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Friday, September 19, 2008

Government unleashes orgy of stimulus

The SEC has changed the rules and short sales of financial stocks are no longer permitted. If the rally in the financial stocks fails, it will be catastrophically confidence destroying. I find it hard to believe it was shorts crushing the financial stocks. Frankly there just isn’t that much short money relative to the amount that buys stocks. Hedge funds make up 10% of the market – they are far more than 10% of the volume but most hedge funds still carry a long bias. Trust me… there were guys that owned the stocks selling them too.

The Treasury is insuring money market funds. The fact that they felt it necessary to insure them is terrifying as it means the egregious credit speculation of the last decade threatens to undermine even dollars that were not put at risk – savings account dollars.

Congress is trying to rush a package together to create a Resolution Trust–type fund to stick full of bad paper. Effectively, the government is going to create a gigantic off balance sheet warehouse for banks. The plan seems to call for the government entity to buy bad paper on the cheap from struggling financial institutions, leaving the banks and brokers hobbled by billions upon billions of dollars of write-downs but solvent. Over the next several years, the government will in turn try to extricate themselves from the positions. Preliminary estimates put the cost of the bailout at a trillion dollars.

Though the stock market is up several percent since news of these actions were leaked to the media, the severity of these issues and the fact that these problems will fester and linger in the coffers of the government suggest to me that recovery will remain elusive. If the government buys these obligations for 10 cents on the dollar, they’re going to be happy to sell them for 20 cents on the dollar. Credit values have collapsed and are being locked in at depressed levels. We are going to be unwinding the excess of the last several years for several years.

There will be no v-shaped recovery here. Earnings estimates are going lower and growth will be harder to come by.

Thursday, September 18, 2008

WSJ: SEC plans to temporarily ban short-selling


SEPTEMBER 18, 2008, 8:13 P.M. ET

SEC Plans to Temporarily Ban Short-Selling By KARA SCANNELL and DEBORAH SOLOMON


WASHINGTON -- The Securities and Exchange Commission took its most aggressive assault against bearish stock bets by stating its intention to issue a temporary ban on short-selling.


SEC Chairman Christopher Cox briefed Congress late Thursday of the agency's intention to take the extraordinary step of interfering with the market's regular functioning. Short-selling is a trading strategy of selling borrowed stock in hopes it falls and can be repurchased at a lower price.


It's unclear if the SEC's intention has been approved by the commissioners, which is required, and whether which stocks are covered or for how long it will be in effect. Earlier this summer, the SEC moved to restrict certain short-selling practices for 29 days, covering 19 financial stocks.


Thursday, the U.K.'s Financial Services Authority said it would ban short selling in financial stocks until January. The FSA said it would review the effect of the ban each month. The FSA also announced additional disclosure requirements from hedge funds of short-sales if a certain threshold is met.


The SEC's decision comes amid increasing concern that short-sellers are abusing legal trading strategies to drive financial stocks lower. Since the near-collapse of Bear Stearns & Cos. in March, regulators have been looking into a combination of short-sales and false rumors are part of the problem.


U.K. Treasury Chief Alistair Darling, who was involved in the FSA's decision, said in a statement Thursday, he welcomed the FSA's "decisive action." He said in current market conditions it was in the "interests of financial stability."


In a short sale, a trader sells borrowed stock, hoping it will fall in price and can be repurchased later at a profit.


The pressure to step up efforts against short-selling gathered steam since last weekend when Lehman Brothers Holdings Inc. steered toward bankruptcy and Merrill Lynch & Co looked for a buyer. Wall Street executives urged Mr. Cox to take steps to slow the sell-off, which they believe is triggered by heavy short selling.


Investment banks are particularly vulnerable to low stock prices as it hurts their ability to raise capital to secure their funding.


The SEC sped up its rule-making and on Wednesday the SEC announced three trading rules that were aimed at curbing abusive short selling. That was followed late Wednesday night with intentions to require hedge funds to disclose more information about their short positions.


Write to Kara Scannell at and Deborah Solomon at


Sandisk faces a dilemma

In their disclosure of their $26 offer for Sandisk, Samsung asked for information about their "relationship with Toshiba, forecasted operating plans, R&D projects, technology roadmaps, key employees and pending litigation". This is pretty much an espionage shopping list in my opinion.

The following day, a mysterious story appeared in the Japanese press discussing Toshiba’s results being well below forecast. The company refused comment. That smells like a plant to me that highlights Toshiba’s own problems in NAND manufacture and potentially puts them in a shareholder unfriendly spot if they look to double up on NAND (which is what buying Sandisk would effectively do for them as Sandisk is their 50% partner in NAND).

Samsung did not make an official offer. This is similar to what Microsoft did with Yahoo and what Electronic Arts did with Take Two. In doing so, they reserve the right to walk away. This is sort of a no-lose situation for Samsung in that they could get access to their primary competitor’s trade secrets and leave them hanging.

I don’t envy Sandisk’s management who are likely to face shareholder pressure to pursue the deal with Samsung. I think Toshiba will be hard pressed to put up the cash to counter. I totally question Samsung’s true motives. And I also don’t blame them for wanting to understand the JV structure better. I would also like to understand it better and Sandisk’s JV disclosure is foggy to say the least. As I’ve said before, Sandisk’s JV structure seems to seek to mask manufacturing operations, not shed light on them.

Good move, Samsung. Good luck, Sandisk.

Tuesday, September 16, 2008

Fed not acting all that reserved; more questions than answers.


Fed finances takeout of Bear Stearns by JP Morgan. Fed puts FRE and FNM into conservatorship. Fed flat out lets Lehman go belly-up -- JP Morgan loans them 87 billion and NY Fed repays it the next day.

Fed agrees to loan $85 billion dollars to AIG to give them time to dispose of their assets in an orderly fashion. The first asset they're disposing is management. The Fed now owns 80% of the company's equity.

Fed injects 70 billion dollars of liquidity into the system today – prior to AIG – but doesn't ease as had been widely expected.

It's a pretty stunning series of maneuvers from an institution that only a few short years ago was known for it's tight lips and long-term view. The Fed must see the credit crisis as a short-term phenomena as it's wiling to take on so much short-term risk.

If you had been following a company for 50 years and it made such a dramatic shift in business behavior, would you feel comfortable?

Two weeks ago, would the Fed have been able to tell you about their plans to buy AIG? Do they run scenario assessment like the Defense Department, figuring out where they might next be attacked, trying to figure out how to avoid killing the most people? Or is this all happening so quickly that they're just reacting?

What would the Fed's balance sheet look like?

Would you want to buy their bonds, knowing the underlying asset was rapidly shifting towards illiquid financial instruments?

These may be brilliant moves. History will know better than we do at this moment. I can't help but feel disconcerted. I'm glad AIG isn't going to fail – it obviously would have been catastrophic. I'm also very frightened that it came down to the Fed having to step in when it seemed to be clear yesterday they didn't want to do anymore bailouts.

The market is extremely jumpy and with good reason. Every day a new sky is falling. Today the Fed elected to catch AIG. So maybe we get a relief rally. Maybe we bounce.

Like Bruce Willis in Armageddon, Bernanke has saved the earth today. Come to think of it, he died doing that, didn't he. Ok, bad analogy. I hope.

We remain in uncharted territory. I would be surprised if that was the last sky to fall… wouldn't you?

I invite your comments and answers because I'm all out.

WSJ reports Sandisk intends to reject Samsung's bid

This could get pretty interesting.

Samsung proposes $26 cash for Sandisk

-- s

Combination Would Deliver Substantial Immediate and Long-Term
Value to Shareholders of Both Companies

Combined Business Would Have Superior Global Brand, Unparalleled
Technology Platform and Scale, and Resources to Drive Convergence
SEOUL, Korea--(Business Wire)--
Samsung Electronics (005930:KS) ("Samsung") today announced that
it has sent a letter to the Board of Directors of SanDisk (NASDAQ:
SNDK) ("SanDisk") reiterating its proposal to acquire SanDisk for $26
per share in cash.

The full text of the letter follows:

September 17, 2008

Board of Directors
SanDisk Corporation
601 McCarthy Boulevard
Milpitas, CA 95035
Attention: Dr. Eli Harari, Chairman and Chief Executive
Mr. Irwin Federman, Vice Chairman and Lead
Independent Director

Dear Eli and Irwin:

We are in receipt of your letter dated September 15, 2008 and are
deeply disappointed that after four months of discussions and meetings
- in Seoul and San Francisco - about a possible business combination,
SanDisk Corporation ("SanDisk") continues to cling to unrealistic
expectations on both its standalone market value and an appropriate
merger price. Under our proposal, which we are reiterating here, we
remain prepared to acquire all of the outstanding shares of SanDisk
for $26 per share in cash. As you know, our proposal is not subject to
any financing contingency and the entire purchase price will be funded
with our cash on hand and available financing.

This offer is full and fair and we believe that, given an
opportunity, your shareholders would agree. It constitutes a very
substantial premium to SanDisk's share price and would deliver to your
shareholders an immediate cash premium of 93% over SanDisk's closing
share price on September 4, 2008, the day before news reports
indicated that we were in discussions about a business combination.
Furthermore, it is a premium of 80% over your closing share price on
September 15, 2008, and a 66% and 164% premium to your 30-day weighted
average price and enterprise value as of September 4, 2008,

Despite the significant premium we propose to SanDisk's current
stock price, your letter states that our proposed price does not
"reflect the intrinsic value of SanDisk's business" and references the
52-week high. The world has changed dramatically in the past 52 weeks
as can be seen from SanDisk's own disappointing results. Consumer
spending and the overall economic situation have been getting worse.
It will take the NAND flash market quite a bit of time to recover.
Notwithstanding the current market conditions, to stay competitive,
SanDisk will need to fund critical investment and development over the
next several months - cost cutting alone will not suffice. Our offer
insulates your shareholders from the risk of market conditions that
have severely deteriorated and are expected to remain challenging. As
highlighted above, we strongly believe that there is significant
execution risk of achieving any stand-alone plan.

While it has been and remains our strong preference to continue to
work with you to reach a binding merger agreement in a cooperative and
expeditious fashion, we have become increasingly concerned that the
lack of progress is not serving the interests of either company's
shareholders. For this reason, and the fact that speculation has grown
since the early September news reports, we feel compelled to clarify
our intentions publicly.

Compelling Business Logic

Our many meetings and conversations over the last several months
have served to confirm for us that a combined Samsung-SanDisk would
have a superior global brand, an unparalleled technology platform and
the scale and resources to drive convergence in the marketplace. With
SanDisk's innovative culture and technology leadership and Samsung's
scale, leadership in manufacturing and execution, and strong systems
and consumer electronics segment knowledge, the combined company would
be well positioned to accelerate the adoption of flash memory
technology in new markets. We can also establish the platforms and
capabilities necessary to position flash as the preferred vehicle for
delivery and storage of a wide variety of content, such as film, in a
way that would not be possible for either of our companies alone.

As we have seen in recent months, markets have become more
turbulent and global economic trends are negative. At the same time
the competitive environment remains challenging. To survive and
compete in these times we will each need to leverage our resources and
rely upon a strong balance sheet to fund critical investment and
development through good times and bad. Separately investing in
necessary state of the art facilities will be a significant tax on
your business in the near term. In addition, reliance on IP and
enforcing it is a costly and uncertain business for both our
companies. Faced with these challenges, now is the time to merge.

SanDisk's Management and Employees

SanDisk is widely recognized for the quality of its people and its
culture of innovation. For our part, that is a key reason we are
attracted to your company and a significant portion of the transaction
value to us is represented by the talented management and employees
that we hope would continue to work for the company going forward. Our
intention is to operate SanDisk as a separate subsidiary company
inside of Samsung and to maintain the environment that has contributed
to your success. We have a long term commitment to the space,
financial stability and a strong desire to grow the SanDisk platform,
thereby creating significant new opportunities for SanDisk employees.
We do not plan to cut jobs - rather, we want to work with you to find
the best way to structure incentives to retain and motivate your key
talent following the transaction.

Process and Deal Certainty

At our July 22 meeting in San Francisco you proposed a process in
which Samsung would forego customary due diligence, not only until all
transaction terms including price are finalized and documented, but
also until we had completed negotiation and execution of a replacement
IP licensing agreement and a new supply agreement, neither of which
would ever come into effect if an acquisition transaction were
finalized. You have also requested as a condition to moving forward
that we provide you with some form of assurances as to regulatory

Although there had been a lack of progress over 14 months of IP
discussions, we dedicated significant time and energy to follow the
path you outlined in order to reach an agreement. Unfortunately, the
process you outlined in July has resulted in no meaningful progress
toward a transaction in the intervening eight weeks. Despite our
substantial efforts on the IP front, you have agreed to schedule only
two meetings since July and during those meetings you have been
unwilling to engage with us on any productive proposals that
adequately recognize the changed market dynamics in your markets and
the decline in value of your patent portfolio in the period since the
IP license was last renewed.

As to the regulatory process, we have repeatedly expressed our
confidence that this transaction will receive all necessary
governmental approvals and we remain willing to immediately engage
your experts to discuss the regulatory process. You have yet to even
identify to us who is acting as your counsel on these issues. Having
dedicated significant time and resources in evaluating this
combination with our external counsel, we do not foresee any issues
that could not be resolved. We again extend the invitation for your
advisory team to engage with our counsel, subject to customary
protective provisions, to share our respective views on this topic.

Confirmatory Due Diligence

Although we have completed extensive preliminary due diligence
based on publicly available information, our proposal is of course
subject to confirmatory due diligence and the negotiation of a
definitive merger agreement. Key due diligence topics that underlie
the value in our offer include your relationship with Toshiba,
forecasted operating plans, R&D projects, technology roadmaps, key
employees and pending litigation.

Again, it continues to be our strong preference to work together
with the SanDisk Board to reach a mutually agreeable transaction. We
have drafted and are prepared to send to you a due diligence request
list and a draft merger agreement. We again urge you to engage with us
promptly in a productive discussion about our proposal.


Yoon-Woo Lee
Vice Chairman and Chief Executive Officer
Samsung Electronics Co., Ltd.

Financial and Legal Advisors

Samsung has engaged J.P.Morgan Chase & Co. and Allen & Company LLC
as its financial advisors, and Sullivan & Cromwell LLP as its legal
advisor in connection with the proposed transaction.

About Samsung Electronics

Samsung Electronics Co., Ltd. is a global leader in semiconductor,
telecommunication, digital media and digital convergence technologies
with 2007 consolidated sales of US$103.4 billion. Employing
approximately 150,000 people in 134 offices in 62 countries, Samsung
consists of four main business units: Digital Media Business, LCD
Business, Semiconductor Business and Telecommunication. Recognized as
one of the fastest growing global brands, Samsung is a leading
producer of digital TVs, memory chips, mobile phones and TFT-LCDs. For
more information, please visit

Forward Looking Statements

This press release contains forward-looking statements, including
those related to Samsung's proposal to acquire SanDisk, which are
subject to various risks and uncertainties, which could cause actual
events or actual results to differ materially from those expressed or
implied in the forward-looking statements contained in this press
release. Among other factors, the proposed transaction described in
this press release could be affected by whether the proposed
transaction receives the support of SanDisk and can be completed
timely and successfully as well as changes in the economic and
business environment. Many of the factors that will determine the
outcome of the subject matter of this press release are beyond
Samsung's ability to control or predict. All information in this press
release is as of September 17, 2008 and Samsung disclaims any
obligation to update any forward-looking statements whether as a
result of new information, future events or otherwise.

Sard Verbinnen & Co
Jim Barron or Kathryn Kranhold
New York - +1-212-687-8080
Elizabeth Hanahan or Lucy Neugart
San Francisco - +1-415-618-8750

Copyright Business Wire 2008

Hewlett Packard – what you see is not what you’ll get


Last night HP offered some estimated cost savings from the EDS acquisition. They also reiterated guidance for the quarter.


Dell does 95% of their business direct to customers. Hewlett Packard, on the other hand, sells to distribution. This creates a ready-to-go inventory channel for the company. It also allows them to say business is fine without talking about the dynamics of fine. It would be very surprising if Ingram Micro and Dell saw all this weakness and it wasn't affecting purchases of HP machines. I think inventory in the channel has to be high. Typically HP stocks distributors during the summer in anticipation of the "back to school" fall and begins to stock in front of the holiday buying seasons. If they're not seeing weakness in this quarter, I would expect they'll see it in the next.


I think the strength in the stock is a great time to get short the stock. They're telling you that their customers haven't yet pulled back when their customers are telling you that demand is materially below their expectations. That's a setup for disappointment going forward.


Toshiba talks of counter-bid for Sandisk

This is strange as Samsung hasn't made a bid yet, but buried in an article on the tape:


"We need to take preventive steps, if (SanDisk) looks like

it'll be acquired," Corporate Senior Vice President Shozo Saito

told reporters on the sidelines of the Industry Strategy and

Technology Forum on Tuesday.

When asked about the possibility of a bid, he said Toshiba

"was interested" but added that it was not in concrete talks.


Sandisk is going to have a disaster of a quarter. No hurry here.

[5:36pm: Samsung had in fact already made an undisclosed bid.]

IT falls into a black hole of demand


For the second time in a month, Dell is on the tape pre-announcing. Ingram Micro, the largest worldwide distributor of IT products, sang a similar tune. Dell says worldwide demand is still bad. Ingram Micro says Europe did not rebound after the summer as it typically does. Tomayto, tomahto.


Tech seems to be getting relatively inexpensive. But then again, it seems like everything else is getting cheaper too. I've bought a couple of stocks because they're cheap. They seem like mistakes now.


A couple of weeks ago I had suggested Dell belonged in the mid-teens. We're almost there. I have a feeling this collateral damage from the credit markets is likely to make you wrong even if you're right on fundamentals here. It's not like you see a lot of stocks jamming on good earnings.


Material weakness at Dell and Ingram Micro likely means ripples through the supply chain. Expect Q4 outlooks to come down pretty hard. HPQ looks pretty vulnerable as they're a big Ingram Micro supplier.



The shape of things to come

"Let the old world make believe
It's blind and deaf and dumb
But nothing can change the shape of things to come"

  • The Ramones

Watching CNBC yesterday was like watching CNN during a hurricane – every report was about the financials – why Bear and not Lehman, why buy Merrill when it was clearly going to get cut in half on the Lehman news, will anyone (please?) rescue AIG… more like an extended plea than reporting. Paulson gets up there and blames it all on housing was perhaps the most chilling and telling moment. He doesn't get it.


When Bank of America can walk into Merrill and 48 hours later decide it's worth paying a massive premium to buy them, it seems the people who really should know if things are stabilizing couldn't possibly. 48 hours is an incredibly short time to do due diligence on so massive a risk proposition. They were afraid to miss it? Seriously? They bought Countrywide a few months ago – could Countrywide really be fully realized? The only thing they've accomplished is they've made themselves too big to fail and the Fed may say they're not backing anyone but they're backing BAC if it gets stuck whether they want to or not.


What we have is not the aftermath of a housing bubble. We have a financial product bubble. This is a big distinction. Housing is a bubble within a larger bubble, a symptom of the deeper problem of newfangled credit products that buyers and sellers alike seemed to not understand. Risk on top of risk on top of risk – in the same way Long Term Capital was leveraged 100:1 and saw it's bet go awry – this is the underlying ailment. What we are looking at will not be solved by saving Bear or by taking the GSE's into receivership. An 11th hour sale of some AIG asset with intangible downside will not rescue the system. We are watching a massive unwind of leverage of unprecedented proportions at all levels of finance. Thar will be blood.


When the internet stocks crashed, there was no big retracement rally. The stocks went down and down and down and ultimately sat there. For years. And no one cared. They were hopeless, doomed, unloved, cast aside like a bad memory. They had gone from the front pages to the pink sheets. They had come off of people's quote screens. Everyone was not watching one stock (AIG) for a green light. They were NOT every single story on CNBC. They were gone.


The truth of the matter is this will take time. And pain. A lot of it.



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