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Citigroup Turnaround Progressing

Much like a large ocean liner turns slowly, Citigroup’s (C) size determines that a turnaround at the banking giant will not be immediate. But, when you have consecutive quarters of year over year strong earnings growth for the fist time in recent memory, one must be encouraged.

International operations posted a 34% increase in earnings and “alternative investments ” (read: hedge fund operations) saw a 77% increase. Citi has made a huge push internationally the past two years and those efforts are now paying off in a major way. In thew recent quarter they closed the acquisition of Egg in the UK (credit card and online banking businesses) and Grupo Cuscatlan (Central American banking). Deals for the Bank of Overseas Chinese and Taiwan, of Bisys and of ATD are all businesses that will expand operations in high growth markets. Also they closed Old Lane early this month and managers Vikram Pandit and John Haven that come with the have a value that cannot be quantified. Most significantly, they now own 60% of Nikko Cordial in Japan in a deal that puts them in the forefront in that region. Roughly 1/3 of the international units growth came from acquisitions meaning that Citi is consistently picking winners.

The big negative and the reason for jittery investors selling shares? Credit costs rose to $934 million in the quarter, including a $259 million rise in credit losses and a $465 million charge to increase loan loss reserves. The $465 million net charge compares to a net reserve release of $210 million in the prior-year period, the company said. Simply put, credit losses are expected to mount…. no kidding. Bank after bank so far has reported the same thing so this should be no surprise. What this news means is that for the first time during his reign, CEO Chuck Prince was able to manage the business to it’s best quarter ever during a tough time. Since we are so worried about load losses, let’s look closer at the same quarter last year. Last year Citi released $210 million from loss reserves that help earnings and this year added $465 to them. That is a cool $675 million swing to earnings or a additional 12% earnings from operations in 2007 over 2006 when these items are backed out. That is significant because it means that when US credit improves and yes it will, Citi is sitting pretty with it’s international operations to really boost earnings.

The consumer unit experienced a 15% earnings decrease and again, this was not totally unexpected. It was pointed out that they are opening up new locations at a “very healthy clip” and this will negatively impact earnings for that segment until those locations are up and running.

Citi is also still cutting costs and said they were “less than halfway” through the $2.3 billion they anticipate saving this year through staff reductions and IT improvements. The reductions to date have finally lead to operations leverage improvements as witness by Q2’s revenue increase of 20% vs cost increases of 16%.

Where does all this leave us? Citi finally seems to be being “managed” and is producing results. It will not happen overnight but I do not have a problem getting paid a rock solid 4.2% by them to wait. T think the street is waiting for confirmation of a turnaround and another strong quarter or two should do the trick and get shares that trade at only 12 times earnings running.

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"Fast Money" Picks for Tuesday

Here are Tuesday’s picks and Monday’s results

Jeff Macke likes Microsoft (MSFT).Open $31.19

Pete Najarian prefers Sterlite Industries India Limited (SLT). Open $17.97

Guy Adami recommends American Express (AXP).Open $64.66

Eric Bolling says keep an eye on Google (GOOG) Open $512.51 and recommends owning IBM (IBM) Open $116.38

Monday’s Results

Jeff Macke told investors to add to their position in Microsoft (MSFT) Open $31.16 Close $31.19 Gain $.03

Pete Najarian recommended Clorox (CLX) on recent options volume. Open $63.90 Close $64.87 Gain $.97

Jon Najarian liked Zimmer Holdings (ZMH), Open $88.08 Close $89.39 Gain $1.31 as well as Rowan (RDC) Open $44 Close $45.70 Gain $1.70

Tim Seymour preferred buying Stillwater Mining Company (SWC) Open $11.25 Close $10.91 Loss $.34

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= 7-5 Gain $30.56
Bolling= 6-6 Loss $5.46
John Najarian= 13-3 Gain $15.54
Macke= 14-7 Gain $6.25
Pete Najarian=4-0 Gain $21.17
Seymore= 1-1 Gain $.01
Finerman= 1-2 Gain $.68

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Sears: A Look Back At The Merger Announcement

With all the clatter out there about Sears Holdings (SHLD) results and the frustration out there a look back is necessary. I was emailed a copy of the press conference announcing the merger of Kmart and Sears by the blog “Concentrated Value” and it was very revealing given what has transpired since and what may happen down the road.

Lampert on Earnings:

“And given the large ownership that we will have on the Board, we will be able, similar to what Kmart has been able to do for the last couple of years, we will be able to manage the business strategically and for the long-term without having to worry about figuring out how to make monthly same-store sales, hit a specific target, and without giving any type of quarterly earnings guidance and then trying to manage the business to that guidance. We understand the potential for the combination. We’re going to manage to the potential, and we’re not going to manage to try to generate sort of steady progress. It’s going to be probably lumpy progress over time.

Lampert On Real Estate Value
” I don’t think any retailer should aspire to have its real estate be worth more than its operating business. There’s been a lot of speculation about real estate strategy, real estate value, and I think that there is some truth to the notion that there are certain retailers whose real estate is worth more than its operating business. I think while that may have been true at Kmart at one point in time, we’ve worked very, very hard to improve the profitability of each of our stores and to make those stores worth a lot more as an operating business than as real estate. The more money the store makes, the more valuable they are as operating businesses, and that’s something that I think the combined company can do very, very well.

To the extent that we have stores that can produce the type of profit that we’re looking for, we would have to consider other alternatives. I think well-run retailers over time should be able to earn a 10 percent EBITDA to sales ratio. I think when you look at Home Depot, you look at Target, you look at The Gap, they all achieve that metric. And again, that’s not something we think that we’re going to be able to do anytime soon, but that’s something that we’re going to work towards. We’re going to work towards best-in-class financial metrics and best-in-class customer metrics.”

Lewis on Cost Savings
“Savings we expect to be fully realized by the end of the third year. We expect this transaction to be accretive in the first year, excluding some onetime costs”

Lampert responding to the comment: Beyond doubling the synergies here, you are not just doubling the challenges also; taking 2 admittedly weaker retailers and just increasing the challenges that both of them face in one larger perhaps weaker retailer entity?

“You made the sure statement that you’re talking about 2 weaker retailers, and I would say that there is probably unanimity of opinion that that’s the perception of the 2 companies. My perception of Sears is that in terms of the Sears experience, the Sears service, and certainly the Sears products, they’re every bit as good as any of its competition. The problem is they are not where the customers are, and that’s the big opportunity. It is not that the retailer per se is weak, but if you have the greatest store and it’s not near where the customers are, that’s a problem. So I think Sears has a very, very different problem in a sense, or had a different problem than Kmart had. So I think that it’s a pretty substantial opportunity to simply bring Sears experience and the Sears product closer where, by the way, Home Depot, Best Buy, Lowe’s, Target, Wal-Mart, that is where they are building, that’s where they’re growing. We’re there. We know it because they seem to want to open stores near us, meaning Kmart, because we are perceived as a weak competitor.

In effect, Sears in a Kmart box in that same environment ought to do very, very well. So that’s the presumption; we’ve got to make it happen. So I think that is really the answer to the first question. In terms of cross-merchandising, we’re going to try all different types of things, and I think that we have the ability because we have such a large store base to experiment. And we’re going to get some things right and we’re going to get some things wrong. But we’re going to have a flexible culture, and with a flexible culture, we’re going to correct our mistakes quickly and move onto something else.”

Lampert on Capital Allocation

“I would say that in terms of capital allocation, I mean that is something that I think that this company will do very, very well. It is great to have internal opportunities where you could actually take the free cash flow and invest it in the business. We have a very significant opportunity, whether it is converting the Kmart stores to Sears, whether it is converting the Kmart stores to a better version of a Kmart store. But we are going to have very strict return on capital requirements, and we’re going to want to allocate the capital to where the best — where it is best used. And if the best use is to repurchase shares, we’re going to look at that. If it is to build new stores, we’re going to look at that.

I think it is important that at least through the transition period, we have a very, very strong balance sheet. And I think that Kmart went through a period where it had a weak balance sheet, and we basically built up sort of undeniable financial strength. I think once Sears sold the credit card business, its balance sheet was very, very significantly strengthened. And I think on a combined basis, you look at the combined cash flow, we feel obviously very comfortable with where we’re coming out of the box. But I do think that at different stages of opportunity, you have different capital structures, and it is something that I think we will critically review on an ongoing basis.”

So, where are we? Lampert and Lewis are managing the business exactly as they said they would just over two years ago. Lampert anticipated a bumpy earnings ride and it has been, he promised balance sheet improvement as a priority and has accomplished that, they also said they had no set idea as to merchandise and was going to try various ideas and are doing it. Notice no mention of the Land’s End expansion currently underway and this illustrates they are flexible and still looking at ways to improve and coming up with new ideas.

All in all, the plan is being executed as initially proposed. It seems the first two years were being spent fixing the financial mess the two separate retailers were in and now we are onto the sales end. That this stage of the plan has coincided with the housing bust and it’s corresponding effect on all retailers like Home Depot (HD), Target (TGT), Lowes (LOW) and Macy’s (M). It does also mean that other retailers will get cheaper and may mean that Lampert may choose to invest the cash in another retailer rather than build new stores from scratch.

Either way, it will be exciting

Now, the recent stock activity. Take a look at a long term chart of Sears Holdings here. The summers of 2004, 2005 and 2006 all saw large percentage share price declines of 15%, 26% and 15% respectively followed buy large run ups and no, same store sales were not increasing back then either. This current one is a great buying opportunity as shares are off 26% from their all time high, just like 2005. Let’s call it the “Annual Sears Summer Stock Sale Event”
s

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Today’s 52 Week Lows

Here are today’s 52 week lows. home builders all hit new lows today, I just am sick of putting them down everyday. If you own them, assume they hit a new low today and will again tomorrow.

TRMP Trump Entertainment Resorts Inc
TRB Tribune Company
WB Wachovia Corp
SHFL Shuffle Master Inc
SEPR Sepracor Inc
PLCE Childrens Place
PKTR Packeteer Inc
PHM Pulte Homes Inc
PFK Prudential Financial Inc
NFLX Netflix, Inc
JOE St. Joe Company
HSY Hershey Foods Corporation
CC Circuit City Stores

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Dow Chemical Enters Bio-plastics In Yet Another JV

Just in case anyone thought DOW Chemical CEO Andrew Liveris might rest after the flurry of deals he has announced to date this year, think again. Dow (DOW), the world’s largest producer of polyethylene, and Crystalsev, one of Brazil’s largest ethanol players announced plans for a world-scale facility to manufacture polyethylene from sugar cane. Polyethylene is the most widely used of all plastics and can be found in all manner of everyday products, from food packaging, milk jugs and plastic containers to pipes and liners.

Under the terms, Dow and Crystalsev will form a joint venture in Brazil to design and build the first integrated facility of its scale in the world. It is expected to start production in 2011 and will have a capacity of 350,000 metric tons. The venture will combine Dow’s leading position in polyethylene with Crystalsev’s know-how and experience in ethanol to meet the needs of Dow’s customers in Brazil and what will likely be international interest. “Meet the needs of Dow’s customers in Brazil.” This is huge. Rather than producing plastic from petroleum and shipping it to Brazil like it does now, Dow will produce it there for pennies and sell it locally to the same people.

Crystalsev is a 100% Brazilian group that commercializes products made from sugar cane through three areas: providing of services to mills; commercialization of sugar and alcohol; and trading – purchase, resale and management of assets. The Group produces 1.8 million tons of sugar, which corresponds to 8% of all sugar manufactured in Brazil, and employs 30,000 people. Crystalsev operates in several regions in the country through 13 companies that, together, form the second major producer of sugar cane in Brazil.

The new facility will use ethanol derived from sugar cane, an renewable feedstock, to produce ethylene, the raw material required to make polyethylene. Ethylene is traditionally produced using either naphtha or natural gas liquids, both of which are petroleum products. It is estimated that the new process will produce significantly less CO2 compared to the traditional polyethylene manufacturing process.

Now, this brings up a few questions. Since Dow will be using ethanol, will they eventually branch into ethanol production in Brazil? Will they export some of the ethanol when the market dictates to the US duty free? ADM is actively looking for a Brazilian partner for ethanol production, will this joint venture possibly lead to a ADM, Dow venture? The possibilities here are endless.

Let’s look at future earnings. The end of this decade should bring in significant, prolonged earnings from the Saudi joint venture, the China project, this Brazilian one and the Lybian venture announced earlier. All these have been announced in just the past 4 months and they will not only bring in additional earnings, they will do so while dramatically decreasing and stabilizing input costs, currently Dow largest wild-card in relation to earnings. In his last letter to shareholders Liveris claimed 2007 would “be a significant year” in the history of Dow.

So far, so good and we are only 1/2 way through.

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Sherwin Williams On A Roll

The lead paint discussion now a days does not even merit the attention of CEO Chris Connor as it’s brief 3 sentence mention was relegated to the PR dept. Good, too much was made of it anyway from the beginning.

As always, SHW delivered consistent results and based on the stock price action, (up 8%) not too many folks had realized that Sherwin was a global company that did not just sell paint to the US housing market. With housing retailers like home Depot (HD) and Lowes (LOW) suffering, the consensus was that Sherwin would also. Yet another reason to ignore the “consensus”.

Highlights:
– Raised expectations for diluted net income per common share for the year to a range of $4.60 to $4.70 per share compared to $4.19 per share last year.
– Paint Stores segment opened 13 new stores, bringing the total new stores for the first half of the year to 30. At this pace, they remain on track to open around 100 net new stores during the year.
– Commitment to control distribution as planned it in the past extends beyond North America.
– Global Group additionally opened nine new stores and branches during the quarter including the 131 MAB stores reopened or acquired, the total of 153 stores during the second quarter and that brings year-to-date total to 180 additional stores
– Cash flow up $46 million to $349 million and bought back 1.3 million shares and has 88 million shares authorized under the current plan
– Declared an 31.5 cent dividend that will increase to 35.25 cents a share next year if the $4.70 guidance is achieved.
– Closed the MA Bruder deal

All in all a great quarter. Can you imagine what they would have done had the US housing market not been in a slump? If you have not been in a Sherwin paint store, they are great and are popping up all over the place. This is a great way to access the DIY crowd and based on results, it is working.

The real story with Sherwin is the overseas operations. With each quarter that passes, the expansion there decreases the impact of the US housing market and turns Sherwin into more of a global player rather that a regional one. Estimates going forward need to take this into account. ValuePlays has been stumping this fact since January and hopefully this quarters results may have convinced more people out there. The key will be the Nitco paints acquisition as, according th CEO Connnor “Nitco Paints is a leading manufacturer and distributor of exterior specialty paints and coatings headquartered in Mumbai, India. Although, a relatively small in total revenues today, Nitco will provide us with the platform in which to grow our presence in the dynamic and growing Indian market.”

Sherwin will grow abroad through transaction like Nitco and it will be come the dominant player in that area of the world. There is no reason to stop trusting Connor now..

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Altria: Earnings and Some Interesting Comments

Dinny Divetre opened the Altria (MO) earnings call by saying “As mentioned earlier, my remarks today will focus on our quarterly results. I will not be addressing specific actions Altria may take going forward to further enhance shareholder value except to repeat what I said last quarter.

He continued, “We remain as committed as ever to meaningfully enhance long term shareholder value. We continue to carefully and diligently examine the benefits of a spin-off of Philip Morris International and other possible value enhancing options to decide the optimal long-term strategic course to follow. And once a decision has been made, we will promptly communicate it.”

Okay, we won’t ask. Earning were about as expected, up 5% after charges related to the NC plant closing. Altria purchased another 30% of a Mexican cigarette maker in a deal valued at $1.1 billion, brining it’s stake to 80% and adding $.30 a share to earnings once it closes. The rest of the stuff was rather vanilla until the Q&A.

Q: “It will take some time before Marlboro Snus will really have a meaningful impact on your EPS. So, would it be fair to say that over the near term, we may hear from Philip Morris more news in terms of the adjacency strategies that will make a more meaningful impact on the EPS and also would some of these adjacency strategies be suitable to be exported to other markets, let’s say Western Europe which demonstrates today many of the same trends as we are seeing in the US market.”

A: “Well, we have announced or PM USA rather has announced that it is going to progress with its adjacency strategy and going to go further into the smokeless category. So I think, you can expect further news from Philip Morris USA. As far as the prospects for Snus you’re right, this is a new category and that’s why we are going to go about it very carefully and cautiously and that’s why we are doing this test — we did the test market with Taboka. We learned a lot. We are using many of those lessons in the introduction of Marlboro Snus. And now we will gradually step this up and you can expect more news from us in the future”

Meaning? I would look towards more acquisitions or large investments in existing makers for Altria. They have a huge cash hoard and a painfully under leveraged balance sheet. There is no tobacco related investment out of their reach.

Q: ” Speaking of Snus and smokeless, certainly there is a shift, and depending on what happens with the federal excise tax increase, which certainly will also include other tobacco products. It’s going to depend on the gap. It’s going to depend on how all the manufacturers handle it. If it occurs, where do you see your portfolio makeup in terms of, as you look out the next 5-10 years and I am thinking specifically PM USA? If you use just the first sort of step into smokeless, would you expand like you said into other tobacco products? Do you feel that will become a larger and larger stake of your overall portfolio into a less (inaudible) top-line.”

A: “Philip Morris USA has announced and said many times in the past, they are committed to their adjacency strategy that covers a wide range of non-cigarette products. And if these are successful which we hope they will be, then obviously these products will make up a larger part of the business than they do today. The question remains. Which are going to be successful? Which are not going to be successful? And it’s impossible to predict but I would venture to say that, five years from now certainly non-cigarette products will make up a meaningful proportion of the Philip Morris USA product mix.”

Commenting on more potential M&A, Devitre said “there are always going to be M&A opportunities out there and there are opportunities out there today, but there are many business development opportunities out there today and we just showed you one with our acquisition of 30% of our Mexican business, so there are many opportunities like that. There are also free standing M&A opportunities..”

Clearly two things are happening. First, Altria some how, some way is going to get into the smokeless tobacco business and second, mergers or acquisitions are in their future. It is clear that the Altria we know to day and the Altria we will be holding shares of years from now will be a dramatically different company.

As for the PMI spin? We will wait patiently for the August 29th board meeting for an announcement or at the very least dividend or buyback news…

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Wal-Mart Making More Apparel Moves

Wal-Mart (WMT) said Friday that a high level apparel executive resigned after the transition to more trendy items from low-priced basics failed to do anything for clothing sales. Claire Watts, executive vice president of apparel merchandising, stepped down Thursday to “pursue other interests,” said Sarah Clark, a spokeswoman for the world’s largest retailer. Yeah, “other interests” like “looking for a new job”.

Promoted along with the company’s move to relocate clothing operations to NYC was GAP veteran Dottie Mattison, formerly chief merchant for Walmart.com. She will oversee women’s apparel, jewelry, shoes and accessories as well as product development. Let’s honest, even if she only manages to bring the apparel offering at Wal-Mart to average, it will be a huge plus for earnings. As it stands now other retailers like Target (TGT), Macy’s (M), Sears Holdings (SHLD) and JC Pennys (JCP) are miles ahead of Wal-Mart.

Many people, including yours truly feel the changes are due to pressure from Allen Questrom has suggested them since joining the board in early June. Questrom was chairman and chief executive of J.C. Penney Co. from 2000 to December 2004. Now, JC Penny has been a great turnaround story so let’s let a guy who was there for the genesis of it make some suggestions, like I said before, can they do any worse?

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Today’s Early Analyst Calls

Here are today’s early analyst calls

UPGRADES

HSBC Holdings HBC Lehman Brothers Equal-weight » Overweight
Navteq NVT UBS Neutral » Buy
Progress Energy PGN Robert W. Baird Neutral » Outperform
Piedmont PNY Robert W. Baird Neutral » Outperform
FPL Group FPL Robert W. Baird Neutral » Outperform
Anheuser-Busch BUD Citigroup Sell » Hold
Amgen AMGN Citigroup Sell » Hold
AFLAC AFL Lehman Brothers Underweight » Overweight

DOWNGRADES

Transalta TAC CIBC Wrld Mkts Sector Outperform » Sector Perform
Great A&P Tea GAP CIBC Wrld Mkts Sector Outperform » Sector Perform
Assoc Banc-Corp ASBC Lehman Brothers Equal-weight » Underweight
Ventana Medical VMSI RBC Capital Mkts Outperform » Sector Perform

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"Fast money " Picks for Monday

Here are the picks for Monday.

Jeff Macke tells investors to add to their position in Microsoft (MSFT) Open $31.16

Pete Najarian recommends Clorox (CLX) on recent options volume. open $61.90

Jon Najarian likes Zimmer Holdings (ZMH), Open $88.08 as well as Rowan (RDC) Open $44

Tim Seymour prefers buying Stillwater Mining Company (SWC) Open $11.25

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= 7-5 Gain $30.56
Bolling= 6-6 Loss $5.46
John Najarian= 11-3 Gain $12.53
Macke= 13-7 Gain $6.22
Pete Najarian=3-0 Gain $20.20
Seymore= 1-0 Gain $.35
Finerman= 1-2 Gain $.68

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This Weeks Dividend Increases

Here are the payment increases for the past week

Renaissanse Learning Systems (RLRN)= 40%

Burlington Northern (BNI)= 28%

Fannie Mae (FNM)= 25%

M&T Bank (MTB)= 16.7%

Commonwealth Bankshares (CWBS)= 16.7%

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This Weeks Insider buys

Here are the insider purchases for the past week

Opko Health (OPK)= $5,308,000

Equity One(EQY)= $3,109,000

Chelsea Therapeutics (CHTP)= $2,671,000

Environmental Tectronics (ETC)= $2,228,000

Allied Nevada Gold (ANV)= $2,217,000

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Notable Dividend Hikes

Here are the notable boosts for the week ending July 15th.

Paychex (PAYX)= 43%

Cummins (CMI)= 39%

Walgreens (WAG)= 23%

Timberland Bancorp (TSBK)= 11%

Bank of NY (BK)= 9%

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Recent Insider Buys

Here are the notable insider buys for the week ending July 15th.

Hudson Technologies (HDSN)= $10,186,000

Management Capital Investments (MGT)= $5,000,000

Books A Million (BAMM)= $1,985,000

Amicus Therapeutics (FOLD)= 1,892,000

Liberty Media (LCAPA)= $1,764,000

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Sprint Customer Service Still Sucks

So here I am on vacation and I brought my laptop so if the mood hit me I could whip out a post or two. One problem, I cannot access the internet with my PCS card. No problem I think, I will just call Sprint (S) customer service and they will help me out.

DUH!!! This is Sprint we are talking about. For two days now I have either been on eternal hold or told "we cannot take your call at this time" by the computer that answers the phone. I never thought I would be relived to get blown off by a robot, at least it saves my wireless minutes.

These guys just do not get it. "Customer" should not be a four letter word and I am really not the enemy.

Now we are going to have to talk about refunds if they ever take my call.

I think the customers Sprint "fired" last week may just may up being the lucky ones.

Todd Sullivan

Sent from my BlackBerry® wireless device