RLI: Another Acquisition to Strengthen Leadership in Niche Markets

An LA presenter likes RLI's (NYSE: RLI, $52.07) position in niche insurance markets. The company has just announced an acquisition of Contractors Bonding Insurance Company, which specializes in surety bonds. This deal will expand RLI's reach in the surety segment/contractors' niche. It is expected to be accretive in the first year. RLI continues to return excess capital to shareholders and has announced a special $7 dividend to be paid on 12/29.

Accelrys: Significant Upside Remains

An LA presenter continues to recommend Accelrys (NASDAQ: ACCL, $8.70). The stock is up 20% since it was presented back in October, but the presenter emphasizes that the company is still early in its multi-year growth phase. ACCL finalized its merger with Symyx in July and is now in a good position to become one of the leaders in the scientific informatics software space. Management has raised its estimates for synergies from the deal to the top-end of the previously provided range. The presenter stresses a substantial cross-sell upside to result from product integration.

Positive Outlook for Airlines

Airlines should have a positive 2011, based on what we're hearing. Major domestic carriers are substantially stronger financially and will continue to benefit from the cost and capacity streamlining. As the economic recovery takes hold, they should continue to see improving yields and a pickup in ancillary revenues. Gains could be tempered by unexpected economic developments and volatility in fuel prices.

Smurfit-Stone: Still a Buy

A NY presenter continues to recommend Smurfit-Stone Container (NYSE: SSCC, $24.71) as a Buy. He notes that the company's October box numbers were good. While OCC prices have risen a bit in the recent weeks, increasing COGS for Q4, the presenter still believes that the Street estimates are too low for Q4 and 2011. He targets $34 in 12 months, which is based on 7x his 2011 EBITDAP-CAPEX projection of $700 mm, less $1bn of tax-adjusted pension, less $750 million in net debt, plus $300 mm in the present value of SSCC's NOLs, and using 100 million fully diluted shares.

Tatum/Roulston Report

Serious sports fans know when watching their favorite teams when momentum changes good or bad. Silence is the result of the home team losing momentum while noise levels rise as momentum grows. In this month’s Tatum survey the crowd is sensing a home team comeback. Across the board(with the exception of hiring outlook) executives are recognizing a more positive environment. Backlog, capital expenditures and general business conditions spiked over last month. One can't help but ask “what is different?” Political risk just changed.

Regulatory environment, health care and taxes (the big three) are all suddenly viewed in a new light due to the election. Has anything actually changed? Not at all, its all perception. After two years of seemingly battling big brother the perception is maybe things can change. Now can we see leadership. Can we deal with the anti-business attitude and the deficit? Can we move towards growth from regulatory stagnation?

We believe we are at a crossroads. If Washington can remove itself from the spotlight and companies can feel unencumbered to use some of the balance sheet leverage expanded over the last 18 months it could change employment and growth in measurable ways. Unlike the government now restricted by its own deficits companies have not been in such positive condition in quite some time. Consumers with higher savings rates and growing real disposable income over the last year than in the previous five could be a bonus as well.

There are still issues of government debt, rogue nations and uncertainty in how politicians will respond to an historical election message. But momentum this month has shifted. A lot of executives are feeling much better than anytime in the last 12 months. This month was a reflection of the momentum shift. Lets hope Washington is listening because the crowd is ready.

Tatum LLC is a nationwide firm specializing in the providing financial and information technology services and executive fulfillment to companies across the country. This joint effort with Tatum is a unique partnership that will provide a differentiated view of business trends - The Tatum/ Roulston Report.

To read the full survey click here.

IBM: Still Positive Despite Recent Runup

A NY presenter still likes IBM at this level (NYSE: IBM, $144.41). By 2015, the company is projected to earn $20 per share, with much of the gain coming as a result of generating $100 billion of FCF over the next 5 years and using $50 billion to buy back stock, reducing the float by 1/3 in the process.

Network(NWK)Equipment

with the Linc launch by Microsoft it is becoming clear that unified communications is now on the map and necessary for multi international business. Network's technology has progressed in encryption and securitization and few new entrants to the UX Technology space can now be used for the MSN and HP models. Example Royal Dutch who has 753 offices is now adding NWK equipment into 106 sites with 2 UX's at eachsight at 30k per unit. This product cuts tech expenses by not replacing legacy equipment but allowing software to connect hardware in an open software at 1/10 the cost. As we migrate to the Internet for communications look at unified communications to be a focal point.

Celanese: Maintaining a Buy Recommendation

A New York presenter continues to like Celanese (NYSE: CE, $36.38). Q3 earnings have exceeded his initial estimates. Consequently, he is raising his projections by about 10%. The presenter is positive about the company's prospects and sees continued growth going forward.

NWK: Recent Developments Signal Solid Growth

A San Francisco presenter is very confident Network Equipment Technologies is entering a significant growth phase (NASDAQ: NWK, $4.36). Some of the largest global companies have already been deploying Network's unified communications (UC) boxes, but the launch of Lync by Microsoft, NWK's partner in UC, this week will accelerate deployments at clients' regional offices. According to the presenter, Royal Dutch Shell is planning to install two of NWK's UC boxes at 700 locations around the world, which alone would add $30-40 million to the company's top line. Schlumberger, Estee Lauder, Accenture are other examples of companies with global presence that are quickly transitioning from using UC at just their headquarters to installing it multiple branches.

LogMeIn: Maintaining a Short Recommendation

A NY presenter is not changing his Sell Short thesis on LogMein (NASDAQ: LOGM, $40.03). He emphasizes that the growth of non-Ignition premium customer additions continues to decelerate and the already intense competition for the iPad Ignition app continues to increase.

Spectrum Brands: No Longer a Buy

A NY presenter is no longer recommending Spectrum Brands (NYSE: SPB, $28.71) as a Buy. The valuation may be cheap, but liquidity has worsened since Harbinger upped their stake. Q2 results were underwhelming. September Q #s will be out next week. The presenter believes that earnings will be fine, but notes that FCF has been weak due to continuing fees and charges.

Capstone Mining: Gaining from Bullish Copper Economics

A New York presenter recommends Capstone Mining (TSX: CS, $4.10) at this level. He believes Capstone stands to benefit from favorable conditions in the copper market. The company has made improvements in production at the two current sites and will be adding another high-grade copper mine. The stock is undervalued versus peers with a strong balance sheet to pursue growth.

RLI: Niche P&C Player with Solid Profitability

An LA presenter recommends RLI Corp. (NYSE: RLI, $59.55) as a Buy. Consistency of underwriting characteristics, a strong balance sheet and management focusing its strategy in good niche markets positions this specialty P&C insurer attractively. Presenter highlights the company's superior ratings, the combined ratio well below the industry's average and valuation.

Global Cash Access Holdings: Valuation Cheap Even in Worst Case

An LA presenter likes Global Cash Access Holdings (NYSE: GSA, $3.65) at this level. Casino cash access for customers is a big data business as well as a necessity. Global Cash Access is an innovator in the space with the largest database on casino patrons spending patterns and the most advanced cash and cashless functionality. Despite losing its Harrah’s contract recently, the company still has a 67% market share. At the current valuation, the stock may be over reacting to an impact of one lost customer.

Accelrys: Transformational Merger with Symyx

An LA presenter recommends Accelrys (NASDAQ: ACCL, $7.25)as a buy at this level. As companies in multiple businesses develop scientific testing, Accelrys’ products are benefited by recent acquisition and the leading application within its space. A solid balance sheet and niche specialty markets are compelling features that the presenter feels support valuation and growth. Once the restructuring stemming from the recent merger with Symyx is complete, the company will be on track to earning $0.50+/share, resulting in a potential upside of 50-100%+.

LogMeIn: Lofty Valuation May Take a Hit

A New York presenter recommends a short on LogMeIn (NASDAQ: LOGM, $37.10). The company provides remote access services to the SMID, enterprise, and consumer markets. LOGM has been able to make some headway with its products, but the free remote access functionality offered by Windows 7 and the threat from much larger competitors like Citrix and Cisco can quickly erode the gains the company has made so far. Its Ignition product for iPads is in intense competition with a number of similar applications, most of which are priced significantly cheaper. The stock has run up on the back of the Ignition launch in April, but now the buzz seems to be fading. Trading at 50 times forward earnings, the presenter believes LOGM is a short at this level.

Cleveland Biolabs Not a Typical Biotech Play

A New York presenter is recommending Cleveland Biolabs (NASDAQ: CBLI, $7.02) as a buy. The company will be filing an application with the FDA next year for its anti-radiation drug CBLB502. Unlike the regular process, the filing will be done under the animal efficacy rule, where only a proof of efficacy in animals and safety trials in humans are required. CBLB502 has shown a remarkable efficacy profile in promates and mice and the company has already successfully concluded two human safety trials. The downside risk has been reduced substantially with the award of a contract by the DOD last month. The potential market for medical applications for the drug in reduction of radiation and chemoterapy treatment side effects far exceeds the defense uses. CBLI's research is supported by various government agencies. The company has other promising programs in its pipeline. The presenter believes that the upside could be very large at this level.

Roulston's Auto Expert with GM's former Chair on CNBC

Paul Ingrassia, one of the most well-known and connected auto industry experts, will be on CNBC at 1.30pm ET with Bob Lutz, former GM Chairman. Paul participated in two auto roundtables we hosted last week in New York. He will be meeting with top executives at Ford and GM in the next several weeks. If you would like to set up a discussion with Paul, please let us know.



Paul Ingrassia, Independent Consultant, Journalist, Author, former President, Dow Jones Newswires (In January, Mr. Ingrassia published Crash Course, a book about 2009 bailouts and bankruptcies of GM and Chrysler. Paul is a Pulitzer Prize-winning journalist, author and former news executive, who worked for The Wall Street Journal and its parent company for 31 years, focusing on the automotive industry, which continues to be the subject of his books and commentaries. He is a regular contributor to the op-ed page of the Journal, SmartMoney magazine, Nihon Keizei Shimbun and CNBC.)

EBIX: Technology Leader in Insurance Software Services

A New York presenter likes Ebix (NASDAQ: EBIX, $23.83). The company operates insurance exchanges around the world that allow carriers to initiate and process policies in a paperless mode. 70% of revenue is recurring. EBIX is growing at 40% rates despite headwinds in the insurance space, with margins approaching 50%. The company is a clear technology leader offering the only end-to-end bundled solution available. There are multiple opportunities for expansion, both in the domestic market and overseas. Ebix is executing an acquisition strategy focused on immediate accretion to supplement organic growth. The presenter believes the stock can double or triple from this level as the company continues to take share in a $10 billion market.

Chairman and Chief Investment Officer, Cumberland Advisors, shares his thoughts on the foreclosure mess

David R. Kotok, Chairman and Chief Investment Officer of Cumberland Advisors, has shared the thoughts from a source in the financial services industry on the foreclosure situation.

“Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper—only the note-holder has legal standing to ask a court to foreclose and evict. Not the mortgage, the note, which is the actual IOU that people sign, promising to pay back the mortgage loan

Before mortgage-backed securities, most mortgage loans were issued by the local savings & loan. So the note usually didn’t go anywhere: it stayed in the offices of the S&L down the street.

But once mortgage loan securitization happened, things got sloppy—they got sloppy by the very nature of mortgage-backed securities.

The whole purpose of MBSs was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with correspondingly higher rates of return.

Therefore, as everyone knows, the loans were “bundled” into REMIC’s (Real-Estate Mortgage Investment Conduits, a special vehicle designed to hold the loans for tax purposes), and then “sliced & diced”—split up and put into tranches, according to their likelihood of default, their interest rates, and other characteristics.

This slicing and dicing created “senior tranches,” where the loans would likely be paid in full, if the past history of mortgage loan statistics was to be believed. And it also created “junior tranches,” where the loans might well default, again according to past history and statistics. (A whole range of tranches was created, of course, but for the purposes of this discussion we can ignore all those countless other variations.)

These various tranches were sold to different investors, according to their risk appetite. That’s why some of the MBS bonds were rated as safe as Treasury bonds, and others were rated by the ratings agencies as risky as junk bonds.

But here’s the key issue: When an MBS was first created, all the mortgages were pristine—none had defaulted yet, because they were all brand-new loans. Statistically, some would default and some others would be paid back in full—but which ones specifically would default? No one knew, of course. If I toss a coin 1,000 times, statistically, 500 tosses the coin will land heads—but what will the result be of, say, the 723rd toss? No one knows.

Same with mortgages.

So in fact, it wasn’t that the riskier loans were in junior tranches and the safer ones were in senior tranches: rather, all the loans were in the REMIC, and if and when a mortgage in a given bundle of mortgages defaulted, the junior tranche holders would take the losses first, and the senior tranche holder last.

But who were the owners of the junior-tranche bond and the senior-tranche bonds? Two different people. Therefore, the mortgage note was not actually signed over to the bond holder. In fact, it couldn’t be signed over. Because, again, since no one knew which mortgage would default first, it was impossible to assign a specific mortgage to a specific bond.

Therefore, how to make sure the safe mortgage loan stayed with the safe MBS tranche, and the risky and/or defaulting mortgage went to the riskier tranche?

Enter stage right the famed MERS—the Mortgage Electronic Registration System.

MERS was the repository of these digitized mortgage notes that the banks originated from the actual mortgage loans signed by homebuyers. MERS was jointly owned by Fannie Mae and Freddie Mac (yes, those two again —I know, I know: like the chlamydia and the gonorrhea of the financial world—you cure ‘em, but they just keep coming back).

The purpose of MERS was to help in the securitization process. Basically, MERS directed defaulting mortgages to the appropriate tranches of mortgage bonds. MERS was essentially where the digitized mortgage notes were sliced and diced and rearranged so as to create the mortgage-backed securities. Think of MERS as Dr. Frankenstein’s operating table, where the beast got put together.

However, legally—and this is the important part—MERS didn’t hold any mortgage notes: the true owner of the mortgage notes should have been the REMICs.

But the REMICs didn’t own the notes either, because of a fluke of the ratings agencies: the REMICs had to be “bankruptcy remote,” in order to get the precious ratings needed to peddle mortgage-backed Securities to institutional investors.

So somewhere between the REMICs and MERS, the chain of title was broken.

Now, what does “broken chain of title” mean? Simple: when a homebuyer signs a mortgage, the key document is the note. As I said before, it’s the actual IOU. In order for the mortgage note to be sold or transferred to someone else (and therefore turned into a mortgage-backed security), this document has to be physically endorsed to the next person. All of these signatures on the note are called the “chain of title.”

You can endorse the note as many times as you please—but you have to have a clear chain of title right on the actual note: I sold the note to Moe, who sold it to Larry, who sold it to Curly, and all our notarized signatures are actually, physically, on the note, one after the other.

If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.

To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

Read that last sentence again, please. Don’t worry, I’ll wait.

You read it again? Good: Now you see the can of worms that’s opening up.

The broken chain of title might not have been an issue if there hadn’t been an unusual number of foreclosures. Before the housing bubble collapse, the people who defaulted on their mortgages wouldn’t have bothered to check to see that the paperwork was in order.

But as everyone knows, following the housing collapse of 2007-’10-and-counting, there has been a boatload of foreclosures—and foreclosures on a lot of people who weren’t sloppy bums who skipped out on their mortgage payments, but smart and cautious people who got squeezed by circumstances.

These people started contesting their foreclosures and evictions, and so started looking into the chain-of-title issue, and that’s when the paperwork became important. So the chain of title became crucial and the botched paperwork became a nontrivial issue.

Now, the banks had hired “foreclosure mills”—law firms that specialized in foreclosures—in order to handle the massive volume of foreclosures and evictions that occurred because of the housing crisis. The foreclosure mills, as one would expect, were the first to spot the broken chain of titles.

Well, what do you know, it turns out that these foreclosure mills might have faked and falsified documentation, so as to fraudulently repair the chain-of-title issue, thereby “proving” that the banks had judicial standing to foreclose on delinquent mortgages. These foreclosure mills might have even forged the loan note itself—

Wait, why am I hedging? The foreclosure mills did actually, deliberately, and categorically fake and falsify documents, in order to expedite these foreclosures and evictions. Yves Smith at Naked Capitalism, who has been all over this story, put up a price list for this “service” from a company called DocX—yes, a price list for forged documents. Talk about your one-stop shopping!

So in other words, a massive fraud was carried out, with the inevitable innocent bystanders getting caught up in the fraud: the guy who got foreclosed and evicted from his home in Florida, even though he didn’t actually have a mortgage, and in fact owned his house free –and clear. The family that was foreclosed and evicted, even though they had a perfect mortgage payment record. Et cetera, depressing et cetera.

Now, the reason this all came to light is not because too many people were getting screwed by the banks or the government or someone with some power saw what was going on and decided to put a stop to it—that would have been nice, to see a shining knight in armor, riding on a white horse.

But that’s not how America works nowadays.

No, alarm bells started going off when the title insurance companies started to refuse to insure the titles.

In every sale, a title insurance company insures that the title is free –and clear —that the prospective buyer is in fact buying a properly vetted house, with its title issues all in order. Title insurance companies stopped providing their service because—of course—they didn’t want to expose themselves to the risk that the chain –of title had been broken, and that the bank had illegally foreclosed on the previous owner.

That’s when things started getting interesting: that’s when the attorneys general of various states started snooping around and making noises (elections are coming up, after all).

The fact that Ally Financial (formerly GMAC), JP Morgan Chase, and now Bank of America have suspended foreclosures signals that this is a serious problem—obviously. Banks that size, with that much exposure to foreclosed properties, don’t suspend foreclosures just because they’re good corporate citizens who want to do the right thing, and who have all their paperwork in strict order—they’re halting their foreclosures for a reason.

The move by the United States Congress last week, to sneak by the Interstate Recognition of Notarizations Act? That was all the banking lobby. They wanted to shove down that law, so that their foreclosure mills’ forged and fraudulent documents would not be scrutinized by out-of-state judges. (The spineless cowards in the Senate carried out their master’s will by a voice vote—so that there would be no registry of who had voted for it, and therefore no accountability.)

And President Obama’s pocket veto of the measure? He had to veto it—if he’d signed it, there would have been political hell to pay, plus it would have been challenged almost immediately, and likely overturned as unconstitutional in short order. (But he didn’t have the gumption to come right out and veto it—he pocket vetoed it.)

As soon as the White House announced the pocket veto—the very next day!—Bank of America halted all foreclosures, nationwide.

Why do you think that happened? Because the banks are in trouble—again. Over the same thing as last time—the damned mortgage-backed securities!

The reason the banks are in the tank again is, if they’ve been foreclosing on people they didn’t have the legal right to foreclose on, then those people have the right to get their houses back. And the people who bought those foreclosed houses from the bank might not actually own the houses they paid for.

And it won’t matter if a particular case—or even most cases—were on the up –and up: It won’t matter if most of the foreclosures and evictions were truly due to the homeowner failing to pay his mortgage. The fraud committed by the foreclosure mills casts enough doubt that, now, all foreclosures come into question. Not only that, all mortgages come into question.

People still haven’t figured out what all this means. But I’ll tell you: if enough mortgage-paying homeowners realize that they may be able to get out of their mortgage loans and keep their houses, scott-free? That’s basically a license to halt payments right now, thank you. That’s basically a license to tell the banks to take a hike.

What are the banks going to do—try to foreclose and then evict you? Show me the paper, Mr. Banker, will be all you need to say.

This is a major, major crisis. The Lehman bankruptcy could be a spring rain compared to this hurricane. And if this isn’t handled right—and handled right quick, in the next couple of weeks at the outside—this crisis could also spell the end of the mortgage business altogether. Of banking altogether. Hell, of civil society. What do you think happens in a country when the citizens realize they don’t need to pay their debts?”

Apollo Valuation Overdiscount Regulatory Risk

A San Francisco presenter likes Apollo Group (NASDAQ: APOL, $50.45) at this level. The current valuation overdiscounts the regulatory uncertainty in the for-profit education space. Apollo's student and program mix mitigate any potential hit to enrollment numbers and revenues from the DOE ruling expected in November. The new orientation program will curb dropouts and loan defaults. The company has solid global expansion opportunities through its joint venture with the Carlyle Group. The downside is very limited at this point and the steady case scenario of $5+ eps can translate into a 60-100% upside.

Roulston smart grid roundtable in San Francisco

Aaron Lehmann has partnered with Roulston Research to review our consultant Roundtables and to add a 40 plus year investor perspective on the experts’ industry comments. The opinions and points below are from his experience. Roulston delivers his thoughts to give our clients a summary of the event and a market insight of possible investment actions that might parallel the conclusions that the experts delivered. Let us know your thoughts, or if you would like to talk to Mr Lehmann directly, we encourage further dialogue.

Aaron Lehmann has since 1968 been engaged in the investment industry as a securities analyst, director of investment research, portfolio manager, and investment banker. His previous employers include Bank of America, Goldman Sachs, Hartford Insurance, Westinghouse Pension Investment Corp., Chase Investors, Steinhardt Partners and several investment boutiques. Mr. Lehmann has performed consulting services for corporations and investment firms. Although retired, he is actively involved in the investment markets and may periodically perform consulting services.

Roulston Conference September 14.2010
Smart Grid: Key Trends, Outlook and Winners/Losers

Sterling Lapinski, President, Genscape, CEO, GLO Ventures, who has impressive credentials, made a very academic type presentation. He focused on wind generation, the storage of the wind gusts and metering issues confronting the alternative energy industry, in particular, as well as the traditional providers of energy. His major concerns are:
1. How do you offload all the different energy sources- wind, solar, LNG, gas, and nuclear and store it for peak levels and what do you do with it in off-peak hours?
2. Can you change users habits to use energy when there is normally lower demand?
3. Can we create better metering to obtain more accurate measures of usage and to adjust the outputs to conform to demand?
4. Can alternative energy systems be made more efficient so that the utilities can get a better ROI?
Mr. Lapinski did not really provide any serious answers to these questions but did say the most likely players will be existing companies that are already in that space, such as: Siemens, IBM, Samsung, GE, as well as all the “chip” manufactures. He also felt that on the industrial metering side Honeywell and Johnson Controls would be dominant. He also raised concerns with the security of the power grid and the risk of cyber attacks.


Aaron Lehmann’s Comments

It was clear that Mr. Lapinski is highly knowledgeable in this field but unfortunately offers no real solutions for some very obvious and serious issues. One would have great difficulty in coming away with an investment thesis from his presentation. Nothing was said about the difficulty of building wind generating systems without some very rare earth materials necessary in building them and the fact that the Chinese now control the rare earth materials. No comment was made about the greater usage of nuclear around the world while the United States lags significantly. After a significant correction, uranium prices have begun to rise sharply based on a very positive long term outlook.

I don’t profess to have the answers to all of his concerns nor those that I pointed out here. What I believe is that while the companies mentioned by Mr. Lapinski may be participants because of their vast resources, I also feel that giants like Emerson Electric, LG, Mitsusbishi, Cisco, Oracle, as well as Badger Metering, and Ituran will be involved. However, I believe that over the next 10 to 20 years new companies will come onto the scene that may have serious solutions. Who would have believed that Intel (founded in the late 1960’s), or Apple (founded in the 1970’s) Microsoft (in the 1970’s), Cisco and Oracle (in the 1960’s), Google (in the 1990’s) and many others would have become the leading companies today. Likewise, there are many creative individuals all around the world looking for the opportunity of emerging as the next Google.
In conclusion, I can not suggest that an investor buys on the basis of a company possibly coming up with a solution to any of the aforementioned issues, since, with the exception of Badger and Ituran, they are very large companies and may only represent a small percentage of their respective business.


Opinions expressed herein are based upon presentations by participants at Roulston Research, LLC. sponsored Roundtables. The associated notes of such presentations summarized herein have not been independently verified for accuracy, truthfulness, or completeness. The report is in no way intended to be a recommendation by Roulston Research, LLC. to purchase or sell any security.

NWK: Benefitting from Transition to UC

A San Francisco presenter recommends Network Equipment Technologies (NASDAQ: NWK, $3.04) as a play on the global transition of enterprises to the unified communications (UC) platform. The company is at the forefront of this paradigm shift, which is finally accelerating to the next level. Large companies are beginning to move from pilot UC projects and installations limited to just HQ locations to much broader rollouts. With the release of Microsoft's new UC server this week and the pending introduction of NWK's new single-box solution, the company is poised to become a major player in the market projected to grow to $15 billion by 2015.

Roulston’s Technology Community Chair’s thoughts on Intel

Bart Perkins, Founder, Leverage Partners, and Roulston Research’s Community Chair shares his thoughts on Intel.

Intel has a Broader Vision.

Intel’s recent purchase of software security maker McAfee along with the wireless chip unit of Infineon have been the basis for a lot of speculation over the last few weeks. Investors and analysts have not been quite sure where Intel is headed.

That changed at today’s (9/12/10) Intel Developer Forum. Paul Otellini announced that Intel will build a 22-nanometer processor in 2011. Otellini stated. "At Intel, our vision is to create a continuum [with] consistency and interoperability between devices." Later he said, “we're trying to deliver a full computing solution stack. … We'll deliver and develop more complete hardware and software solutions (emphasis added) than ever in the past."

Later Otellini expanded on the theme, observing computing needs internet connectivity, security, and energy efficiency. All this means that Intel is expanding well beyond its roots as a chip maker. Today Intel is positioned to offer virtually all components of a mobile device. They can provide the processor, security, and operating system.

Intel is not limiting themselves to mobile devices. They are positioned to expand into a much wider set of products. In the Sept. 13 issue of Forbes Magazine, Otellini said “Everything is getting connected; everything is getting smarter; TVs, phones, cars, retail displays. The microprocessor is the driving factor for this. We believe our architecture is best suited for these tasks.”

Update on Alamo Group

Recommended late last year by Texas presenter the company is tied to farm income with mature products in mature markets. A reminder that they sell specialty mowers and products to farmers and governments for road and field maintenance. Their concept is to tuck in multiple brands so that when giovernment asks for 2-3 bids they are multiple bidders with multiple brands in niche markets. Their other focus is expansion internationally adding brands and products to offer all products to all markets. Their replacement cycle is 5-7 years in the government side and 7-9 years in the Ag side. With farmer income strong and commodity prices rising, business is good. Government municipal purchases have slowed but still holding to past cycle. Presenter still likes the story.

Listening to Kansas City Southern talk Economy

There is a $200/container savings crossing the border by shippers switching from the 1.9 million trucks to rail. Look for more to happen. Cross border traffic for KSU is up 55% year over year now equal to 25% of their total business. Hurricane Alex really hurt 2010 but other growth has been with train length up 10% year over year. Pricing is increasing and carloads are up 24%. No recession here.

American Eagle Off the Recommended List

A New York presenter is liquidating his position in American Eagle (NYSE: AEO, $13.48). The stock has gained 15% since the presentation at one of our small cap idea forums. The company reported its fiscal Q2 results yesterday. The presented believes the performance was OK, but he is no longer positive on the name, due to the unprecedented promotional environment. The near-term outlook is very challenging (AEO is running 50% off the entire store inventory) and no longer justifies owning the stock, in his view.

Boston Healthcare Roundtable Summary

Aaron Lehmann has partnered with Roulston Research to review our consultant Roundtables and to add a 40 plus year investor perspective on the experts’ industry comments. The opinions and points below are from his experience. Roulston delivers his thoughts to give our clients a summary of the event and a market insight of possible investment actions that might parallel the conclusions that the experts delivered. Let us know your thoughts, or if you would like to talk to Mr Lehmann directly, we encourage further dialogue.

Aaron Lehmann has since 1968 been engaged in the investment industry as a securities analyst, director of investment research, portfolio manager, and investment banker. His previous employers include Bank of America, Goldman Sachs, Hartford Insurance, Westinghouse Pension Investment Corp., Chase Investors, Steinhardt Partners and several investment boutiques. Mr. Lehmann has performed consulting services for corporations and investment firms. Although retired, he is actively involved in the investment markets and may periodically perform consulting services.

Roulston Research hosted a healthcare forum in Boston on July 21, 2010 with industry experts Mark Lindsay, Director, The Livingston Group, Health Care & Pharmaceuticals Practice, and Ronald Hollander, Principal, Reform Exchange. The audience’s main concerns were:

Will the healthcare bill be repealed and if so what is “plan B” (alternative plan)?
Who are the likely beneficiaries or losers?
What will happen to costs, especially in light of the Massachusetts healthcare plan?

A summary of the panel’s responses are as follows:

The bill will not be repealed.

The bill contains over 800 issues that need clarification, which could take many months or even years.

Industry lobbyists will attempt to “educate” the legislatures in order to make the bill understandable and pragmatic so that businesses can adjust their policies to the final bill.

The panelists feel that companies such as Aetna, HCA, United Healthcare, Kaiser Permanente, and WellPoint are big enough and have the depth to alter their strategies to conform to the new policies.

There will be fewer hospitals, as they expect significant industry consolidation since smaller hospitals and private practices will not have the resources to remain independent.

Converting handwritten medical records to electronic data bases. (The present legacy data must be digitized)

PPO’s, HMO’s, etc. will need to address their cost issues. Current programs are still too expensive but the industry must await the new rules before implementing their measures to deal with the new realities.

Medicare and Medicaid costs and pricing will have to undergo changes in order for the system to remain viable.

End of life costs will have to be seriously addressed since a significant part of patient care expenses are associated with this period.

Insurers must get more data from the rulemaking before they can make changes to their policies and the pricing in order to generate satisfactory profits.

Supposedly, according to Mr. Hollander the Massachusetts healthcare bill only increased the state’s budget by 1%. (The audience found this hard to believe and this is difficult to not view as an issue of semantics).

Employers will have to scrutinize their healthcare costs and realign their efforts to preventive care and perhaps more self insurance.

Establishing more cost effective medical screening to reduce absenteeism and changing the attitudes of workers to help themselves.

Establishing different type of community health services along the line of urgent care centers.

Medical staffing may become more of an issue because of uneven hospital bed occupancy.

Although record keeping changes may occur rapidly, observers would like to see what cost benefits will ensue.

Investment Implications

Investors are urged to look “outside the box,” beyond the current industry leaders, to those businesses that could benefit from some of the likely changes. In addition to the traditional companies mentioned by the panelists (see point 4), one should consider CR Bard, Abbott Labs, Baxter Labs, and other big pharmaceutical and biotech companies that have a good pipeline, and large insurance companies that can come up with new policies to address the changes.

Some points to consider before being able to invest prudently are:

Key issues not addressed in the original bill need to be clarified to allow corporate planners and individuals to formulate strategies that will make the bill a document that solves the healthcare issues, which the original bill has failed to do, i.e., wider coverage at affordable rates, tort reform, streamlining data input/and not increasing the currently enormous debt.

The need to computerize legacy data and manage billing systems and hospital procedures will create significant opportunities for the existing vendors in that space along with entrepreneurs that will launch ancillary services. Outsourcing of physicians, nurses and other specialized skills will create vast opportunities. Many high quality technology companies could benefit from the greater need of storing information, transferring and processing of the data. Select medical instrumentation companies could benefit from more screening tests. Home healthcare and hospices, more user friendly packaging and dispensing of drugs could be major beneficiaries as they realign their businesses.

Examples of companies that could benefit are:

Arcadia Resources (KAD)* – A $100 million sales company, that provides home care, medical staffing, and pharmacy services and has 70 facilities in 18 states. Perhaps, the most interesting aspect of this $92 million capitalization stock is its Daily Med pharmacy division. This entity distributes medications to patients that take multiple drugs on a daily basis in a user friendly pack that enables the patient to get the proper dosage at the right time. Daily Med has a very strong relationship with WellPoint that has excellent long-term potential. They are currently servicing WellPoint insured patients in California and Virginia, and South Carolina and will soon be in New York, and Kansas. The initial feedback from its current patients has been favorable. WellPoint is better able to track its patients and thereby help control costs and pricing of their policies. A key point in the current healthcare bill is Medical Therapy Management (MTM), which is exactly the area that Daily Med is in and may be the only independent company in this area. Arcadia Resources is in the “sweet spot,” driving down total cost by improving patient compliance of drug therapy. They just had their contract with WellPoint extended for three more years.

PRGX Global Inc. (PRGX)* – With estimated sales of $180 million in 2010, and a market capitalization of about $120 million, PRGX provides audit recovery services, principally to business and government agencies having numerous payment transactions and complex purchasing environments. They serve many different types of customers that include pharmaceutical firms, healthcare payers, both private sector and health insurance companies along with State and Federal government agencies such as the Center for Medical Services (CMS). The U.S. Government recently decided to audit Medicare payments and asked PRGX Global to run a demonstration model on $89 billion of Medicare payments (A&B) to determine what overpayments may have been made. PRGX indicated that $330 million could have been saved. The U.S. Government has officially hired PRGX to analyze $30 billion of Medicare payments. Assuming similar type results in the previous analysis at PRGX’s 9% fee of the savings would generate about $10 million to the company at high margins. This contract is scheduled to start in the Q3 of 2010. A substantial part of the costs were absorbed in the earlier demonstration project. It is easy to see how PRGX could benefit from the healthcare bill. This combined with its existing business augurs well for the future.

Cerner Corporation (CERN) is a supplier of healthcare information technology solutions, healthcare devices and related services and is instrumental in transforming IT functions for its enormous customer base of 3,400 physician practices that covers 30,000, 2,300 hospitals, 1,500 retail pharmacies, 600 ambulatory facilities, and 700 home care facilities. Cerner’s strong position could receive a significant boost of the healthcare bill. Cerner with a $6.3 billion market capitalization is selling at 26.6 times management’s $2.85 per share projected for 2010, a debt/equity of 0.07, and a $3.6 billion backlog, the stock may be attractive, particularly on pullbacks to the $70 level.

Disclaimer
Aaron Lehmann is an independent private investor and is not affiliated with any investment firm, broker dealer, or advisory firm. Information is obtained from public documents, management and industry checks and relies heavily on Mr. Lehmann’s extensive investment experience. No warranties are made for the reliability of the data. Mr. Lehmann’s personal account, IRA or family partnership may own positions in stocks mentioned in this report (noted with an *). Any position may be bought or sold at anytime during the present or future circulation of this report. No updates should be expected. Mr. Lehmann, although not currently engaged as a consultant, may from time to time act in a consulting capacity.

Opinions expressed herein are based upon presentations by participants at Roulston Research, LLC. sponsored Roundtables. The associated notes of such presentations summarized herein have not been independently verified for accuracy, truthfulness, or completeness. The report is in no way intended to be a recommendation by Roulston Research, LLC. to purchase or sell any security.

No Change in CSCO Thesis

A New York presenter maintains his bullish view on Cisco (NASDAQ: CSCO, $21.91).
The guidance last week was a little underwhelming, but the business remains solid. At the current price, the stock is trading at less than 11X non GAAP trailing EPS if the net cash of about $4 per share is subtracted. The presenter believes the difference between share buyback and option issuance should just be added as an ongoing expense.

Maudore Increases Reserve Estimates

A New York presenter argues that Maudore Minerals could be worth $10 right now based on the new resource estimate released today. The Quebec-based gold mining company reported results that indicate a more than 100% increase in high concentrate deposits in its Comtois project. The presenter believes that the next estimate expected in 6 months or so will show another very significant jump, based on the drill data reported since the February cutoff date for the last report.

Roulston Consumer Chair on Key Retail Trends

Craig Johnson, the chair of our Consumer group, has shared his perspective on the current trends in the retail space:

Flight to value resuming; post-post frugal fatigue: WMT, TGT both up only modestly, as F&C predominate, and as discretionary still lags. Winners: Dollar stores, TJX, ROST, ARO, F-21; COST/BJ’s; but now with first reappearance of barbell growth in 2 years.

Dollar stores emerging as C-stores without the gas pumps, rapidly expanding SF, units

High heat driving AC/Fan sales for WMT/TGT, COST, LOW/HD, BBY/HGG; best in several years, but not a make/break.

Unless Exclusive/Unique/New, Full price merch left on racks (ex URBN/Anthro, JCG-F, TIF).

Winners focus on Value, Speed, Productivity, Newness: VSPN

Needs/Wants/Desires: Necessities vs. Discretionary: e.g. COST Food/Cons’ YOY 61% to 65%; WMT 49% to 53%; BJ’s 68% to 71%. Discretionary categories were recovering most strongly, off of pent-up demand, but now taking a breather.

Women’s Wear rebounding from 2-3 year drought: TLB (going younger, ANN esp Loft, CWTR all up from deep ditch, but far below sales highs; JCG, CHS, Anthro/URBN, all much better, better comps with smaller fleets.

Deflation still strong in sectors: CE (Notebooks, Netbooks, GPS)—but FPT new generation of LED, 3D and IPTV Net-Connectivity will bring TV AUR’s up; Apparel deflation easing/reversing by 1-2% 1Q2011, with hikes tempered by sourcing into Bangladesh, Cambodia, VNam; and Food has bottomed, with dairy up and beef/corn going up; some product inflation

Private Label substitution, higher quality, but lower prices and thus Av. Tkt down.

More frequent trips continuing, with small AT’s

Home sector in major turnaround, 1Q best Q since 4Q2006, but 2Q softening again. WMS, BBBY, TJX/HomeGoods, and Home depts of broadlines strong (TGT, KSS, M, even WMT). HIP bottomed in Jan/Feb, all much stronger in March/April/May, best Spring since 3+ years, and still accelerating. Key has been the great outdoors: nursery, lawn & garden, and OPE

WSM strongest in several years, esp PB, PB/T-K sides. W Elm still work in progress, being tweaked by Mgt.

BTS shoppers delaying purchases till later in season; more looking vs. buying July MTD; waiting closer to need, and for sale prices/next mark

Thoughts about Back-to-School Season from Roulston’s Consumer Chair

Craig Johnson, President of Customer Growth Partners, and Roulston Research’s Consumer Community Chairman predicts this year will be a better back-to-school season than last year. “It will be pretty good, but only because last year was the worst since World War II," he says. His firm forecasts sales gain will average 5.2% for July, August, and September, compared with last year’s 3.3% decline.

No Change in Long-Term View for Schweitzer-Mauduit

A San Francisco presenter remains positive on Schweitzer-Mauduit'S (NYSE: SWM, $46.22) long-term prospects. The company lowered its 2010 guidance on today's earnings call, but the story is still intact. The thesis may take a bit longer to play out than originally envisioned, but SWM does have the dominant technology in the growing market.

Observations from Roulston Retail Expert

Arnie Cohen, former COO at J Crew and one of our retail experts, shared his thoughts on several retailers from his recent store visits and other channel checks. He says that Forever 21 is grabbing market share and doing extremely well with their high school and college shoppers. American Eagle is very strong in denim, but Abercrombie on the other hand is having real problems and struggling to reverse its slump.

Roulston/Dallas presenter likes Entropic(ENTR) Semi business home entertainment exposure

The multi room viewing options offered in Cable and Satellite is positioning ENTR technology is good market position for high revenue growth. Video streaming opportunities also will fuel longer term growth.

Roulston/Dallas presenter likes potential of new product at Heelys (HLYS) at current valuation

With the stock trading at its cash value the company is rolling out its new skateboard shoe. Although a narrow product line its valuation trading right near cash value is worthy as an option on any success of the shoe that the presenter feels may have novelty value.

Roulston/Dallas presenter likes Hot Topic (HOTT) hi cash and no debt

This retailer taking advantage of Pop culture trends has seen negative comps that with the help of new merchandising VP from American Eagle may be poised with great balance sheet to see a shift positive.

Roulston/Dallas presenter feels Auxilium(AUXL-Short) drugs have limited upside

Two drugs Xiaflex and Testim both concern presenter with limited upside potential and yet projections that seem to value the company still well above current upside potential.

presenter still likes Alamo but story has moved stock well

Ag business has been picking up and in particular Bush Hog business has been in line with presenter's expectations. with an upside of $30 the stock is up 40% since recommendation and time to lighten up could be appropriate at this point. 1/3 of company business is with county and city governments who had a tough winter and budgets for roads and maintenance are stretched as well as overall budgets. Story has godd move and good time to lighten

Roulston/ New York presenter likes American Eagle (AEO) for valuation

Not trying to make a statement on the state of the consumer the presenter emphasized that some operating improvements (closing and opening brands, sourcing changes and aerie) and combined with non operating moves like stock buybacks position the stock price attractively.

Roulston/New York Presenter likes Nova Gold (NG-Amex) for diversified properties

Four properties located in Alaska and British Columbia offer diversification but potentially significant reserve potential if Nova can afford their share of development costs. Some recent investors show interest after looking at asset potential.

Roulston/New York presenter likes small cap Gold company Maudore(MAO.V) in Quebec

At our small cap event in New York this presenter made case for Maudore having significant advantages from transportation and mining costs in the close proximity to users. Former Bear Stearns analyst in management has different incentive and perspective and reserves may be understated.

Roulston/New York presenter likes Mercator (ML.TO) and China demand for Minerals worldwide

In a forum that focused on names in some basic materials the presenter likes the outlook for copper and in particular the Mineral Park mine reserves and the ramp up of their production and cash flow.

Roulston/New York presenter likes Spectrum Brands post bankruptcy and refinancing

The bankruptcy story is behind the company. Major shareholders have consolidated over 80% of the company with operations seemingly on the right track and a lack of coverage the story seems to be flying under the radar.

Roulston/New York presenter recommends Devon Energy as value in recent energy turmoil

The move by the company to domestic E+P is well documented but the change to the balance sheet and some of the other cost cutting and operating issues support the timeliness of this recommendation.

Tatum/Roulston Report

This month’s business conditions as reported in the Tatum Survey reflect the uncertainty corporations feel today. Confusing politics, an overwhelming media information flow and an increasingly complex international matrix continues to seemingly confuse directions. Regulation, health care and taxation seem to be the focus of virtually every company we talk to in interviews. Washington provides little direction and leadership. Actions reflect ineptitude dealing with oil spills, immigration or any other issue of the moment resulting in a general feeling of incompetence in resolving challenges we face today. The Tatum Survey once again reflects the mixed signals businesses feel in this environment. Orders, backlogs and employment show a mixed report of confusion of businesses that don’t seem to know how to look forward. Hiring in particular just seems to be the lightening rod of the frustration. Increasingly, it is the barometer both the markets and economists are focused on to cite how businesses in absence of clarity are hesitating to move forward.

It used to be as the US goes the world followed. Although this is still important, there are new factors influenced by emerging markets demand for products and services. This change and the technology revolution happening worldwide continue to impress us as underlying support for the economy and an important cog in the wheel that in the past became overly dependent on the US consumer. As the consumer deleverages and the government impact becomes more regulatory and less stimulative, the outlook will remain cloudy and confusing. Recent European debt concerns show us all where current trends can lead, and the markets responded to this with a sense of realization and questioning of “now what?” The age old question of inflation /deflation and growth/stagnation is in the air. Without the consumer, housing, such an important part of past cyclical growth in place, the new economy needs to truly become defined for the current frustration to disappear. The slam to the financial system has hurt confidence and investor apathy is prevalent. How do we grow wealth? This is a question that investors must be able to define to move forward.

Tatum LLC is a nationwide firm specializing in the providing financial and information technology services and executive fulfillment to companies across the country. This joint effort with Tatum is a unique partnership that will provide a differentiated view of business trends - The Tatum/ Roulston Report.

To read the full survey click here.

Presenter Continues to Recommend Graftech

A New York presenter remains very positive on Graftech (NYSE: GTI, $15.28). The company will not be going on the road prior to the completion of the Seadrift Coke acquisition. The presenter is hearing that big steel players are behind the recent request from the Justice Department for more information about the proposed acquisition. The company still expects a clearance and a subsequent deal closure in 2010.

Roulston Consumer Chair Talks About U.S. Retail Sales

Craig Johnson, President of Customer Growth Partners LLC, and Chairman of Roulston Research's Consumer Group, shares his thoughts in an interview with Bloomberg TV on the outlook for U.S. retail sales.

To listen to Craig's interview click here.

Dissapointing Guidance, but Still Good Upside for Smart Balance

A New York presenter was definitely dissapointed by the lowered guidance offered by Smart Balance' management (NASDAQ: SMBL, $4.22) on the last earnings call. Nevertheless, he believes that the company's push in milk and other new products remains a reasonable strategy. SMBL's presence on supermarket shelves will continue to grow. The presenter still sees a takeover over a long-term, but his new buyout target is $10 rather than $12 he mentioned originally.

Still Positive on Corning

A New York presenter has recently met with Corning's management (NYSE: GLW, $16.91)and remains positive on the comany's prospects going forward. He anticipates a really solid Q2, with no major surprises. The longer-term story remains intact, but the stock has been pressured by concerns about peaking in the glass market and consumer challenges. The presenter is more excited about the guerilla glass potential than he was 3 months ago.

Updated Targets for SVR

A Dallas presenter continues to like Syniverse Holdings (NYSE: SVR, $20.38). He is projecting EPS of $2.01 for 201 and $2.25 for 2011, versus the Street's consensus of $1.89 and $2.08, respectively. His near-term target for the stock is $24, going up to $27 in 12 months.

Abraxis Bought Out

Our San Francisco presenter spoke of a high likelihood of a buyout for Abraxis (NASDAQ: ABII, $74.20) at our SF idea forum in April. The announcement today confirmed his view. ABII is getting acquired by Celgene, with the deal expected to be finalized in Q4. The stock was trading at $51 at the time of the presentation.

Tatum/Roulston Report

The Tatum Survey is reflecting caution this month across the board. As last month showed general optimism across all areas from capital spending to employment and capital availability, this month showed relatively no change month to month in most of these categories reflecting some degree of pause and stability. This is reflective of what we hear in our research calls with companies. As optimistic as all the pundits are we must remember they are trying in most cases to get investors to act so general optimism prevails. In reality there is no visibility. Taxes, Health Care reform, and regulation is all we hear from executives who appear to like the improvement they see but are concerned with Europe all the government recent activity and even the impact of the recent oil spill in the Gulf creates a degree of uncertainty as a recent CEO stated how can oil prices not go up?

At Roulston we feel markets are reflecting general liquidity availability having improved. But the volatility that has returned reflects a lack of visibility and confidence in any time frame beyond that which can be seen right now on order books. That leads us to believe that any uncertainty like what we have seen in the BP disaster or European Sovereign debt issue can potentially create volatility and immediately. A dependence on government solutions in Europe shows can be troublesome. Why that is becoming more the norm in this country defies rational economic thought. As we look at increasing governmental debt now strangling cities and states, the federal government seems oblivious to what clearly is an issue everywhere else.

To read the full survey click here.

SF Presenter Very Positive on Abraxis

A San Francisco presenter is encouraged by the recent data released by Abraxis Bioscience (NASDAQ: ABII, $51.17). The company's chemo treatment Abraxane demonstrated a 31% improvement in the response rate over Taxol in a Phase 3 trial for first line non-small cell lung cancer. ABII's chemo platform is also in a late stage trial for advanced melanoma. The presenter notes that Abraxane revenues can potentially increase 10-fold over the long term from $400 million currently. The company has hired Lazard and Goldman, looking at a potential sale, which in the presenter's estimation can happen at $75-$85/share.

BP Settlement?

Both British Petroleum and the Obama administration have a problem. They need to extricate themselves from the relationship they have been forced into due to the Gulf oil spill. And they need to do it quickly.

The issue is simple. The administration views the cleanup and payment of economic damages as instruments of social and political policy. BP approaches the process from a point of view of balancing legal, financial, and public perception aspects.

Obama needs a solution that will stop some of the bleeding before the mid-term elections. BP needs a solution that will restore confidence among lenders and business partners. Who wants to do business with a company facing an open-ended liability? Lenders will balk, and governments and other oil companies will be reticent to enter into long-term deals with a company facing such an uncertain future.

For its part, the Obama administration relies on the technique of ruling by fiat, taking money from hapless taxpayers (and Chinese bond buyers) to fund largess for which it takes credit. It seems to be taking the same tack with BP, continually making bolder demands.
While the claims settlement process is basically an insurance operation, however, the administration is unhappy with the speed and frugality of BP’s process. In addition, the administration is demanding an escrow fund administered by an “independent” panel. Would the government demand such a thing from an insurance company? The government has also put a moratorium on deep drilling in the Gulf, and wants BP to pay for the costs resulting from it. BP is balking. The Obama administration is already running into Margaret Thacher’s admonition that the problem with using other people’s money is that you soon run out of it.

The issue of the responsibility for the moratorium is a dangerous one for the administration. If regulations were adequate and BP made a mistake, there is no reason for a moratorium, and BP should not be liable for the costs of it. If the regulation was inadequate and BP followed the rules, there is an argument that the government bears not only the responsibility for the moratorium but also the cost of part of the cleanup or broader damages. Remember that offshore leasing is a $13 billion annual revenue source for the government. Given that revenue stream, it would make sense for the government to have disaster recovery procedures in place, including dispersant and boom inventories. It is more efficient for the government to do this than the individual drillers. If individual drillers provided this backup, the redundant costs would lower their bids and reduce government revenues to a greater degree. Similarly, bills in Congress calling for unlimited liability would have the effect of lowering revenues dramatically as fewer companies would bid smaller amounts for leases.

For the administration and BP, the current claims settlement system is a no-win situation. If BP pays a satisfied claimant, the government gets no credit. Unhappy claimants, most likely the vast majority, will wonder why the government isn’t “doing something.” And the more the government tries to expand the definition of relief, the more BP will pull back.

There may be international issues too. The British might not be happy to see the US legal system destroy an iconic British company that pays over 10% of the dividends of a major British stock index.

What’s the solution? Why not have BP pay the US government a large sum of money, say $30-50 billion, in exchange for the government taking on the cleanup liability? The administration can quickly claim a win before the elections. It can then set up a claims process and get credit for the largess that flows from it. It can freely use the military to assist in the cleanup. Over the years this process will take, the political process will allow the government to move expenses around so that it can be seen to have made a very shrewd deal, while once again using the hapless taxpayer’s money to pay for the broad social policy embedded in the settlement process.

If there is no settlement, there is a real chance that BP would be forced to file for bankruptcy, throwing sand into the gears and ensuring plenty of voter, as well as shareholder disenchantment. A settlement would also allow BP shareholders to survive with a reasonable valuation and dividend.

Both sides win—the right basis for any deal.

Dell update from presenter

Dell was recommended near this same price about a year ago(14). The presenter still likes the cyclical recovery he sees in the box business and with $4/share of cash he likes where he thinks the cyclical improvement will take the stock price versus others in the space. Upside target still $20.

Priceline and Expedia: Short/Long Pair Trade Still On

A New York presenter still likes the short/long pair trade on Priceline and Expedia, but has taken some off the table. The Priceline (NASDAQ: PCLN, $185.11) leg of the trade is clearly a winner, with the stock dropping close to 30% since the presentation back in April. The valuation discrepancy has lessened, but is still severe based on projected EBITDA numbers. The presenter notes that while Expedia's progress in Europe has been steady, the gains have been slower than he had originally anticipated.

NWK: Positioned to Gain from Unified Comm rollout

A San Francisco presenter is very bullish on the prospects for Network Equipment Technologies (NASDAQ: NWK, $4.55). This small telecom equipment manufacturer is at the forefront of the shift to the unified communications platform on the enterprise level. The company has over 400 distribution partners, with Microsoft its strongest and most promising relationship. NWK already has 40 large companies on its customer list that are actively deploying UC. The ramp in revenue will come when major enterprises will begin rolling out UC in its branch and remote locations, something Accenture is already doing. Shell has recently announced plans to fully deploy UC. Maintenance and software sales can potentially double revenues from each UC-equipped site. Government entities at various levels are in early stages of UC deployment and will be a great opportunity for NWK over the long-term.

GLP: Major Asset Acquisition

A Boston presenter spoke at our April forum about the high likelihood of Global Partners (NYSE: GLP, $20.79)acquiring distribution assets from majors. Two days ago the company announced it was buying all of Exxon's retail sites in Massachusetts, New Hampshire and Rhode Island. The company's CEO spoke of three reasons behind the purchase: the expansion of GLP's wholesale gasoline and diesel volume; a substantial new income source; and a higher efficiency in the company's wholesale supply operations. Globa will finance the purchase by borrowing under a revolving credit line or through a capital raise. The transaction will be completed by the end of the year, and will be accretive to earnings in the first 12 months of operation.

visit to Graftech

With a large exposure to Mini mills Graftech will benefit more from Chinese and third world expansion than more traditional steel participants. They foresee 3-5 year growth of 10% of industry capacity and in that environment believe they are well positioned in their core business. The tuck in of new Coke acquisition takes away the price increase pressure of the last few years and after studying the industry puts them in a better position to control costs and compete less on price and more on their market leading technology.

Engineered solutions has some interesting opportunities in solar with their Graphite solutions and also in Nuclear with Gen 4 reactors. Depending on future policies these could be long term options.

Positive Outlook for Unifi

A Boston presenter likes Unifi (NYSE: UFI, $4.12) at this level. One of the directors has made a number of purchases at or below the current price in the past two weeks. Management reiterated on the recent conf call the previously given EBITDA guidance for fiscal 2010. Business prospects are looking better with apparel manufacturers seeing consumers making a stronger than anticipated comeback. Growth for this producer of polyester and nylon yarns over the next two years will come from developing regions like South America with the company's Brazilian operation doing particularly well, and from UFI'S higher value-added Reprieve line based on recycled PET. The presenter notes that if a deposit requirement on water bottles is passed, leading to lower prices for recycled PET, the volume available to Reprieve would increase dramatically.

Thoughts on CVS' CEO Departure from Roulston Expert

Randy Vogenberg, Principal, Institute for Integrated Healthcare, and one of our leading consultants in the healthcare group commented on the pending retirement of CVS Caremark's CEO Tom Ryan. Randy believes there is high likelihood CVS will sell Caremark and reposition their Minute Clinic operations following the pharmacy giant's struggles with Caremark's integration. He notes that historically all Caremark buyers had to sell it at a loss.

In an unrelated observation, Mr. Vogenberg suggests that the debate over the new CMS leader Don Berwick is bound to result in a controversy around for-profit hospitals and other provider systems reliant on Medicare/Medicaid business.

Positive on China Valve and NetScout

Our Dallas presenter remains positive on NetScout Systems (NASDAQ: NTCT, $13.08) and China Valves Technology(NASDAQ: CVVT, $9.65). CVVT is being dragged down with the rest of China-based names, and is dirt cheap at these levels. NTCT is also very attractively valed here. The company just had its best quarter ever and raised guidance. Prospects are boosted by tremendous growth in wireless.

Healthcare Roundtable in San Francisco

Yesterday we hosted a healthcare roundtable in San Francisco with two insiders to the changes happening in health care reform and benefit management. Since the Obama Plan was pushed thru we have seen a virtual freeze on bidding for new contracts and plans. Nobody seems to be in any hurry to aggressively price for new business while many renewal prices are being bid 20-30 percent and higher on existing plans.

The industry seems to be focused on assessment of the next 6 months until elections, the next 2 years until the next presidential election and the next 4 years until reform really gets put in place. The five major carriers seem to have a window where they will see 20 million lives added to health care coverage, they can increase rates without rate controls and they can potentially then position to even leave the individual coverage business where after 4 years of what could even be a windfall they may feel that when rates are controlled they will exit the individual space all together. A little ironic in its impact it ultimately may move us to the more socialized medicine world after a huge windfall. Could be said to be sarcastic but is the hand dealt.

Seems in the meantime to be a move towards more self funded plans and consumer driven plans like HSA and HRA models. Interesting that in these plans when consumer drives decision scripts spend versus doctor spend increases significantly.

Winners are PBM's, drug companies and some health tech players. Losers hospitals, doctors and in the long run insurance companies.

Ensco: Undervalued Driller Well-Positioned for Upturn

A New York presenter likes Ensco (NYSE: ESV, $47.75) at this level. The company is the lowest-cost producer of deepwater rigs in the space. This business is expected to contribute 50% of the total revenue in 2-3 years, once all 8 of ESV's units become operational. The jackup segment has been hit by declining day rates, but the rate of decrease is slowing down and management projects stabilization in the second half of 2010. Long-term dynamics remain very favorable for the offshore drilling industry. Ensco has $1.2 billion in cash on the balance sheet and the lowest leverage ratio among its peers. The company has just raised its dividend from $0.10 to $1.40. $560 million remains available for buybacks under the current authorization. ESV has moved HQ's to the UK and will have a significantly lower tax rate going forward. The presenter's target is $60, but if jackup rates start increasing, the upside could be more significant. A takeover is not out of the question.

Pair Trade: Long Expedia, Short Priceline

A New York presenter recommended a pair trade on Expedia (NASDAQ: EXPE, $23.68) and Priceline (NASDAQ: PCLN, $264.30). EXPE has been exceeding expectations in the recent quarters, but the stock performance hasn't been nearly as good as PCLN's. Priceline remains the #1 player in Europe, but Expedia is gaining on the continent with its substantially increased hotel inventory. EXPE is also able to offer air and hotel packages to European consumers, who prefer to order packaged accomodations, something Priceline is not providing. Expedia's TripAdvisor portal is the only real advertising revenue generator in the space, with growth in this business accelerating recently for EXPE. Trading at 8x EV/EBITDA versus 17x for Priceline, Expedia is strongly undervalued in the presenter's view, while PCLN may be topping here.

Vitesse: Turnaround Play Positioned for Mext Generation Network Buildout

A New York presenter likes Vitesse prospects following last year's debt resturcturing (OTC: VTSS, $0.43). With the company's financial difficulties largely behind, management was very optimistic discussing VTSS' growth potential on the fiscal Q1 call. Vitesse is the only player in the space offering a full line of products for both Carrier and Enterprise network applications. The company has an impressive customer list, which includes Cisco, HP, IBM, Huawei, Alcatel among others, and is a sole-source supplier for all of the chips it supplies to its largest accounts. The explosion in data traffic and growing network complexity and speed requirements will drive demand for Vitese's products for years to come. A reverse split to get relisted on NASDAQ has been approved by shareholders. The presenter targets at least a double from here based on earnings and peer valuation. New investors may want to take a closer look at the company before it starts going on the road in the next few months.

Somaxon Pharmaceuticals: FDA Approved Sleep Aid Has Great Potential

A New York presenter believes Somaxon's (NASDAQ: SOMX, $7.43) insomnia treatment can achieve blockbuster status. Silenor has just been approved by the FDA in March, with the launch expected in Q3. Limited sleep maintenance properties and residual effects of the leading sleep aids currently on the market leave a large proportion of insomnia patients dissatisfied with the treatment. Somaxon's drug helps maintain sleep for 7-8 hours, is non-addictive, and doesn't trigger a hangover effect. The product's non-controlled status will allow faster penetration of the $2.5 billion market. The company is looking for a partner to help with Silenor commercialization. SOMX is an attractive acquisition target in the presenter's opinion. A 3-year exclusivity period originally given to Silenor may be extended to 10 years of protection.

Air Products: Beat Consensus, on Track to Boost EPS by 20%+ in Fiscal 2010

A New York presenter commented on Air Products' fiscal Q2 results (NYSE: APD, $76.77). APD had an excellent quarter virtually across the board. The company beat the consensus by $0.03 and raised its full year earnings guidance. In APD's take or pay business very few customers are not taking what they've paid for, a great sign going forward. The backlog situation signals consistency of future earnings. Margins are moving up and getting closer to the company's 17% target. Management didn't offer more clarity on the progress of its offer for Airgas, but the presenter expects resolution by early September.

Corning: Dominant Player in Fast-Growing LCD Glass Space

A New York presenter believes Corning (NYSE: GLW, $20.40) doesn't get enough credit for its dominant postion in the LCD glass market. The company commands a 60% share in the space that's projected to grow 14-22% this year. Consumers around the world are both switching from CRT TV's to LCD models and adding new TV sets. The penetration rate in North America is 40% and substantially lower in developing regions, where most of the growth will come from in the coming years. The company has high expectations for its new Gorilla Glass technology. Management predicts incremental sales from this product may reach $1-4 billion in the next 3 years. The technology is very well-suited for touch screen devices and new borderless TV's. It's already used by 17 major brands. The stock is currently trading at 10x forward earnings. The presenter believes that as concerns about the supply/demand picture subside, the multiple should expand to 12-14x. Incremental earnings from Gorilla Glass will be $0.20-0.75/share in his estimation.

Onyx Pharmaceuticals: Lung Data Coming out Mid-Year

Our New York presenter continues to recommend Onyx (NASDAQ: ONXX, $29.14). The company has said that the data from a Phase III trial in lung cancer for its main product Nexavar would come out mid-year. Nexavar has been approved for breast cancer and is being tested in other indications. If the lung data is positive, the stock will go up dramatically, but the downside should the results dissapoint is limited to 5-10%, in the presenter's opinion. He would add to his postion aggressively if the date is negative. The Street is underestimating Nexavar's potential in breast cancer and is not giving enough credit to the drug's prospects in other types of cancer.

Yum Brands: Switching to Hold

A New York presenter still likes Yum! Brands (NYSE: YUM, $43.00), but would wait now before commiting new capital. The stock is up 20%+ since he recommended the name back on March 2 and is now close to the presenter's long-term target. Q1 earnings were quite strong with a big turnaround underway in China. The company is seeing some improvement in its domestic operations, but emerging markets ex-China is where the real upside to the current earnings expectations can come from.

Energy Roundtable in Boston

Last week we hosted an Energy Roundtable that focused on just how fast the natural gas space has been growing. With new discoveries and new methods in particular in shale the consultants focused on how the dynamics are changing affecting world supply, US reliance on foreign production and ultimately long term pricing. Another issue put to rest was the divestiture activity of big oil. Both experts agreed it was not a universal theme but more selective asset sales based more on better focus on returns on investments. Most of the conversation focused on best opportunities to take advantage of the changing landscape.

Global Partners: Niche in Northeast Downstream with Solid Upside

A Boston presenter likes Global Partners' (NYSE: GLP, $22.29) established position in the Northeast downstream market. This MLP has a network of terminals covering most of New England, New York, New Jersey and Pennsylvania. GLP, led by a highly experienced management team, has been expanding and upgrading its existing assets ,and acquiring new facilities. The company has just completed an offering to pay down its long-term debt. GLP stands to benefit from the shakeup in the space. The company can quickly ramp up its operations with majors getting rid of their downstream assets. The 8.7% yield should appeal to prospective investors.

Roulston Expert on Changes in Prescriptions Mix and Cost Sustainability

Dr.Randy Vogenberg, a recognized opinion leader to Fortune 500 employers, executive director of Biologic Finance & Access Council Program at Thomas Jefferson University's School of Population Health, and a member of our healthcare expert group, shared his thoughts on an ongoing shift in prescriptions mix. Two key trends are the move of precription drugs to over-the-conunter status and the increasing share of expensive biologic therapies, which is projected to increase 10-fold in the next 10 years, from 5% to 50% of the total mix. Biologics will raise the pressure on the country's ability to afford coverage. It's not clear even with the reform how we can accomplish it. In the typical benefit design, these higher costs are unsustainable. Dr. Vogenberg believes we'll see a continued shift to high-deductible plans combined with more traditional catastrophic coverage.

Tatum/Roulston Report

The Tatum survey this month was a breakout. Although we have seen steady improvement over the last year from the cliff drop in late 2008 and 1q 09, this month was unarguable and most importantly it seems we have finally reached a point where Fed easing is finally leading to banks loosening the reins. With the prospects of financing now seemingly becoming available the prospects of improvement in backlogs, capital spending and employment now seem much more probable and are now more widespread in improvement being recognized across more regions and industries. The fact is that once visibility is perceived in financing it creates a domino effect on overall growth prospects. When the backlog trend becomes more lasting more companies start considering how they are going to grow.

We still take an approach that this downturn had a more significant psychological impact as corporations in general saw a sudden double digit drop when the slowdown hit, banks halted virtually all forms of lending and the consumer was shocked into near panic. This emotion and memory from this shock is not going to go away easily or lightly. The effect is like touching the hot stove and not forgetting the valuable lessons of our painful experience. We feel the slow recovery will continue to be challenged by political instability and the international effects. Investing into many industries and even small business investment in general is affected by Health Care concerns, potential tax implications and a general cloudiness of future predictability. We have stated very often before that market confidence has a direct correlation to visibility. As we now see banks seemingly opening the lending window the clouds clear slightly more. Now the future has one more positive variable but we still find when we talk to companies nobody wants to project trends past the next few months. The last few months nobody wanted to go past 30 days. So there is improvement.

To read the full Survey click here.

Overstock: Controversial, but Finally Profitable and Well-Positioned

A San Francisco presenter admits Overstock (NASDAQ: OSTK, $20.38) is a highly controversial name, but is confident the company has finally turned the corner. Last year was the first time OSTK showed a profit. The company is one of the leading forces in the online liquidation merchandise retail. Overstock has strong relationships with manufacturers of brand-name merchandise and gives them a great platform to efficiently get rid of their excess inventory without poluting their sales channels. The company aggregates a vast variety of items in different categories on its site, providing consumers with easy access to discounted merchandise without having to hunt for it in remote outlets. Overstock has a well-recognized brand and is ranked second among domestic retailers for the quality of its service. With online retail continuing to expand, OSTK is well-positioned for significant upside.

GLP: In a Good Spot to Gain from a Shake Up in Downstream

Our Boston presenter likes Global Partners at this level (NYSE: GLP, $22.55). This wholesaler of refined petroleum products is trading at the same level it did when the company went public in 2005, but it is a much larger operator and positioned better than ever before. GLP stands to benefit as majors try to get rid of their underperforming downstream assets. The presenter believes the company is on a verge of making a sizable acquisition. The company just did an offering to pay off its long-term debt. The stock yields 8.7%.

Zoran: Cash Limits Downside, Significant Upside as Profitability Recovers

A San Francisco presenter believes Zoran (NASDAQ: ZRAN, $10.85) is poised for a substantial upside at this level. The company designs chips for TV's, DVD's, set-top boxes, printers, and digital cameras. Addressable markets are projected to grow from $2 billion to $4 billion in the next three years. The transition to digital and HD in Europe and emerging markets is a big opportunity. Zoran's frame rate conversion technology for high end TV's is industry-first and there is a good possibility Samsung may become a customer. ZRAN did $1.30 in earnings in 2007 and if the company gets back to $500 million in revenues, there is no reason it can't regain profitability shown three years ago. The company has no debt. $8/share in cash limits the downside. The upside is $20, based on cash and $1.00 EPS in 2011.

Syniverse: Positive Trends Across All Segments

Our Dallas presenter continues to recommend Syniverse (NYSE: SVR, $19.53). The stock is up close to 20% since late September when it was originally discussed. The presenter's $24 target is based on a discounted earnings multiple relative to peers. This provider of wireless and data services has been seeing a pick-up in roaming volumes with travel metrics improving. Management gave a low guidance for roamings and the presenter believes there is a substantial upside to be realized. The messaging business acquired from Verisign last year has been performing well above the company's estimates. Operations in emerging markets are showing positive signs as well. The big overriding driver for SVR is the proliferation of smartphones, the trend that will only strengthen going forward.

Health Care update from Washington

So a few weeks ago we had a member of Obama's transition team and a former Hillary Care White House staffer at a roundtable. He said Health Care was dead two days when he talked after the Massachusetts election. What he did not know was the story would break two days later that the (EVIL) insurance companies were going to anounce 30% price increases to make their 2% margin next year. Since with millions of lives that transpires into hundreds of millions in profits this infuriated the two people that matter in Washington as well as their all too willing accomplices. So we had a talk with our Washington connection.
He is dumbfounded by the Hallmark bill. Not only could Washington have accomplished the same ends months earlier without the nuclear option, but this action has poisoned the waters. Pointing out the political suicide of the action, he also discussed that due to the partisanship the issue had already caused thru the two "summits" at this point getting something done was a less worse alternative to not getting something done. Focus groups tell insurers and politicians that if people are told insurers increase costs they will believe it, while if they are told insurers dont save costs they don't believe it. Thus, the third party payer system inherently has a distrusting element that the Democrats understood and were all too willing to incorporate into their agenda.
Now players from insurers to hospital to drug companies to payers have 4 years to make changes. They will. United Health Care is reviewing getting out of the individual health care insurance space. Dupont who self insures and is backed by Lloyds has lost the reinsurance backing (rumor has it). Now with reduced incentives for Medicaid reimbursement California insurers had to make changes. Just nobody thought that the President and Mrs. Pelosi seeing this happening in her state would create the kind of promises and deals so unprecedented in history to ram this thru. The caution ...look out if Republicans get control of the House or Senate and are in charge of oversight after the election,. It wont be pretty what they uncover in the dealmaking. Health Care is now a pure partisan issue. We will get Mark back on the road this summer.

Retail Roundtable in Boston

Shelley Forrester does quite a lot of surveying consumers as does Craig Johnson. They discussed the new definition of value as everyone is trading down on something and more money being spent on the home. A definition that does not know how to cook but yet is making the transition from eating out as often. Branded product is making a comeback yet private brands also winning especially some moving up the quality chain. Stores making better inventory controls and better replenishment helping turns. Spoke of TJ Maxx overcoming poor curb appeal and taking advantage of new MFO sourcing (made for outlet) there buying strength takes advantage of longer runs(paying vendors to make more of brand name product) and similar strategies to keep getting enough product. Finally travel experience getting more and more unpleasant time, money and energy demands getting worse not better a longer range down cycle. Are missy stores seeing turn around. Craig watching trend closely.

Nokia: Still Dominant in Low-End Handsets, Positive Signs in High-End

A New York presenter likes Nokia (NYSE: NOK, $15.42). The stock is up about 15% since it was recommended a couple weeks ago, but there is still significant upside left. The company had been losing ground in smartphones up until recently, but gained market share on the high-end of the handset market in Q4. New versions of its Symbian operating system coming ut in 2010 will make the user experience much more enjoyable and should finally make the platform appealing to app developers. Nokia is seeing some success with is data and messaging offerings. The company is still dominant in the low-end of the market, where its unparalleled scale and stenght of its distibution network make it very hard for rivals to compete effectively.

Air Products: Leveraged to Strengthening US Economy

Our NY presenter believes Air Products and Chemicals (NYSE: APD, $74.55) is a good value at the current level. Volumes are picking up in the company's core onsite gas business. 40% of the company's contracts are long-term, take or pay agreements, guaranteeing a certain level of output sold. APD is expanding into multiple growth areas. There are solid signs of growth in emerging markets, particluarly in Asia. The company had its $60/share all cash offer for Airgas rejected by ARG board, but the presenter believes the deal will go through later this year. Other competitors are not likely to enter a bidding war. If the merger takes place, 60% of APD's business will be domestic, and thus leveraged to the upside in the US Economy in 2011-2012. His target is $90 based on 15 times FY 2011 earnings.

Yum! Brands: Great Potential in China and Other Emerging Markets

A New York presenter likes Yum! Brands here (NYSE: YUM, $37.63). The company has a tremendous opportunity in China. It's the largest QSR chain there, but the penetration rate is only 3%. MCD is the only true global competitor in the country. The company can count on years and years of expansion in other developing countries as well. Management is working to reverse declines in the domestic market, and there have been signs that the US operation is improving. The Street's expectations for a turnaround in NA are low, so if the company is successful, the upside could be significant. The presenter forecasts EPS to reach a $3 run rate within 18 months. At 15x earnings, his target is $45.

Tatum LLC

Sam Norwood is a Senior Partner at Tatum LLC who provides financial staffing and advice throughout the country and monthly conducts the Tatum Survey. As our partners in their review of the economic conditions we have found their monthly insight to be one of the highest value added insights to the economy. Sam overseas the monthly survey and his thoughts here reflect his personal opinion of the economy.

"I am trying to be optimistic about the mid-to-longer term, but my view is actually quite pessimistic. At this stage we cannot grow our way out...it would take double digit growth for over a decade, and this is not in the cards. We3 cannot tax our way out...it would take 15 percentage points added to each level of the marginal tax rates. This is not in the political cards, and even if it was attempted, the result would be economically disastrous. Can we borrow our way out? I don't think so. Currently our own Fed and the Chinese account for over half the purchases of new Treasury bills, notes, and bonds. What happens if China boycotts our debt, just as the OPEC nations stopped shipping us oil for a while in 1973? And, while our Fed probably NEEDS to be buying our debt now in order to keep interest rates low (artificially) what happens when the time comes to unwind the excess levels of liquidity that has been injected to bail the world out of the crash a year ago? No, I think borrowing is also not in the cards to provide a way out. If the healthcare passes, we will be adding another very expensive entitlement our spending, like Medicare/Medicaid and Social Security. If you consider that the sum of entitlements, military, and interest on the debt account for over 80% of Federal spending, that leaves less than 20% that is discretionary. It would take a catastrophe to bring about meaningful spending reductions. Monetary policy can accommodate only so much in accommodating irresponsible deficit spending. Projections currently visualize trillion dollar deficits many years in the future. Typically these projections are optimistic. Then add universal healthcare which the Liberals are now seeing as a fundamental right. The outlook is for an unsustainable trend. As Herb Stein devlared in a profound moment of insight: An unsustainable trend will come to an end". Wonderful. We just do not know how or when, but my view is that it will be a wrenching period of adjustment.

This is not the first time in history that irresponsible governments have gone through extended periods of spending beyond their capacity to tax. The ultimate solution has always (not just sometimes, but ALWAYS) been to debauch the currency. Just run the monetary printing presses and let inflation ultimately bail out the borrowers. We will pay off our debts with cheaper dollars. Our Federal government is not the only entity over its head in debt. How about our states, such as California? The states cannot bail themselves out through currency devaluations (and therefore self-imposed inflation. Therefore, they have a Constitutional requirement to balance their budgets. But many states, especially the more "progressive" are ignoring this legal requirement. They are also playing cook-the-books to hide the biggest part of their liabilities. In the case of California, the reported general obligation debt is approaching "only" $100 billion. State Agency debt, not included in the G.O number, is over $200 billion, and unfunded pension liabilities are also over $200 billion. So, California's debt is over a half a trillion dollars. The rating agencies are threatening to cut their debt ratings. There is talk of the Federal government (our tax dollars) guaranteeing all state debt. If we thought there were corporations that were too big to fail, how about states? States are too big to fail. They would also benefit from a dose of inflation so they can pay off their debts with cheaper dollars.

Individual households are deeply in debt. Much of the middle class is maxed out on their credit cards after having used their homes as ATM machines in refinancing to support their excessive lifestyle for many years. Lower classes are in worse financial trouble. A large percentage of homes are under water financially. A dose of inflation could bring them back so their values might again be higher than the mortgages financing them. Suppose by magic inflation were to double the value of homes and double personal income overnight. Wow. Homeowners could instantly afford their mortgage payments with their higher income. I believe that a populist government, recognizing that there are more voters that are borrowers than lenders, and not being very mindful of the interim turmoil caused by an inflationary spiral, might see inflation as a positive thing and would hope to see more of it. The last thing any administration wants to do is to see the collapse happen on their watch. No administration wants to be the one that has to reduce spending, particularly reductions in "entitlements".

Greece is a perfect example of what could happen in our states. Facing certain defaults on its debt, Greece had to admit to hiding 3/4 of their deficit. The IMF is stepping in with requirements that Greece must implement a severe austerity program that will last for many years. There is rioting in the streets. In Europe this could spread to Spain and Portugal, maybe Italy and Ireland and Belgium. While Greece is small, if the other countries fell into the same situation, the stresses would be come large. These countries are in debt way over their heads through an imbalance in receipts versus disbursements. They cannot bail themselves out using the traditional method of debauching their respective currency because their currency is the Euro. Germany, and to a lesser degree, France, are the only internal sources of European bailouts. How do you think the German and French taxpayers are going to feel about bailing out their less responsible neighbors? This situation could rip the EU apart.

A part of the U.S. investment community seems to be unmoved by these developments. They look at current inflation and say, "What inflation? As long as the Economy is weak we don't have to worry about inflation. You can's push a string. It takes rising demand to pull the string for rising prices". Well, I for one would hope that the current statistical recovery will morph into a full fledged period of economic growth, when we will indeed see the CPI basket of goods and services rise. But inflation can also be seen as the declining purchasing power of the dollar. By flooding the market with liquidity (for instance through the Fed buying huge amounts of Treasury securities) we inevitably diminish the value of each dollar, and this will inevitably show up in a rising CPI.

The overall point of all of this is that as I look out over the next 5 years I am pessimistic because I do not visualize the world getting fiscal control. The ultimate adjustment, when it comes, will be horrific. In the near term, I sometimes feel like the guy who has jumped off roof of the 20-story building and says, as he passes the 11th floor, well, this doesn't seem to hurt a bit."

SuperMedia: Turnaround Play

A New York presenter recommends SuperMedia (NASDAQ: SPMD, $39.40). This publisher of directories just emerged from bankruptcy in January, with a debt load reduced from close to $10 billion to $2.75 billion. Management's much more focused strategy and improving economy make this an attractive turnaround story. The company's unique guarantee program differentiates SPMD from competiton. Strong online presence, growth in direct mail, and opportunities in mobile applications should help mitigate negative trends in print directories. The upside is 100%+, based on comparison to DEXO, a major competitor, which has also gone through bankruptcy.

Tatum/Roulston Report

The pundits just can’t get enough economic data to make their point. Wall Street economists can’t help but compare the current recovery to the past. It just seems they can’t be talking to the same companies, bankers and consumers we see in our travels around the country and the Tatum Survey is hearing every month. As we have said recessions are economic while depressions are emotional. The credit meltdown has had a lasting emotional impact unlike anything we have seen in the last 50 years. Savings, retirements and a good degree of confidence was lost and not soon to be replaced. Political and credit signals are creating ongoing uncertainty and this month in the Tatum Survey, we see that maybe unemployment is slowing but overall employment is not growing. Uncertainty is reflected in sloppy backlogs, capital expenditures and to some extent credit availability.

There is a leaderless funk that is concerning in its breadth. Business has reached a bottom and rebounded to a plateau where business after business we talk to compares to the levels they saw 3-5 years ago with little sign of visibility. There are businesses in isolated segments that are growing and some even thriving with catalysts in technology and health care spending to go along with government stimulus. We are not naysayers, but reality is that consumers are weighing the issues of credit and debt much differently than the last 20 years. Common sense tells us as we look at the state of commercial and consumer mortgages that banks are not likely soon to change their flexibility and generosity. Politicians are entering their “season”, so rhetoric is bound to rise. Our view is the market has pockets of opportunity for good managers. In general valuations reflect sluggish growth. Selectivity, accountability, transparency and diversification are our focus in 2010.

To read the full Survey click here.

Live Nation: Attractive Following Merger with Ticketmaster

A NY presenter likes Live Nation Entertainment (NYSE: LYV, $13.41). The company finalized its merger with Ticketmaster in late January and is now a fully integrated entertainment services platform. Management was conservative with its guidance for cost synergies from the deal and there could be significant upside to company's projections, beginning in 2011. Sponsorships and new ticketing schemes designed to cut out the secondary market for tickets, represent significant incremental revenue opportunities. The presenter targets a 20% upside, but stresses that his estimates don't include potential top-line synergies. The stock is only followed by two analysts currently.