Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Tuesday, February 19, 2008 5:59 PM

There was certainly enough in the way of bad news in the papers Tuesday if you wanted to be bearish. The WSJ reported that Lehman might take a billion plus hit in the commercial real estate lending market. There are $200 billion in "leveraged loans" on banks balance sheets. These are loans made to facilitate leveraged buyouts and since the market has fallen, they can't be sold without taking a loss. Citi is thought to have $43 billion, Goldman Sachs $36 billion, and J.P.Morgan another $26 billion. The guessing is that the loss ranges from 5-7%, but that's a guess. The banks could hold them to maturity and most probably get paid. It's the low interest rate relative to prevailing levered deals that makes these loans unattractive at the original terms, but then the lending capacity of the banks is reduced since capital is tied up on the balance sheet supporting these loans.

UBS also speculated the additional losses of between $123 and $203 billion could be taken on additional subprime losses, the above mentioned levered loans, commercial real estate loans gone bad, and the hit that would be taken by banks if the monoline insurance companies failed and they lost the guarantee on some CDO's that are part of that guarantee package. Wow ! Enough to make you run away.

Yet the market started out on a strong note powered by a good report from WalMart and it wasn't until oil soared towards the magic $100 per barrel price that the market lost ground. By the close, the averages were off a touch. All-in-all, a good day. As I have said, when stocks don't go down on bad news, there is hope for mankind.

WMT had a good report. Cost controls were evident so it looks like the company can maintain/cut prices to attract consumers and maintain margins. The growing overseas presence helped (especially in Cnada, Brazil, and the UK) and about 40% of the U.S. segments' total comes from groceries, a notoriously low margin business, but WMT seems to have its groove in that field. The stock trades at about 14 times next twelve months earnings estimates, which is the lowest multiple in memory. We/I own it and feel its a solid play in this type of economic environment where the consumer is challenged.

I wrote about America International Group (AIG) last week. Over the weekend Barrons highlighted the stock and strongly recommended it. The analyst quoted said "most if not all of the charges will be reversed back into AIG earnings over the next few years...... The portfolio has a weighted average life of just over four years." I continue to recommend AIG and I'm very glad to have some company.

Hell hath no fury like a woman scorned. A British man obtained a restraining order against a bitter ex-girlfriend who sent him 10,000 phone text messages in two months. That's an average of one every eight minutes ! And the idiot didn't get a new cell number ?

Berkeley, California rescinded its decision to tell the U.S Marines they were "unwelcome intruders" for running a recruiting center in the city. The rebuff to the Marines caused a national furor, and protests in Berkeley itself. It's not called the "Peoples Republic of Berkeley" for nothing.