Stephen’s Posterous

Wesco Financial is headquartered in Pasadena, California. The company’s Chairman is Charlie Munger, known as the business partner to Warren Buffett, head of Berkshire Hathaway.  The 85-year-old billionaire wears thick glasses and is Berkshire's Vice Chairman.
 
Mr. Munger says, "We've got our own peculiar operating model. Nobody else operates the same way or stays in the game in a major corporation as long as we have, so we've got a different model. And we like it that way."

Mr. Munger and Mr. Buffett work 1,500 miles apart. Mr. Buffett works in Omaha, Nebraska, while Mr. Munger works in Pasadena. The two men have built up an impressive record by sticking to the basic principles of value investing by buying companies in industries they understand, with managers they trust, at cut-rate prices, writes Justin Baer of the Financial Times.

Mr. Munger is credited with helping Mr. Buffett move beyond buying stocks for no other reason than that they were cheap. There are no regular meetings at Berkshire, no company standard management.  Berkshire owns 80% of Wesco. Wesco's annual meetings are held each spring in Pasadena and the event has a devoted following among investors.
 
Mr. Munger is a voracious reader. His conversations and writings are peppered with references to philosophers, psychologists and inventors whose works and life stories he has studied.To read what Mr. Munger enjoys reading, take a look at Seeking Wisdom: From Darwin to Munger by Peter Bevelin.

While Mr. Munger and Mr. Buffett no longer speak daily, they do speak weekly, and they have never had an argument. "We are having a huge amount of fun understanding how the world works," Mr. Munger says.
 
Mr. Munger has amassed a big fortune in part because of his association with Mr. Buffett, but has also built a loyal following of his own.  At Berkshire Hathaway's annual meetings in Omaha, Charlie Munger plays the role of Warren Buffett's cantankerous sidekick. His most famous phrase is, “I've got nothing to add." Brevity is something Mr. Munger is familiar with.
 
Mr. Munger's views on new financial services regulation is this: "I don't see why a major investment bank, with its too-big-to-fail government guarantee, should be allowed to be anything but a very boring business."

Read more about Charlie Munger is a previous post.

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The Financial Times reported that Byron Trott, a former Goldman Sachs banker, and frequent financial adviser to Warren Buffett, has raised more than $2bn in capital for his investment firm.

The fundraising success highlights the spotlight that has accompanied Mr. Trott's role as Warren Buffett's preferred and trusted investment banker.

BDT Capital Partners, the venture Mr. Trott founded earlier this year to invest in and advise family-run and entrepreneurial businesses, continues to seek additional commitments. The firm has also begun to add senior dealmakers including Don McLellan, former head of mergers and acquisitions at Motorola.

Mr. Trott worked for Goldman Sachs for 27 years and headed the firm's Chicago office before launching on his own. He has been singled-out repeatedly by Mr. Buffett for his skill in either advising Berkshire or bringing deals to his attention. Berkshire Hathaway holds a modest partnership interest in BDT.

Mr. Trott's departure from Goldman Sachs and BDT's Buffettesque investment strategy has driven speculation that he may be among those Mr. Buffett is considering as his successor as Berkshire's chief investment officer.

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"How serious is the present economic mess?" Munger asks. "Deadly serious. The worst mess since the Great Depression. You can't tell what happens when people get discouraged enough."

He praised the government's aggressive response to the crisis. But he says it might not work -- and cites the example of Japan, where significant government intervention in a financial crash was ineffective.

Mr. Munger is positive on stocks today, but negative on the economy. And does he think Coca Cola and Wells Fargo are good investments? Yes, he does.

Kathy M. Kristo from the Los Angeles Times continues:

"The natural consequence of capitalism is that some companies succeed and some companies die," Munger said. But capitalism, he said, doesn't equal deregulation. Financial firms, which were at the forefront of the economic cataclysm, need to be re-regulated into boring, slow-growing businesses, Munger said.

"I don't see any reason why a major bank that was 'too big to fail' should be anything but a very boring business," he said. "I don't see any reason why you should have a system where every bright young man fresh out of college should have $8 billion to play with."

"If you wait until the economy is working properly to buy stocks, it's almost certainly too late," he said. "I have no feeling that just because there's more agony ahead for the economy you should wait to invest." But you need to be selective.

Green energy is an example. A government push toward sustainable businesses might help revive the economy, but dumping money into every environmental firm to come along would be a dangerous path.

Here's the Story on Berkshire's Munger by Scott Patterson, WSJ.com

Warren Buffett is synonymous with Berkshire Hathaway Inc., getting credit for billions of dollars in big deals that have made him an icon to investors around the world. But on the one day a year when he faces his shareholders, at his side will be his longtime partner, Vice Chairman Charles Munger.

On May 2, 2009, the partners will take their decades-old act back to the stage in Omaha, Neb., telling thousands of loyal shareholders that they see huge opportunities amid the financial crisis that drove Berkshire to its worst performance since Mr. Buffett took it over 44 years ago.

The two men, Mr. Munger, 85 years old, and Mr. Buffett, 78, speak frequently and confer about most deals, but there are differences. Mr. Munger is laconic; Mr. Buffett loquacious. Mr. Munger leans Republican; Mr. Buffett tilts Democratic. Mr. Munger will pay hefty price tags for businesses; Mr. Buffett likes safe, dirt-cheap stocks.

Mr. Munger's views have pushed Berkshire into some surprising directions. Several years ago, Mr. Munger learned of an obscure Chinese maker of batteries and automobiles called BYD Inc., which hopes to create a cheap, functional electric car.

A Chinese tech company is nothing like the shoe and underwear makers Berkshire had been buying. But Mr. Munger was enthusiastic, less about the technology than about Wang Chuanfu, who runs BYD. Mr. Wang, Mr. Munger says, is "likely to be one of the most important business people who ever lived."

Mr. Buffett was skeptical at first. But Mr. Munger persisted. David Sokol, chairman of Berkshire utility MidAmerican Energy Holdings Co., paid a visit to BYD's factory in China and agreed with Mr. Munger's assessment. Last year, MidAmerican paid $230 million for a 10% stake in BYD.

"BYD was Charlie's idea," Mr. Buffett said. "When he encounters genius and sees it operating in a practical way, he gets blown away."

Mr. Munger also was an advocate of Berkshire's $4 billion investment in Iscar Metalworking Cos., an Israeli maker of metal-cutting tools, in 2006. The investment was relatively pricey, especially given Mr. Buffett's preference for cheap companies. But Mr. Munger convinced his longtime partner that Iscar was worth the cost.

The deal helped pave the way for other large investments by Berkshire in companies outside the U.S. Results on the two investments haven't been reported.

The men share a view that the U.S. financial system will change, and criticize past excesses. "People were horribly overpaid for just pouring on leverage," Mr. Munger said. The two investors have repeatedly warned about the systemic risks posed by the abuse of leverage and derivatives.

Mr. Munger thinks regulators may significantly curb the amount of leverage, or borrowed money, that banks can use. That will drive down pay at Wall Street firms, since traders won't be able to make as many big, leveraged bets. This could benefit Berkshire, with its cash hoard of $24.3 billion at the end of 2008. "There's going to be new rules in the game," he said. "For someone like us, that's going to be very interesting."

Saturday's meeting comes after the worst year in Berkshire's history, when it lost 9.6% in book value per share, a common metric it uses to track its performance. It marked the biggest decline since Mr. Buffett took over the company in 1965, when it was an East Coast textile maker, and turned it into an investing powerhouse. Berkshire's shares have fallen 36% since September.

The two investors say they expect Berkshire to return to form in the near future, and they continue to collaborate. They speak on the phone at least once or twice a week from their respective offices, Mr. Buffett in Omaha, Mr. Munger in Pasadena, Calif.

"Charlie understands the essence of a lot of businesses probably better than people in those industries do," Mr. Buffett said. "He gets right to the point of it quicker than anyone I've seen."

Mr. Munger grew up in Omaha and joined the U.S. Army during World War II, serving as a meteorologist in Alaska. After the war, he earned a degree from Harvard Law School and became an attorney at a California firm. He also became a serious investor. He met Mr. Buffett in an Omaha restaurant in 1959. After working together on a number of investments for many years, the two joined forces full time at Berkshire in 1978, when Mr. Munger became vice chairman.

One of their early deals is one of Berkshire's best-known brands. In 1972, Mr. Munger helped persuade Mr. Buffett to participate in a joint purchase of See's Candies, a California boxed-chocolate maker, for $25 million. While the price seemed steep by some measures, the deal was wildly successful, producing more than $1 billion in pretax earnings.

Without such investments, it isn't likely that Berkshire could have grown as large as it has, says Whitney Tilson, manager of T2 Partners LLC, a New York money manager that owns Berkshire stock. He says: "Munger helped Buffett appreciate some of the higher-quality investments that lead to multibillion-dollar outcomes several decades later."

Financially, Mr. Buffett has done better. He boasts a net worth of $37 billion in 2008, according to Forbes magazine's list of the world's wealthiest people, putting him at No. 2 in the world behind Microsoft Corp. founder Bill Gates. Mr. Munger placed 522 on the list, with a net worth of $1.4 billion.

Mr. Munger has won the respect of Mr. Gates, who sits on the company's board. When the Justice Department accused Microsoft of abusing monopoly power with its Windows operating system in the late 1990s, Mr. Gates says he sought out Mr. Munger for legal advice. He also consulted Mr. Munger when considering how to set up his charity, the Bill & Melinda Gates Foundation.

"Warren wouldn't have done nearly as well without his help," Mr. Gates said in an interview.

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Though it's the largest packaged-food manufacturer in America, Kraft Foods (ticker: KFT) doesn't seem to get much respect from investors. The company boasts brands that are entrenched in American culture, from Nabisco crackers and Oreo cookies to Maxwell House coffee and Oscar Mayer processed meats.

For years Kraft was beleaguered by a bureaucratic operating structure and a stagnant pipeline. Many attribute these flaws to the corporate culture at former parent Altria Group (MO). Kraft went public in 2001 and Altria fully divested its stake in 2007. Kraft has been undertaking a massive turnaround to revamp its pipeline and create a more nimble corporate structure.

However, these gains have been offset by the run-up in the costs of the food maker's raw ingredients in the previous two years. And if that weren't bad enough, Kraft's move to raise prices to offset those costs hit store shelves as the economic situation significantly deteriorated in the second half of 2008.

As a result, Kraft shares have fallen 27% over the past 12 months to $22.87. By contrast, brand-name peers Kellogg (K) and General Mills (GIS) are down 25% and 19%, respectively in the past year.

Although it shares have underperformed its leading competitors, Kraft is a more compelling defensive play than the competition for one major reason: It carries a 5.2% dividend yield that is nearly twice the yield offered by the 10-year Treasury. As cash flow improves, Kraft could raise this payout. The yields at Kellogg and General Mills are in the mid-3% range.

Kraft "offers an appealing total return potential" with shares priced at around $20-$22, says Alan B. Lancz, president of Toledo, Ohio-based investment money-management firm Alan B. Lancz & Associates. The stock is trading "at a historic low, the yield is at a historic high and the expectations are low," he adds.

The stock is trading 12.1 times forward earnings estimates. Its norm is 14.5-16.5 times. Lancz has been shifting to a more defensive portfolio after successfully playing the rally in more cyclical names in recent months. He is expecting a slow, prolonged recovery and Kraft "is definitely more defensive" in this environment.

It doesn't hurt that Warren Buffett's Berkshire Hathaway (BRKA) is Kraft's largest shareholder, owning a 9.4% stake at the end of 2008. But you don't have to drink the Kool-Aid, which by the way is a Kraft product, to see the upside potential in the company's shares. Kraft has been making strides under its three-year turnaround plan started in 2007, which includes cutting costs, divesting assets such as Post cereals and creating synergies from acquisitions (of biscuit maker LU in Europe).

Notably, Kraft has carved out 20 business units with decentralized decision making. "We've taken off their shackles by blowing up the bureaucratic matrix," Chief Executive Officer Irene Rosenfeld said at a consumer conference earlier this year. Alexia Howard, an analyst at Sanford C. Bernstein, says the pipeline is starting to improve after it "was starved for years under Altria."

She names Kraft as her top pick in 2009 with an Outperform rating and $34 price target, pegging it as "a margin recovery story."

A recovery in operating margins, which had fallen from 21% in 2002 to 12.5% last year, along with the 230 basis-point improvement in gross margins in the fourth quarter excluding the impact of commodity hedging losses shows that Kraft is "already starting to see a turnaround," she adds. This turnaround will take time. Lower commodity costs will help ease margin pressure, particularly for dairy products.

Meanwhile, Kraft has talked candidly about its challenges. The company expects to earn $1.88 in 2009, in line with 2008 results, after taking into account a 40-cent headwind from a stronger U.S. dollar and pension costs. Nearly 60% of Kraft's sales are from the U.S., 25% from Europe and the rest from other regions.

The company's sales volume fell 5.2% in the fourth quarter of 2008 (from a year earlier), and management projected further declines in the first quarter of 2009, which will be reported in May, but these weak numbers are misleading. More than half of the fourth-quarter drop in the sales volume was due to a deliberate move by the company to get rid of underperforming brands.

Higher supermarket prices as Kraft passed on commodity prices have hurt sales volumes more than cash-strapped consumers trading down from premium priced goods to private-label alternatives, Howard notes.

Private-label products have a 21% share in categories where Kraft brands hold a No. 1 or 2 market share by a wide margin, compared to the industry average of 20%. Kraft is benefiting a bit from consumers trading down from premium products, says IBISworld industry research analyst George Van Horn. For instance, Maxwell House coffee gained market share for the first time since Kraft started tracking this data more than a decade ago.

About 40% of Kraft's U.S. sales are from products that have triple the market share as their next competitors, and 50% of its global sales are from products that have twice the market share of their largest competitors, says Howard.  Kraft has nine brands that each generate more than $1 billion in annual revenue and at least 50 brands each raking in greater than a $100 million a year.

The company has been strengthening its relationship with its major customers, Carrefour, Tesco and Wal-Mart Stores, and sharing marketing costs. As stores reduce inventory and cut shelf space, it is the middling players between Kraft and private-labels that are getting cut, notes Howard.

Kraft's turnaround won't be an overnight sensation. But until then, an attractive valuation and fat dividend will feed investors looking for a tasty return.

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Byron Trott, a long-time Goldman Sachs banker and a trusted adviser to Berkshire Hathaway’s Warren Buffett, is leaving the company to start his own investment fund with backing from the billionaire.

The new venture, BDT Capital Partners, will invest in and advise family-run and entrepreneurial businesses. Berkshire will hold a “modest partnership interest” in the firm, an assistant for Mr Buffett said.

Mr Trott’s departure ends a 27-year association with the bank that culminated with his appointment as head of the Chicago office, and raises questions on whether Goldman will retain its enviable position as adviser of choice to one of the world’s richest and respected investors. He has been singled out repeatedly by Mr Buffett for his skill in either advising Berkshire or bringing deals to his attention.

“I should add that Byron has now been instrumental in three Berkshire acquisitions,” Mr Buffett wrote in his 2003 letter to Berkshire shareholders. “He understands Berkshire far better than any investment banker with whom we have talked and – it hurts me to say this – earns his fee. I’m looking forward to deal number four (as, I am sure, is he).” Mr Trott also came to Mr Buffett with an offer to buy preferred shares in Goldman itself. Berkshire invested $5bn in the bank in September.

Berkshire said it would maintain a close association with both Goldman and Mr Trott, who becomes the latest senior Wall Street executive to leave their employer as the financial services industry wades through its steepest downturn in generations. Jon Winkelried, Goldman’s co-president, Morgan Stanley’s Bob Scully and Merrill Lynch’s Greg Fleming are among those to exit since the onset of the crisis.

A person familiar with Mr Trott’s thinking said the scrutiny that Goldman endured in recent months as one of the most visible institutions in an industry beset by the financial crisis and political backlash did not play a role in the timing of his departure. Nevertheless, Goldman executives had hoped to keep Mr Trott, one of their brightest stars.

Mr Trott, who also serves as vice-chairman of investment banking, had weighed forming his own fund for several years, and wanted to begin the venture with enough of a time horizon to see BDT’s investments blossom, the person said. He relied heavily on the counsel of his frequent client, Mr Buffett, who himself prefers to invest in family businesses, people familiar with the matter said.

When Mr Buffett restricted certain Goldman executives from selling their shares in the firm as part of his investment agreement, he did not include Mr Trott on the list.

Separately, JPMorgan Chase began another round of planned redundancies in its investment bank. The job cuts, which are part of efforts to reduce the 28,000-strong workforce of the investment banking division by around 2,000 people by the end of the year, are believed to have come in the prime brokerage division, among others.

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This may be a great time to add shares of Amazon.com to your shopping cart and proceed to checkout.

The stock makes sense because the retailer itself makes sense to smart shoppers. They don't waste valuable gas fighting for a parking space in a massive mall parking lot; they find prices that compete with Wal-Mart's and flirt with the Web's biggest bargains; and they can easily peruse a vast array of merchandise, ranging from gigantic TVs to Elmore Leonard novels to disposable razors. What's more, their purchases tend to get delivered as promised.

The many benefits of the e-tailer's business model are even more apparent in tough times. Amazon's highly automated and centralized operations run at a lower cost than those of traditional retailers, allowing the Seattle company to pass on significant savings to its customers. Rather than truck merchandise to thousands of stores from myriad distribution centers, Amazon picks and packs its items from computerized warehouses where they are shipped direct to a customer's house, just the way founder Jeff Bezos envisioned.

No stores means fewer layers of expense for real estate, employees, inventory and utilities. While traditional outfits like Circuit City and Linens 'N Things have gone belly up, and speculation mounts about the staying power of household names like Sears (ticker: SHLD), among many others, Amazon.com (AMZN) had a strong Christmas season and free cash flow that rose 16% for 2008.

"A lot of consumers are migrating to Amazon," says Walter Price, a veteran technology investor from Allianz Global Investors. "It simply has a better retail model, and it is only getting better," and Bezos has added a couple of kickers, which Price views as options on two nascent Amazon businesses that aren't reflected in the share price.

The e-commerce pioneer always has been pragmatic in finding ways to leverage its operations by running portions of other companies' businesses, from Website check-out services to logistics.

Now, Amazon is taking that a step further by providing Web services, better known these days as "cloud computing." What is cloud computing? It is the outsourcing of information-technology and data-center operations to third parties, mostly by small- and medium-sized companies that choose not to spend their resources to deal with these tasks themselves.

The name cloud derives from the remote ether-like computer space where the outsourced operations take place. Amazon, which has spent more than $2 billion on its systems in the last decade, has divided these services into several parts, including: Amazon Simple DB (databases), Amazon Elastic Compute Cloud (computing capacity) and Amazon Simple Storage (data storage).

Price believes these services could eventually generate hundreds of millions of dollars annually and investors are getting them for almost nothing.

The second kicker is Kindle, a digital-reading device. Its original version was generally well received, but its recently released 2.0 edition has become a hit with consumers. Wall Street analysts estimate the company has sold 350,000 of the devices, which got a plug from Oprah Winfrey last fall. A Kindle runs $359, and it not only generates revenue but protects and promotes Amazon's original business of selling books.

Of course, Amazon's financial performance hasn't gone unnoticed. With a forward-looking price/earnings ratio of 39, you may feel as though you are paying retail for the shares. But valuing them on a cash-flow basis is a more accurate gauge because it takes into account the company's unusually long float period, which allows it to use the cash as working capital.

At a price of 70 on Friday, March 27, 2009, the shares sell at roughly 20 times the company's free cash flow of $1.36 billion, or $3.18 per share, in 2008. That is less than Wal-Mart 's (WMT) free cash flow multiple of 22.6 and Costco 's (COST) 25.4.

Allianz's Price expects free cash flow to grow about 20% annually going forward, without taking potential revenue growth from Kindle or Web services into account. He believes the shares could crack 100 in two to three years, while Piper Jaffray research analyst Gene Munster has a more modest 12-month target of 81 for the stock.

Amazon's business model for billing, inventory and delivery gives the company some unique financial advantages over other retailers. It can carry customer payments on the balance sheet for up to 26 days before it must pay suppliers. The float on that money can help to lower pricing and gives Amazon still more power to grab market share.

"We have a negative operating cycle," Chief Financial Officer Tom Szkutak told investors at a recent Morgan Stanley conference. "So, as we grew, we generated cash from working capital. And we are all about maximizing profit dollars, not individual margins," he said.

"It isn't unreasonable to expect that revenue could double over the next three years," says Price, barring a complete collapse of the economy. Amazon reported 2008 profit of $1.49 a diluted share or $645 million, up 36% from the prior year on $19.17 billion in revenue for fiscal 2008, which was up 28% from 2007.

Because of its other advantages, the e-commerce company tends to follow others' prices without necessarily trying to beat them. "We really want to offer low prices every day...[but breadth of] selection is very key to growth," Szkutak told the conference. Not only does Amazon carry more product categories than ever either through its own e-tail operations or third-party retailers on the site, it also offers more brands and styles per category.

Amazon's strong balance sheet and wide selection stand out even more in this wretched retailing environment, where malls find themselves losing tenants, and tenants find themselves with less and less inventory. Retail sales generally stagnated in 2008 and have dropped nearly 10% for the period December 2008 through February 2009 over the same period a year earlier. With the exception of Wal-Mart, drugstores and warehouse clubs, just about every retail business is off.

That leaves Amazon to pick up the slack. More and more consumers turn to the Web for shopping, with Amazon often the first destination. After a decade of starting their online purchases by searching on Google (GOOG), cybershoppers now make Amazon their default page, knowing that its bots are crawling the Web to identify the lowest prices.

Even e-Bay (EBAY), which tried to compete, recently shifted its focus back toward selling used merchandise. And with less than 10% of all retail sales done over the Internet, there's loads of upside. Price contends that U.S. online sales will account for as much as 20% of total retail sales within the next 10 years.

On top of that, Amazon is grabbing a greater share of online commerce as consumers realize that it is routinely price-competitive, delivers in a timely fashion, and now has arguably the greatest selection of merchandise assembled in one place, albeit in cyberspace, including Wal-Mart.

"E-commerce now starts and ends with Amazon, and eventually it will show up with higher sales," Price says. "As they get more volume, their costs relative to their prices should come down, which should improve their profits over time," he says.

Amazon is also growing overseas. It now ships in six foreign countries, including Germany, Japan and China. For the fourth quarter, international sales of $3.07 billion were 46% of total revenue.

Lower shipping costs also improve the customer's experience. In the early days, Bezos would goose sales with free-shipping promotions. Now he has implemented a "Prime Program" designed to keep shipping costs down while spurring more sales.

For $79 a year, Amazon customers get guaranteed "all-you-can-eat" free shipping on two-day deliveries for most merchandise, excluding bulky items like furniture. Or they can pay $3.99 extra for one-day delivery. Only Amazon can afford to offer those terms and still make a profit because of its huge volume and efficient inventory and shipping operations." Amazon's logistics is its secret sauce," Price says.

One of the reasons Piper's Munster upgraded Amazon to a Buy in early March was a survey his firm conducted that showed 81% of Amazon's customers are satisfied with the retailer, compared to 71% for eBay.

More important, 94% of the respondents said they would recommend the e-tailer to a friend. That score, he says, is reminiscent of Apple 's (AAPL) tally earlier this decade before the iPod, as well as Netflix 's (NFLX) rating prior to its breakthrough. In both cases the scores presaged big runs in the stocks to record highs.

"It's a leading indicator," says Munster. Goldman Sachs analyst James Mitchell was impressed by Amazon's 15% increase in year-over-year gross profit and 9% jump year-over-year in operating profit. The fact that it could grow profitably during one of the worst holiday shopping seasons ever meant Amazon wasn't just "buying" revenue via discounted pricing, noted Mitchell.

Majestic Research predicts Amazon is on track to at least meet expectations on revenue for its first quarter ending March 31, 2009, adding that sales have begun to accelerate and could actually exceed Street estimates for the quarter.

After spending billions to build the technology that drives its retail operation, Amazon, at its heart, is a tech company. As a result, it is always looking for ways to leverage operations, which is why it is pioneering areas like cloud computing. Tech researcher Gartner Research forecasts that, industry wide, this category will reach $56.3 billion in revenue in 2009, a 21.3% gain over 2008. The market is projected to reach $150 billion in 2013.

The notion of trusting your entire enterprise-computing needs to someone else is controversial and meets with resistance by big corporations. But small- to medium-sized companies, especially start-up software developers, embrace the trend. Adam Selipsky, a vice president of Web Services at Amazon, told trade publication Intelligent Enterprise that there are three reasons for companies to switch to its cloud: efficiency, economics and performance.

Start-up software companies are among Amazon's biggest Web-services clients. They can develop code and deliver software using Amazon's delivery infrastructure, paying only for the computing power they use and leaving the data center headaches to Amazon. This allows start-ups to build their businesses without a lot of upfront cost, which is especially attractive during this period of tight capital.

Amazon isn't competing with Nordstrom (JWN) or Sears in this marketplace. It's going up against the likes of IBM (IBM), Google, and Microsoft (MSFT). But Price thinks Amazon has an edge over Google, because Amazon's systems use computer languages that are more open and flexible. Plus, the company is already geared toward handling outsourcing in other parts of its operations, so adding data-center services is just a natural extension, Price argues.

Tech Crunch, an online-technology publication, estimates that 60,000 corporate customers are using Amazon Web Services. Amazon wouldn't confirm that number.

Kindle is another example of Amazon's technology prowess. The electronic book reader is arguably superior to a similar gadget developed by Japanese consumer-electronics giant Sony (SNE). It even has prompted comparisons to Apple's iPod and iTunes. Kindle allows people to carry entire libraries of digital books on one device, and it focuses their selections on Amazon's list of offerings.

It also provides potential growth from the device itself. That won't provide a huge boost to sales in the short term, but the Kindle could improve margins, says JPMorgan Chase analyst Imran Khan. For the iPod, Apple has to pay for intellectual-property rights on songs and movies; and Amazon must pay book publishers for its digital content. But both "playback"devices are proprietary.

According to some analysts, it isn't a stretch to see Kindle's estimated 350,000 unit sales hitting one million this year. Goldman's Mitchell, for one, predicts Amazon may double or triple Kindle sales in 2009 based on demand built not only by the Oprah endorsement, but by an increasingly broad range of book titles, and sales to overseas markets such as Germany and Japan.

If Amazon can build a big Kindle user base, it could raise barriers to entry in the eBook market, lower per-book marketing costs, reduce fulfillment costs, and increase revenue , all of which would lead to higher margins, Khan argues.

Needless to say, fulfillment costs on a digital download are a lot lower than those on a book delivered via an overnight shipper. Fulfillment costs took an 8.3% bite out of Amazon's revenue last fiscal year, whereas the cost of delivering an eBook would account for about 2% to 3% of total revenue.

Khan more conservatively forecasts Amazon to sell another 500,000 Kindles in 2009, adding $63 million in fiscal 2009 revenue, or two cents earnings per share. He predicts Amazon will sell 12 million eBook downloads during the fiscal year. Every two million book downloads equals about a penny a share in annual earnings, Khan says.

There is more than a comparison with Apple; there is compatibility. The Kindle reader application is now available for the Apple iPhone, which will expand Kindle's reach beyond avid book readers. Another potential boon: schools and colleges, if Amazon successfully taps the textbook market.

Of course, there are risks. Just last week the company said it would close three distribution centers, laying off or transferring 210 workers, to fine-tune its business. And whenever investors pay up for growth, there is always the chance that revenue can disappoint.

Amazon is hardly immune from the crash in consumer spending. If it gets much worse, the company will surely suffer. As it becomes a more global entity, foreign-currency swings can have a negative impact on revenue, too.

During the dot-com boom, shopping over the Internet was an exotic experiment. Today, Bezos' Amazon has created an experience that is often more satisfying than shopping at an understaffed mall store with depleted inventories. With more selection, less hassle and faster checkout, and with competitive pricing thrown in, you have the world's best retailer, albeit one whose shares trade at a technology multiple.

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John Paulson is known for his short-sales savvy. But his flair for long positions shouldn’t be underestimated. The hedge fund bigwig is set to take preferred stock in Dow Chemical to help it fund the $15bn purchase of Rohm & Haas it was recently trying to wriggle out of. So is the Haas family. It’s a way to help do the deal without sinking Dow. It also rescues a big Paulson bet, at least for now.

Paulson and the Haas family will together buy $2.5bn of Dow preferred, giving the chemical company enough wiggle room to purchase Rohm without immediately running aground - as it had claimed it would if forced to close the deal and fund it by drawing heavily on risky short-term debt.

The deal came as Rohm's lawsuit against Dow for trying to pull out of the acquisition was about to get under way. Had the court ruled against Rohm or even forced a compromise deal, Paulson’s 18m-share bet on Rohm, a big one, since it represented about 4% of Paulson’s assets under management at the end of December, would not have looked so clever. Rohm's share price was drifting down towards $50 a share before hopes of a settlement resurfaced in recent days.

As it stands, the other shareholders will get the $78 a share in cash that Dow originally offered. And it looks as if Paulson is essentially reinvesting his proceeds in Dow.

The deal allows Paulson to move upwards in the capital structure, where he’ll sit alongside Warren Buffett, providing him a margin of protection against further deterioration in Dow’s business. While he has been quite bullish on the company’s prospects, it faces significant challenges. After all, boss Andrew Liveris’ rationale for walking away from the Rohm deal was that the combined company would not be viable.

And despite the new equity funding and other emollients just announced, such as additional potential synergies and the extension of the term of much of the $12.5bn in debt financing from one to two years, Dow isn't out of the woods. The economic downturn has crimped its business and may do so for some time. Paulson has rescued his bet for the time being, but the game isn't over yet.

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In his letter last week to Berkshire Hathaway (BRKA) shareholders, Warren Buffett took himself to task for more than quadrupling the firm's stake in energy giant ConocoPhillips (COP) last year.

"The terrible timing of my purchase has cost Berkshire several billion dollars," Buffett wrote. Buffett may have got the timing wrong, but it might be wise to take his advice also contained in the annual letter: "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

Right now, shares of ConocoPhillips, hovering near their five-year low, are an attractive way to play an eventual rebound in crude-oil and natural-gas prices. The company's above-average exposure to natural gas compared to its peers could drive returns in an economic recovery that would also boost the lagging commodity.

The stock is trading at a sharp discount based on several valuation metrics. Shares are valued at 0.6 times book value whereas Exxon Mobil (XOM) and Chevron (CVX) are trading at 2.6 and 1.4 times, respectively.

The dividend, yielding 5%, offers stable returns in this volatile market. Lee Delaporte, director of research at Dreman Value Management, says ConocoPhillips is his firm's largest holding for a very simple reason: It is a large, diversified energy company that is also "one of the cheapest in the energy space."

"I think from a long-term perspective that I'm going to get a better return over time in a ConocoPhillips" as the valuation gap narrows, Delaporte says.

"ConocoPhillips shares outperformed the major integrated companies every single year from 2003 through 2007 and by a wide margin, not by one or two points," says Fadel Gheit, managing director at Oppenheimer. That stellar track record came to an abrupt end in 2008: ConocoPhillips fell 41%, versus the major integrated group's 30% decline and the Standard & Poor's 500 index's 39% drop during the year.

Gheit, who also was optimistic about ConocoPhillips and other integrated oil companies early last year, admits, "Warren Buffet and I made a mistake. I never thought that [oil and natural-gas] prices would collapse the way that they did and stay the way they did, but obviously you live and learn."

A rebound in oil to at least $55 a barrel and natural gas to $6 per million British thermal unit "will make this stock very cheap," Gheit says. The market is valuing ConocoPhillips' oil reserves at $9.46 a barrel versus the group average of $11.11.

ConocoPhillips stock typically trades at a discount to its peers. That's because the company has a history of making untimely acquisitions at the top of the market. In the fourth quarter, the company took a whopping $34 billion write-down largely for its acquisition of Burlington Resources in 2005 and a 20% stake in Russian oil giant Lukoil in 2007.

This is a noncash accounting charge, but "the slate's been cleaned and when gas prices recover, it's going to be positive for them," says Dreman's Delaporte. Even so, the company built its way into the group of major integrated oil companies and commands an impressive reserve base with attractive long-term growth opportunities, such as developing liquefied natural-gas facilities in the Middle East.

ConocoPhillips has cut spending and halted its stock repurchases so that it can essentially live off of cash flow. The company ended 2008 with $755 million in cash compared to $35 billion at Exxon and $24 billion at Chevron.

As the "junior member of the elite club," Gheit notes that ConocoPhillips is more susceptible to shocks -- such as Venezuela's move to nationalize reserves in 2007. Its large exposure to volatile natural gas (40% of production) has been a drag in the downturn, but the upside potential from here is significant.

Oil and natural-gas futures fell 70% from last July's peak to trough a few months later, but the 9% rebound in natural-gas prices has lagged the 33% recovery in oil, says Gheit. "I think oil prices will go higher and gas will be catching up." This would also improve margins. ConocoPhillips' profits fell to $8 a barrel of oil equivalent in the fourth quarter from $24.40 in the third quarter, wrote Barclays Capital analyst Paul Cheng in a Jan. 29 report.

Earnings are expected to drop from $10.66 in 2008 to $4.03 in 2009 before climbing to $6.03 in 2010, according to Thomson Reuters.

Margins for producing gasoline and other oil products have improved as refiners slashed production to match demand. So this refining component "will be helpful in this particular period rather than be hurtful," says Carlton Neel, portfolio manager at Virtus Investment Partners/Zweig Advisers. Refining and marketing operations make up about 20%-25% of revenues.

The company is holding an analyst meeting on March 11. At its current price, we suspect that Warren Buffett's excitement for the stock could be rekindled.

Source.