1) US troops, extremely overworked and undermanned, have performed heroically amidst a "low-grade" civil war operating environment involving foreign and terrorist forces. 

2) The US cannot leave without likely creating near perfect conditions for a regional war, and the current effort requires a long-term monetary and political commitment to rebuild the military to increase readiness for non-Iraq threats. The US cannot rely upon the current deterrent of "overwhelming" Air Force, Navy and nuclear weapons power as a permanent solution to underinvestment in personnel and equipment.

Several hedge and mutual funds have acquired large positions in S, anticipating a WiMAX and hybrid cell/walkie-talkie phone-led recovery (functioning on both its CDMA and iDen networks) and a possible private equity bid for the firm. They may also view its shares as cheap based on perceived book value and the difficulty in replacing the company's infrastructure, retail network, and cellular licenses.

However, I believe that high debt levels ($21B), deteriorating cash flow, and increased competition and customer attrition will prevent a quick snapback for its stock. The company recently lost the opportunity to participate in the first portion of a large-scale U.S. Government telecom contract, jeopardizing the chance to gain a slice of $20-40B in future revenue, and still needs to aggressively bid for the second contract.

Why have Americans tolerated this? Cell phones have become very important to everyday life through ease of communication and safety. There are also few alternatives - large barriers to entry remain for potential competitors and carriers hold a near monopoly. Carriers have been licensed and regulated by the Federal government, possessed billions in legacy land-line cash flow to obtain these licenses and create/acquire their infrastructure, and have developed relationships with cell tower owners and local municipalities to build their networks.

They also have the mobile phone makers in a vise grip - they require certification from the carrier to sell their products, with carriers dictating costs and features. In the absence of unlocked phones and plans that do not require a long-term contract, customers maintain little influence or power.

With CEO Michael Farrell at the helm, the firm remains one of the best managed and well-capitalized mortgage real estate investment trusts, and its 10-K provides a good overview of the operations of this class of specialty REITs. Many of you may be familiar with its shares' precipitous rise and fall in the last 3-4 years amidst a Greenspan ease and later increase in short term interest rates. However, the company has likely turned the corner and created a foundation to achieve steady, long-term success for shareholders.

Mortgage REITs [MREITs] raise capital by issuing stock to the public or by borrowing money, which they invest in mortgage-related bonds and other assets. By exploiting the spread between the rates paid on their borrowings and the interest received from those bonds/assets ("net interest"), these REITs can make large dividend payouts to investors. However, in a time of rising rates, this strategy can backfire - rates on debt increase faster than interest paid on their holdings, the spread contracts, and they must decrease their dividends.

A private equity deal may be a stretch at a market cap of $80B, but I wouldn't be surprised if its stock became the target of opportunistic investors.

VNO also agreed to protect the foreign-based sellers from future litigation associated with Donald Trump. Trump had sued the group, alleging that they withheld compensation from him in a previous sale of joint owned property and used the proceeds to purchase the buildings now sold to VNO. The NY Supreme Court ruled in the group's favor, but Trump chose to appeal. To complete the transaction, VNO had to assume any Trump-related legal risk. Trump also still owns the other 30% stake.

It's a big purchase, but VNO investors have become accustomed to this activity along with several opportunistic investments in faltering retailers that own valuable real estate.  The company began as a remnant of the old Two Guys chain on the East Coast, which went out of business in the 1980's but lives through its former real estate properties.  In the 1990's, Roth decided to purchase a majority stake in another declining retailer, Alexander's. The deal further increased VNO's property portfolio, allowed it to enjoy the real estate boom of the last 10 years, and thus transformed the firm into a multi-billion dollar operation. 

However, inflation levels remain "elevated," likely because of strong wage growth, increased skilled labor needs, and high resource utilization. Demand in many industries meets/exceeds production capacity, allowing producers to raise prices, and consumers/businesses will accept them. It's especially true in the gasoline markets, as increasing demand forces refineries to test their upper production limits.

JMBA became a public company last year through the use of a special purpose acquisition corporation [SPAC] - essentially a shell company that issues shares to the public and later utilizes those funds to buy an operating company. The firm's growth trajectory has just begun, and Starbucks would then possess an entire portfolio of high profit margin beverages and healthy foods. JMBA and SBUX could also continue to exist as separate brands.

We've discussed the firm's problems in the past, and the company won't find a quick fix through the potential acquisition of Palm.  I would continue avoiding the stock.

I'd put my money on MOT - it would have a carrier-certified hardware device to complement its recent purchase of mobile email software maker Good Technology and thus possess a complete offering to counter RIMM's (RIMM) Blackberry and Apple's (AAPL) iPhone.

Dealbook covers MOT's potential interest, and Om Malik provides further analysis, noting MOT CEO Ed Zander's cancellation of his keynote address at CTIA next week.

Over the last several months, the company's stock price has suffered because of several concerns. Slower sales in the early months of 2007, increased store opening expenses, and uncertainty regarding their heated food/breakfast rollout have combined to pressure its shares. Some other issues include expansion concerns in China, McDonald's (MCD) introduction of premium coffee and subsequent praise in Consumer Reports, and press coverage of Dunkin Donuts' expansion push.

The company also experienced difficulty managing customer wait times, with its labor intensive Frappuccinos causing slower service and pushing consumers to avoid some locations. Most importantly, Chairman/Founder Howard Schultz wrote a surprising internal memo to SBUX execs, lamenting the possible deterioration of the SBUX culture and customer experience.

Cisco develops much of the hardware and software now used to route voice and data traffic over the world's communication networks and can then allocate some of its core product earnings to acquire firms that offer complimentary products and services.  Individuals and businesses are rapidly utilizing the net to collaborate and interact, and WebEx's products allow Cisco to provide increased product breadth for small/medium businesses.  They already own Linksys, providing hardware/software for local wireless and ethernet-based networks, and recently purchased Scientific Atlanta, best known as a video/cable box maker, to augment their video products.   

History will note that lax oversight and poor risk management were the two most important contributing factors of the recent turmoil. Other factors include: cheap money resulting from artificially low rates, lax underwriting standards that allowed less creditworthy borrowers to purchase a home with no equity, little proof that they could manage the debt payments, and poor understanding of loan terms.

As Alex Pollack wrote in Monday's Wall Street Journal, mortgage lenders and hedge funds relied too heavily on mathematical models and financial "innovation" in their attempt to mitigate the risk of default and loss for these loans.

Jim Cramer notes the promise of Riverbed in a post yesterday on RealMoney.com (sub req.), stating the likelihood of a rapid ramp in sales and earnings in the coming year.

Bottom line - the firm may not be the next Cisco (CSCO), but it doesn't need to be in order to succeed. It develops Wide Area Network optimization hardware and software - known as "wide area data service solutions" that increase the speeds of internal corporate networks - and recently signed a large reseller deal with HP (HPQ). 

While most investors measure themselves by long-term monetary returns, many of us place greater value in the craft and legwork of investing itself - researching businesses, digging into their operations and financials, predicting change, and attempting to discover unknown and undervalued companies in which a dollar can be purchased for 50 cents. To do this, we build a model/framework to evaluate companies and their stocks and hope to create a foundation for long-term success. However, we also need to maintain a level of flexibility and self-evaluation, constantly revising the tools we use and assumptions we make, allowing that framework to evolve. Fortunately, Warren Buffett provides one of the best free, comprehensive tool kits to build our model and help guide its evolution - his annual letters.

I wanted to briefly discuss some themes and my own takeaways from this year's release:

The Gap's difficulties deserve their own article, but I will quickly recap the company's history to provide some perspective. Don and Doris Fisher founded the company in San Francisco in 1969 as a retailer of Levi's jeans, gradually adding over a dozen other brands to its inventory. Seeking merchandising talent, the Fisher's hired Millard "Mickey" Drexler from Ann Taylor in 1983, and Drexler quickly changed the firm's retailing strategy by consolidating its retail brands into the private-label Gap line, expanding store locations, and providing basic yet classic clothing for customers.

Although sales exploded in the 1980s and early 1990s, Gap executives had the business acumen to open the lower-priced Old Navy chain in 1994, as revenue growth slowed in their core Gap brand. Old Navy became a huge success, but in 2002, facing new competition, unsuccessful merchandise changes, and tension between Drexler and the Fisher family, the Gap pushed Drexler out the door and hired Pressler. This article from NY Magazine also notes Drexler's lack of attention to the fundamental operations and financial management of the firm, and states that Drexler remained (remains?) angry regarding his treatment by Fisher and the Gap's board.

And, amidst all of these concerns, Apple's (AAPL) iPhone may force MOT to alter its competitive strategy for profitability in the cell phone market. There's also a small Finnish firm named Nokia (NOK) that likes to stick its finger in MOT's eye domestically and create havoc for the firm overseas.

Although MOT has always encountered strong competition (and Apple will likely target much less than 10% of the global cell phone market of 1 billion devices), it now must handle the traditional players - NOK, LG, Samsung, SonyEricsson - while attempting to convince consumers that its non-iPhone/non-Pearl offerings should command higher prices.

Readers know from a prior post on the housing market and Warren Buffett's recent purchases (via Berkshire Hathaway) of the stock that I think that it's a strong buy.  The company, whose core operations include the manufacture of Sheetrock wallboard and ceiling products, may suffer some short-term indigestion as homebuilders work off inventory and cut their home starts.  However, its business fundamentals and valuation remain solid - it currently possesses a free cash flow yield of 8-9%, controls 30+% of the wallboard market, maintains a sizable raw material base, and has reserved nearly $3B for asbestos claims.  Although a Democratic Congress may delay any expected legal settlement, it has enough cash on hand from its recent equity offering to fund core operations and will likely earn $5/share next year.  Sheetrock isn't going away, and USG remains a textbook Buffett business - competitive moat, strong management, financial margin-of-safety, stock price discount to intrinsic value thanks to asbestos liability fears, and at least 10-15% likely growth well through the decade.

USG's share price has been volatile over the past 5 years - surviving a near-bankruptcy experience because of asbestos-related lawsuits, it dropped to the low single digits in late 2002-early 2003, at which time Buffett began to buy.  As I remember, he even loaned the stock to short sellers who believed that litigation would crunch the equity holders completely.  Their bet ended badly as the company benefited from the housing boom of the last few years and hope of a Federal asbestos settlement. 

1) Continued Management/Execution Risk

Poor management execution has allowed Google to steal search share and the associated, text link-based high-margin ad dollars. YHOO has been unable to fully develop products from its 2003 Overture acquisition in a timely manner, and by placing strategic business focus on multiple properties/services that rely more heavily on traditional display advertising, management has exposed the company to economic cyclicality. Amidst these difficulties, anecdotal evidence also persists that some important clients have migrated their display-based ad dollars to YHOO properties' competitors, as they may believe that the firm has not provided a compelling reason to allocate their capital solely to YHOO.