MAJOR PAPERS:

• Investors are taking their money out of hedge funds more now that at any time over the past 10 years, according to the Wall Street Journal. Firms are bracing for the end of June when the next big wave will hit.
• First it was a demand for management changes, and now shareholders, including one time director Eli Broad and fund managers Shelby Davis of Davis Selected Advisors and Bill Miller of Legg Mason Inc (NYSE: LM), are again upset with American International Group Inc (NYSE: AIG) and want changes in the boardroom as well, the Wall Street Journal reported.
• The Wall Street Journal reported that Citigroup Incorporated (NYSE: C) will close Old Lane Partners, a hedge fund co-founded by CEO Vikram Pandit.

OTHER PAPERS:

• Spotlight Capital is increasing pressure on Chico's FAS Inc (NYSE: CHS) and said it has been in touch with 25 major shareholders in order to oust CEO Scott Edmonds and unseat board member John Burden, who are accused of having a conflict of interest, the New York Post reported.

WEB SITES:

• Advanced Micro Devices Inc (NYSE: AMD) denied reports certain of its new dual-core chip, code-named Kuma, have been canceled, according to CNet. A spokesman for the company said that the launch of Kuma, scheduled for the second half of 2008, remains on track.

Legg Mason Value Trust manager Bill Miller built his reputation -- and the fortunes of his investors -- by beating the benchmark S&P 500 for 15 years, a streak that ended in 2006.

But since that run ended, the fund has struggled mightily with bad bets on companies like Countrywide Financial (NYSE: CFC), Bear Stearns (NYSE: BSC), and Yahoo! (NASDAQ: YHOO). Now Miller's investors are questioning his philosophy, and so is is the legend himself.

A big part of Miller's brilliant track record was his belief in focus investing -- concentrating his bets on a few stocks rather than a bunch. The Legg Mason Value Trust holds just 35 stocks. But according to the New York Times, that strategy is now being reconsidered. Miller said that "The question we are asking ourselves is: Should we think more broadly now about probability, about high-impact events and protecting against them by having broader exposure to the market?"

I seriously doubt that that's the right strategy. Miller is universally acknowledged to be a great stock picker -- diluting his influence by building a portfolio consisting of his 200 best ideas instead of his 35 best sounds like a sure road to mediocrity.

The larger point is this: After a 15-year streak of greatness, Miller has hit a rough patch. Two years of underperformance doesn't change 15 years of greatness, and this is a bad time to consider changing the strategy that led to his track record.

The elbows are getting sharp in the corners and soon the battle lines over the Microsoft (NASDAQ: MSFT) fight for Yahoo! (NASDAQ: YHOO) will become more evident to the public. Legg Mason's big equity fund, lead by disgraced stock guru Bill Miller, is prepared to support an effort by Yahoo! to remain independent, should Microsoft lower its offer, according to The Wall Street Journal.

Miller's performance has been so hideous over the last year that he should keep his opinions to himself.

What Miller is not acknowledging is that Microsoft may simply walk away if it cannot get the support of Yahoo!'s shareholders and board. The portal's stock was below $20 and many predict it could go back there if Microsoft withdraws its offer. The eventual price depends on Yahoo!'s first quarter performance, but at this point, Redmond thinks it has the best deal -- perhaps the only deal -- in town.

The conventional wisdom is that if Microsoft goes away, it may take years for Yahoo! to get its price back above $30, if it gets there at all. Yahoo! may be underestimating how bad the current recession could get. If so, it may look back at the current offer and rue the day that it decided to fight a takeover.

At the very least, with Miller's track record, he is hardly a bell-weather for what Yahoo! should do.

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

It's been a tough first four months of the year for Bill Miller of the Legg Mason Value Trust (LMVTX), famous for his 15-year run beating the S&P 500. Even after a 4.12% bounce in his fund's net asset value on Thursday, he's down 14.95% for the year. One major culprit? His stake in Bear Stearns (NYSE: BSC) that was once worth more than $200 million, making the fund one of the firm's largest shareholders.

According to the Wall Street Journal (subscription required), Miller's performance reminds him of his tough run that began the 1990s: "Back then, a similar crisis was unfolding in financial markets and Mr. Miller eventually swooped in to buy money-center banks like Chase Manhattan and Citicorp that he thought were underpriced, as well as insurance companies and mortgage lenders. Financials made up as much as 45% of Mr. Miller's portfolio by the mid-1990s, and helped drive his 15-year winning streak as they rallied over the years."

Mr. Miller told his fund's shareholders that "the past two years are a lot like 1989 and 1990," and there's a "reasonable probability the next few years will look like what followed those years."

Maybe so. But investors should be wary of the fact that a big part of Miller's outperformance stemmed from his exposure to financial stocks and now that same exposure is dragging his fund into the lowest echelons of mutual fund performance.

Is the Legg Mason Value Trust just a glorified bet on the bounce back in financials? If so, investors may want to tread carefully, as Miller has been wrong about the sector for awhile.

MOST NOTEWORTHY: Legg Mason, Panacos Pharma and PepsiAmericas were today's noteworthy upgrades:

• Wachovia upgraded Legg Mason (NYSE: LM) to Market Perform from Underperform citing valuation, new CEO change, and reduced Citigroup (NYSE: C) ownership.
  
• Bear upgraded Panacos Pharma (NASDAQ: PANC) to Outperform from Peer Perform citing renewed confidence in Bevirimat, an HIV inhibitor, following analysis of Phase IIb data. The firm expects a partnership for Bevirmat to be the next catalyst.
  
• Deutsche Bank raised PepsiAmericas (NYSE: PAS) to Buy from Hold shares on valuation, as they believe the recent weakness is overdone.

OTHER UPGRADES:

• Fannie Mae (NYSE: FNM) was raised to Equal Weight from Underweight at Morgan Stanley.
  
• Friedman Billings added Great Atlantic & Pacific Tea (NYSE: GAP) to its FBR Top Picks List.
  
• Jabil Circuit (NYSE: JBL) was upgraded to Neutral from Sell at Merrill Lynch.

You know the old adage for success in the stock market -- buy low and sell high. Well unfortunately too many Americans today are doing the exact opposite as they seek coverage from a very volatile stock market. They bought when this market was near the top and are now selling in panic.

I prefer to watch two men who clearly know how to buy low and sell high -- Warren Buffett (also known as the "Oracle of Omaha" and Bill Miller, a very successful fund manager at Legg Mason, who is known for his 15-year winning streak against the Standard & Poor's 500 stock index.

So are they selling or buying? Both are buying and buying big. According to Sunday's Washington Post, Buffett upped his stake in Kraft Foods (NYSE: KFT), Johnson & Johnson (NYSE: JNJ), U.S. Bancorp (NYSE: USB), and Wells Fargo (NYSE: WFC). He also took a new stake in GlaxoSmithKline (NYSE: GSK). Buffett disclosed that he owns 132 million shares in Kraft, which means he owns 8.6% in the maker of Ritz crackers, Philadelphia cream cheese, and Maxwell House coffee.

Bank of America Corp.'s (NYSE: BAC) $4 billion acquisition of Countrywide Financial Corp. (NYSE: CFC) isn't sitting well with the mortgage company's biggest shareholder, Legg Mason Capital Management (NYSE: LM)

Legendary money manager Bill Miller, who raised his Legg Mason Value Trust fund's stake in Countrywide to 15% and could buy as much as a 25% interest, said in a letter distributed to the press that he was "quite surprised by the decision to sell the company at close to a seven-year low in the stock price, and agreeing to a bid that amounts to only 30% of book value." Predictably, Bank of America disagrees with Miller. A company spokesman told Bloomberg News that "we believe it is fair for both companies."

MarketWatch was running a interview today with Will Nasgovitz, co-manager of the Heartland Select Value Fund (NASDAQ: HRSVX). The $332 billion fund has absolutely trounced the S&P 500 (AMEX: SPY) since 2000. Even with an extremely rocky 2007, the fund is up over 100% since 2000, where the S&P is actually (ugh) in the red for the same time period.

The secret sauce?

MarketWatch quotes manager Nasgovitz as saying that the team running Select Value has a background covering small- and micro-cap stocks, which don't get as much analyst research coverage, that they apply when delving into larger companies.

What's Nasgovitz buying of late?

Jay Winthrop of Douglass Winthrop Advisors LLC, a $250 million (assets under management) New York registered investment advisory firm, likes to buy stocks whose prices are so low that the odds of them benefiting from a positive surprise exceed those of losing from a negative one. Douglass Winthrop is ahead of the S&P year-to-date and has delivered "positive, tax-efficient results since inception in 2002." Through its 10% to 15% stock turnover, it offers investors lower expenses and taxes than its higher turnover "fast money" peers. As Winthrop summed it up: "Good things happen to cheap stocks."

Four stocks that he mentioned particularly caught my attention:

• Nestle S A (OTC: NSRGY). Nestle has benefited from its investment in emerging markets -- giving it a strong brand and distribution presences in countries experiencing rapid growth. A significant share of its profits are generated in developing markets. And its core food business is cheap when its strategic investments are backed out. Nestle trades at a mere 13x to 14 x operating earnings -- which is lower than the value of stocks in its peer group. Finally, Nestle is capitalizing on the profitable and growing health and wellness trend.
• Legg Mason (NYSE: LM). Legg Mason is a pre-eminent asset manager with $1 trillion under management. But its stock has declined due to temporary problems. Its Value Trust fund -- which had long outperformed the market under its manager Bill Miller -- has had two sub-par performing years in a row. And it's had troubles integrating a merger with Citigroup Inc.'s (NYSE: C) mutual fund unit. Winthrop also thinks Legg Mason has been hit by the overall decline in financials. However, he argues, Legg Mason trades at 1% of assets under management which is far below the 2% industry average. And its valuation is much less than that of newly public alternative investment managers.

In August I posted on the danger that subprime mortgages pose to people who invest in money market funds. Today, the New York Times reports that several such funds have invested in commercial paper (CP) issued by Structured Investment Vehicles (SIVs) backed by subprime mortgage-backed securities (MBSs). I think all money market funds should start a public information campaign to let people know if they have the SIV virus and if so, what they're doing to protect their customers from it.

Earlier, I posted on all the new vocabulary words I've learned in the last year thanks to the subprime mortgage meltdown. This $1.3 trillion market consists of mortgages to people who can't afford to repay in many cases. Forty seven percent of the loans were made without documentation of the borrower's income -- these are known as liar loans. The subprime mortgages were packaged as MBSs and among the buyers were SIVs -- off-balance sheet entities that use a bank's good credit rating to issue CP to invest in MBSs.

Thanks to the subprime mortgage meltdown, the CP is not worth as much as before so the money market funds that bought it are now forced to break the $1 per share constant value or put money into the fund to make up for the lost value. So far, analysts say that most SIV securities are trading at 97 to 98 cents on the dollar. But if more SIVs are forced to unwind, the resulting fire sale would put pressure on prices.

If you follow growth and value investing gurus, you've probably heard of Legg Mason's Bill Miller. After 15 years of beating the S&P 500 index, the value investing champ is now in a two-year rut of trailing the index. What happened? All great things come to a change, so with another not-so-good trend under way, Mason is re-tooling some things to get back on track.

While I am a huge fan of growth investing and index funds, from international and emerging markets to REITs to small caps, I also pay attention to value funds and markets. With various industries and sectors, loading too much in one risks the potential for losing timing in another. Case in point: Miller's Legg Mason Value Trust (NASDAQ: LMVTX) was overweight in telecom and tech, and underweight in the energy sector in the last year or so, and that explains not beating the S&P 500.

How could such a seasoned manager miss the boat here? Like many of you, I've missed plenty of boats, and the man is only human. One of Miller's top 10 holdings is Amazon.com (NASDAQ: AMZN), which has seen a great rally this year, but still is overvalued once you consider the fundamentals of the company's financials.

If you own one of the following money market funds, you might want to consider whether your money will be there when you want to withdraw it:

• The $16.6 billion Evergreen Institutional Money Market Fund
• The $4.5 billion Evergreen Prime Cash Management Money Market Fund
• Legg Mason Inc.'s (NYSE: LM) $52.5 billion Master Portfolio Trust Liquid Reserves Portfolio.
• The $62 billion Columbia Funds Series Trust Cash Reserves

According to the New York Times [registration required] these four funds own commercial paper -- short term corporate IOUs -- backed by residential mortgages which Standard & Poor's may downgrade. S&P specifically raised questions about four commercial paper issuers for possible downgrades:

There is no holiday break for the rumor mill as word of many a company's activity is bantered about.



BUILD-A-BEAR WORKSHOP INC (NYSE: BBW)

As the stock shot up 14% the other day, it was revealed that the warm and fuzzy big bear hired Lehman Brothers to "explore strategic alternatives." Some analysts think an LBO is what will happen, and range the valuation at from $34 to $36. Very recently the company reduced its second quarter per share profit expectations to 7 cents to 10 cents, down from 15 cents to 19 cents, because of slow sales at stores that have been opened for at least a year. Here's a bear to be bullish on.


COUNTRYWIDE FINANCIAL CORPORATION (NYSE: CFC)

It's troubled times for the nation's largest mortgage lender. Earlier in the week the shares began to fall when it was revealed that they may be a part of a government investigation into subprime loans. It certainly doesn't help that three former company executives pleaded guilty to conducting insider trading in shares of Countrywide. The heat is on.


THE STEAK N SHAKE COMPANY (NYSE: SNS)

Two Texas investment groups, HBK Investments and Lone Star Funds, who between them own about 9.5% of the company, are said to be interested in digesting the whole dang thing. The 490 restaurant chain that has operations in 20 states just saw their most recent quarterly profit drop 30% from the previous year, as same store sales fell 4.7%. Gentlemen that they are though, they'll only pursue the sizzle if the board cooks it up with them.



STILL FLYING AROUND


WENDY'S INTERNATIONAL INC (NYSE: WEN)

They say they may want to sell the company, and the latest firm to gobble up shares is Tudor Investment, purchasing a 6.1% stake.


TD AMERITRADE HOLDING CORPORATION (NASDAQ: AMTD)

Jana Partners and S.A.C. Capital Advisors, who have about an 8.4% combined ownership of AMTD, are keeping the pressure on for the firm to partner up with another brokerage firm, and have now formalized their demands.



BUZZ


DJO INCORPORATED (NYSE: DJO): MMI Investments purchased 9.4% of the company's shares. When they buy in, they usually see the company acquired...Pride International Inc (NYSE: PDE): Spin off of foreign assets, or a possible takeover, has attracted interest...Legg Mason Inc (NYSE: LM): Pershing Square Capital, whose activist leader William Ackman has tried to push around McDonald's Corporation (NYSE: MCD) and Wendy's, has taken a 1.5% share of the company.

The crème de la crème of portfolio managers met up in New York to exchange investment ideas at the Ira W. Sohn Investment Research Conference last week. Presenters included turnaround expert Wilbur Ross, Joe Rosenberg who has managed money at Loews Corporation (NYSE: LTR) forever, Bill Miller of Legg Mason Inc (NYSE: LM) and Mason Hawkins, Chairman of Southeastern Asset Management.

Some of the highlights:

• General theme was favoring large cap over small cap
• Technology is coming back into favor in addition to healthcare
• Investors should avoid Asia

Mason Hawkins ended the conference not recommending individual stocks but focusing more on investment advisory prose: have the discipline to say no, be patient and wait for the right opportunity, be willing to stand on your own when no one agrees with you, and take advantage of other peoples fear and greed. That investment advice pretty much follows the thoughts of many of the presenters.

Poor Bill Miller. After seeing his Cal Ripken-esque 15-year streak of beating the market end in 2006, he's trailing the S&P 500 again in 2007. His investors at the $21 billion Legg Mason Value Trust were probably content to laugh off the end of his run, but another off-year in 2007 could raise some eyebrows. Is Bill Miller finished, some will ask? Or, can he make a comeback amid mounting pressure to deliver returns to shareholders?

When asked about whether his amazing run was just a fluke, Miller replied by pointing out that the odds of beating the market every year from 1991 to 2005 are about 1 in 2.3 million. "So there was probably some skill involved... On the other hand, something with odds of 1 in 2.3 million happens to about 130 people per day in the U.S., so you never know."

I wouldn't give up on Bill Miller just yet. He's one of the greatest investing minds ever, and I would look for him to regain his form. And if he doesn't? Well then he just be another member of the 90% of mutual fund managers who don't beat the market.