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How the Bulls Changed Their Story -- Part II

long discussion of CPN; piece below, hyperlink to full story

"Craig Shere, an analyst at Calyon Securities, has been deft in his calls on Calpine lately, downgrading the stock near 4 in early August and upgrading it at 2.75 Aug. 24. It's up 16% from there to 3.20, and he thinks the stock can get to 5, based on an options-based valuation that presumes Calpine will be viable at least through 2009 -- which will require meeting almost $4 billion in debt maturities in 2007 and 2008."


Thanks for the info, but that link is only accessible to paid subscribers.

There is a bigger question in my mind: what is Calyon Securities' ownership position in Calpine securities? One can't possibly evaluate the fairness of Craig Shere's opinions without knowing whether his employer has a vested interest in manipulating the market. Does Barrons answer that question?

And does it tell why Calyon is the only company that is actively -- even fervently -- issuing changes to its stock ratings? As I noted in an ealier message, only one other analyst has even mentioned the stock in the past two years, which would seem to represent an extreme disinterest by most big players. The stock has gone from $5 to almost $1, and back up to $3 -- but not one change in rating from anybody besides Calyon? Come on, that's mind-boggling.

I am astounded that Barrons would refer to Shere's analyst changes as "deft" -- suggesting that he predicted actions due to some cleverness. Until somebody provides good evidence to the contrary, I am just as ready to believe that his recommendation changes were *intended to change* market sentiment about the stock -- NOT to reflect the value of the stock. In an earlier message, I pointed out the overly coincidental timing of a Calyon upgrade earlier this year, that pulled CPN out of a nosedive it was in at the time. That upgrade was contradicted by Calyon so quickly afterward, one could not help thinking that Shere is only focused on short-term valuations.

For all we know, Calyon is going short and long in alternating cycles, or simultaneously, arbitraging CPN to make money off the extreme volatility of CPN's price. How would we possibly know? Calyon is international. It may well be one of the buyers of all those securities Calpine keeps issuing that are off-limits to U.S. buyers -- and to scrutiny by the SEC.

So without reading more of the Barron's piece, here's my opinion. CPN went up when the Bear Stearns deal was announced, but any fool could have predicted that. I had already predicted a gradual rise in the price in advance of the 3Q earnings announcement, and I'm not any kind of expert.

I have also predicted, and reiterate here, a bombshell when the company reports it has missed the consensus earnings estimate for Q3, due to the closure of 6 Calpine-operated plants in the south for varying periods of time recently, and the lack of customers in that region due to infrastructure damage, not to mention the evacuation of a major population center.

Does CPN get to $5 *despite* such setbacks? I don't know, ask Craig Shere. I think it's a cop-out to put a four-year time horizon on a stock price prediction! Lots of time for Craig to change his mind in 2006, 2007, and 2008 -- and he surely seems to change his mind a lot. I mean, those contrasting facts are contained right there in one paragraph: the guy goes from buy to sell to buy in just a few months. So what's the point of talking about 2009, for goodness sake?

The only way Calpine meets all those debt-reduction targets is by increased cash flow from a growth of revenue. But since they've been selling off assets, they have reduced their basic revenue-producing business. Now, they are attempting to revive a different revenue stream, from energy TRADING, which is even more risky than energy generation. In at least some of that activity, they have to share any profits from that trading with Bear Stearns, so one wonders whether this will be enough to offset the big storm-induced hole I predict in the balance sheet by the end of this month, or the ongoing difficulty of making a profit when natural gas is more expensive than coal.

In the meantime there will be lots of stocks rising by similar percentages to those he predicts -- with a lot less downside risk. All I would say in favor of a CPN bull is that the Bear Stearns deal could hold an unpredictable amount of benefit for Calpine, conceivably enough to avoid the disasters that will, otherwise, consume the company.

If there's more in that article to address these questions and issues, I'm sure others would be happy to hear them. For me, it's just an academic exercise since I no longer own the stock and would not touch it with a ten-foot pole. I admit to being very caustic in my opinion of the company's management, which by its own report has never made any mistakes... kinda like some governmental characters I can think of. ;-)
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