Prudential Financial (PRU) recently announced that Wells Fargo (WFC) will pay $4.5 billion in cash to purchase Prudential's noncontrolling interest in their retail brokerage joint venture, which includes Wells Fargo Advisors, LLC (collectively, Wells Fargo Advisors). Market reaction was ecstatic, sending shares up more than 5% to 51.97 in early trading. While this is good news, it is not unexpected, and does not constitute a reason to chase the gains.

Life Insurance Issues – as mentioned in my article on Metropolitan (MET), life insurers have become somewhat suspect due to their exposure to MBS, CMBS, CRE, and exposures to the equity markets due to guarantees included in their variable annuity products. As the economic outlook has become clearer and somewhat more favorable, these companies have started to revert toward their normal valuation metrics. The question would be, how far will this process go?

Iconic Industrial 3M (MMM) recently released guidance for 2010:

...the company anticipates sales of $24.5 billion to $25.5 billion, with organic sales volumes growing 5 to 7 percent and currency effects adding 2 to 3 percent to sales for the year. 3M also expects that 2010 earnings will be between $4.85 and $5.00 per share. 2009 earnings per share are expected to be between $4.30 to $4.35 per share, or $4.50 to $4.55 per share excluding special items. Refer to 3M's October 22, 2009 press release for a complete list and explanation of special items for the first nine months of 2009.

MetLife Inc. (MET) just announced guidance for 2010 in a range of 4.00 to 4.40, which is somewhat above what the street had been expecting. Shares were up over 3% to 36.75 in early trading, while forward P/E, based on midpoint guidance of 4.20, is 8.75. This stock is cheap based on forward earnings, and is an attractive investment to investors who can become comfortable with the market's perception of the risk involved.

Equity market risk - In common with competitors Prudential (PRU) and Hartford Financial Group (HIG), MET has an exposure to the equity markets arising from guarantees provided on variable annuities.

Back in July, I wrote an article suggesting the use of NIPA Corporate Profits as a yardstick for measuring the level of the S&P 500 index. NIPA stands for National Income and Product Accounts, one of which is Corporate Profits. The US Bureau of Economic Analysis includes this number as a sub account in GDP, and as such it is logically consistent with GDP.

At the time, with the S&P at 950, Corporate Profits suggested that a more normal level for the index would be 1,200. As the situation developed, the S&P has since made substantial progress closing the gap. Tuesday's revision of GDP updates Corporate Profits through the end of the 3rd quarter, and it is now possible to develop a revised target or normal level for the S&P based on the new information.

Ben Graham has become associated with a tangible book style of stock picking, where the investor looks to physical assets, particularly cash, for value and margin of security. While he was fascinated by the market inefficiencies that made it possible at times to buy real companies for less than net cash, he also was also aware of the merits of what he called “goodwill giants.”

From “The Intelligent Investor,” here is a brief discussion:

MBIA (MBI) recently filed an 8-K with the SEC, explaining its current situation with regard to the availability of tax refunds under the recently enacted 5 year NOL carryback provisions. I have read it over several times and I am still scratching my head in puzzlement.

From the conference call (see transcript) I knew that they have approximately $500M of available tax refunds under the new law, but for 2008 they were not in an NOL position, while 2009 to date had a small NOL.

Cobra Electronic (COBR) is now entering a crucial period where possible risk/reward is heightened. I wrote the stock up favorably in December of last year at 1.10, setting a target of 7, citing the combination of low p/b and a real business with some brand name recognition. Cobra makes radar detectors and CB radios, and has developed AURA, a verified data-base of speed and red-light cameras worldwide.

Trading as high as 1.65 following 3rd quarter earnings, the company is at a crossroads, suffering financial stress in the form of breach and waiver activity on its loan covenants, but offering potential rewards from a recovery in its business. The 3Q 09 conference call included a statement that Cobra has executed an agreement with a major manufacturer of mobile phone and navigation products to include the AURA data-base in selected North American and European products beginning early next year. This is expected to be launched and announced early next year. Revenue from the deal is expected in the 2nd half of 2010.

U.S. Financial Institutions are interconnected – as the fall of Lehman demonstrated, they are tied together and interwoven in a complex web of obligations which can rip, run or unravel with unexpected consequences. As such, they may be regarded, for analytical purposes, as having one balance sheet. Double entry bookkeeping, which underlies all GAAP accounting, suggests that assets should equal liabilities for this giant composite balance sheet. I doubt that it does. The purpose of the article is to raise questions on two areas that do not seem to add up, and suggest that exploring these relationships would be a good task for the systemic regulator.

Derivative Assets and Liabilities – Five large banks together constitute the bulk of the U.S. Derivative market. The nature of the derivative transaction is such that each position has two sides, an asset and a liability, which will be on the books of the counter-parties. While numerous hedge funds and other bit players add complexity to the picture, it is evident that collectively derivative assets should equal liabilities for the banks involved, since a majority of the trades eventually make their way back to the largest players.

Many pundits have opined that the American consumer is on the ropes, so far in debt that he will be unable to contribute to the economic recovery. Because consumer spending has recently been about 70% of GDP, this has led many to declare that the recovery cannot proceed until a lengthy de-leveraging process has been completed. Factual information is available to assist in quantifying this concern: here is a link to the Federal Reserve's Household Debt Service and Financial Obligations Ratios. After downloading and studying this information, a plausible case can be made for the possibility that this process can be completed in a one or two year time frame, after which a strong and sustainable economic recovery would be possible.

The household debt service ratio - DSR - is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt. The Fed provides information going back to 1980, so it gives us a look at a number of troughs/recessions which preceded strong recoveries.

Eric Dinallo was on Bloomberg recently, talking about CDS and other regulatory issues. This clip is worth watching: he is the only politician or regulator who understands the dangers posed by CDS and inadequate regulation and is willing to talk about realistic solutions.

Dinallo, as former NY State Superintendent of Insurance has first hand knowledge of the issues involved, due to the problems he dealt with on AIG, MBIA (MBI), Ambac (ABK) and other financial guarantors. He and NY Governor Paterson attempted to bring the CDS issue to a head by offering to regulate them as insurance, if the Federal government did not step in and do something. At the time, it seemed that Congress would be doing something, but more than a year later CDS regulation is still being debated and in the process whatever we get is going to be too watered down to resolve the issues. Dinallo makes some excellent points:

Sigma Designs (SIGM) recently announced the acquisition of CopperGate for 160 million, to be paid with $92 million in cash plus the issuance of an estimated 4 million shares. Boards of both companies have approved the deal.

As has been happening lately, shares of the acquiring company traded down. Sigma closed Tuesday at 13.46, down about 6% on the day. After reviewing the slides that accompanied the company's conference call, I regard the acquisition as a favorable development, based on a good strategic fit and the ability to fund it without incurring debt.

ConocoPhillips (COP) released its 3^rd quarter interim results on 10/2, followed on 10/7 by an announcement of a dividend hike, together with plans to rationalize their portfolio and grow production. Shares closed Friday at 50.84, up 13% so far in October. Shiv Kapoor drew a lot of comments with his October 1^st article, suggesting COP may be a multi-bagger. Warren Buffett uncharacteristically admitted a mistake and took large losses on the company, a fact which seemed to distract some of the commentators from the fundamentals.

I have owned COP off and on for years, reliably extracting profits via covered calls at the lower end of its value range, and mentioned a recently added long position in a September article focused on changes in portfolio emphasis. However, I did not look that carefully at the selection when I made it, and I must confess to being a little surprised at the rapid price movement. Studying the 10/7 press release what I see is management's tacit admission of strategic errors, followed by corrective action, which is winning market support.

On September 30, Jim Cramer commented favorably on electric utility Exelon (EXC), after the stock closed at 49.62.

I was not listening (a little bit goes a long way) but according to Miriam Metzinger, he said that the cap-and-trade bill should benefit Exelon, which has nuclear power exposure. Investors have a good entry point because the "stock is way off."

Gulf Islands Fabrication Inc. (GIFI), at Friday's closing price of 18.06, is a value play in the oil and gas equipment and services industry. The initial attraction is a combination of low P/B (1.0) and low Price/5 Year Average Earnings (11.5). The company has numerous strengths, which over time should allow it to overcome current weakness in revenue and backlog and participate strongly in the growth area of deep water equipment.

I picked up the idea from a screen by Alan Brochstein here on Seeking Alpha. Checking further, the same name appears on a screen he did on 3/28 which also included Carbo Ceramics (CRR) and Lufkin Industries (LUFK), both successful picks I wrote up favorably and bought for my discretionary account. To some extent I work by affinity – I follow Alan and since this idea is a case where our thinking leads in the same direction, I did my own research, developing the following information and opinion.

Specialty steelmaker Haynes International (HAYN) at yesterday's closing price of 32.08, is interesting as a long-term play on industrial recovery. Attractions include a strong balance sheet, ample cash, technical expertise, and a diversified customer list that is a who's who of global industry. Weighing against that, the specialty alloy business is cyclical and highly competitive, capital intensive, and dependent on aerospace, chemicals and power generation - all areas that have been hard hit by the economic slowdown.

Overview – Haynes International is a leading developer, manufacturer and marketer of high performance nickel-and cobalt-based alloys used in corrosion and high-temperature applications. There is a good recent presentation on their website: rather than rehash that information, here is a link. Recent financial results include a large non-cash write-off of goodwill: future projections are in the break-even area for several quarters forward. However, the stock is attractively priced based on five year average earnings and should perform very strongly in a global economic recovery.

Multi-line insurer Allstate (ALL) was recently downgraded by Goldman Sachs, from neutral to sell. The analyst cited risk of loss of market share for Auto, low ROE on Homeowners, and uncertainty about the Life operation. The shares naturally gave up a few points on the news, so I thought I would go back over my thinking on Allstate. The shares closed Thursday at 30.33. TTM P/E is meaningless due to heavy write-offs and catastrophe losses in 2008.

5 Year Average EPS – Property and casualty insurance has a tendency to run in cycles: as soon as the companies start to make pretty good money, they compete by reducing prices and expecting to make it up on volume. That doesn't work for long, so they start to lose money, raise prices willy-nilly, and soon return to profitability. Because of this, analysis of profitability and valuation should rely on long term averages and specifically include any bad years with write-offs or restructuring charges. For companies that buy back their own shares, as Allstate does, the proper metric is 5 year average EPS, share count adjusted.

Obama's address to Wall Street was poorly received – a smattering of applause for the announcement of the CFPA, but otherwise a deafening silence, followed afterward by commentary that sees little probability of meaningful reform of financial regulation. Most denizens of Wall Street have missed the point. It is useful to go back over the speech, reading between the lines, and drawing information as to the solutions that will be legislated from the analysis presented as to the fundamental causes of the turmoil.

What Wall Street fails to comprehend is the anger of those who are impoverished by the ongoing transfer of wealth created by our political and financial system. When this anger is directed at President Obama because of his advocacy of health care reform, which seems to inevitably result in a transfer of wealth, they easily grasp that reform as the President envisions it is not politically feasible. From that they erroneously conclude that the he is politically powerless.

Webster Financial Corp. (WBS) is a regional bank, interesting as a value play where the investor has the benefit of the involvement of smart money - in this case, Warburg Pincus.

As a strategy, following the smart money into financials worked horribly during the meltdown, a prime example would be TPG and Washington Mutual. However, the exceptional circumstances which existed last year have now been resolved and/or incorporated into expectations, and this situation makes good sense as contrarian value play.

Sigma Designs (SIGM) closed Friday at $15.67, with a TTM P/E of $23.2 and a P/B of $1.32. It is well above its 52 week low of $6.93, dating back to late last year. This chipmaker has further upside potential, with the possibility of dramatic improvements, dependent on the successful development and marketing of its products into the cable industry. I picked up the idea from a screen by Marc Gerstein here on Seeking Alpha. The basic attraction is the combination of excess cash with a real business in a tech stock.

Overview – the company describes itself as follows:

Procter & Gamble (PG) filed an 8-K yesterday, summarizing the contents of a presentation made to a conference of institutional investors. The tone was positive, including a statement that the company expects to see a resumption of organic growth during its second quarter, ending December 2009. Organic growth is projected in a range of 1 to 4%. The CFO, Jon Moeller, noted that comparisons will get easier going into the second quarter. The stock was up 4%, closing at 56.04.

I included PG in a bullish series of diagonal spreads I did during August, and wrote up here on Seeking Alpha, the reasoning being that large, well-capitalized companies with strong brands can be expected to perform well as the safety and reliability of their earnings streams is better appreciated during what may prove to be a slow recovery.