ValuePlays

Here are the most read stories for the month of March:

1. The ValuePlays Portfolio
2. Sherwin Williams- No Lead Threat
3. Ethanol: Debunking A Few Myths
4. Taking “A Leap”
5. Housing: Enough Already!

Site traffic surged again this past month as subscribers rose 50% and daily traffic jumped 78% for the month (140% the past 2 weeks). Keep forwarding the daily email to family and friends and encourage them to sign up themselves, the more of us there are the better for all of us.

• I have added an email link on the main page. Feel free to email me thoughts and ideas for stocks or general investing. I do not always get a chance to review the comments on a post and if you are commenting on something that was posted days ago, chances are I may not get to it. Enhanced Features Subscribers always get top priority but I will try to get to all of you. As the numbers of site visitors grow each day the delay here may become longer. Do yourself a favor, just buy the subscription for $6.99 a month and guarantee a fast reply. Think of it this way, if you had bought just 10 shares of each stock I recommended when I recommended it, you would have paid for 41 months of the subscription already. It really is a no brainer.
• Criticism and /or complaints are welcome also just, keep them constructive. I can promise insulting or otherwise inappropriate emails to me or other “commenters” will be deleted immediately and the email address blocked. If you are so inclined to send one, make it a good one because it will be the last.
• I am always looking for way to better the site and frequent visitors at times have noticed some odd things as I learn programing code “on the fly” as they say. Feel free to email any ideas to me. I cannot promise I will act on them but they will be considered. Any legitimate suggestion to better your experience on the site will get serious consideration.
• Stock or investing ideas are welcome and may be used in a future post. For your privacy, your email address will not (unless you want it to be).

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Since the US crop report is coming out in 15 minutes this morning at 8:30 am, I though I should comment on it since I have been both an advocate and investor in renewable fuel for quite some time through Archer Daniels Midland (ADM). First things first, the crop report. Estimates for corn are an increase of 10 million acres for a total of 88 million acres being planted. My estimate is a minimum of 90 million acres. People for far too long have underestimated both the US farmer and the ethanol industries desire and ability to make ethanol a staple fuel source. Things begin to really change this summer. $4 a gallon gas will be reached and this will be the summer consumers finally have had enough and start to rise up in chorus to demand more ethanol at their pumps.

Currently ethanol is blended in 3% of gas in the US. We could up that number to 10% and need no modifications to any vehicle on the road. Million of people are driving E85 capable vehicles and are not even aware of it. My 2005 Suburban bought in Massachusetts for example, can run on E85 and I would be using it were it available. I would, and ever study done to date has confirmed that people would be willing to pay more for a home grown fuel than for gas from oil from the middle east.

The renewable fuels standard President bush signed in 2005 called for refiners to use 4.7 billions gallon of ethanol by the end of 2007 and it increases gradually to 7.4 billion gallon by 2012. Many ethanol critics use this as proof that were it not for the mandate, ethanol would not be used. To illustrate why this is false one must consider that in 2006, 4.8 billion gallons were produced for a demand of 5.3 billion gallons. Were the mandate the only reason for ethanol demand, these numbers would not exist. By the end of 2008 a minimum of 8 billion gallons will be available and no slackening in demand is seen. Why? Ethanol extends gas supplies and keeps the cost of gas down. Demand for E85 in the Midwest cannot be met. In short, famrers and the ethanol industry have made the “required standard” irrelevant.

Has there ever been a product that the majority of Americans wanted that business did not find a way to produce affordably and in quantites to satisfy them? I can’t think of any either….Do not ever bet against American ingenuity

Here are some more ethanol tidbits:

FACT: In 2005, the ethanol industry supported the creation of more than 153,725 jobs in all sectors of the U.S. economy, boosting U.S. household income by $5.7 billion.

Ethanol industry operations and spending for new construction added $1.9 billion of tax revenue for the Federal government and $1.6 billion for state and local governments. And the combination of spending for annual plant operations and capital spending for new plants under construction added more than $32.2 billion to gross output in the U.S. economy.

Source: Contribution of the U.S. Ethanol Industry to the Economy of the U.S. in 2005

FACT: By increasing the demand for corn, and thus raising corn prices, ethanol helps to lower federal farm program costs.

In 2004, USDA estimates ethanol production reduced farm program costs by $3.2 billion.

FACT: Ethanol refineries serve as local economic power houses. Click here for information on how a 50 and 100 million gallon ethanol refinery can benefit your community.

FACT: If ethanol were removed from the market, a shortfall would have to be made up from expensive imports.

Gasoline prices would increase 14.6% in the short term (36.5 cpg if gas is $2.50/gal). Prices would increase 3.7% in the long term (9.25 cpg if gas is $2.50/gal) even after refiners built new capacity or secured additional sources of supply.

Source: LECG, LLC, May 2004

FACT: The federal ethanol program generates revenue for the U.S. Treasury.

The federal ethanol incentive, which is available to gasoline marketers and oil companies (not ethanol producers) as an incentive to blend their gasoline with clean, domestic, renewable ethanol, is a cost-effective program. It actually returns more revenue to the U.S. Treasury than it costs, due to increased wages and taxes and reduced unemployment benefits and farm program payments, while at the same time holding down the price of gasoline and helping the American farmer.

The federal ethanol program was established following the OPEC oil embargoes of the 1970s, which exposed our dangerous dependence on imported oil. As an alternative to petroleum, ethanol directly displaces imported oil and reduces tailpipe emissions while helping to bolster the domestic economy. Yet today we import more petroleum than ever before. With rising crude oil prices and increasing international instability, incentives for production and use of domestic ethanol are critical.

We have subsidized the oil industry substantially since the early 1900s, and continue to do so. In fact, according to the General Accounting Office in an October 2000 report, the oil industry has received over $130 billion in tax incentives just in the past 30 years – dwarfing the roughly $11 billion provided for renewable fuels. During this time, U.S. oil production has fallen while annual U.S. ethanol production has grown dramatically.(GAO/RCED-00-301R)

Recently I have been corresponding with several readers about their holdings and and in the course of our conversations, I suggested to many of them that they enroll in a DRIP plan for a certain security. Many of them did not know what they were, how they worked or how they helped their investments. So naturally, when I have a bunch of folks asking the same question, it then becomes time for a post about it.

First things first: What is a DRIP plan? It is short for “dividend re-investment plan”. Now the next question you probably have is what does that mean? It means that instead of getting cash each time the company you have stock in pays a dividend, they give you more stock. What does this do for you? A couple of things

• It allows you to acquire more stock without paying brokerage fees (commissions)
• Keeps dividends in your account accruing, rather than being spent.
• Increases your return on the original investment at a greater rate than had you just received them in cash (more on this below).
• Dividends are only taxed at 15%, so compounding your returns via them vs. ordinary income reduces your tax burden.

Now, how does all this work? Lets go through an example. I will make it as simple as possible but as usual, please email me any questions. We are buying stock in ABC Corp. We buy 100 shares at $20 a share for a total investment of $2000. ABC pays an annual dividend of $1 a share (5%) that increases 10% annually. Now, for simplicity, lets assume that the price of ABC stock never changes for 10 years and stays the same as we bought it at, $20. This way we can measure the true effect of the DRIP plan.

After 10 years, the no-drip plan investment would have returned to you $1593.74 in dividends for a total return on your original $2000 investment of 79%, or a average of 7.9% annually.

Now, lets look at what a DRIP plan can do to those same results. Remember, we are now getting our dividends in stock, not cash. This means that our results are going to be compounded by the extra shares we will be receiving which we will then be receiving dividends on. I will go through the first few years and then extrapolate it out to the final result:

Year 1
Shares = 100
Dividend = $100 or 5 more shares ($100 divided by the $20 a share price)
Non-DRIP plan dividend= $100

Year 2
Shares= 105 (100 + 5 from year 1 dividend)
Dividend= $115 or 5.75 more shares ($115 divided by the $20 a share price)
Non-DRIP dividend = $110

Year 3
Shares = 110.75 (105 + 5.75)
Dividend= $134 or 6.7 more shares ($134 divided by the $20 a share price)
Non-DRIP dividend= $121

You can see that after only 3 years, because our dividends are buying us more shares, we are increasing our annual dividend over the no-drip holders. Lets fast forward to the end of the ten years and see where we end up

Year 10
Shares= 191.84
Dividend= $450 or 22.5 more shares
Non-DRIP dividend= $235.79

At the end of ten years, the DRIP plan has a total of 214.48 shares in the account. At the stable price of $20 a share, this brings the DRIP account value to $4,289.60 for a gain of 114% or 11.4% annually. This also means that the drip plan delivered a 48% greater return than the non DRIP plan.

Drips also have the advantage of protecting you if the stock price drops. Should the price of the stock drop, your drip plan is purchasing you MORE shares of the company. This is in a way an insurance policy.

Enrolling in a DRIP usually takes less that a minute. If you use a broker like E*trade, you can do it online without filling out a form. Just click and submit.

DRIP plans are an easy way to increase your returns without doing any extra work on your end. Remember, these results were accomplished without the price of the stock increasing a single penny!! Had it increases at all, the returns would have been magnified.

“I got the best deal that was available,” Patrick Lynch, RI Attorney General commenting on Lead Paint settlement with DuPont

“What makes this announcement so gratifying is that this money will go straight to cleaning up the mess”. Lynch commenting to press at announcement

“Just…..follow the money” Deep Throat, All The President’s Men


Have you ever turned over a compost pile? The more you dig and the deeper you get into it, the more it smells. I am getting the same whiff as I dig deeper into the Rhode Island Lead Paint litigation.

The first trial against lead paint manufacturers ended in a hung jury in 2002, before the start of the second trial, Patrick Lynch, Rhode Island’s Attorney General, announced that he settled the State’s claims against the DuPont Co. Interestingly,however, it appears that the settlement may not be a ‘‘settlement.’’ Both Lynch and DuPont (DD ) say the deal was not a legal settlement but simply an agreement. Because it is not a settlement, DuPont is not giving money to the state. In return for dropping DuPont from its lawsuit, DuPont agreed to donate $12.5 million to charity. Moreover, because it was not a ‘‘settlement,’’ Lynch’s private law firms had to agree to waive their customary attorneys’ fees. Specifically, the settlement requires DuPont to donate $9 million to the Children’s Health Forum, $1 million to Brown University and $2.5 Million to the Dana-Farber/Brigham and Women’s Cancer Center in Boston. Lynch’s office described the DuPont deal as a major victory for the state because at the time of the agreement, it was unclear whether Rhode Island would ever see a penny from the lawsuit that already had one trial end with a hung jury. At first blush, this settlement appears to be a reasonable deal for Rhode Island.

However, as the old saying goes, ‘‘the Devil is in the details’’– and those details came to light in 2006. At the time of the settlement, Attorney General Patrick Lynch described Children’s Health Forum (‘‘CHF’’) as a national nonprofit organization focused on preventing childhood exposure to lead. He failed to mention, however, that:

1. The Washington-based Children’s Health Forum was founded in 2002 by a lawyer hired by DuPont to work on lead poisoning issues.
2. It has received most of its funding from DuPont
3. Most of its board members have ties to DuPont.
4. CHF leases its office space from the Dewey Square Group, a high-powered Washington lobbying and public-affairs firm that DuPont uses as its consultant on ‘‘communications’’ issues, including lead paint.

If that was not enough, CHF’s executive director, Olivia Morgan, is a partner in the Dewey Square Group. Lynch’s spokesman claims that the attorney general did not know the group had a relationship with DuPont when he struck the deal, and DuPont is silent about whether it ever informed the attorney general about its relationship with CHF. While Lynch may have been ignorant about DuPont’s relationship with CHF, his chief of staff, Leonard Lopes, who sat in on talks with Du-Pont, was aware that there was a relationship between the two. Thus, $9 million of the $12.5 million ‘‘agreement’’ is being controlled by a Washington, D.C., based charitable group with extremely close ties to DuPont. Interestingly, there is no written agreement stating how CHF is to spend the DuPont donation.While CHF is supposed to dole the monies out to groups in Rhode Island, that apparently will seek it through an advisory commission set up by Lynch, CHF could arguably spend the money in any manner it chooses.

The International Mesothelioma Program at Brigham and Women’s Hospital.

Although DuPont was unwilling to allow any money to be used as attorneys’ fees, it was willing to donate an equivalent amount ($2.5 million) to charity and asked Lynch to identify which charity he wanted to receive the money. Instead of deciding which Rhode Island charity should benefit from the $2.5 million DuPont gift, Lynch asked Jack McConnell (Motley Rice’s lead lawyer in the lead-paint case) if he had a favorite charity. Mr. McConnell identified the International Mesothelioma Program at Brigham and Women’s Hospital in Boston, Massachusetts. Lynch honored Motley Rice’s request and told DuPont to make the gift to that program. As a result, the money is not going to a Rhode Island hospital, it is going to a Boston hospital. Moreover, mesothelioma is not related to any lead-based health hazard. Mesothelioma is a deadly cancer of the tissue surrounding the lungs that is caused by exposure to asbestos. Hence, millions of dollars generated by resolution of claims against a major defendant in a “Rhode Island public nuisance case involving lead are going to a Massachusetts program that addresses asbestos related illnesses.

How such a diversion serves the public interest or benefits the public health of Rhode Island citizens is an unfathomable mystery. Motley Rice identified that charity because when the law firm joined the executive advisory board of the International Mesothelioma Program, it made a $3 million pledge to the program; a pledge that could be funded with monies raised from other sources, as opposed to a check written by the law firm or its lawyers. Thus,while Motley Rice agreed to waive its attorneys’ fees, it saw no problem with using equivalent monies to fund the majority of the firm’s financial obligation to the mesothelioma program. Motley Rice, however, is not the only law firm wanting monies to go to this program. It turns out that another law firm Lynch hired to serve as co-counsel on this case — Thornton & Naumes — also sits on the board of the mesothelioma program and also has a $3-million pledge to the same program. Neil Leifer, a Thornton & Naumes lawyer who worked on the lead case, said it ‘‘seems reasonable’’ that his firm should also receive a credit toward its $3 million pledge to Brigham and Women’s.

Both Motley Rice and Thornton & Naumes attempt to justify the monies being used to settle their pledges because they both waived their legal fees associated with the Rhode Island case. Donald A. Migliori, an attorney with Motley Rice, told the press that: ‘‘[w]e’tr not ashamed – this money isn’t going to pay our legal fees.; Our law firm’s work in asbestos litigation over the years has enabled us to finance the lead-paint litigation for the past nine years.’’Neil Leifer echoed a similar sentiment when he said it ‘‘seems reasonable’’ that his firm’s share of the waived legal fee should be credited toward the $3 million that it has pledged to Brigham and Women’s. ‘‘I’m not sure why it would be inappropriate.’’Some people, however, see things a bit differently. Leonard Decof, one of the state’s original lawyers in the lead-paint case, argues that $2.5 million is a‘‘de facto’’ legal fee, and that he is therefore entitled to a portion of this money for his past services. At this time, it is not certain whether any of the $2.5 million DuPont gift will be credited toward Motley Rice’s $3-million pledge. A spokesman for Brigham and Women’s said hospital officials have had no conversations with Motley Rice about whether the $2.5 million from DuPont will be credited toward the law firm’s pledge. According to DuPont’s spokeswoman, the company was not aware of Motley Rice’s ties to the mesothelioma program, but simply agreed to donate the $2.5 million to Brigham and Women’s as the charity designated by Lynch. DuPont has released a statement saying that it ‘‘has instructed the hospital that its payment should not be credited to any pledge or obligation of Mr. McConnell, his law firm, or any other entity.’’

The basis of tort law is the compensation of victims for wrongs committed against them. Everyday thousands of plaintiffs lawyers across the country fight for their clients. These are real people with real injuries. These lawyers do us all a service in that they assure our workplaces are safer, drivers exercise more caution, environmental laws are followed, the products we consume are made as safe as possible and when we are injured through the preventable negligence of others, we are compensated. Across our country each day people who’s lives would be ruined and left penniless due to injuries caused by another have it essentially saved by a plaintiffs lawyer fighting for them and assuring that those responsible are not allowed to just walk away from their actions. You cannot fully appreciate the service these honest people perform until the day comes you are lying in a hospital bed, unable to work and provide for your family because of the careless actions of another and your lawyer prevents your total financial destitution. The Rhode Island lead paint litigation encompasses none of these scenarios and in one fell swoop tarnishes the situations of all tort victims. The genesis of the RI legal action was the “harmful effects of lead on the children of Rhode Island”. Yet when an “agreement” or “settlement” with a manufacturer is reached, not only does this money evade managing to find its way to the hands of these alleged “victims”, 92% of it does not even stay in the state of RI, and what did manage to stay there went to a private university, Brown (why not a public one like URI?) for research, not clean up efforts. The Brown University website makes no mention of the funds.

Recently, Lynch commented: “today’s ruling has enormously positive ramifications on the health, safety, and welfare of Rhode Island’s children.” It is a great sound bite, if only it were true. I am sure this is not the result the people of RI hoped for when they read about the settlement in the newspapers. Where is the voter outrage in RI? Do they enjoy being duped? Why aren’t they demanding the money be returned to Rhode Island? I have been unable, despite Mr. Lynch’s claims, to find any evidence that any of this money has actually been used to clean up a single Rhode Island home.

I was recently sent what I consider to be the most comprehensive lead paint analysis to date. Please read it here. It should also be noted portions of this post were taken from that report. A very interesting part is a section showing where lead currently exists in our lives and how that may be poisoning the children of Rhode Island, not paint.

Recently shareholders of corporation have become very aggressive legally with those inside the company who, through questionable or dubious actions, destroy shareholder value. It is time that we at Sherwin-Williams (SHW) get as equally aggressive with those outside the company. Let’s take the bull by the horns here. If not the state of RI, then the AG or theirlaw-firm, Motley Rice. Time to go on offense. I for one am getting sick of being on defense all day.

An interesting comment from a Wall St. insider in Jane Genova’s blog Law and More: …”damages from an unconstitutional act such as a contingency-based-lawsuit can be addressed to the plaintiff firm of Motley Rice and to possible Rhode Island parties who deemed to benefit. This could be highly likely given the possible missteps of Rhode Island Attorney General Patrick Lynch in what I perceive as alleged preferential treatment of DuPont. I will add this: The state of Rhode Island has a major hurdle to get past the contingency issue. From that, there could well be an onslaught of litigation directed at Attorney General Patrick Lynch and the plaintiff law firm of Motley Rice.”

“Okay, pork belly prices have been dropping all morning, which means that everybody is waiting for it to hit rock bottom, so they can buy low. Which means that the people who own the pork belly contracts are saying, “Hey, we’re losing all our damn money, and Christmas is around the corner, and I ain’t gonna have no money to buy my son the G.I. Joe with the kung-fu grip! And my wife ain’t gonna f… my wife ain’t gonna make love to me if I got no money!” So they’re panicking right now, they’re screaming “SELL! SELL!” to get out before the price keeps dropping. They’re panicking out there right now, I can feel it.” Eddie Murphy, Trading Places

First let me apologize. In a previous post I stated I would not comment on housing anymore after “my initial” post. Conditions, however, force me to go back on my word. This must be done for a few reasons. First, I have received a host of emails from readers on the subject and do feel obligated to address them lest they think they are being ignored and second, I seem to be the only person who is not in the process of packing up my family, withdrawing all our cash from the bank, gathering whatever canned goods we can scrounge up and heading to the hills incoherently stammering like Hunter Thompson in some bizarre Y2K panic induced flashback.

Are you surprised?
Housing has been on a tear for the last decade. Before the last year and a half, things became insane. It is relatively easy to spot the beginning of the end in a bubble when you are not wrapped up in it. During the tech bubble in 1999-2000 when any mammal with an opposable thumb and a mouse could make money, that moment was arrived at when novel little things like earnings were no longer important and took a back seat to revenue growth, “website hits” and “click through” metrics. It was a time when a company could actually report quarterly numbers, have increasing losses, mounting debt, but because revenue and other internet traffic metrics grew, its stock would explode to the upside. The inevitable happened, people realized if a company is not able to earn a profit, or even demonstrate a realistic plan of how they might, it really is not worth $144 a share and the prices of these stocks then fell off a cliff. You also had prices of stocks in companies like Home Depot (HD) and Coke (KO) included by the frothing hoards in this mania. These were companies who actually had earnings, but were growing them at rates in the teens who were selling at 50 times those earnings. These companies, caught up in the euphoric irrationality of the millennium also suffered as people then realized that while these companies were actually able to earn a profit, paying 50 times them for companies who make screwdrivers and Coke had the same effect as getting married in Vegas after a weekend of drinking screwdrivers and doing coke. Both decisions in retrospect left people wondering what the hell they were thinking. The answer? They weren’t.

Enter housing. With people petrified of stocks and interest rates obscenely low, they poured money into housing. Predictably, prices soared. For a real example. My wife and I bought out first house in 1997 after we were married. We paid $107,000 for it and put about $20,000 of cosmetic changes into it (painting, some updated wiring and insulation). Three years later we sold it for $285,000. Our second house was bought for $117,000 and comped out 4 years later for $368,000. There is no logical reason for this. When we bought both houses they “comped” out similar to other houses in the area so we were not the recipients of an unusual bargain and when we sold them, similar “comps” applied so the buyers did not get “ripped off” compared to what other buyers were paying. The market was just clearly running as all buyers were paying these prices, the buyers and sellers were not insane, the market was. So when did the seams begin to come apart? Two words:

No Documentation
You really have to read this stuff to get an understanding of why the market ran up and why lenders are now in trouble. This is from Lending Tree.com:

There are three main categories of no-documentation mortgages:

1. NINA (no income, no asset) mortgages
How to qualify: NINA mortgages come the closest to being truly no-documentation loans. When you apply for one, you won’t need to supply information about your income, employment or assets. All the lender will check is your credit score and the assessed value of the property.
Interest rate: Because the lender is going on so little, your credit score needs to be very high to obtain this type of mortgage. If you are approved, your score will be a big factor in setting the interest rate, which will typically be 1 to 1.5 percent higher than a traditional mortgage, but may be as much as 3 percent higher.
Who it may be right for: People with excellent credit who do not want to disclose the details of their holdings; people who rigorously guard their privacy.

2. No-ratio mortgages
How to qualify: With a no-ratio mortgage you don’t need to declare your income, so a lender can’t calculate your debt-to-income ratio (your monthly loan payments divided by your monthly income — a ratio lenders usually prefer to remain below 36 percent). Lenders will still require other documentation, however, such as assets, other debts and employment. They’ll often require that you’ve been in the same job for two years.
Interest rate: You’ll pay a higher rate than you would for a traditional loan, but not as high as with a NINA.
Who it may be right for: People who would have difficulty obtaining a traditional mortgage because of their high debt-to-income ratio; people who have income that is difficult to verify.

3. Stated-income mortgages
How to qualify: With a stated-income mortgage, you do not need to prove your income with pay stubs or W2 forms. You must be able to document the nature of your employment (again, two years in the same job is usually required), but you can simply declare an income level that is reasonable for your line of work.
Interest rate: Because you supply other documentation and will be able to show a healthy debt-to-income ratio, this type of mortgage carries only a slightly higher rate than a traditional loan. About half a percent is typical, though it varies with other factors such as credit score, the size of the down payment and how stable your income is.
Who it may be right for: Borrowers who have a good income but find it hard to prove, such as self-employed people with a lot of tax write-offs, or people who earn much of their income in cash or tips.

What is shocking is the justifications they give for those who these loans “may be right for”. You are buying a house, you are borrowing money from a bank to do so. The expectation is that you will need to have money to put down on it and actually be able to demonstrate an ability to pay the bank back. The phrase “take my word for it” should never enter the conversation. It did though and that is the genesis of the current situation. When buying a $500,000 house involved less paperwork than buying a Ford Escort, red flags ought to have been going up.

In 2005 and 2006 the number of both mortgage brokers and real estate agents hit historic highs. A mortgage is a commodity, give me a price and a rate and I will choose a broker. There is very little a broker can do to distinguish themselves from each other. With so many brokers and a limited number of qualified mortgage applicants, brokers had to find new applicants. The only place for them to go was the pool of people who under the current rules not only did not qualify for a mortgage would not receive credit from a bookie were they to ask. The new motto was “If they don’t fit under the current set of rules, change the rules”. So they did. What they failed to realize was, the rules were there for a reason, they worked. We are now realizing that people who do not want to provide proof of what they do for a living, how they earn income, what that income actually is or where their down payment is coming from are not doing so out of some symbolic “privacy concern”, but because what they are saying is quite frankly, bull. Who has trouble “verifying income”? Crack dealers? Illegal immigrants working under the table and not paying taxes? Contractors who cheat on their taxes? If you want my money, prove you can pay it back or take a walk and let the next person in line step up, unless of course the line is small, the others are just like you and we really need to give you the money… thus the mortgage industry dilemma the past few years. Like I have said more than a few times before, the surprise here is not that this happened, it is that it did not happen sooner.

Where do we go from here? A slow decent to normalcy. That is all. Not a crash, not a recession, not a depression, just normal housing conditions with realistic lending guidelines. Bernanke will not allow a recession and to be quite honest, the overall economy is performing so well, it will resist it. We have record profits, record corporate cash levels, full employment and moderate sustainable growth. This may end up actually benefiting stocks as all the money that chased real estate the past 4-5 years will now look to stocks for superior returns since it will not be in real estate for a while. There are trillions out there looking for a home to grow in, what happens to the bottom 1% or 2% to the mortgage market will not really effect us except entice those trillions to look for a better home. The US stock market welcomes you.

Do not let the doomsayers out there scare you, let them panic and keep your cool like Billy Ray Valentine… see the movie.

Visit the site: Gannon on Investing to see the latest “Festival of Stocks” for the week of March 19th. The host, in this case Geoff Gannon, of the festival chooses what they feel to be the best posts currently and does the work to organize them for us. It is a great way to see a variety of posts from different authors. Geoff did a great job this time and has organized the posts by subject.

Topps

Disappointing Offer for Topps: Why this Deal is $7.55, Not $9.75 By Cheap Stocks
The recently announced Topps deal is met with some tough words and common sense in this post from Cheap Stocks. Those words mean even more coming from a former shareholder who specializes in stocks with a lot of excess cash on the balance sheet.
Stocks: TOPP

Against the Topps Deal By Gannon On Investing
For those who just can’t get enough of the Topps deal or who simply enjoy falling asleep in front of their computer screens, here are 5,000+ words of vitriolic analysis often approaching pure philippic – written by yours truly.
Stocks: TOPP

Buybacks

Stock Buybacks and Dividend Payments Remain Strong By Disciplined Approach to Investing
David Templeton takes a look at stock buybacks and dividend payments. According to a press release from Standard & Poor’s, S&P 500 companies spent $105 billion buying back their own shares during the fourth quarter of 2006.

The Buyback Indicator Still Going Strong? By CXOAG Investing Notes
In a related post, the CXOAG blog cites a recent paper discussing the stock repurchase anomaly in recent years. Based on that paper’s findings, it appears investor awareness of the anomaly’s existence has not served to eliminate it.

Stock Analysis

This Panther is Ready to Pounce By ValuePlays
A detailed post reviewing Owens Corning’s latest conference call. The author clearly likes the stock. Much of the post is devoted to discussing the (conservative) assumptions present in the company’s earnings estimate.
Stocks: OC

Handleman is Still a Bargain By The Picky Investor
In this follow-up to an earlier post, the author explains why Handleman is still a bargain, despite suspending its quarterly dividend. The post discusses qualitative as well as quantitative aspects of the business and its merits as an investment.
Stocks: HDL

Manitowoc Company “Revisiting a Stock Pick” By Stock Picks Bob’s Advice
Following his usual format, Bob Freedland revisits Manitowoc Company for the second time. He first wrote about the company in November of 2004; then, revisited it in January of 2006. This is his latest update on Manitowoc.
Stocks: MTW

Conviction Buy List By One Guy’s Investments
Travis Johnson rips a page from Goldman Sachs’ playbook and presents a “conviction buy” list of his own. It consists of four very different companies: Gol Linhas Aereas Inteligentes, American Science and Engineering, Cemex, and Exelixis.
Stocks: GOL, ASEI, CX, EXEL

Investing

Profit With Split-Offs By Fat Pitch Financials
George is at his best in posts like these. Here, he leads investors through the split-off process, step by step. He explains what split-offs are (and how they differ from their better known brethren, spin-offs), why they can be profitable for individual investors, and where you can start looking for future opportunities in this area. He also provides two examples of recent split-offs.
Stocks: MCD, CMG.B, WY, UFS

Great Companies Don’t Always Make Great Stocks By The Peridot Capitalist
A short post on an important topic. Why do the portfolios of even the best value investors always look so ugly? Why can’t sell-side analysts distinguish between a business and a stock? Why do America’s least admired companies outperform America’s most admired companies? Simple, because great companies don’t always make great stocks.
Stocks: BBY, RSH

I receive several emails yesterday after my Sherwin Williams (SHW) post on Wednesday asking how I could be so sure the lower courts decision would eventually be tossed. I am going to direct you to a paper from the Washington Legal Foundation that eviscerates the lower court’s handling of the case. It a matter of “when” not “if” this ludicrous ruling will get tossed. A note: The text below (except for the comments at the end beginning with “Sherwin’s stock…”) is taken from the paper and I have noted here what I feel are the most important sections for those of you who do not wish to read all 34 pages.

On a cold gray February day in 2006, a jury in Rhode Island found three companies liable for creating a “public nuisance.” In that case, styled as Rhode Island v. Atlantic Richfield Co, the State of Rhode Island sued four former manufacturers of lead pigment. The State claimed that the manufacturers were responsible for creating a “public nuisance” in Rhode Island during the century before residential sale of lead paint was banned in 1978. The case made national headlines because, for the first time, lead pigment manufacturers were found liable for problems allegedly caused by poorly maintained lead-based paint in privately owed homes.

One year later, on another cold gray February day, the Rhode Island trial court (the “Court”) issued a long awaited decision regarding the Defendants’ post verdict motions. In a 198 page decision, the Court found that a multitude of alleged legal errors by the Court an alleged misconduct by the State’s trial team either did not occur or were not sufficiently serious to require a new trial. In the same decision, the Court ruled that the State’s “non-delegable” duty to perform lead abatements was in fact partially delegable – so long as the State remained ultimately responsible. But the Court’s ruling was much more than a lengthy disposition of procedural and substantive issues regarding the trial and the verdict. In a decision that dispensed with the most fundamental requirements of American tort law, this Rhode Island trial court held that merely manufacturing and marketing a product is sufficient to impose liability on a defendant—even in the absence of any evidence that a defendant’s product produced harm to any person where the nuisance allegedly exists. With this broad stroke, the Court ruled that neither product identification nor evidence of specific injuries attributable to a particular defendant is necessary before a defendant is ordered to abate a nuisance.

As a result of this ruling—which is preliminary and may not be subject to appeal presently (it now is- my comment) —this Rhode Island Court has created an extraordinarily dangerous vehicle for lawsuit abuse—a tort where liability is based upon unidentified ills allegedly suffered by unidentified people caused by unidentified products in unidentified locations. At least in Rhode Island, product liability law has been swallowed up by the amorphous concept of “public nuisance”—a development that should alert every industry to the dangerous alliance of public authorities and private counsel, and their opportunistic distortions of traditional legal principles.

The extensive trial held in 2006 was not the first trial in this case. In 2002, a jury deadlocked 4-2 against the State’s original public nuisance claim.The jury deadlocked because they were not able to agree as to whether the State had established the existence of a public nuisance. In response, the State persuaded the Court to lower the threshold for finding a public nuisance. Additionally, in the second “all-in” trial, the Court allowed the State to try the manufacturers not on their own conduct, but on the conduct of their trade associations, conduct that did not occur in Rhode Island, but rather happened in other states. And then, in the second trial, the State refused to disclose new evidence that, by the State’s own standards, the childhood lead poisoning “problem” in Rhode Island was eliminated before the trial ended. In spite of this evidence, known only to the State, the State argued to the jury that the level of childhood lead poisoning in the State had reached a “plateau,” and was no longer declining. Thus, the jury was deprived of critical evidence—unknown to Defendants until after the verdict was returned—that flatly undermined the presence of the “nuisance” the State wrongly claimed to exist.

As a result of the Court’s jury instructions, and the State’s trial tactics, the jury’s decision against the Defendants, in hindsight, now seems predictable and, indeed, inevitable. Although the second jury was also initially deadlocked 4-2 in favor of the defense, post-verdict interviews indicated that the Court’s jury instructions essentially directed a finding liability.According to one juror, the jury instructions “didn’t give the paint companies much of a window to crawl through”. Some, such as the private contingent fee lawyers that Rhode Island hired to prosecute its case, claim that what happened in Rhode Island constitutes “justice.”

Others, including these authors, take a different view. The Judge’s rulings and the State’s conduct resulted in a monstrous mosaic of serious errors, many of which, standing alone, constitute reversible error. When viewed as a whole, the Rhode Island Court’s decision abdicates the judiciary’s fundamental role to ensure procedural and substantive fairness to all parties—a role that is enshrined in our most honored jurisprudential traditions. It is not the role of the judiciary—and certainly not the role of a trial judge—to blithely “change the law” when precedents raise barriers to a plaintiffs’ recovery, especially when, in order to do so, the court must sweep centuries of common law tradition under the rug. Such an analogy is particularly apt in this case because, like soil under the carpet, the injustice of the Court’s ruling persists—even when covered by almost 200 pages of creative justifications.

According to the Court, “based on the evidence that a public nuisance exists … and on common sense, the jury properly could have concluded that whoever sold and promoted lead pigment in Rhode Island proximately caused the public nuisance. In effect, the sale and promotion would complete the chain of causation that begins at manufacture, and ends with the existence of the public nuisance.” The authors wonder if “common sense” also dictated that the Court ignore all of the landlords and property owners who improperly maintained the lead-based paint or allowed it to deteriorate to where it became a health hazard.

The trial court defined a public nuisance injury simply as “the cumulative presence of lead pigment in paints and coatings in [or] on buildings in the state of Rhode Island”. This wrongly suggests that an injury to a large number of individuals is the same as an injury to the community as a whole. Case law clearly states that “harm to individual members of the public” (no matter how many) is not the same as harm “to the public generally”. In its jury instructions, the Court altered the language in comment g of §821B of the Restatement (“A public right is one common to all members of the general public”). Instead of following the Restatement, the Court instructed the jury that: “A right common to the general public is a right or an interest that belongs to the community-at-large. It is a right that is collective in nature. A public right is a right collective in nature and not like an individual right that everyone has not to be assaulted defamed, or defrauded, or negligently injured”.

As will be discussed elsewhere in this article, the State provided no proof that the “nuisance” existed anywhere except in private residences. Accordingly, the alleged problems did not threaten the exercise of any rights held by the public at large, such as the use of public buildings or resources, but rather related to the exercise of private rights by private individuals in their private abodes. Since no “collective” right was impacted that applied to the general public, the trial court’s instructions overstepped the bounds of public nuisance as defined by the common law, and dissolved the distinction between public and private nuisance as separate causes of action.

Thus, for the first time in common law jurisprudence, the Rhode Island Court held that the characterization of a nuisance as “public” or “private” depends not upon its impact on rights held by the community at large, but rather upon the number of persons allegedly affected by the problem. The State’s intrusion into areas governed previously by personal claims is an alarming expansion of governmental power. Using the “common law” to justify such a usurpation of private interests is not only unprecedented, but also sets a dangerous precedent that may be used to justify even greater expansions of governmental authority into private spheres.

As the situation now stands, the Rhode Island trial court has unleashed a phenomenon bounded only by its own ingenuity—a phenomenon that contains seeds of abuse that, unless constrained, threaten the fundamental structures of representative democracy by imposing liability without wrongdoing and remedies without injury. At its essence, the new “claim” imposes liability solely upon the basis of a person’s status as a product manufacturer, making them responsible not for what they have done, but rather for who they are.

Sherwin’s stock is being held back by this abhorrence, once this cloud is duly lifted, the stock will run. What I would like to see for a change is a shareholder lawsuit against the State of Rhode Island for the financial harm we have suffered as owners. Our loss would be both the artificial stagnation of the stock price, the money spent on this litigation that cannot be used for corporate purposes or returned to us owners as a dividends or share repurchases and the time executives have spent on the litigation, not the selling of paint and coatings.

Perhaps that would put an end to these games and discourage those greedy little localities in Ohio contemplating a similar exploitation of our legal system.

“I got two words for you, shut the **** up” Robert De Niro, Midnight Run

Am I the only person who has had it with all the “housing” and “subprime” talk? My god, it is almost as if nothing else is happening out there. When the media get stuck on something they are like Rainman obsessing about Wapner being on in 5 minutes. Let it go gang. For two years all we have heard is “housing must slow down” and “there are too many risky loans out there”. Now that the housing market has slowed down and the home buyers with those risky (subprime) loans did exactly what we knew they would do, default, this is suddenly a big deal? Just in case you are not already sufficiently nauseated by the deluge of housing rhetoric out there, here is my one and only “two cents” on it. I want to go on record and say I am only posting on this topic as a response to emails I have gotten so I do not plan to comment further on this except to update this post much later to test its accuracy. Why? This is not really the big deal it is being made out to be. Some numbers:

• Approximately 80% of the mortgage market as “A” credit
• For “A” paper, the delinquency rate is in a comfortable 2.5% range.
• 20% of the market as “subprime” of all types and terms.
• Of the 20% slice, the Mortgage Bankers Association reported this week that some 13% of those loans were in some stage of delinquency, a number which has steadily risen over recent quarters.
• While alarming, the flip side is that some 87% of subprime loans are performing fine
• Only 6 percent of homeowners hold subprime ARMs (adjustable rate)
• Even if we hit a 20% default rate among subprime ARM holders — a rate twice as high as the foreclosure peak after the 2001 recession, that is only about 1% of the national mortgage market.

Simply put, for homeowners out there 95 out of 100 of us are having no problems with their mortgages (or at least are not delinquent). So why the hysteria? Easy, we have 24 hour news coverage to fill and saying the housing market is “slowing down like expected” just does not capture a headline like “subprime carnage threatens to lead US into recession”, does it? But it is as good an excuse as anything though, right? In mean, most people cannot follow (nor do they want to) the intricacies of the Japanese yen carry trade that the talking heads blamed the market sell off a few weeks ago on but, most people own homes so lets go with that, at least they can relate to it.

The reality is that unless you are one of the unfortunate “subprime folks” who are stuck, these headlines will have no effect on you. What is of note here is in the majority of excess defaults are the “no documentation” loans. These were mortgages given to folks whose credit was so bad they were not forced to provided credit histories and in return agreed to pay interest rates in many cases more than twice the national average. So, we are now supposed to be surprised they defaulted? Another oft overlooked detail of many of these loans is that those taking them were not required to provide proof of citizenship. While the exact number may never be known, how many of these defaults are people just walking away from homes after some of the immigration raids that have littered the news lately? Chances are these were bought with invalid social security numbers anyway so there is no actual risk to their credit rating or future ability to purchase another house in another town as fake social security cards are as easy to get as a ham sandwich. Basically you have a mess of subprime mortgages created by lenders who gave money to anyone with a pulse (I am sure we will get reports of dead people getting loans soon enough). Faltering home prices are likely to blame for another portion of the default of loans. Borrowers with little equity (5% or zero down loans) who face difficult economic times or rising monthly payments (adjustable loans) have little chance to refinance their mortgages or sell their homes in hopes of making full repayment if the market hasn’t produced any “instant equity” for them to utilize. There is no easy way out, except to mail the keys back to their lender.

Now let’s look at housing. Personally the gauge I look at the most closely is inventory. It is the most basic economic law, supply and demand. High supply is bad for sellers (this includes home builders) because the more homes sitting out there for sale, the lower the prices they then command. Since homes are valued on a “comparative” basis, the lower the price of the home for sale next to you, the less your home now becomes worth. The lower the supply, the higher prices homes then command and then all the above issues become moot as they resolve themselves. So, for me, inventory rules. Let’s look.

Inventory (months of supply, New and Existing homes):

Year ————–New————- Existing
2002 —————5.8—————— 4.7
2003 —————5.5—————— 4.6
2004 —————4.1—————– 4.3
2005 —————4.8—————– 4.5
2006 (Jan) ——–5.7 —————–6.5
2006 (July)– – 7.2—————– 7.3
2007 (Jan) ——-6.8—————— 6.6

What can we deduce from these numbers? It would seem that the worst of the housing market was in July of 2006. It is my opinion that we in a trough now and probably will remain here until the new home inventory is worked off. As the new home inventory falls, buyers will begin to automatically work off the excess existing home inventory as by default less new home are available. The economy is strong and unemployment is low so there are no exterior factors pushing the market lower. The problems now were created by excesses on the part of lenders and homebuilders. Once they have taken their medicine, things will turn around.

Builder confidence in the market for new single-family homes receded in March, largely on concerns about deepening problems in the subprime mortgage arena, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. After rising fairly steadily since its recent low last September, the HMI declined three points from a downwardly revised 39 reading in February to 36 in March. This too is good news as pessimistic builders will refrain from new projects, further reducing inventory.

Another reason the market may have bottomed? Famed “Legendary stock picker Bill Miller (Seeking Alpha, Mar. 18th): , portfolio manager for the $20.8 billion Legg Mason Value Trust [LMVTX]: Recent Buys For Legg Mason Value Trust: Homebuilder Centex (CTX): 597,000 shares (cost: $28.4 million); total position now 6.1 million shares. For those of you who read Sunday’s post, Bill Miller is the only fund manager to beat the S&P 15 years in a row in the past 40 years, paying attention to what he feels is undervalued is usually a good idea.

I hope housing turns around soon, if for no other reason I won’t have to read or hear about it all day long….