Monday, January 21, 2008


In 2005, while an MBA candidate at Ivey, I was enthralled by David Conklin’s Global Environment of Business class. David is a fantastic professor and was kind enough to warn us on numerous occasions to sell any and all of our US dollars because it had nowhere to go but down. I did not heed his warning.

Fast forward to 2007. I spoke with David in December asking him about his availability to give a presentation on the credit markets to our team at DRI Capital. I confessed to David that I had not taken his advice on the USD. He gave me a second chance. He said Armageddon is upon us and to brace myself. Here we are in January and 2008 has begun with a bang. The Dow has swooned more than 15% from its high (earlier today stock markets around the world were pummeled and the Dow Futures don’t look pretty for tomorrow).

The R word is being thrown around like there is no tomorrow and financial stocks are in a free fall. Even strong results from IBM (NYSE: IBM) and Intel (Nasdaq: INTC) were not enough to calm the jittery crowd. Meanwhile, Bank of America (NYSE: BAC) seemingly took advantage of the turmoil and snatched Countrywide Financial (NYSE: CFC) for pennies on the dollar. At least 30 BofA analysts spent 4 weeks on their due diligence. Time will tell how real the diligence was and if this move was brilliance or stupidity. Countrywide shareholders will get 0.1822 BofA shares for every share they own. Countrywide shares are trading at least 20% below that exchange value creating what could turn out to be a fantastic arbitrage opportunity. The market believes BofA could still walk away or reprice the deal.

Meanwhile, Mr. Buffett is bouncing up and down with joy snapping up more Burlington Northern Santa Fe (NYSE: BNI) on a daily basis. He also figured he may as well start a bond insurance business while he is at it. Look no further than Ambac (NYSE: ABK) and MBIA (NYSE: MBI) to see why he smells blood. I hope you weren’t one of those unloading your Berkshire Hathaway (NYSE: BRKB) stock because according to many Mr. Buffett is apparently past his prime. Well not quite. The shares have all but ignored the downdraft and have rocketed to all time highs as Mr. Buffett works his magic and puts his cash hoard to work. There are also the Sovereign Funds of Kuwait and Singapore and the famous Prince Al-Waleed. All are salivating at the chance to own a piece of America’s behemoth financial titans.

One positive out of all this is that stellar businesses such as Moody’s (NYSE: MCO) are trading at half their peak valuations. And one of our favorites, Mr. Lampert’s Sears Holdings (Nasdaq: SHLD) has been cut in half. Ok, so retail is in the dog house especially since a recession is all but inevitable, if the US isn’t only experiencing one. But I believe Mr. Lampert will squeeze value out of Sears. The real estate and the Sears brands should provide ample downside protection. In the meanwhile, both Mr. Lampert and I thank Mr. Market for giving us the opportunity to buy more stock. Starbucks (Nasdaq: SBUX), the purveyor of my daily morning coffee has also been the subject of numerous analyst downgrades and doomsday scenario press coverage by the media. That is one to keep an eye on. And how about Intel? Robust results and the crushing below we predicted they would deliver to Advance Micro Devices (NYSE: AMD) have not prevented a 30% decline from 2007 peak valuations.

The magnitude of write-offs at the Citigroups (NYSE: C) and Merrills (NYSE: MER) of the world has been staggering. That may just be the tip of the iceberg. But don’t fret Mr. Market’s moodiness. To paraphrase Warren Buffett, be greedy when others are fearful. Yes, life will go on beyond Armageddon and will almost certainly be better than before.

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