S&A Digest: Off tomorrow

Off tomorrow... The death of BOA?... The official bear... Family Dollar jumps 8%... Commercial real estate rout... Dell buying Dell... We're not the Oxford Club...

 We're not publishing The Digest tomorrow... The office is closed to celebrate the Fourth of July. But keep your eyes on your inbox; we're sending out a special offer.

 Bank of America's (BOA) acquisition of Countrywide Financial closed yesterday, with just about no one noticing.

It's as though a news bulletin interrupted an episode of American Idol to say a giant meteor headed for Earth would arrive in an hour... and our greatest anxiety was over the minutes of Idol we'd missed.

 Perhaps Ken Lewis, CEO of Bank of America, is reflecting on the last words of the philosopher Socrates. "I drank what?"...

I can understand Lewis wanting to buy $60 billion of thrift deposits for $6 billion (including its previous $2 billion investment). I can't understand him wanting anything to do with Countrywide's poisonous mortgage business.

Bank of America now yields more than 10.5%. Is it a bargain? Or is the fat yield a flashing red sign indicating massive risk? I choose the latter, and I expect the dividend to be cut late this year or early next year. Once Countrywide's losses start working their disappearing act on the bank's capital position, BOA will need all the cash it can retain. With half a dozen preferred dividends to pay, the common dividend is the easiest thing to cut.

 We're officially in a bear market. The Dow closed yesterday at 11,215.51, down more than 20% from its October 9 high of 14,164.53.

 People have no money to spend now that gas is above $4. Food prices have doubled, and stocks are going down. In particular, retail stocks are suffering... except for dollar store Family Dollar. Family Dollar announced its highest quarterly profit in eight years yesterday, and the stock jumped more than 8%.

 Commercial real estate is feeling the recession... Rents grew 0.7% in the second quarter, the slowest rate since 2005. Meanwhile, inflation rose at least 1% last quarter, leaving landlords at a loss. And for the second quarter in a row, businesses vacated more office space than they leased. The national vacancy rate is up to 13% from 12.8% last quarter.

 Shares of Dell have dropped 26% since last October, and Michael Dell, who returned to the CEO position, is buying. Between last Friday and Tuesday, he plowed $100 million into the company. The purchase, one of the largest insider buys in the last five years, brings Dell's holdings to 12.4% of the company.

 Michael Lewis worked at Salomon Brothers during the glorious 1980s bond-trading days. He wrote a book, Liar's Poker, about his experience. He's since retired, but still writes books and an occasional piece for Bloomberg. In his latest Bloomberg article, he provides a beautiful analogy for Wall Street:

The first thing you need to know about recessions is that they don't signal the end of anything on Wall Street. They're more like a red flag during a Formula One race: The cars coast gently around the track until the wreckage is cleared whereupon they all roar off as if the accident never happened. The difference on Wall Street is you can make the disaster work for you. You can inch your car quietly forward, so when the race resumes, you're its surprise leader.

 Our friend at the blog Leveraged Sell-Out writes some of the best Wall Street satire around. After graduating from Princeton, he moved to New York and lived with nine bankers. Their absurd conversations, in particular a shouting match over whose bonus would be biggest, and general disillusionment inspired him to write. He got his start after sending a cover letter to Lehman Brothers for an investment banking position...

I realize the possibility of long hours exists in such a position, and I am ready to work as hard as necessary. I have been practicing staring at a computer monitor for extended hours, I can currently sit motionless in front of a screen for 28 hours, and I am improving daily.

His letter quickly made it around Wall Street inboxes. Now, four years later, his blog boasts one of the biggest readerships in the industry. To read his latest post, click here...

 New highs: none.

 Enjoy your weekend. If you feel like sending us angry e-mails from your beach chair, we'll take 'em... feedback@stansberryresearch.com.

 "A study proved this years ago... thats why esso changed name to exxon." – Paid-up subscriber David

 "Unless something's changed, I believe the FASB is the Financial Accounting Standards Board, vice Federal." – Paid-up subscriber Jack

Goldsmith comment: Our mistake.

 "I see no discussions on the failure of the SLX drop. And I believe the VFH position will not fare too well in the long run when the total bank info becomes public. It is suggested you carry a time/date stamp with all new positions. I find it impossible to match most of your entry prices in a fast market. – Paid-up Oxford life member, Walter Lamb. P.S. If this is not the right address, please forward." – Paid-up subscriber Walter Lamb

Ferris comment: You've got the wrong people, Walter. We aren't the Oxford Club; we're Stansberry & Associates Research. And while we share a common shareholder (Agora, the world's largest financial newsletter holding company), we are seperate entities. We have nothing to do with Oxford's recommendations or its editorial policies. But I'm sure it maintains a customer service forum where you can send your concerns.

By the way, I encourage you to take a look at our Alliance program. If you join now, you can come to our annual Alliance meeting, which will be held in Hong Kong this year.

Regards,

Dan Ferris

Medford, Oregon

July 3, 2008

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