Freddie's Billion-Dollar Question

Freddie Mac (NYSE: FRE) , under investigation for its accounting practices, could end up having to restate between $1 billion and $3 billion in its earnings over the past three years, according to an article in The Wall Street Journal today.

Back in January, Freddie Mac announced that it would restate its last three years' results on the advice of its new auditor, PricewaterhouseCoopers. How big the restatement would be wasn't revealed at that time, though.

When the company shook up its top management last week, and then became the target of at least two governmental investigations, outsiders began to wonder if this was a larger problem than the Street originally thought.

The restatements will boost earnings in the prior periods and reduce future earnings because of the alleged "cookie jar" or "smoothing" nature of the accounting schemes. Freddie Mac says it won't talk about restatement figures until it has finished its own investigation into the matter, which should be by the close of its third quarter. It has, however, characterized the restatement as "material."

Quote of Note

"When you're as great as I am, it's hard to be humble." -- Muhammad Ali

Kodak on the Radar

Eastman Kodak (NYSE: EK) warned yesterday that its Q2 GAAP net income would be $0.05 to $0.25 a share, and that "operational earnings from continuing operations" would be $0.25 to $0.35 a share, half or less of its prior $0.60 to $0.70 guidance. Shares dropped 10% to $28.77, 32% off their 52-week high.

The reason? You guessed it -- SARS. The company says the disease killed film and photographic paper sales in Asia, adding that film sales across the industry in China plummeted 50% in April and May. But apparently other business compensated, because the company projects Q2 revenues as flat against last year (down 5% when adding foreign currency effects), so the bad income statement news apparently comes from higher costs. Hmm.

If the quarter is just a bump on the cost-cutting road (which has produced declining days sales outstanding and better inventory turns), any rational investor must at least ask whether the company's powerful worldwide brand and a 6.3% yield offer the enticing combination of dividends -- if it's secure -- plus at least some future growth. (Why? Just read what three Foolish analysts have been saying -- nay, shouting -- lately in Jeff Fischer's Earn More, Keep More, Mathew Emmert's Powerful Payouts, and Tom Jacobs' Dividends Plus Growth.)

Safety of the dividend?
Despite the current speed bump, Kodak's numbers for the last eight quarters are actually encouraging. Total debt has declined 30% to $2.7 billion, while cash and equivalents have more than doubled to $597 million. The dividend payout for 2002 was a very reasonable 30% of free cash flow, but the key for 2003 will be whether the company can maintain and increase that free cash flow (net cash from operations minus capital expenditures and tax benefit from stock options). So far, it hasn't yet reduced 2003 cash flow expectations.

On the growth side, two promising areas are medical imaging and OLED (organic light-emitting diode) display venture, but clearly the company needs most to grow market share in its primary consumer business in today's digital imaging world. Cost-cutting and inventory management, despite their excellent early returns, can only go so far.

Discussion Board of the Day: New Paradigm Investing

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Finding an ETF Fit

Since exchange-traded funds (ETFs) entered the investment lexicon -- giving us permission to sprinkle our stock talk with words like "spiders," "webs," "diamonds," and "vipers" -- investors have been snapping them up.

ETFs -- bite-sized versions of an index fund that enable investors to buy a portfolio of securities in a single share -- are easy to buy, easy to understand, and add a shot of instant diversification to any portfolio. Assets invested in ETFs reached nearly $95 billion in January, up from $15.6 billion in 1998.

Are they right for your portfolio? With more ETF choices coming to market all the time, more investors are likely to find that they make a good fit in the right circumstances.

Need a shot of fixed-income stability in your portfolio? A few months ago, the SEC granted Barclays permission to roll out a handful of ETFs that track fixed-income investments. Four will be based on U.S. Treasury bond indexes, and three on investment-grade government and/or corporate bond indexes. They are expected to begin trading in July.

Got a hankering for some Naz action? Recently, Fidelity Investments filed to take the Nasdaq Composite to the ETF altar. (It's Fidelity's first foray into the ETF marketplace.) The Fidelity Nasdaq Composite Index Tracking Stock will seek to match the return of the widely followed benchmark, which includes about 3,600 listed Nasdaq stocks. The ETF is expected to begin trading on Aug. 11, according to Fidelity's filing.

Fools like the low-cost, tax efficient nature of ETFs. They offer a sane way to add diversification to a portfolio because they enable investors to bypass the high fees associated with actively managed mutual funds. Since they are bought and sold just like a stock, you must have a brokerage account.

But they're not for everyone. We don't recommend buying small amounts on a regular basis since you'll pay a commission each time you make a transaction.

To see if an ETF would be right in your portfolio, check out the ins and outs in our 60-second ETF overview.

Who Wants to Be a Foolionaire?

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Quick Takes

Martha Stewart appeared in a New York courtroom today. U.S. District Judge Miriam Goldman set a January 12, 2004 trial date for the creative business mogul. The date, which is subject to change, was set so that Stewart's defense attorneys could have enough time to review the government's case against her.

Soon you won't find any antibiotics in McDonald's(NYSE: MCD) meat. The burger king told its meat suppliers to start phasing out the use of antibiotics, which spur growth in animals, because of concerns that the presence of antibiotics in meat is making humans more resistant to them.

Initial applications for jobless aid dropped for a second straight week, though overall claim levels remain high. First-time applications for unemployment benefits fell 13,000 to 421,000 claims during the week of June 14. The measure's been above the 400,000 level for 18 weeks now. Economists view the 400,000 mark as evidence of labor market stagnation.

And Finally...

Today on Fool.com:

For updated stories throughout the day, bookmark our ever-changing News section.
Earn More, Keep More: Dividends are key to a market-beating strategy, and new tax laws are a boon.
If you're looking to diversify your portfolio, Mathew Emmert has suggestions for putting Real Estate Investment Trusts (REITs) to work for you.
Chubb raises $1.2 billion to keep ahead of asbestos claims.
Does Sony's new fingerprint recognition technology make sense for consumers?
Is Micron a speculative plaything?
Lehman benefits big time from bond strength.
In Fool's School, what's a "run rate"?

Contributors:
Bob Bobala, Robert Brokamp, Mathew Emmert, Jeff Fischer, Tom Jacobs, LouAnn Lofton, Bill Mann, Selena Maranjian, Rex Moore, Rick Munarriz, Matt Richey, Reggie Santiago, Kate Southerland, Dayana Yochim