Equity Research and Investment Analysis

It has been an interesting and generally very tough year for stocks related to the video game industry, and yesterday's guidance from game-maker Electronic Arts (ERTS) cast more doubt on the near term future for the industry. According to an article from the New York Times, Americans are choosing to entertain themselves at home more often these days, often with video games. We have our doubts that video game industry will see a year as bad as 2009 again for the next few years, and these stocks are priced attractively relative to many other stocks in the current market environment.

The last couple of years have been just awful for Sprint, but so much of the difficulty has been priced into the stock. When a stock has fallen out of favor like Sprint has, it only takes a few things to go the right way for the shareholders to really benefit. The projections for break even subscriber growth and the emphasis on strengthening the balance sheet are positive developments for Sprint.

Without naming names, the often fiery and always controversial Jim Cramer turned his outrage on another controversial titan, AIG's (AIG) founder Hank Greenberg. The problem as Cramer views it, is that Greenberg was the one that lead the company into its risky derivatives business, but he rarely takes any heat for these decisions. Furthermore, Greenberg has proposed a plan to reduce AIG's debt to the government, and with the stock surging more than 20% on Monday he is being hailed in some circles as a potential savior to the company.

Fundamentals such as revenue and cash flow are certainly extremely weak compared to historical norms for this company, as the company is still hemorrhaging cash, possibly $5 billion in this quarter. However, the near term direction of Ford shares are not being driven by fundamentals.

Interestingly, Credit Suisse is looking to raise capital even after reporting to the world that the start of 2009 has been successful. The implication here is that Credit Suisse may be looking to get aggressive and buy up a competitor at a distressed valuation.

A sweeping downgrade of financials by credit rating agency S&P was one of the major stories of the day. Or on second thought, what does this tell us that we did not already know, and so far the market has not even noticed.

As many companies are cutting staff expenses across the board, Credit Suisse has come up with a clever method of accomplishing two goals at once. For starters, the company will give their employees a bonus the amount of which will not be known for quite some time, and the company is reducing its exposure to risky debt. Interesting idea, I wonder how the CS employees feel about it.

Genworth has seen significant appreciation well in advance of the fundamentals justifying such gains. Analysts are expecting fiscal 2010 earnings of $1.10 which would make the valuation look attractive, but that seems to expect quite a bit out of Genworth’s other units if the mortgage unit will see its peak losses in that year. As capital markets have healed this year, GNW has raised capital through asset sales, a debt offering, and a secondary offering of stock in order to provide a cushion for any future losses.

There is significantly less risk in this bank than probably any other major bank, and their CEO believes that the conventional wisdom regarding New York City is probably too bearish. With a multiple below 13x and a dividend yield around 4.5%, we firmly believe this investment will start to attract some attention as quality becomes more of a premium.

Cramer talked about enormous upside on this deal with Colonial, as their mortgage unit, which had come under DoJ investigation, posses no liability to BB&T. The offering went on sale Tuesday, and so far in morning trading the stock is up more than 2 percent. Clearly, BB&T is having no trouble raising money in the open market.

Clearly, the relaxation of mark to market has served the purpose of giving banks a breather from book value destroying write-downs. However, as Weil exposed, book value is really simply accounting fiction. Many of the credit issues that caused this mess are still yet to be worked out, and at Ockham we remain very wary of bank stocks.

As today's earnings release demonstrates, credit concerns still necessitate fortification of their balance sheet. We will continue advising investors to steer clear of Deutsche Bank for the time being because the recent economic improvements are still vulnerable and the actions of the company do not inspire a lot of confidence in the immediate future.

There were a couple of very interesting pieces of news from the this morning that I believe are important. One, a study by the WSJ, has shown that banks thus far are lending less than before they received the TARP funding. The second comes from a newsletter from John Mauldin that warns of the possibility of more TARP programs headed our way.