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Andy Kern submits: I haven’t heard a lot of discussion about this, so I thought I would put my thoughts down on this blog, because to me the phenomenon is pretty obvious. There is some serious value out there right now, and for the last two months the market has been more inefficient than I have ever witnessed in my lifetime. Many stocks, especially small caps, are selling at valuations FAR below their intrinsic value, even after accounting for the possibility of severe and prolonged recession. I am convinced the reason for this is not fundamental, it is institutional.
Hedge funds make up a huge portion of the market and the vast majority of them are levered, many highly levered. By “hedge fund” mean simply the plain-vanilla, independent equity long/short type (not the arcane structured-product investing kind like Bear Stearns’ that got us in to this mess in the first place). By “highly levered” I mean anything from 400% gross exposure (this would be 200% long and 200% short) to infinity. Complete Story »
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Investment U submits: Last week, I suggested you ignore Washington and "the bailout," and do what great investors such as Warren Buffett do in times of crisis - buy stocks. Based on reader response, you would have thought I recommended investing in the Titanic, and doubling down on the Hindenburg. My email inbox was full of remarks from people who thought I had lost my mind. Complete Story »
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 Hickey and Walters (Bespoke) submit:
Yesterday's release of short interest as of mid-September showed that overall levels of short selling remained nearly unchanged from the end of August. Given the SEC rule changes announced since the middle of September, you can expect these figures to show a big change when the figures for the end of the month are released. One stock that did show a large change, however, was Constellation Energy (CEG). From the end of August through the middle of September, short interest in the stock increased by over 400% from 1.4% to over 6% of the stock's float. As shown in the chart below, while the stock of CEG has been in a downtrend all year, it started to crater on September 15th, right after short interest spiked. Complete Story »
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Trader Mark submits:Much like Amazon.com (AMZN), Constellation Energy (CEG) was a trade - however by being off by 24 hours we went from what could of been a sizeable gain to a small loss. However, those long term investors in this name really took the brunt of it as "when shorts attack" + S&P/Moody's downgrades required CEG to sell out at a prices not seen since 2002 to Mr. Buffet.
I was hoping for a counter offer but this piece of news dims that outlook... Complete Story »
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Trader Mark submits:Looks like EDF did make a bid after all. - A French nuclear power company is upping the ante for wholesale power supplier Constellation Energy Group Inc. (CEG), offering to pay $8.50 per share more for the company, which has agreed to be sold to a unit of Warren Buffett's Berkshire Hathaway Inc. Electricite de France SA offered Monday to pay $35 per share for the Baltimore company.
- EDF made the offer in conjunction with private equity firms Kohlberg Kravis Roberts & Co. and TPG Capital. EDF owns nearly 10 percent of Constellation Energy now.
But Constellation CEO is adamant he is sticking with Buffet despite the far lower price - boggling. Why the board of directors, who are supposed to represent shareholders, is not stomping its feet is beyond me. Complete Story »
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Greentech Media submits: By Daniel Englander The financial crisis has claimed its first major energy casualty. Warren Buffet beat out French energy giant EDF to buy cash-strapped Constellation Energy (CEG) for a pittance this evening. The utility and power trading company’s stock dove 58 percent over three days this week, pushed down by liquidity fears and a downgraded credit rating. Sound familiar? Buffet’s MidAmerican Energy will buy Constellation for $4.7 billion after Constellation’s board rejected an offer from EDF, which owns 9 percent of the power trader, for a $500 million cash infusion. Complete Story »
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Dah *** Lau submits: Warren Buffett’s ability to act swiftly in buying Constellation Energy Group (CEG) for $4.7 billion is truly amazing. At the beginning of the year, Constellation traded for over $100 and its shares had slumped below $25 prior to Buffett’s acquisition announcement.  At a $26.50 take-over price, Buffett is paying about an $11.5 billion price tag for Constellation, including net debt and retirement obligation. LTM EBITDA: $1,925 million, which means Buffett paid less than 6 times EBITDA for Constellation. By the way, property, plant and equipment [PPE] are worth $10.4 billion alone. The great lessons from Buffett and Munger are: Complete Story »
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 Felix Salmon submits: Amidst the craziness in financial markets right now, there's only one thing that's certain: When it comes to valuations, nobody knows anything. Morgan Stanley (MS) can be cheap one day at $30 a share and then expensive the next day at $20: Everything is incredibly fluid, and trying to make long-term investment decisions in the eye of a hurricane is a great way to lose a lot of money very fast. For that reason, I admire Warren Buffett's decision to sit this crisis out on the sidelines and not give in to the temptation to try to buy financial assets on the cheap. Yes, he's a value investor -- but values change over time, and Buffett likes the kind of assets where values rise slowly over the course of years, rather than falling precipitously over the course of minutes. Complete Story »
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Trader Mark submits:Well that is unfortunate - we are going to lose 10% or so as Constellation Energy (CEG) was forced to sell out ... and only got $26.50. Congrats to short sellers for nailing another company. This was a $65 stock a week ago - looks like MidAmerican got a steal since Constellation was desperate as the S&P rating agency was forcing its hand. Once they downgrade the debt, a death spiral ensues in this market.
Complete Story »
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Trader Mark submits:Looks like I found my personal Lehman Brothers (LEH) - down from $38 to $25 in just 2 hours. Amazing. S&P, which has been a useless credit agency which missed the entire subprime debacle, is now in shoot first ask questions later mode - simply on the chance it might change the rating the market is fleeing the stock. I had to cut some at a loss just to avoid carnage but what an amazing turnaround. - Standard & Poor's on Wednesday said it may change its credit ratings on Constellation Energy Group (CEG) amid concerns over the power supplier and utility owner's access to credit.
- S&P placed Constellation's ratings on watch "developing," indicating they may be raised, lowered or left unchanged at "BBB," the second lowest investment grade.
- "The CreditWatch placement reflects the increased urgency for the company to execute on its recently announced asset divestment plan and to complete other credit supportive strategic initiatives to shore up its balance sheet in the face of a broad loss of market confidence," S&P said in a statement.
- Options being considered by Constellation include selling the company, and management has told the rating agency talks on this are at an advanced stage, S&P said.
- S&P said it confirmed that Constellation's credit lines are in place, adding "Constellation is facing an acute crisis of confidence that has resulted in a decline in its stock price and a widening in its five-year CDS spreads.
- "I don't think they need to be bought totally, they may just need a partner for the trading book," said Dot Matthews, analyst with CreditSights. "The trading book has been providing all these great earnings but it requires so much collateral," she said. (I'd agree in a sane market. This is not a sane market)
- French energy group EDF SA recently doubled its stake in Constellation to 9.51 percent, under an agreement that limited the French company's purchases to 9.9 percent of company.
This is why this market is completely scary right now. It is at the discretion of buyers of the credit spreads swaps. And you can create a run on a stock just by buying a large swathe of these. So to reiterate - S&P is going to possibly downgrade due to an acute crisis of confidence. Caused by a decline in stock price. Caused by an increase in credit swap spreads. Complete Story »
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