Many U.S. and European banks are reportedly considering divesting certain units in order to recapitalize for the tough times ahead, according to the Wall Street Journal. Banks considering such drastic moves are Citigroup (NYSE:C) and HSBC Holdings (NYSE:HBC) among others. Shareholders are hoping that these moves could help recapitalize the firms enough to avoid any further share dilution or worse.

Citigroup may shed or shut down several of its mid-sized units valued at around $12 billion while HSBC could exit all or parts of its $13 billion U.S. automotivd financing division, the Journal reported today. Citigroup units that may be shed include Student Loan Corp, its North American auto lending business, Redecard SA (its Brazilian credit card company stake), and its Japanese customer finance business. Meanwhile, HSBC is considered well capitalized but has experienced many issues with its automotive business that has been lagging behind.

One of the larger rumors circulating is that Citigroup may be considering a sale of Smith Barney, which could approach $10+ billion in value alone. Citigroup has a business that is fairly independent of its retail banking, commercial banking, and investment banking operations. And Smith Barney has about 9.3 million client accounts with around $1.6 trillion in total assets. Whether or not parting with Smith Barney would cause any real harm is uncertain, but it is a huge business that certainly could be sold in order to preserve liquidity.

Many are anticipating any units put up on the block to be acquired by Asian banks or sovereign wealth funds looking to build their portfolio of cheap dollar assets. Meanwhile, if Citigroup decides to sell its stake in Smith Barney, it is likely that a well-capitalized bank like Wachovia may consider acquiring it. Regardless, this is a situation that is definitely worth watching closely!

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Hedge funds are starting to feel the effects of the credit crunch as getting credit from lenders becomes increasingly difficult. Many investment banks are cutting back on loans to hedge funds by eliminating some clients and raising borrowing fees for others after heavy losses forced them to slim down their balance sheets. This could put pressure on both banks and hedge funds that rely on each other to boost their profits and returns.

Many hedge funds, known as quants, use computerized models designed to spot and take advantage of small pricing inefficiencies in the marketplace. These funds rely on a massive amount of leverage to drive their returns, and trouble borrowing could soak up their profits. Meanwhile, activist hedge funds and private equity funds rely on large amounts of debt and credit in order to finance M&A deals that they have used to bolster their returns during the past few years.

Hedge funds often borrow through a “repo” operation whereby the hedge fund sells securities to banks in exchange for cash, while entering into an agreement to buy them back at a later date when they pay the money back. These rates are skyrocketing, however, as banks are increasingly worried that hedge funds won’t be able to repay the loans. Morgan Stanley, for example, has been asking for one percentage point over LIBOR to enter into a repo agreement using junk bonds as collateral, according to the Wall Street Journal.

Problems in the hedge fund industry could cause problems in the larger markets too. Many public institutions, high net worth individuals and retirement funds have large investments in hedge funds that have traditionally returned healthy profits. Any limits in lending could adversely impact the returns for these hedge funds. Meanwhile, hedge funds that are forced to abandon deals or liquidate large positions may also prove to be a drag on the market. In the end, this is a significant event worth watching!

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Warren Buffett plans to carve out his own niche to profit from the nation’s credit market turmoil. The billionaire’s Berkshire Hathaway (NYSE:BRK) announced his intentions to start up a bond insurer that aims to make it cheap for local governments to borrow and may prove to be a tough competitor for the trouble existing insurers. Shareholders are bullish on the developments that promise to put more of the firm’s massive cash reserves to work.

Berkshire Hathaway Assurance Corporation is set to open for business today in New York and will focus on guaranteeing bonds for cities, counties, and states to finance sewer systems, schools, hospitals and other public projects. Berkshire’s solid AAA rating, which is held by very few companies, is likely to go a long way in a market that has many people unsure of who they can trust. After all, firms like Ambac Financial and MBIA are now seen as at risk of losing their AAA ratings due to the increased risk of mortgage-related bonds that they insure.

Warren Buffett said in an interview that there appears to be a high interest in a new company to seek permission in other states that account for a large chunk of municipal-debt issuance. After New York, the firm will likely seek to do business in California, Puerto Rico, Texas, Illinois and Florida. The billionaire said they would move prudently but would commit quite a bit of capital if they like the business. And in the end, focusing on municipal debt is a relatively safe bet when compared to asset backed securities!

In the end, this is more great news for Berkshire Hathaway shareholders who are seeing Buffett partake in a buying spree into the market decline. Recently acquisitions combined with this new business should help the firm put some of its massive capital reserves to use. Combined, these factors make BRK a stock worth watching!

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MRV Communications Inc. (NDAQ:MRVC) shares rose more than 20 percent earlier this week after the company finally made good on its promise to spin-off Source Photonics via an initial public offering. The number of shares to be offered and the price range of the proposed offering have not yet been determined, but the IPO is planned to net up to $130 million for the optical communication products maker. Shareholders are hoping that the move will unlock value through the separation.

Source Photonics makes optical subsystems used to transmit high-bandwidth video, voice and data. Its customers include Alcatel-Lucent, Motorola, and Tellabs. The division posted a loss of around $1.4 million for the nine months ended September 30th compared to a $311,000 loss for the same period a year earlier. Revenue during that period increased 40 percent to $93 million. Meanwhile, the company expanded its employee base to 1,486 employees and full-time contractors worldwide.

Spin-offs in general often prove to be great investments for a variety of reasons; however, this spin-off is slightly different for a number of reasons. First, MRV is only selling the company’s Class A shares while retaining all Class B shares for itself (although they may be spun-off later). Secondly, Source Photonics is a company that is losing money operating at a loss. And finally, this offering is more of an IPO than a spin-off in that new shares are being issued.

In the end, this spin-off may not be worth investing in immediately, but any divesture of Class B shares by MRV would definitely be worth watching. Also, MRV itself will be able to save money and realize IPO proceeds and profits as a result of this spin-off. Therefore, it may be worth watching the parent company itself.

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Bear Stearns (NYSE:BSC) shares rose marginally after a British billionaire disclosed a 9.57 percent stake in the firm even as shares continue to fall. Joseph Lewis, the 486th richest person in the world, has acquired almost two million more shares of the investment bank as a part of an option strategy that appears to be backfiring. Shareholders are hoping that the billionaire investor will hold on to the stock and take some action to unlock value in the company’s shares.

Lewis became the Bear Stearn’s largest shareholder in September after the firm’s two hedge fund collapsed due to bad bets on mortgage-backed securities. The billionaire spent nearly $860 million to buy 7% of the company when the stock was trading at more than $100 a share, which means he was already sitting on a paper-loss of more than $100 million. Now, Lewis appears to have been forced to acquire $1.19 billion in additional shares at an average price of $107.31 a piece, which will likely further extend his losses.

Bear Stearns has been hit particularly hard by the mortgage downturn with a fourth quarter net loss of $854 million on write-downs of $1.9 billion on its portfolio of residential mortgages and related assets. Meanwhile, many analysts are not even sure that the pain is over in the mortgage markets. Many prime mortgages are due to reset to higher rates and default rates among those borrowers are also expected to rise. The economy is also on uncertain ground, and any general slowdown could affect investment banking business.

In the end, shareholders are hoping that the billionaire will do something to help the company turn itself around. Bear Stearns is in a world of hurt now and it appears that this billionaire is too. Combined, these factors make BSC a stock worth watching closely!

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There’s a lot of talk about a recession these days from both politicians and economists, making many investors very nervous about the future. Recession is defined as two consecutive quarters of negative gross domestic product (GDP) growth. Currently, there is no consensus on whether we are in a recession, going into a recession, or simply in a bad market, but it never hurts to learn how to protect your stock portfolio.

Most people sell stocks from their portfolio going into a recession, but they should be buying. After all, “buy low, sell high” is the fundamental definition of how to make a profit. Those who have a long time until they plan on withdrawing money from their portfolio should look at increasing contributions to their 401(k) and IRA accounts. Meanwhile, those who are retiring soon should consider staying the course and riding out the downturn.

The most important thing you can do to protect your portfolio is to diversify your investments. This means not only buying different stocks within the United States, but also buying ETFs or mutual funds that track indexes in foreign countries. After all, countries like China and Brazil are soaring while U.S. markets are faltering. Meanwhile, diversification itself is statistical proven to not only increase returns but reduce volatility, which means you will realize more profits from your portfolio!

Recessions also produce many opportunities to profit substantially. Stock pickers who are able to sort through fundamentals will be able to find many bargains during a recession. Particularly, companies that export the majority of their products may be in a great position with a weak dollar and weak domestic economy. Meanwhile, companies providing products that people need everyday – such as energy – may also be companies that are unnecessarily beaten down.

On a related note, it is important to keep a healthy savings account since unemployment tends to rise as economic growth slows. Typically, it is important to keep three to six months worth of living expenses in an emergency fund. This money should be kept in a liquid account like a money-market account that makes more than a standard savings account but does not carry the risk of an investment account.

In the end, be sure to keep purchasing stock during the downturn and maintain a diversified portfolio that fits your risk profile. Also be sure to keep money on the side in case you are affected in other ways by a recession. Combined, these things can help you recession-proof your portfolio!

Warren Buffett’s Berkshire Hathaway (NYSE:BRK) announced that it had completed its acquisition of Marmon Holdings after just two weeks of negotiation. The billionaire investor had been searching for ways to spend its $43 billion in cash on its balance sheet, but many were surprised by the move. The deal will not only be Buffet’s largest acquisition outside of the insurance industry but it also comes at a time when many are expecting a recession in the U.S. economy.

“Our transaction was done just the way Jay would have liked it to be done — no consultants or studies,” Mr. Buffett said in a statement, referring to Jay A. Pritzker, one of the founders who died in 1999. Mr. Buffett met Jay Pritzker in the 1950s and for many years served on the board of Grinnell College in Iowa with Marian Pritzker, who was married to Jay and is Thomas’s mother.

Marmon Holdings is a Chicago-based conglomerate that owns more than 125 businesses that operate more than 300 production facilities in 40 countries. These companies operate within a variety of business sectors including construction services, distribution services, highway technologies, industrial products and services, information management, metal products, retail services, transportation services, water treatment and wire and cable products. Interestingly, much of its large electrical components, water treatment and retailer services businesses are very dependent on the U.S. economy.

In the end, it is interesting that Buffett was so willing to make such a large acquisition outside of the insurance sector and during a time when the U.S.is expected to enter a recession. Perhaps Buffett believes that the U.S. is not quite as likely to enter a recession as first thought…

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Amazon.com Inc. (NDAQ:AMZN) shares rose today after the company announced record sales during this holiday season. Online shoppers purchased 5.4 million items – or 62.5 items per second – from the online retailer with the busiest day being December 10th. Meanwhile, brick-and-mortar retailers like Wal-Mart and Target may have missed their best estimates. The move suggests that an increasing share of shopping is being done online from the convenience of home.

Amazon announced some interesting holiday facts:

• Amazon.com sold Nintendo Wii systems at approximately 17 per second when they were in stock.
• Amazon.com sold enough high-def DVD players to cover seven football fields.
• If you lined up all of the GPS units Amazon.com sold this holiday, they would make a trail from New York to Philadelphia; however, a new trail wouldn’t be necessary with the use of a GPS.
• Amazon.com sold enough auto wrenches to stretch all the way around the Daytona 500 track.
• Amazon.com sold enough Hannah Montana wigs to outfit the entire audience at her December 20th show in Providence, RI.
• Amazon.com’s One-Day Shipping was extended an extra day through Sunday, December 23rd for Prime members this holiday season.
• The last Prime order placed on December 23 in time for Christmas delivery contained “Futurama, Vol. 1″ DVD, “Lost in Translation” DVD, “A Charlie Brown Christmas” CD, “The Fountainhead” by Ayn Rand paperback, “Bridge Over Troubled Water” CD, and “Pulp Fiction” (Two-Disc Collector’s Edition) DVD delivered to Herndon, VA on December 24th.

The statistics suggest that investors should also be watching Garmin (NDAQ:GRMN) and Nintendo (OTC:NTDOY) stocks as they appear to have experienced strong sales. Meanwhile, Target (NYSE:TGT) shares declined after the company cut its expectations for same-store sales. Wal-Mart (NYSE:WMT) shares also fell amid expectations that their sales also suffered at the hands of online shopping. In the end, this is a trend that will only continue…

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Target Corporation (NYSE:TGT) found itself in talks with Pershing Square’s William Ackman after the activist boosted his stake in the company from 9.6 to 10 percent and owns derivative contracts that amounting to an economic interest of around 12.6 percent. The activist investor acknowledged that Target is “probably the best retailer in the world” and announced that it was in talks with management to boost the share price. Shareholders are hoping that the activist will take action to unlock value.

Target shares have fell 21 percent since Ackman first disclosed his holdings, but the activist maintains that the company is in good shape. Many investors believe that Ackman is focused on the company’s possible sale of its $7 billion credit portfolio, which was delayed due to evaluations taking longer than expected as a result of the current credit market conditions. Shares have continued to slide recently on news of delays in this decision that could prove to be a windfall for shareholders if approved.

William Ackman is an activist investor that previously took stakes in Wendy’s, McDonalds, and Ceridian and unlocked value by pushing management to improve profits and cut costs by selling or spinning off divisions. Investors are hoping that the activist will be able to unlock value in Target. Combined, these factors make TGT a stock worth watching!

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Merrill Lynch (NYSE:MER) shares led the financials higher today after the company announced that it had sold its commercial finance unit and raised $6.2 billion through a private placement to Temasek and Davis. The move comes after the firm announced record writedowns amid a credit crunch and subprime crisis that wrecked havoc on its asset backed securities. The firm is widely expected to face more writedowns, but these events give investors new hope that a bottom may be near.

General Electric purchased Merrill’s commercial finance unit, which will enable the firm to redeploy approximately $1.3 billion in capital. The sale includes the firm’s corporate finance, equipment finance, franchise, energy and healthcare finance units, but not the commercial real estate finance unit. The deal will add more than $10 billion in assets and $5 billion in other commitments to GE Capital Commercial Finance’s businesses, which currently stands at around $260 billion.

Meanwhile, Temasek Holdings purchased $5 billion of newly issued Merrill stock at a price of $48 per share through a private placement of newly issued common stock. Davis Selected Advisors also purchased another $1.2 billion at an unknown price per share. Some investors are upset that the company was willing to dilute their stake at a price of just $48 per share, but it is likely that the two investors had a chance to take a look at the company’s books and felt that that was a fair price given future writedowns. Regardless, the firm now has increased liquidity and more investors.

In the end, both of these are great news for Merrill Lynch shareholders as it provides the company with greater liquidity while also showing at least some confidence in the company’s stocks. Combined, these factors make MER a stock worth watching!

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