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Buffett’s Bailout? Uh… No

Do people really think Berkshires Hathaway’s (BRK.A) is really “helping” the bond insurers? Really?

Buffett offered to insure $800 billion of municipal bonds held by the major insurers such as Ambac (ABK) and MBIA (MBI). Problem with that is based on results to date, that seems to be the only part of the insurers portfolio not falling apart. While the move would improve the “guarantee” offered by both companies, it would then leave them holding a collection of failing loans. Buffett is essentially offering to insure the only part of their portfolio not at risk. How is this helping them? In all reality, this would end up being a drain on their liquidity.

The only person other than Berkshire shareholders and Buffett hoping they take the bait on this is probably Pershing’s Bill Ackman. Once the only stable part of their portfolio now pledged to Buffett, Ackman’s prediction of failure for the insurers is as close to a sure thing in investing as one could get…..

Disclosure (“none” means no position):None

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Another Misleading Sears Holdings Article

This one surprised me. The WSJ ran an article Friday that made things at Sears (SHLD) look dire. Let’s take a closer look.

A summation of the article is pretty simple. Sears’ cash will be far below last years levels when they report and thus, investors will run for the exits.

The article starts off with this quote, “Now, some analysts wonder whether falling sales, slimmer profit margins and other woes are causing cash flows to decline to a level that could hinder a turnaround.”

The very reason Sears split into 5 separate entities was to avoid this very scenario. It will allow each division to pursue deals outside of the current locations. This was witness just last week by the Diehard deal with Orange County Choppers. I am having trouble figuring out what any cash deterioration at Sears would hinder more deal like this. I can easily see how they will expand sales of those items and actually increase cash. I can also easily picture licensing deals for Craftsmen tools and Kenmore appliance that throw more cash Lampert’s way.

Later in the article comes this gem “…Sears to draw on a $4 billion credit line. But this might not be received well by creditors, especially if it looks like the borrowing is being done to fund further stock buybacks.”

Now, has Lampert ever borrowed to repurchase shares? Ever? If we go just the end of Q3, Lampert had $734 million of cash in hand. The company said that, as of Jan. 11, it had used $513 million of that cash to repurchase stock in Q4 and as of Nov. 27, it had paid back a $625 million credit facility.

Both of these were done from cash from operations. If Lampert had ANY inclination to repurchase shares with debt, he surely would not have paid off the credit facility. Lampert has been constantly paying off debt since taking over Sears and that is the reason the company has the best balance sheet of its competitors (JC Penny (JCP), Macy’s (M), Home Depot (HD) and Kohl’s (KSS)). As a matter of fact, since taking over Sears, Lampert has reduced its outstanding debt every year and FY 2008 that just ended will be no different.

The article also laments the fact that cash is lower this year than at the same time last. But, it casually misses the fact that Lampert has repurchased almost $3 billion in stock in the last 9 months vs $800 million total the previous year. Now, had he not done that, the cash balances would be similar.

The same people who are wringing their hands over the cash account today at $1 billion are the same ones who were complaining when it was at $4 billion and Lampert was just sitting on it. Back then they were championing Lampert to spend it on a Home Depot, Radioshack (RSH) or Macy’s acquisition. In retrospect, any one of those moves at the prices they were at then would be a complete catastrophe today. I wonder were all the articles pointing that out are?

So, Lampert invested that cash on Sears by repurchasing stock. By doing so, he has increased shareholders percentage ownership of earnings in excess of 13% rather than destroying it with an abysmally timed dilutive acquisition to appease folks. Thank you Eddie.

The essence of this article is based on a flawed premise. It is a bit like speculating about the cash drain at Berkshire Hathaway (BRK.A) should Warren Buffett try to outbid Microsoft (MSFT) for Yahoo (YHOO). It will never happen so making the speculation is just filling a page with words. To be honest, I had a hard time finding the premise.

Whitney Tilson, said Friday on CNBC that he was “aggressively buying shares in the 80’s” recently. To quote Whitney “we are buying a 30 cent dollar”.

Disclosure (“none” means no position): Long Sears, None in others

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The Weeks Top Stories at Value Investing News

Here are the top from the last week at VIN

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Warren Buffett Speaking in Toronto

Berkshire Hathaway’s (BRK.A) Warren Buffet speaking at the “Business Wire Canada” opening reception.

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Looking at USG

As I was scanning James Cullen’s site I came across a post that intrigued me.

James wrote an analysis of USG and for the back round, here is it. Now that being said, in an interview I gave wit him, I said that I though housing was the next big value find. I also said that currently the situation was “too opaque” and that there would most likely be some builders go under. Trying to figure out who is next to impossible as the variables (land owned, where it is, local housing markets, carried value of land on books etc) are so subjective, getting a true handle on a builder is just guesswork.

So, that being said, if we do think home building is the next value area, rather than try to pick a builder, why not pick the maker of a product they all need? It really does not matter who is left standing among the builders when all this is over. No matter who it is, they will be buying wall board from USG.

That makes USG a very interesting proposition. It also does not hurt that Warren Buffett’s Berkshire Hathaway (BRK.A) owns 17% of the stock.

James did a follow-up post after the recent earnings call and the outlook for 2008 is not real rosy. But, this is a management team that has never thrown out rosy scenarios to investors in an attempt to prop up a stocks price.

It would seem that I am not the only one who thinks this way as the stock has jumped from $31.05 to $38 (22%) and change since Jan. 7th.

What to do? Well, sit and wait for now. I can’t buy anything after a 2 week 20% plus run. Now, if the stock were to give 1/2 that back, I would then become interested. Should it plop more back on the table, I would be inclined to be a buyer.

Will it? I am inclined to say yes. Housing will be a drag for a while and eventually many recent buyers will give up and move on to something else. When they do, the price ought to fall.

Disclosure (“none” means no position):None

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The Week’s Top Stories at Value Investing News

Here they are, the Top 20 from VIN

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

To: All Sears Holdings (SHLD) Associates

From: Edward S. Lampert, Chairman of the Board

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The Weeks Top Stories at VIN

Here are the top stories this week at Value Investing News

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Buffett Donates Shares

In an SEC filing today, Berkshire Hathaway’s (BRK.A) Warren Buffett disclosed donations of 3,090 shares of Class B Common Stock to charity.

The donation dates are:
8/28/07= 120 shares
9/5/2007= 1,080 shares
9/14/2007= 805 shares
10/10/2007= 10 shares
10/31/2007= 1,000 shares
12/19/2007= 75 shares

The charity(s)that received the shares were not disclosed.

Disclosure (“none” means no position):None

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Lampert’s Move: Yes, Its About Brands

Eddie Lampert’s move at Sears Holdings (SHLD) on Friday is a big one in unlocking value at the retailer.

In November I stressed that Sears was not so much of a retailer story but a brand one. The general idea was that post and several others was that Lampert would eventually leverage the quality brands he has.

The Wall St. Journal reported Saturday that Lampert is doing just that.

Said the Journal, “A Sears spokesman confirmed the moves late Friday, saying the new structure will provide operating businesses with “greater control, authority and autonomy.”

It continued, “The contemplated restructuring would create separate units to manage Sears’s real-estate holdings and run brands such as Kenmore, Diehard and Craftsman. It isn’t clear how the units would be divided or which unit would run the stores themselves.

The structure would allow Mr. Lampert to spin off or close business units more easily, said a person knowledgeable about his thinking. “He warmed to the idea of a spin-off strategy,” this person said. The company also is willing to be flexible about how each unit will be set up, based on the skills of its operating executive. One practical effect of that could be to reduce costs.”

He is essentially setting up Sears like Warren Buffett’s Berkshire Hathaway (BRK.A).

This is probably the single best thing Lampert could have done. Why? Let’s say I am the newly minted head of the Kenmore line. What is my first move? Pick up the phone and call Home Depot (HD) and Lowe’s (LOW) and see who want to sell some of the best appliances out there. When I hang up, I tell them they can expect a call from the Craftsmen guy next. Will they license the brands to GE (GE) to expand sales even more?

Will we see Diehard batteries in Wal-Mart’s (WMT) or Targets’s (TGT) automotive sections soon? How about AutoZone’s (AZ)?

With Wal-Mart consistently trying to upgrade it apparel options, could we see either Lands End, Joe Boxer, Covington, Structure or Canyon River Blues on the shelves? With Target looking for refreshed options after a very disappointing holiday season, might they take a stab at it?

The main issue with Sears as it is set up now is that the closing of questionable locations now dramatically impacts sales. If the brands are being sold through other locations, closing and selling stores can have a more positive effect on the bottom line as the sales impact is not nearly as great but the expense reduction is the same.

We know Target has been begging Lampert to sell them hundreds of locations. Could the newly separated real estate management arm rather than selling them become a landlord to Target? Rather than just closing a Kmart location, rent it to Target. In that respect, that division becomes a REIT to the holding company. With 3,500 locations under it, the options are incredible.

The point is that if the main brands that account for the majority of the profits currently are licensed and sold through other outlets, the importance of the physical stores are diminished. It also means that Sears now has more options for the marginal stores it may be carrying now. Sears could keep the best and most profitable locations while disposing of the lesser ones through leases or outright sales and keep merchandise sales and profits going through other retailers.

This is exciting..

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

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Top Stories of the Week at Value Investing News

A long weekend so a nice long list. Some really interesting article this week…

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Berkshire Still Adding To Burlington Northern Stake

Warren Buffett’s Berkshire Hathaway (BRK.A)disclosed it added again to its Burlington Northern (BNI)stake in an SEC filing Friday.

In the filing Friday after market close, Berkshire disclosed it bought 1.2 million more shares of the railroad.

Purchases:
1/16: 44,200 shares @ $76.55
1/17: 205,800 shares @ $77.83
1/18: 996,100 shares at $76.97

This brings Berkshire total holding in the company to 63,775,118 shares

Disclosure (“none” means no position):More admiration, None

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Bernanke Profile This Weekend

Roger Lowenstein, who wrote one of the two best books on Buffett I have ever read has a piece on Fed Chairman Ben Bernanke in The NY Times this weekend. It is a must read..

Here is the story:

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Merrill’s CDO Valuation Very Interesting

New Merrill Lynch (MER) CEO John Thain said something very interesting Thursday in an interview after the bank released earnings

“We had $15 billion of them (CDO’s) on the books in September and now that has been written down to $4.4 billion. Essentially they are being valued on their interest only component”. See the interview here:

This is stunning really. It also means that when the CDO market settles, the very same securities that have been eviscerated will see a surge in value. Thain also said that the CDO market was non existent in December and that recently they had sold a few of the securities.

He gave no details on the transactions but the fact there is even some liquidity in that market is good news indeed.

What has happened to the CDO markets is a bit like pricing all mortgage brokers for bankruptcy because one of them go. It is important to note that while defaults have risen, they are by no means above historical norms or in a danger area. Despite that, the entire universe of them have been hit.

This type of thing seems to happen in real estate due to its prolonged cycles. When Berkshire Hathaway’s (BRK.A) Warren Buffett first bought into Wells Fargo (WFC) in 1990, he did so in the midst of a California housing crisis. Warren determined that bank’s value as reflected by its stock price was being unfairly tainted by the market. A “guilt by association” thing. All things housing we sold off. While many lenders at the time were suffering due to loans made, Buffett felt that while Wells would take a small hit (much smaller than anticipated), when housing recovered, it was well positioned to then capitalized. He called the classic over-reaction of the market and has since made a killing on the stock.

What is happening today is very similar to that time frame, crisis’s create opportunity….

Disclosure (“none” means no position): None

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Berkshire Hathaway Adds to burlington Northern Stake

Warren Buffett’s Berkshire Hathaway (BRK.A) added to its Burlington Northern (BNI) holdings on Monday and Tuesday.

Through its National Indemnity subsidiary, Berkshire added 141,400 shares on 1/14 at $78.18 a share and 807,400 shares on 1/15 at $77.69 each.

This brings Berkshires total holding in the railroad to 62,529,018 shares.

Disclosure: None

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