MP3 and audio downloads wreaked havoc on the music industry, siphoning revenue away from record labels and driving many traditional brick-and-mortar music retailers out of business.

Now, publishers and retail bookstores are standing at the precipice of a similar fate as digital readers – like Amazon.com Inc.’s (Nasdaq: AMZN) Kindle and Sony Corp.’s (NYSE ADR: SNE) Reader Digital Book – lure readers out of the cozy confines of Barnes & Noble and Borders Books and Music by offering a wide selection of portable e-books.

Barnes & Noble Inc. (NYSE: BKS) fell short of expectations in the first quarter with a net loss of $2.2 million, or $0.04 per share. The company also lowered its full-year comparable store sales guidance at Barnes & Noble stores from slightly positive to slightly negative.

Eager not to become a relic, Barnes & Noble last week launched the world’s largest e-book store – an online bazaar that will make roughly 700,000 titles available for download. New releases and best sellers will cost $9.95 each, but the site will also offer nearly 500,000 public-domain books for free.

“Today marks the first phase of our digital strategy, which is rooted in the belief that readers should have access to the books in their digital library from any device, from anywhere, at any time,” said William J. Lynch, president of BN.com.

Barnes & Noble’s e-bookstore will ratchet up competition with Amazon.com, whose critically acclaimed Kindle has been building a solid user base.

Amazon does not release specific sales figures pertaining to its Kindle, but Credit Suisse Group AG (NYSE ADR: CS) estimates that the company will sell 1.8 million of the electronic reading devices in 2009, TWICE.com reported. That figure could increase to 2.9 million units in 2010 and 8.5 million in 2014. Revenue from the device could climb from $623.6 million in 2009 to $813.7 million in 2010 and $1.8 billion in 2014, the bank said.

While sales of the Kindle are profitable, each e-book Amazon sells costs the company $1.50, Credit Suisse analysts estimate. However, that is expected to change by 2012 as Amazon’s costs come down. At that point Amazon’s profit on e-book sales will soar to $31 million.

However, Amazon only offers about 330,000 e-books for its Kindle, and does not have the rights to publish the roughly 500,000 public-domain books that B&N acquired through a deal with Google Inc. (Nasdaq: GOOG).

And while Barnes & Noble does not have a reading device of its own, its catalogue of 700,000 titles will be available for download on a wide range of devices, including the iPhone, BlackBerry, Windows-based PCs and Macs. Amazon’s e-books are only available for the Kindle and iPhone.

Additionally, B&N said its e-bookstore would be integrated into the upcoming e-reader from Plastic Logic Ltd., which will compete head-on with Amazon’s Kindle.

The Plastic Logic reader “has the potential to blow the Kindle out of the water,” Michael Norris, an analyst with media researcher Simba Information, told BusinessWeek. “It’s Barnes & Noble’s way of hedging their bets and being able to attach their name to a cool electronic device.”

Of course, some analysts are skeptical that Barnes & Noble’s e-bookstore, and its new deal with Plastic Logic, will be able to compete with the Kindle.

“I don’t think they will be stealing market share from Amazon,” Sarah Rotman Epps, a media analyst with Forrester Research told the New York Times. “If anything, I think they are contributing to the growth of the whole category of digital reading.”

But even if B&N fails to wrestle market share away from Amazon and its Kindle, it will still gain a valuable foothold in a fast-growing market.

Sales of e-books grew to $113 million in 2008, up 69% from the year prior, according to the Association of American Publishers.

E-readers will account for about a third of the U.S. adult book-reading population in just five years, according to Credit Suisse. The installed base of e-readers will rise from 1 million in 2008 to 4 million this year and 32 million in 2014, the bank estimates. 

Meanwhile, the total U.S. e-book wholesale industry will grow from $52.3 million in 2008 to $196.6 million in 2009 and $1.8 billion in 2014.

The International Digital Publishing Forum says that wholesale e-book revenue exceeded $25 million in the first quarter of this year, compared to $7.5 million in the same period last year.

News and Related Story Links:

• New York Times:
  Barnes & Noble Plans an Extensive E-Bookstore

• BusinessWeek:
  Can E-Books Save Barnes & Noble?

• International Digital Publishing Forum:
  Industry Statistics

• TWICE:
  e-Reader Market To Explode: Credit Suisse

• Barnes & Noble:
  Barnes & Noble Reports First Quarter Financial Results

• Barnes & Noble:
  eBooks

• Barnes & Noble:
  Barnes & Noble Launches World’s Largest eBookstore

• Money Morning:
  Buy, Sell or Hold: Amazon.com Inc. (Nasdaq: AMZN) Remains Unquestionably Bullish

Goldman Sachs Group Inc. (NYSE: GS) said yesterday (Tuesday) that it posted record earnings in the second quarter, but that’s not necessarily an indication that better days have arrived for the U.S. banking sector.

Goldman’s revenue in the three months ended June 26 was $13.8 billion, compared with $9.43 billion in the first quarter and $9.42 billion in the second quarter a year earlier. Net income rose to $3.44 billion, or $4.93 a share.

But analysts say investors should consider those results to be uniquely Goldman’s and not indicative of what we’ll be seeing from the greater financial sector. Traders said Goldman made several key moves during the quarter. The bank:

• Played the whipsaw volatility in the global credit markets by trading bonds to generate part of its quarterly fortune.
• Properly played a similar pattern in U.S. stocks this year, profiting as an early-year plunge reversed course and turned into one of the most-powerful short-term.
• Capitalized on such commodities as oil, while also trading volatile currencies.
• And made the most of its position as one of the few remaining heavyweight-investment-banking firms willing and able to service the deal-making market. It reaped lucrative fees from the high-margin business of underwriting stock offerings, which have surged anew this year as other more-troubled financial institutions raced to raise capital.

“What’s so intriguing about Goldman Sachs is that there are all these levers there,” says David Wintergreen of the Wintergreen Fund, which owns Goldman shares told BusinessWeek. “There are so many ways this company can win.”

A look at a common risk-taking measure – so-called “value at risk,” or VAR – shows that while other investment banks were playing it conservative, Goldman was clearly game to take risks. VAR, an estimate of what an institution could lose in a single day, zoomed by more than 20% in the first quarter and jumped 33% during the second quarter, hitting another record high.

Fixed-income trading remained strong, with second-quarter revenue rising to $6.8 billion from $6.6 billion for the first three months of the year. It was up 186% from the second quarter of 2008.

The bank also saw a massive bump in equity trading where revenue jumped 110% over the past quarter, to $2.2 billion.

However, there is a question about whether or not these profit-making opportunities will disappear in the year’s second half – which looks much more challenging. Part of that challenge will be for the company to deal with the heightened group of regulations it is now subject to after having converted from an investment bank to the more-heavily regulated bank-holding company.

JPMorgan Chase & Co. (NYSE: JPM), which reports today (Wednesday), will have a similar challenge, and still tther firms – such as and Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C), which report later this week – continue to struggle under the weight of their toxic assets.

News and Related Story Links:

• Goldman Sachs:
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• Money Morning:
  Hot Stocks: Goldman Sachs Expected to Post “Blowout” Quarter Amid Run of Lackluster Corporate Profit Reports
• BusinessWeek:
  Goldman Sachs: A Special Case

Ladenburg Thalmann Financial Services (LTS) analyst Dick Bove is one of the few Wall Street banking analysts who has been consistently “getting it right” in terms of analyzing the impact the financial crisis has had on that critical sector. As a result, he’s viewed as one of the true “axes” – top sector analysts – on U.S. banks.

And yesterday (Tuesday), Bove slashed his targets on BB&T Corp. (BBT), dropping his price target from $35 to $22 and trimming 2009 earnings from $2.79 a share to $1.56 a share, Reuters reported.

Bove said that the Winston-Salem, N.C.-based BB&T’s shares have continued to fall, even though the bank is gaining market share and seeing lending opportunities emerge.

Investors believe the bank may have “severe real estate problems in Atlanta with land loans and [in] North Carolina with condo loans [and] to this point, nothing that management says will change investors’ views on this subject.”

In a related story, BB&T Corp., the nation’s 12th-largest financial holding company, said Friday that its executives will not receive 2008 bonuses under the company’s short-term incentive plan, the Charleston Regional Business Journal reported.

BB&T’s statement issued Friday did not say why its executives would forego bonuses. It did state that the company earned $1.5 billion in net income in 2008. But the banking firm had earlier reported credit losses totaling $528 million for the 2008 fourth quarter, an increase of  $344 million from the comparable quarter a year earlier.

As part of the executive bonus announcement, BB&T said the “increases in net charge-offs, non-performing assets and the provision for credit losses were driven by continued deterioration in residential real estate markets and the overall economy with the largest concentration of credit issues occurring in Georgia, Florida and metro Washington, D.C.”

BB&T, which received $3.1 billion under the U.S. Treasury Department’s Troubled Assets Relief Program (TARP), operates more than 1,500 financial centers in 11 states and Washington, D.C.

News and Related Story Links:

• Reuters:
  Dick Bove slashes targets on BB&T.

• Charleston Regional Business Journal:
  BB&T Corp. says bank’s top executives won’t receive 2008 bonuses.

• Wikipedia:
  Troubled Assets Relief Program.

Yum! Brands Inc. (YUM) expects another year of double-digit profit growth.

For nearly everyone else, 2009 won’t be just “another year.” Nearly every economist expects the first half of the New Year to bring more of the same, a deepening global financial crisis that’ll throw an even bigger, wetter blanket on economic growth than it did this year.

Indeed, even more than in 2008, next year will be a real-life case study of the survival of the fittest. And Yum’s certainly fit for the fight.

“Our industry is better-positioned in times like this,” Yum Chief Executive Officer David C. Novak told The Wall Street Journal. “We’re better-positioned than most other categories and industries.”

Already, we’re seeing companies slash work forces, trim (or abolish) dividends, and lock the safe that stores their spending money, sell off holdings or even shut down completely.

Yum’s not immune from the downturn. It, too, is cutting $60 million in operating costs from its U.S. business. It’s also putting a hold on buying back shares next year to preserve cash.

But unlike most, Yum hasn’t red-lighted its 2009 expansion plans – it’s still planning to build as many as 1,400 restaurants in international markets. About 500 of those new stores will be in China. That’s part of the reason the overall company is projecting at least 10% profit growth in 2009.

More broadly, Yum is expanding in the world’s fastest-growing economies and is making its menu part and parcel of every foreign country in which it operates. Two factors have imbued the company with a corporate killer instinct that’s enabling it to survive and thrive in the face of the current harsh economic environment: The innate strength of its own brands and a proven ability to adapt to any market it decides to pursue.

For marketing muscle, the Louisville, Ky.-based Yum has an army of brands – Pizza Hut, Kentucky Fried Chicken, Long John Silvers and A&W – plus its own line of Yum Restaurants that it operates outside the United States.

And its overseas franchises – especially Pizza Hut and KFC – are especially adept at making themselves the people’s favorite local flavor, instead of just their favorite American flavor.

Here’s a look at some of the items on Pizza Hut’s China menu: tuna fish pizza, roasted squid, zesty shrimp soup, a variety of rice-and-meat dishes (kimchi pork, curry beef and Hungarian beef rice), green tea, and chocolate mousse cake.

The bottom line: Yum’s stronghold and growth potential in China is shaping up as one of the most promising investment stories of 2009.

China Stronghold

As far as Yum Chief Financial Officer Richard T. Curucci is concerned, the company’s target for 10% profit growth should be easy to hit.

“We can get these numbers without heroic sales performance” at existing restaurants in China, Carucci said on a Webcast from the company’s analyst meeting, Reuters reported.

While Carucci says that Yum is “still not sure how China’s going to respond to a slowing economy,” he is certain of the company’s master plan which makes the Red Dragon the centerpiece of its growth strategy.

As of now, the United States accounts for 41% of Yum’s operating profits. China accounts for 28% and the rest of the company’s operations around the world account for the remaining 31%.

By 2013, China will account for 40% of Yum’s operating profit, while the United States and the rest of the world will each account for a 30% share, according to company projections.

As this plays out, Yum should outdistance some of its rivals, especially McDonald’s Corp. (MCD). That’s because Yum has done a better job penetrating the China market.

From 2002 to 2007, Yum opened 1,678 new stores in China, for a total of 2,558. In that same span, McDonald’s added 330 stores, giving the Golden Arches’ owner a total of 876 stores in China.

Yum has even stolen McDonald’s thunder in the mascot department. Its KFC mascot, a chicken character (naturally) named “Chicky,” roams stores and interacts with children. And the company’s Chicky program includes in-store birthday parties, kids’ fun camp and school tours of its stores. No wonder that Novak, the Yum CEO, boasted to Business Week two years ago that Chicky had already become “the Ronald McDonald of China.”

"We’re on the ground floor of a booming market, just like when Colonel Sanders started KFC and Ray Kroc started McDonald’s," Novak told Business Week, noting that he one day wants to have as many restaurants in China as he does here in the United States.

Stateside Strategy

Novak said last week that the United States market was the lone problem the company has had in 2008.

Not only does Yum face a wider number and variety of competitors, but also fighting the headwinds of recession.

In addition to cutting $60 million from operational costs and suspending the company’s share buyback, Yum will offset the planned opening of 200 new U.S. restaurants by closing about the same number.

Other strategies will appear on the menu.

At Pizza Hut, the company is adding lasagna to its new Tuscani pasta line.

At KFC, it’s rolling out a grilled chicken option, a menu item Novak called a “transformational product” at an investor conference last week, The Associated Press reported.

The chicken chain will also create and promote a value menu, featuring items costing from $0.99 to $1.99.

News and Related Story Links:

• Money Morning Economic Outlook 2009 Series:
  For the U.S. Economy in the New Year, the Pain Will Precede the Promise.

• The Wall Street Journal:
  Yum Pins Growth on Overseas Gains.

• Wikipedia:
  Kimchi.

• Reuters:
  Yum can reach 15-20 pct profit growth in China: CFO.

• The Associated Press:
  KFC planning a national grilled chicken rollout.

• Wikipedia:
  Survival of the Fittest.

• Business Week:
  A Finger-Lickin’ Good Time In China.

McDonald’s Corp. (MCD) is the quintessential American fast-food chain. For decades, its golden arches have dotted the U.S. landscape, its advertisements have dominated the airwaves, and its catchy slogans and jingles have been drilled into our brains.

But McDonald’s ability to adapt to shifting consumer demand and build a strong global brand, as well as its customary role as a fast and reliable vendor of cheap meals, has made it a market leader. 

U.S. sales at McDonald’s locations open at least a year jumped 4.5% in the month of November, as cost-conscious consumers opted for more affordable meals.

“I think what you’re seeing is that McDonald’s has so far been relatively immune to the recession,” David Morris, senior analyst at consumer research firm Mintel, told The Associated Press.

In addition to increased traffic from cash-strapped consumers looking for affordable meals, McDonald’s has also bolstered its foreign sales.

Global same-store sales surged 7.7% – down only from October’s 8.2% increase. Sales climbed 7.8% in Europe and 13.2% in the company’s Asia/Pacific, Middle East and Africa division.

The company has been so successful at bringing in revenue that it upped its quarterly divided by 33%, a move that means even more to investors at a time many dividend-paying companies are lopping off their investor payouts.

McDonald’s New Menu

McDonald’s menu selection is one reason for the growth. Burgers are the cornerstone of McDonald’s business, but strong sales of breakfast foods and chicken sandwiches have been the company’s main growth engine. For instance, a breakfast menu that was once limited to the Egg McMuffin now includes McGriddles, the sausage biscuit sandwich, and hot cakes.

After concocting a spicy chicken sandwich to compete Wendy’s – one half of the Wendy’s Arby’s Group Inc. (WEN) – the company earlier this year took on Chick-fil-A Inc. with the introduction of a Southern Style Chicken Biscuit. McDonald’s also went “south of the border” with the introduction of the McSkillet Burrito and Chipotle BBQ Snack Wrap. 

All of these new items were designed not just with the objective of sneaking market share way from competitors but catering to regional tastes.

“They started looking at Chick-fil-A and they have this chicken product and said we have to do something comparable to them,” Vivian de Jesus, franchisee of four Atlanta region McDonald’s restaurants, told the St. Louis Business Journal. “The South is a chicken market and we needed something that would compete on the same level.”

McDonald’s is no doubt hoping its new, spicier products will catch on in the American Southwest. 

McDonald’s has also beefed up its global menu, tailoring its international offerings to the palates of its foreign consumers.  The restaurant first started serving beer in Germany in the 1980s and then in Canada. Customers can order pasta freshly cooked to order in Rome, porridge in the United Kingdom, and a deep-fried patty of beef ragout in the Netherlands.

Did Somebody Say Makeover?

In addition to making over its menu McDonald’s has embarked on an ambitions “reimaging” campaign that originated in Europe, but has since morphed into a global effort.

A few years ago, after European customers snubbed their noses at McDonald’s trademark red and yellow motif and rush-in, rush-out service, the company tapped Denis Hennequin, president of McDonald’s European operations, to lead a massive image overhaul.

McDonald’s spent more than  $800 million remodeling 1,280 restaurants across Europe. The company’s signature red and yellow signs and plastic and vinyl interiors were replaced with more art deco scaffolding, leather couches, wood tables, and wall paintings. It also began offering Internet access and rental iPods to many of its contemporary European customers.

“The brand position is different in different parts of the world,” Hennequin told BusinessWeek. “In Europe it’s more about the experience.”

However, the McMakeover got such a positive response that McDonald’s has decided to apply some of the lessons learned overseas to its home market. The company has applied the principles of feng shui – the strategic representations of earth, water, fire, metal and wood – to many of its new U.S. locations.

Earth tones, bamboo plants and water trickling down glass panels are now common features at many McDonald’s restaurants. Plush chairs and flat-panel televisions are also cropping up.

Finally, the makeover also includes new packaging for McDonald’s food. The company hired the U.K.-based Boxer to help rebrand and repackage its product.

Paul Castledine, Boxer’s chairman and chief creative officer, told BuisnessWeek that designers spent hundreds of hours in focus groups before settling on the concept of provocative headlines bolstered by vivid photography as the new look for McDonald’s packaging.

Sign up below… and we’ll send you a new investment report for free: “Credit Crisis Report.”

“There is only one,” McDonald’s new Big Mac container, proudly exclaims. Meanwhile, the other side of the box depicts the vegetables, cheese, and cooking utensils used in the burger’s making. 

Mary Dillon, McDonald’s global chief marketing officer, told BusinessWeek that the company wanted to “create unique personalities for our menu items by telling a story about each one.”

Like its menu offerings, McDonald’s new packaging is unique to both the product and region. Packaging in Australia highlights beef sourced in nearby New Zealand. In Argentina, some sandwiches feature images of marinated seasoned onions, and in Europe, Le Hamburger’s ciabatta roll is the main point of emphasis.

“This demonstrates the authenticity of the locally grown ingredients we use,” Dillon said.

The new packaging made its debut in at 13,900 U.S. locations in early November. And while Dillon didn’t say how much the company spent on the redesign, estimates range from $50 million to $80 million.

That’s quite a bit of money, considering most McDonald’s customers will likely discard the new packaging without so much as a second look. But the company believes strongly that this is a vital next step in developing a more consumer-friendly product.

“People want to know more and more about the food they’re eating,” Castledine said. “And, well, the box is the most intimate touch point with any brand.”

Also, 82% of McDonald’s new consumer packaging is made from renewable paper or wood materials.

News and Related Story Links:

• Money Morning:
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• BusinessWeek:
  A New Look for McDonald’s

• Associated Press:
  McDonald’s same-store sales jump in November

• Fortune:

  Beyond ‘Royale with Cheese’

• New York Times:
  The Golden Arches Go Upscale

• McDonald’s Corporation:
  McDonald’s Delivers Another Month of Strong Global Comparable Sales – November Up 7.7%

There is no doubt that the global economic environment presents a very bleak outlook.  The National Bureau of Economic Research (NBER) last week announced that the U.S. economy has been in a recession since last December – a situation that appears to be getting worse, given that the economy lost half a million jobs lost half a million jobs in November. Interestingly, the market traded up both those announcements.
On Nov. 24, Hewlett-Packard Co. (NYSE: HPQ) reported a quarterly profit of $1.03 a share, exceeding analysts’ estimates of $1.01 a share.  Hewlett-Packard almost doubled its revenue from technology services from last year because of its acquisition of Electronic Data Systems Corp. earlier this year, and a 21% increase in quarterly sales of notebook computers and a 10% rise in personal computer sales.

You read that right: Hewlett-Packard recorded a big jump in three key business areas – during a recession.

These impressive results are due to Hewlett-Packard outperforming its peers with superior products and exemplary execution. What’s more, Hewlett-Packard has been an early adopter of some of the fastest chips for servers – the “Shanghai” chip by Advanced Micro Devices Inc. (AMD), which just leapfrogged the offerings of arch-rival Intel Corp. (INTC) in terms of both speed and market share.

In its core printer and server business units, Hewlett-Packard actually experienced a slight contraction in businesses.

The key to Hewlett-Packard’s better-than-expected results is the large proportion of recurring services and supplies, which are much less vulnerable to a contraction in economic activities.  You need to keep your systems running with the up-to-date software and maintenance services and you need to keep buying ink for your printers.  This recurrent income smoothes out earnings and is a blessing for companies like Hewlett-Packard, International Business Machines Corp. (IBM), Automatic Data Processing (ADP) and others, which benefit greatly from such sustainable income streams.

In this light, Hewlett-Packard’s management not only blew away its earnings estimates, but also came out with a much stronger-than-expected guidance.  Well, the market was overbought that day and the stock sold off the next day.  The word dropped by some was that the analyst community did not believe Hewlett-Packard’s rosy outlook.  But the reality is that the market had anticipated Hewlett-Packard’s strong results and bid up Hewlett-Packard’s stock ahead of the announcement.

So far so good, but what about the future?  Mark V. Hurd, Hewlett-Packard’s president, expects to be able to cut $1 billion in expenses in 2009 from redundancies from the EDS acquisition that he will be eliminating.  And Hurd has shown a strong track record in this sense since he took the helm in 2005. 

So the question is how much faster Hurd can cut costs to compensate for the reduction in economic activity, in case things keep getting worse as they very likely will in the first quarter of 2009.  But there is some hope that the incoming Barack Obama Administration will add to the aggressive monetary and fiscal stimulus already approved and only partially implemented by the current administration.  In any case its positive effects are only starting to be seen.

And the other question is how much downside has the market already discounted in Hewlett-Packard’s shares, which are down 38% from their 52-week high of $52.90. Well, with a trailing Price/Earnings (P/E) ratio of only 10.0 and a P/E to Growth Rate (PEG) ratio of 0.7 for this very resilient profit stream in a company characterized for flawless execution, Hewlett-Packard is a steal.  This can also be said for most of the market, which is in panic state, taking refuge in government bonds yielding almost zero. 

This last phenomenon has been referred to by Mohamed El Arian, co-Chief Executive Officer of PIMCO as a U.S. Treasury bubble. And in times of panic, it is a good idea to buy.  So I will unequivocally recommend buying HPQ in increments.  I would buy one-fifth of my position on weak days prior to year end – accumulating half our position – leaving the last half for purchase in the first quarter of 2009.

 ACTION TO TAKE: BUY Hewlett-Packard Co. (NYSE: HPQ), but do so with some care. Purchase two-thirds of your position between now and year-end, and the final third during the first quarter of the New Year. **

Editor’s Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises – cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you with his newly created "Shadow Stock Trader" specialized trading service. To find out how to subscribe, please click here. "Buy, Sell or Hold" is a new Money Morning feature that has most recently analyzed such companies as Bank of America Corp. (NYSE: BAC), Suncor Energy Inc. (NYSE: SU), Potash Corp. (NYSE: POT), Garmin Ltd. (Nasdaq: GRMN), Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), Cisco Systems Inc. (Nasdaq: CS), Chevron Corp. (NYSE: CVX), Valero Energy Corp. (NYSE: VLO), General Electric Co. (NYSE: GE), and steelmaker Nucor Corp. (NYSE: NUE).]
** Special Note of Disclosure: Horacio Marquez holds no interest in Hewlett-Packard Co.

News and Related Story Links:

• Money Morning:
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Money Morning Staff Reports

If you like the car, will you love the company?

When it comes to Ford Motor Co. (F), a Canadian car dealer bet a month’s sales on that premise.

Rose City Ford dealership owner John Chisholm offered 100 shares of Ford stock to anyone who bought a new or used vehicle from the dealership during the month of November, the Windsor Star newspaper reported. Chisholm, the president and general manager of Rose City, said he got the idea from a General Motors Co. (GM) dealership in Texas that offered GM shares for each vehicle sold. So Chisholm opted to try it in Windsor, the Ontario, Canada city where Ford has both a long history and deep community roots.

“What a great way to show our confidence in the company,” Chisholm, who employs 80 at a dealership that his father founded nearly 30 years ago, said in an interview late last week. “We believe the company is going to be around for a long, long time.”

Chisholm was planning to actually buy the shares Monday for customers who bought a vehicle last month. He expects to extend the promotion, should its popularity continue.

“We want as many people with ownership in the company as we can,” said Chisholm, who owns Ford shares himself. “They’ll be going up. This is an incentive that is going to grow.”

Just how big a payoff the incentive deal provides the dealership’s customers will depend on whether Ford is able to turn itself around in the coming months.

Thanks to the ongoing global financial crisis – and stung by the worst sales slump in 25 years – Ford lost $3 billion in the third quarter and now the Dearborn, Mich.-based company and its two other “Big Three” cohorts are pressing both U.S. and Canadian lawmakers for emergency aid. All three are to submit turnaround plans to Congress this week – a requirement if General Motors, Ford and Chrysler Corp., are to receive $25 billion in U.S. government bailout loans.

Some details began to emerge yesterday (Tuesday), according to a report that runs elsewhere in today’s (Wednesday’s) issue of Money Morning. Among other things, Ford is considering the sale of its stake in Volvo as it seeks to raise cash.

Anthony J. “Tony” Faria, a marketing expert who is the co-director of the University of Windsor/DaimlerChrysler Canada Automotive Research and Development Center (ARDC), told the Windsor Star that the Ford promotion was “interesting” and “attention-getting,” even though the present value to customers was less than $300, a small inducement compared to other incentives and rebates.

“I presume Detroit Three dealers probably will be looking for a lot of creative things they can do to improve traffic through their dealerships,” Faria said.

Promotional flyers for what the dealership portrayed as “confidence sale” exhorted local customers to “be a part of history,” proclaiming that “100 shares is the way forward.” Public interest has already been piqued by the inexpensive promotion, which customers say they like because of the potential for a big payoff, the newspaper reported.

“The 100 shares are an absolute bonus,” customer Tina Reed said, just before she drove away from the dealership in a brand-new charcoal-gray Ford Focus. “I keep an eye on the stock market but now I’ll pay a little more attention.”

JP Morgan Chase & Co. (JPM) credit analysts had rated GM’s distressed debt as a “Buy,” noting that the company – known for such brands as Chevrolet and Buick – was likely going to survive.

Interestingly, Ford has a market cap of $6.09 billion – making the company known for bringing forth such innovations as mass production, the Model T and the assembly line more than twice as valuable as GM, the market-share leader (of the U.S. carmakers). Ford had $172.5 billion in sales last year, and $160.1 billion in 2006.

GM had $181.2 billion in sales last year and $205.6 billion in 2006, according to statistics provided by Google Finance. The company right now has a market value of only $2.8 billion.

Shares in the embattled automaker hovered near $30 in 2001, but have nose-dived since that time. GM’s shares closed Monday at $4.59 each, a decline of 65 cents each, or 12.4%. They have traded as high as $29.95 in the past 12 months.

Ford shares closed Monday at $2.55 each, down 14 cents, or 5.2% per share. They’ve traded as high as $8.79 in the past year.

Whether the price will tank or skyrocket in these uncertain times is anybody’s guess but many, including Faria, the marketing expert, believe the stock is poised for a rebound – especially if the U.S. and Canadian governments can agree on a multibillion-dollar bailout package.

I’ve seriously thought about buying a lot of Ford shares at this price because one of two things is going to happen,” Faria said. “Either Ford is going to fail and you’re going to lose all of it or, if Ford doesn’t fail, the shares, at some point, are going to be worth a lot more.”

Faria said Ford was in better shape financially than GM and Chrysler, but conceded that the fates of all three are intertwined because they share suppliers dependent on business from all three – and because of the need for government aid.

Not everyone sees a bright future for Ford. Indeed, one Web site wag wrote on the Windsor Star Web site that “I have some Penn Central, WorldCom., Enron, Nortel (NT) and Citibank (C) shares if Mr. Chisholm would like to take them in trade for a new car. They are in certificate form, so he can use them to decorate the showroom. Cheaper than buying new wallpaper.”

News and Related Story Links:

• The Financial Post:
  Windsor car dealer offers Ford stock with purchases.

• The Windsor Star:
  
  Ford shares offered as incentive to auto buyers.

• Money Morning:
  GM, Ford, and Chrysler Chiefs Push for Action in Washington as Congress Debates Another Bailout.

• Reuters:
  GM Likely to Survive, Bonds a "Buy": JPMorgan.

• Reuters:
  GM’s bonds fall ahead of expected restructuring plan.

• Bloomberg News:
  GM, Ford, Chrysler UAW Leaders Call Emergency Meeting.

• TheStreet.com:
  GM Readies Viability Plan: Report.

• Money Morning News:
  Big Three Auto Companies Weighing How to Shed Weight for Gov’t Bailout.

• The Financial Post:
  Detroit Three proposals seek billions from U.S. government.

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Embattled U.S. banking giant Citigroup Inc. (C) has agreed to buy back $17.4 billion of assets remaining in a series of funds known as structured investment vehicles, or SIVs, after it previously agreed to guarantee the liabilities in those funds.

In a separate story today (Wednesday), Wall Street banking analyst David Trone said that he expects higher credit costs and additional losses to force Citi to take $3 billion in write-downs in the year’s final quarter, a realization that prompted him to boost his quarterly loss estimate for the company and cut his target price for the stock.

“The key question is whether management will be able to continue to find buyers for business units, which is necessary to fortify the capital base against further credit losses and write-downs,” Trone, an analyst with Fox-Pitt Kelton Cochrane Caronia Waller, wrote in a research note to clients.

Fox-Pitt boosted its quarterly loss estimate for Citigroup from its prior projection of only 8 cents a share all the way to 79 cents a share. The brokerage then cut its profit estimate for 2009 from its earlier estimate of 69 cents per share all the way down to 28 cents, Reuters reported.

Trone, who rates Citi shares as performing “In Line” with the general market, cut his target price on the shares from $20 to $16. From Tuesday’s closing price of $8.36 a share, even that lower target price would represent a return of 91%.

Worries about Citigroup’s problem assets will continue to weigh down investor confidence, Trone wrote. Thus, while Citi is definitely a “cheap” stock by one key measure, it isn’t necessarily a bargain.

“Citi trades below tangible book, although we believe this is at risk given still-large problem asset exposures,” Trone wrote.

Citigroup’s shares have traded as high as $35.29 in the past 52 weeks. Its market capitalization (market cap) – the actual value of a publicly traded company – has plunged from $195 billion at the stock’s 52-week high to just under $41 billion today.

A new report states that Citigroup has slipped to the fifth-largest U.S. bank by market value, falling behind U.S. Bancorp (USB). The top five are JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), Bank of America Corp. (BAC), U.S. Bancorp and Citigroup. Less than two years ago, Citigroup was on top of that list.

As for the asset buyback, Citi said it’s moving the structured investment vehicle assets into a portfolio of assets held for sale. The transfer allows the SIV funds to fully repay maturing debt obligations. It will be accounted for as a “cashless” transaction, since the funds were essentially already on Citi’s balance sheet. In fact, the assets will be labeled as being “available for sale” basis, meaning changes in their value will affect the company’s balance sheet equity – but not its earnings, Reuters reported.

Back in December, Citigroup agreed to support the SIVs, which at the time held roughly $49 billion of assets. At one point, the bank’s SIVs were actually “off-balance-sheet” entities, holding roughly $100 billion in assets.

A SIV is a fund that borrows money by issuing short-term securities at a low interest rate and then lends that money by purchasing long-term securities at higher rates of interest. If managed correctly, fund investors can make a profit from the difference.

SIVs proliferated, and were in widespread use by investment banks and other financial institutions. But they ran aground when the credit crisis caused the demand for short-term bonds and commercial paper to evaporate. SIVs saw the value of their holding plummet, forcing institutions such as Citi – which had been operating the funds as off-balance-sheet funds – to prop them up with financial support.

This is the latest move Citigroup – one of the hardest-hit by the worldwide financial crisis – has been forced to make as it struggles to get back into the black. Citi has notched losses in each of the past four quarters, including a $2.8 billion loss in the third quarter, and has taken in excess of $40 billion in write-downs.

On Monday, Citi unveiled plans to cut more than 50,000 jobs in the “near term” and slash expenses by 20% to preserve capital as it faces a global slowdown that’s expected to push well into 2009. The cuts are on top of the 23,000 jobs eliminated so far this year and are part of Chief Executive Officer Vikram Pandit’s plans to whittle the bank’s work force down to 300,000. By the time Pandit puts down the corporate-cost-cutting machete, he’ll have lopped off about 20% of the company’s work force.

At its peak at the end of 2007, Citigroup had a work force of 375,000.

Just last week, as Money Morning reported, Citigroup announced the release of 10,000 employees, and said it was boosting interest rates an average of 3% for about one-in-five of its credit card holders.

[Editor’s Note: An “occasional” series, Money Morning’s “Hot Stocks” feature has most recently chronicled developments involving Companhia Vale do Rio Doce (ADR: RIO), the world’s biggest iron-ore producer, and Priceline.com Inc. (PCLN), the name-your-own-price travel-services player. Also make sure to check out our weekly “Buy, Sell or Hold?” feature, which runs most Mondays here in Money Morning.]

News and Related Story Links:

• Reuters:
  Citigroup says buying back remaining SIV assets.

• Reuters:
  Citi to write down $3 billion in fourth quarter: Fox-Pitt.

• Wikipedia:
  
  Structured Investment Vehicles (SIVs).

• Yahoo! Finance:
  Citigroup acquiring $17.4 billion in SIV assets as it winds down the troubled funds.

Money Morning Staff Reports

Riddle me this: When is it good news when an analyst slashes his price target for a stock by 55%?

Answer: When that “reduced” target price still represents a 59% gain.

That’s precisely the scenario facing Companhia Vale do Rio Doce (ADR: RIO), the world’s biggest iron-ore producer. Felipe Reis, an analyst for Banco Santander SA (ADR: STD), yesterday (Monday) slashed his target price for the U.S.-listed shares by more than half, stating that the worldwide outlook has become “more challenging.”

Reis, who previously had placed a year-end 2009 price target of $40 a share Vale’s U.S.-listed American Depository Receipts (ADRs), now says the shares of the Rio De Janeiro-based mining-and-metals heavyweight will trade at $18 at next year’s close. If you’re keeping score, that’s a reduction of 55% from his prior target.

But it still represents a 59% gain from yesterday’s closing price of $11.32 a share.

”We are adjusting our estimates for Vale in order to reflect the more challenging scenario in the commodities market,” Reis wrote in a research missive, noting that the reduced target price takes into account “the significant global economic slowdown.”

In related news yesterday, Merrill Lynch & Co. Inc. (MER) cut its 2009 economic-growth forecast for Brazil to 2.9%, from a previous estimate of 3.1%, as the lagging effect of scarcer credit may be deeper than thought.

The Brazil exchange-traded fund, theiShares MSCI Brazil Index (NYSE: EWZ), was the focus of a recent Money Morning “Buy, Sell or Hold” column, and soared as much as 42% in six days after it was recommended as a “Buy.”

Money Morning Contributing Editor Martin Hutchinson also recently wrote favorably about the long-term prospects of the Brazil economy as a “safe haven” market that U.S. investors should consider.

News and Related Story Links:

• Bloomberg News:
  
  Vale Falls as Santander Cuts Share Estimate on Global Outlook.

• Money Morning Buy, Sell or Hold Series:
  
  Buy, Sell or Hold: iShares MSCI Brazil Index.

• Money Morning Special Investment Report:
  Four “Safe Haven” Markets For U.S. Investors.

• Money Morning Hot Stocks (Part I):
  Hot Stocks: IBM Bucks the Earnings Trend as Tech-Sector Stocks Trade Down to Bargain Levels.

• Money Morning Hot Stocks (Part II):
  Hot Stocks: Intel Posts Earnings Surprise Because the “Atom” Was No Bomb.

• Money Morning (Hot Stocks Part III):
  
  Hot Stocks: Can AMD’s Future be Fabulous if it’s Fabless?

• Money Morning Hot Stocks Series (Part IV):
  Hot Stocks: Coca-Cola’s Strong International Sales Serve Up Sparkling Third-Quarter Results.

• Money Morning Hot Stocks Series (Part V):
  Hot Stocks: Priceline.com Shares Poised to Beam Up, Barron’s Says

Money Morning Staff Reports

With Priceline.com Inc. (PCLN) – the name-your-own-price travel-services player – it’s time to either beam up or buy in.

Priceline – the online airfare and hotel-booking firm known for its kitschy TV ad campaign that stars “Star Trek” star William Shatner as “The Negotiator” – is an interesting possible profit play, thanks to its strong balance sheet and market muscle in the bargain-hunting end of the travel-services sector, the financial weekly Barron’s says.

The stock market has already factored in the challenges facing the travel and retail sectors into Priceline’s stock price, Reuters and Barron’s both reported.

According to Barron’s, as the current financial crisis deepens, consumers are going to devote an increasing amount of time to their personal and household spending budgets – a point that Money Morning has repeatedly made as part of its ongoing “Credit Crisis Safety Plays” series. As those consumer concerns about spending and household budgets increase, Priceline’s name-your-own-price business will become a bigger draw, Barron’s, the popular investing weekly, said in its most recent edition.

Barron’s also said Priceline has little debt and plenty of cash on its balance sheet, including $282 million in free cash flow this year. At Friday’s closing price of $54.57, Priceline was trading at 8.8 times projected profits for 2009. That’s well below the average Price/Earnings (P/E) ratio of 21 for Internet retailers, and 9.0-plus for the travel and leisure sectors, Barron’s reported.

Priceline also has a tendency to report upside earnings surprises. In each of the past four quarters, the Norwalk, Conn.-based Priceline has beaten analyst estimates by amounts that range from 9.9% to as much as 27% (Please see accompanying chart).

Strategy Shift a Major Plus

According to noted travel writer Arthur Frommer, Priceline.com was largely once just “a rather exotic service meant only for the gamblers among us – the folks willing to accept the risk of a 6 a.m. flight or an out-of-the-center hotel. By featuring its bidding process (‘name your own price’), Priceline.com came up with absurdly low air or hotel rates, but with the drawback of sometimes producing a dawn departure, a multi-stop flight or a badly located hotel.”

But that’s changed. In a story he penned for TheLedger.com, Frommer said that while Priceline “still maintains its ‘name your own price’ option – the way to get the very lowest prices imaginable - it now also offers the same full-disclosure airfares and hotel rates that Web sites like Hotels.com, Expedia.com (EXPE), Travelocity.com, Orbitz.com (OWW) and others offer.”

The bottom line: Priceline.com often beats the prices offered by these other “full-disclosure” Web sites – and without charging the extra fees that these other sites hit users with, Frommer wrote.

The economic slowdown may also benefit Priceline. The financial crisis has hit the travel sector and the airlines hard. So the major airlines are now using Priceline.com as a way of disposing of their unsold seats – “of which there are a great many,” Frommer wrote. But that’s good news for the more-adventurous traveler, since the “last-minute” airfare deals feature has returned to the Priceline.com Web site, Frommer said.

Priceline is now going global. With its recent acquisition of European hotel search engine called Booking.com, Priceline.com is also has become a standard full-range search engine for hotel rates both in the United States and abroad. Booking.com is the largest of the hotel booking sites in Europe, meaning users will find offers from some of the “more interesting, nonchain, boutique-like hotels that are often absent from American hotel search engines.”

Master Marketer

When it launched its somewhat campy television ad campaign, Priceline.com was smart enough to go after the king of camp himself – Shatner, whose entire TV life has been spent playing such campy characters as Capt. James T. Kirk (Star Trek), police Sgt. T.J. Hooker (T.J. Hooker) and legal legend (in his own mind) Denny Crain (Boston Legal). Shatner’s performances as the “Priceline Negotiator,” have spawned kudos both for Shatner and for Priceline.

Curiously for Shatner, however, it’s original “Star Trek” series veteran Leonard Nimoy (Mr. Spock), and not the irrepressible Shatner – described by one writer recently as the “master of the strained staccato delivery” who landed a role in the new Star Trek (2009) movie due out next year.

But Shatner does have a new talk show starting: Shatner’s Raw Nerve debuts Dec. 2 on the Bio Channel, media reports state.

News and Related Story Links:

• Reuters:
  
  Priceline could be a good opportunity – Barron’s.

• The Ledger.com:
  Travelers Should Check out Revamped Priceline.com.

• Myspace.com:
  William Shatner as “The Priceline Negotiator.”

• Imdb.com:
  
  Star Trek (2009).

• Imdb.com: Leonard Nimoy.
• Frommers.com:
  Travel Writer Web Site.

• Booking.com:
  Travel Web Site.

• TrekMovie.com:
  
  ShatWatch: Raw Nerve Nimoy Clip & Pics + Shatner Talks Kirk Fight Moves.

• The Los Angeles Times:
  William Shatner on comics, fame and missing the ‘Star Trek’ movie.

• Money Morning Hot Stocks (Part I):
  
  Hot Stocks: IBM Bucks the Earnings Trend as Tech-Sector Stocks Trade Down to Bargain Levels.

• Money Morning Hot Stocks (Part II):
  Hot Stocks: Intel Posts Earnings Surprise Because the “Atom” Was No Bomb.

• Money Morning (Hot Stocks Part III):
  
  Hot Stocks: Can AMD’s Future be Fabulous if it’s Fabless?

• Money Morning Hot Stocks Series (Part V):
  
  Hot Stocks: Coca-Cola’s Strong International Sales Serve Up Sparkling Third-Quarter Results.