59%

Greenhill & Co. (GHL) = 52%

National Instruments (NATI) = 42%

Gannett & Co. (GCI) = 29%

Bank Of America (BAC) = 14%

Time Warner (TWX) = 13%

Reynolds American (RAI) = 13%

Anheuser – Busch (BUD) = 12%

Wells Fargo (WFC) = 10%

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This Weeks Notable Insider Buys

Again as Peter Lynch famously said “the are many reasons insiders sell shares but only one reason they buy, they feel the price is going up”.

Company and amount of insider purchases:

Jeffries Group (JEF) = $9,821,000
Gatehouse Media (GHS) = $6,605,000
Thornburg Mortgage (TMA) = $5,997,000
Allied Nevada Gold (ANV) = $5,614,000
Western Alliance Bancorporation (WAL) = $3,433,000

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52 Week Low Club

Here are todays cellar dwellers. Homebuilders actually escaped the list today

WMG Warner Music Group Corp
WCC Wesco Intl Inc
SIX Six Flags Inc
SHRP Sharper Image Corporation
RNWK RealNetworks Inc
ODP Office Depot, Inc
OB Onebeacon Insurance
LNY Landry’s Seafood Rest
FORR Forrester Research, Inc
FBN Furniture Brands

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KKR Will Pull IPO Plans

After watch shares in fellow PE guys that went public plummet, KKR has wisely pulled plans to list it’s shares. Both Blackstone (BX) and Fortress (FIG) are now trading almost 30% below their IPO prices. Why?

Democrats. Democrats are looking to take power in 2008 and are already sharpening their tax pencils with cigarettes, your dividends, your capital gains, oil companies and now private equity in the cross-hairs. Currently PE can classify earnings in a way that provides them with a 15% tax rate. Democrats want to change the rule and make it 35%. Why would anyone want to buy shares in a company whose tax liability may jump 125% in a year?

They wouldn’t, and aren’t.

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Blockbuster Loses More Money

So, it would finally appear that the “lower prices” plan at Blockbuster (BBI) is only “lowering profits”?

This one is really bad. Despite a GAIN of $77 million on the sales of Gamestation Stores, the company still managed to lose $35 million. Lest one think this is “not that bad”, last year at the same time they had a $68 million profit. Blockbuster currently has a “get more subscribers that Netflix (NFLX)” at all cost mentality and it is coming at, unfortunately, too great a cost. Far too great…

I am just waiting for the next earnings call when they announce that “in an effort to gain more subscribers, we will now pay them $2.99 per rental. If we have to pay every person in America to rent from us in order to be the number one video rental chain we will do it.”

At least they will have more subscribers than Netflix…. fools..

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GAP’s Choice: Looks Good

Let’s just ignore that GAP (GPS) said when the board committee first launched its search it said that it intended to find an apparel merchant with “deep” experience in retail and merchandising.

GAPS new CEO comes from Canada, where much of his two decades of business experience is in grocery stores and book retailing. Glenn Murphy, 45 was unanimously chosen after a “rigorous process,” according to Gap’s recent statement. Murphy’s last job was a six-year stint as chairman and chief executive of Shoppers Drug Mart, Canada’s largest drugstore chain were he credited with leading the company through an unprecedented period of growth and shareholder returns. Before that, he spent time selling groceries and books. When he joined Shoppers Drug Mart, it was a mature retailer that was generating lots of cash from 800 stores. When he left, there were more than 1,000 stores and sales and productivity were dramatically improved as they turned in 22 straight quarters of increasing revenues and per-share profits. So, we know the guy can get results. But, can a grocery store guy sell clothes?

In a word, yes.

The problem with GAP as I have claimed several times before is not it’s merchandise but it’s operations. Too many stores with the same merchandise competing against each other (GAP and Old Navy) for dollars and not enough investment in the brand that has the most value and growth in it, Bannana Republic.

GAP does not need someone who can come up with the latest style to lead them what they need is someone who can allocate capital smartly to get the most out of what GAP already has. In my first GAP post in March I detailed how minor changes could produce good return for shareholders almost immediately. I also like that he is going to pony up $2.5 million of his own cash to buy shares this week.

Murphy has a track record of succeeding in this area. “Murphy implemented several innovative changes including altering interior layouts, converting the in-store cosmetics area to a destination, and elevating product mix to include luxury labels,” Citigroup (C) said on Murphy’s performance at his previous role in upgrading the retailer to a “buy”

What to do? Based on his past record a gambler should buy shares. Those will a little less risk tolerance may want to wait and here what he has to say on the subject..

All in all, I think this will end up being a good move for GAP.

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Sherwin Williams Chart Analysis

I do not pretend to nor do I want to know how people come up with this stuff but it is interesting reading for you chart folks out there

Here it is