The S&A Digest: Buffett buys Bear?

Buffett buys Bear?... Our apologies... There's no bad party in South Beach... China likes steel... Zell likes Mexico...

 Shares of Bear Stearns jumped yesterday on rumors that Warren Buffett has taken an interest in the beleaguered investment bank. According to the New York Times, Buffett called Bear CEO James Cayne one month ago as the stock was approaching $100. Bear is also said to be in talks with commercial banks Wachovia and Bank of America. The news sent Bear's shares up 7.7% yesterday.

 PSIA pick Microsoft's (MSFT) Halo 3 video game brought in $170 million in its first day of sales, smashing any U.S. video game or movie release in history. Microsoft also added 1 million subscribers to its Xbox Live service, an online service that allows you to play and interact with friends for $49 a year.

 Things are looking up for True Wealth pick BHP Billiton (BHP), one of the three largest iron-ore producers in the world. Analysts estimate that iron ore prices will increase 30% next year as Chinese demand outpaces supply. China steelmakers, which buy almost half of the world's traded iron ore, are scurrying for raw materials to produce more cars, railroads, and buildings. One Goldman Sachs analyst sees iron ore prices rising until 2010. Steve's readers are already up more than 120% on the recommendation, and it looks like more gains are on the way.

These iron ore miners are in a situation of pent-up demand, where their only worry is keeping up with supply. Real estate billionaire Sam Zell loves taking advantage of these situations... it's a surefire way to make money. Currently, Zell is producing low-income housing in Mexico, China, and Egypt. The locals are lining up to buy these $6,000-$10,000 houses, and Zell is racking up 25% margins. Zell reported that the sales office for his Mexico operation, Homex, is open 24/7. It is literally selling homes at 3 a.m.

 We goofed in yesterday's Digest. We wrote a brief about PolyMet (PLM) and its increased reserves. Only one problem, S&A Gold Report editor Matt Badiali sold PolyMet on August 17. Our apologies for the confusion.

 New highs: Alnylam (ALNY), Covance (CVD), FLIR Systems (FLIR), Coca-Cola (KO), Arcelor Mittal (MT), Nokia (NOK), Petrobras (PBR), Raytheon (RTN), Sangamo (SGMO), Sinovac Biotech (SVA).

 Porter will take over Digest duty again tomorrow. Being a dad took precedence back at home. Until then... feedback@stansberryresearch.com.

 "As a paid subscriber of 12% Letter, I have purchased Loews, Thornburg Mortgage and PWI. Sure glad I bought PWI because it has helped me offset my losses on the other two. I bought Thornburg literally days before it crashed and burned. I am deeply ambivalent about the PWI deal. The Canadian government has foolishly driven down the price of Canadian royalty trusts and the smart folks in the Persian Gulf are using those depreciated petrodollars to buy bargain hard assets. I sure hope SA is correct about the Green River formation in the Rockies (in this regard, I have been accumulating Questar for more than 20 years). The way things seem to be going, the Persian Gulf folks are moving to control North American energy assets as well as Mideast. In summary, I am a little jaundiced about Tom Dyson's picks."

– Paid-up subscriber Jim Fisher

Goldsmith comment: I don't know what you could be jaundiced about. The vast majority of Tom's picks are up. His portfolio is returning double digits, and he closed his last two positions for 35% and 54% gains. Sure, he lost money on Thornburg Mortgage, but nobody knew how bad that situation was going to be. At least you weren't invested in a Bear Stearns fund.

 If that Ford modeling party where you got the cold shoulder was the 'best' party you went to in Miami, how bad was the worst one, dude?" – Anonymous

Porter comment: There's no such thing as a "bad" party in South Beach.

 "I have a friend that lives near the Olympic Dam area in Australia and this friend has close associations with gold exploration and mining in that area. Here's what he had to say about it: 'gold reserves there were not as favorable as expected. I've heard as the copper and uranium that is awesome in quantity. It's touted that BHP will get 100 years out of that mine at Olympic Dam.'" – Paid-up subscriber Daniel Duke

 "I think you are supporting Dan Ferris's picks blindly. An investor newsletter not only has to guide their subscribers on stock picking, but also when to get out. Dan should have known better than to hang on to Levitt. Thanks to him I am down 22k in LEV. He never came out with a sell on LEV. Does he still believe its a value play. Then he owes it to us to tell us what we do with the Rights offering which is closing on the 28th of this month. Do we buy to average down and if not whats the rationale, since it still appears as a Hold in his newsletter?

"I am really not complaining about all his other picks where I am losing money like DFC (which he could have foreseen coming), MOT, FreightCar, Western Union etc." – Paid-up subscriber Dilip

Ferris comment: Levitt was a pick in the old Real Estate Shareholder letter. When we stopped publishing that letter, we moved the picks to the bottom of page eight of Extreme Value (it's labeled "the real estate portfolio").

I continue to hold it in the model portfolio because I believe it will bottom out at some point. I know the housing lots and the stake in Bluegreen are worth more than the stock price. But the sentiment is terrible, and it's levered enough to really hurt.

Right now, it's in a bit of trouble with lenders. Lenders can call in loans if certain things happen... things like exceeding contractual limits on holding periods and the number of spec units in inventory, exceeding loan-to-value ratios based on current appraisals (i.e., collateral impairments), and continued development where development has already begun. Given the state of things, you can bet all three of these have kicked in, and Levitt is now scrambling to amend the terms so it doesn't have to pay back tens of millions of dollars (or more).

It can't borrow anymore, so it is selling equity with the rights offering – which is just a secondary stock for existing shareholders. It's for up to 100 million shares at $2 each... And Levitt has about 20 million shares outstanding right now. Ouch.

If the offering gets sold out, Levitt can probably pay down some of its debt and maybe even complete some of the halted development.

 Levitt's CEO has reduced his annual salary from $515,000 to $1. And the company is laying off 200 employees, about half the workforce of the Levitt and Sons homebuilder subsidiary.

Levitt was spun off from BankAtlantic Corp. in 2003 or 2004. That's how Third Avenue got it. It's one of two housing developers Third Avenue still holds. (It hasn't sold a single share.) The other is MDC Holdings.

I can't give individual advice, but if I had real money in the stock, I wouldn't make my decision based on how much of the company I wanted to own after the rights offering. I'd make it based on how much I already had in it. If I wanted to increase my position size, I'd buy into the offering. If not, I wouldn't.

Regards,

Sean Goldsmith

Baltimore, Maryland

September 27, 2007

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