Analyst Upgrades

• SuperValu (SVU) to buy from hold at Hapoalim.
• Constellation Energy (CEG) to buy from hold at Citigroup.
• Doral Financial (DRL) to neutral from sell and ABB (ABB) to buy from neutral at Sterne Agee.

Analyst Downgrades

• American Eagle (AEO) to neutral from buy at SunTrust.
• Tenet Healthcare (THC) to market perform from outperform at Wells Fargo.

On Friday, Toys 'R' Us filed documents with the Securities and Exchange Commission to go public in the New York Stock Exchange under the ticker symbol "TOYS." The IPO could raise as much as $800 million. Toys 'R' Us was purchased by Kohlberg Kravis Roberts (KFN), Bain Capital, and Vornado Realty Trust (VNO), for a price of $6.6 billion in 2005. Now, the consortium would like to realize some profit from that transaction.

Since the company was purchased, Toys 'R' Us has pursued a buying spree to improve its market position and enlarge its footprint. The company purchased FAO Schwarz in 2009, and has also bought a smattering of e-commerce websites in efforts to enlarge its market reach. Unfortunately, this strategy has left the company with an extremely unwieldy debt load. Indications are that a portion of the proceeds from the sale of stock shall be used to reduce the company's debt portfolio.

If you're looking to buy into an upswing post-recession, it doesn't look like the private equity market will be on your list. Valuations didn't fall as much as you might think, meaning that the bargains you usually find during a downturn just aren't showing up this time.

In the leveraged buyout market, prices were around 25% higher, on average, than they were in 2001, when the dotcom economy fell apart, according to Standard & Poor's Leveraged Commentary & Data. And transactions closed in the past three months have hit heir highest levels since the private equity market peaked in 2007.

Says Christopher O'Brien, president for U.S. and Europe of Investcorp Bank BSC, another "golden era" isn't coming. He tells Bloomberg News, "There's a lot of pressure to put investors' money to work now, and valuations are still high. It's a seller's market."

Over the past few years, it's been hard to find successes in private equity. But, in the case of KKR, there is no doubt that it made a good deal in the leveraged buyout of Dollar General in July 2007 (the company had been public since 1968). The price tag was $7.2 billion.

Now, the company has filed to go public. And, in light of KKR's recent success with the Avago (NASDAQ: AVGO) public offering -- as well as the resurgence in the equities markets -- there's a good chance that Dollar General will also get a nice reception.

KKR & Co. is a step closer to being publicly traded, now that the board of its Amsterdam-traded buyout fun has given the green light. If a majority of the unitholders in KKR Private Equity Investors LP (OTC: KPE), the listed fund, consent, the transaction could be finished by October 1, 2009.

This would result in KKR's finally reaching an exchange. The private equity fund tried to go public via initial public offering (IPO) in 2007, after the Blackstone Group (NYSE: BX) raised $4.75 billion that way, but market conditions scuttled the attempt.

Here are some highlights from this past week's earnings coverage from BloggingStocks:

• Aetna Inc. (NYSE: AET) lowered its 2009 earnings guidance, initially sending the share price lower.
• Ciena Corp. (NASDAQ: CIEN) reported a bigger-than-expected Q2 net loss as revenues sank.
• Collective Brands Inc. (NYSE: PSS) saw Q1 earnings and sales decline, but beat Wall Street estimates.
• Google Inc. (NASDAQ: GOOG) earnings prospects led Goldman Sachs analysts to increase its forecasts.
• Guess? Inc. (NYSE: GES) weak Q1 results topped estimates and it offered guidance that pleased investors.

Private equity giant KKR & Co. (NYSE: KFN) posted a $1.2 billion loss last year -- compared to pretax net income of $815 million the year before. This is KKR's first loss in at least five years.

Bloomberg pins the blame on a drop-off in leveraged buyout transactions. A $1.4 trillion market in 2006 and 2007, only $212 billion was spent on takeovers last year, which was bound to put a dent in KKR's top and bottom lines.

Bloomberg reports that Gome Electrical Appliances Holdings Ltd. may sell up to 20% of the company to Bain Capital LLC. The asking price is said to be approximately $500 million. The other companies competing for the piece of Gome are KKR & Co. (NYSE: KFN) and Warburg Pincus.

Gome is the second-largest electronics retailer in China, with more than 800 stores in over 160 cities. So it makes a nice target for investors looking for alternatives to recession-constrained businesses in the United States, Europe and developed markets in Asia.

KKR is one of the oldest and most successful private equities firms in the U.S. The "successful" part may be changing, which puts it in the same boat as a lot of its peers. Shares in Blackstone (NYSE: BX) now trade just above $6, compared to a 52-week high of almost $23 and $35 less than two years ago.

KKR Financial (NYSE: KFN), a spin-out of part of KKR, replaced its CEO and another top officer. According to Reuters, "Last month, KKR Financial suspended its third-quarter dividend as it arranged for more time to pay off its borrowings." Rarely a good sign. Shares of KFN have done much worse than those of Blackstone. The stock has dropped to $0.72 this morning from a 52-week high of $16.78. On the NYSE, that makes it a candidate for delisting.

Firing the CEO at KFN is like putting a band-aid on a mortal wound. Nothing will come of it. The fault of what has happened at the firm is based on the dead market for LBOs and the rapidly falling value of LBOs done over the last three years. KKR may think it looks good to dump the CEO of the unit, but it won't make a difference.

Trying to turn around private equity operations is like trying to turn around big banks. It is not going to work for a year or more, no matter what is done. The cracks in the foundation of the credit world are too systemic. Companies like KKR will have to hope that they can ride it out until there is some recovery in the value of the companies in which they invested.

KFN trades below $1 because the premise that was at the core of taking it public is flawed. The stock will not recover.

Douglas A. McIntyre is an editor at 247wallst.com.

Analyst upgrades:

• Baird upgraded Optimer Pharm (NASDAQ: OPTR) to Outperform from Neutral and raised its target to $13 from $8 citing the decidedly positive data from the OPT-80 trial.
  
• Banc of America upgraded Quest Diagnostics (NYSE: DGX) to Buy from Neutral on valuation and believes management has set expectations well.
  
• Credit Suisse views Jacobs Engineering (NYSE: JEC) as a high quality name given the quality of management, execution track record, and relationship business model. Shares were upgraded to Outperform from Neutral.
• Horizon Lines (NYSE: HRZ) was upgraded to Overweight from Equal Weight at Stephens.
  
• Bancolombia SA (NYSE: CIB) was raised to Buy from Neutral.
  
• Great Lakes Dredge (NASDAQ: GLDD) was upgraded to Buy from Hold at Morgan Joseph.

Analyst downgrades:

KKR Financial (NYSE: KFN), the publicly traded arm of the famous private equity firm, is doing extremely well. The company's net rose to $49 million from $38 million in the same quarter a year ago. It dropped its provisions for loan loss reserves, a sign that its portfolio should be doing well.

It also cut its dividend to zero. The FT says that it is "a sign that the company is husbanding cash amid continuing market turmoil." Put another way, firms that are doing well may cut dividends just in case the economy and their businesses get worse next year.

That is remarkably troubling news, because it puts payouts at risk even at some large companies, especially those with financial divisions or balance sheets with some portion of their assets in risky securities. It also could hurt the chances dividends will be paid at firms with falling cash flows and substantial debt due next year. On the financial unit count GE (NYSE: GE) comes to mind. On the falling cash flow metric, The New York Times (NYSE: NYT) presents a risk.

Being among America's great companies may not count much any more, especially when it comes to sending cash to shareholders every quarter.

Douglas A. McIntyre is an editor at 247wallst.com.

TheStreet.com's Jim Cramer says the only action in the sector is that the rumor mill is spinning overtime.

There are tons of ridiculous stories that can be written in the Naked City. Notice that every day we are blessed with a story about how there are three private-equity firms examining Lehman Brothers (NYSE: LEH) (Cramer's Take) and Neuberger Berman (NYSE: NEU) (Cramer's Take). I think I have read that story a dozen times now.

You can list them, too: Blackstone (NYSE: BX) (Cramer's Take), KKR (NYSE: KFN) (Cramer's Take), Apollo (NASDAQ: AINV) (Cramer's Take), maybe Cerberus. What are they going to do, deny it? "No, we are not looking at it?" Their investors would love that: "Well what the heck are they doing with our money?" would be the reaction of investors if they issued denials. I predict weeks more of phantom tire-kicking of Lehman by nonexistent private-equity firms.

How about private equity about to swarm over collateralized debt obligations? Usual cast of characters there. Right? Come on, those stories are a penny a dozen. Every day I read about them. But nobody, other than Lone Star, is doing anything, anything at all on this front. If there were buyers, you can bet that Lehman and AIG (NYSE: AIG) (Cramer's Take) wouldn't be in the woods, lost, hopeless, with tons of bad European paper.

MOST NOTEWORTHY: American Capital, Realty Income and KKR Financial were today's noteworthy downgrades:

• Jefferies downgraded American Capital (NASDAQ: ACAS) to Underperform from Hold as they see a disproportionate risk profile in the company's current portfolio when compared to most peers.
  
• Banc of America cut Realty Income (NYSE: O) to Sell from Neutral as they believe the current valuation is not sustainable.
  
• Bear lowered KKR Financial (NYSE: KFN) to Peer Perform from Outperform following the company's announcement that it intends to sell 20M shares in a public offering.

OTHER DOWNGRADES:

• Goldman cut PepsiCo (NYSE: PEP) to Neutral from Buy.
  
• RBC Capital downgraded Avocent (NASDAQ: AVCT) to Sector Perform from Outperform.
  
• JP Morgan removed NICE Systems (NASDAQ: NICE) from its Focus List.

MAJOR PAPERS:

• The Wall Street Journal reported that KKR Financial Holdings LLC (NYSE: KFN), a unit of Kohlberg Kravis Roberts, revived concerns of a credit crunch after it asked for a restructuring of billions of dollars in short-term debt.

OTHER PAPERS:

• According to sources, the Chicago Tribune reported that Deutsche Lufthansa AG (OTC: DLAKY) could look to take an equity stake in a merger between Continental Airlines Inc (NYSE: CAL) and UAL Corporation's (NASDAQ: UAUA) United Airlines.
• The Associated Press reported that the pilots' unions of Delta Air Lines Inc (NYSE: DAL) and Northwest Airlines Corporation (NYSE: NWA) are unable to agree on how seniority for the companies' pilots would work under a combined carrier. The impasse puts the deal in "serious jeopardy," inside sources reported.

WEB SITES:

• Electronics retailer Sharper Image Corporation (NASDAQ: SHRP) has filed for bankruptcy, citing declining sales and profitability, Bloomberg reported.

U.S. stock futures were significantly lower this morning, indicating U.S. stocks could have a rough start as investors await data on inflation and housing. Despite solid results from Hewlett-Packard after the closing bell Tuesday, renewed concerns about the credit market, oil climbing above $100 a barrel and the uncertainty about the upcoming data pulled futures lower.

Like seemed what was going to be a healthy gains day Tuesday, ended on a down note after oil futures reached the $100 a barrel. The Dow industrials fell nearly 11 points, or 0.09%, the S&P 500 lost over 1 point, or 0.09%, and the Nasdaq Composite dropped 15 points, or 0.67%.

Meanwhile, around 10:30 a.m., weekly crude inventories will be reported. Oil closed for the first time above $100 a barrel Tuesday, but prices retreated somewhat Wednesday to around $99 a barrel. Concerns over a refinery explosion and the possibility that OPEC may cut its output caused oil prices to spike with several other factors remaining in the background.