Jim:    Back on January 3rd, I put Legg Mason Inc. (LM) in the Sell Block... with the stock at $73.44. I thought Bill Miller, the legendary money manager behind LM's biggest fund, not to mention the Chief Investment Officer of Legg Mason Capital Management, had lost his touch, making LM one toxic stock...

Nine months and 32 points later, LM still hasn't learned its lesson, so we're re-sentencing this recidivist asset manager to the Sell Block... Sell, sell sell!... I wouldn't go near this one.

This is a case of solitary confinement... because we're not allowed to waterboard stocks in this country, much to my own chagrin...

Why bother with re-sentencing?...

The reasons are myriad, but I think the single-worst one is that LM is the largest holder of Freddie Mac (FRE), the common stock... As of the end of July, it owned 79.9 million shares, a 12.4% stake. The legendary Bill Miller just couldn't help himself... he kept buying and buying and buying...

How could he not see that the government was going to have to intervene and potentially destroy the common stock?...

But it's not just Freddie Mac, although that's his most recent bad call...

Bill Miller and LM were all over Bear Stearns, big buyers of Countrywide, Thornburg Mortgage Inc. (TMA), now at 41 cents... They loved Washington Mutual (WM), now at $2.83... It was like he was completely oblivious to the whole mortgage mess...

Now, I said that Ben Bernanke knew nothing but, compared to Bill Miller, Bernanke's a veritable Einstein...

This is the guy who fought the Yahoo! (YHOO) merger... the Microsoft (MSFT) bid... and has now seen the stock cut in half... he fought that. Only a Yahoo would believe in YHOO at this point...

What else does he own?...

How about Qwest (Q)?... Yeah, Quest, down 59%... How about some Eastman Kodak (EK), down 42%... The black hole that is AIG (AIG), down 73%... These are all year-over-year numbers... How about Sprint Nextel (S), down 63% year-over-year...

Bill Miller has become a one-man wrecking crew. He buys your stock and you're dead...

And it's not just stocks where LM got mortgages wrong... LM has enormous exposure to SIV-related issues... these toxic mortgage-related securities that have been the bane of so many banks... LM says it has $3.5 billion in remaining SIV exposure... and about $3.1 million in cash. As the company's had to raise capital to support the SIV funds, it doesn't believe it needs to raise capital anymore... But, gee, I think I've heard that one before.

This is not your father's LM which, for years, was the best-run money management company in the world. Now it's totally off the reservation.

Who the heck wants to have your money managed by the company that got itself neck-deep in the mortgage mess? I mean, if they can't run their own money for heaven's sake... This is such a red flag for any of LM's potential customers. I don't see how the company's going to be able to attract new investors, let alone keep old ones...

And when you look at LM's latest quarter, you can actually see that the investors are fleeing like rats on a sinking ship...

LM had $18 billion in net cash outflows for the quarter. That's terrible. New money to manage is the lifeblood of asset management companies, which get their profits not from performance, obviously, but from taking a cut of the total assets they manage.

Now LM is running $923 billion, down 3% from the previous quarter, and down 7% from the previous year. I think the capital exits will accelerate, given the Freddie Mac debacle. I could see it losing 10% of its money without a problem.

And you can't blame the market for LM's woes; not all asset management companies have had to suffer during bear markets. Back on February 5th of 2007, we had a "pair trade"... as it's called. It's a long time ago, but we compared LM - then at $104 - with T. Rowe Price Group, Inc. (TROW), at $48. Since then, TROW, the stock, is up 20.7% during this great bear market. LM's stock is down 60% since we told you to get out of it.

If TROW can perform during troubled markets, and it can... last quarter, it had a net cash inflow of 2%, something that it's maintained for at least the last seven quarters... then LM frankly has no excuse at all.

This is LM's second offense. That means it goes straight to solitary confinement. Frankly, this company's lucky to avoid getting the needle.

If you want to own an asset manager I think you should, again, still... swap out of this one, and into T. Rowe Price Group, Inc. (TROW), which is bringing in new money, and isn't up to its neck in lethal mortgage-related securities...

Here's the bottom line...

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The Bottom Line!:     When good money managers go bad, don't hope the glory days will come back.  Just get out of dodge or, in this case, Legg Mason Inc. (LM).  Because I believe Bill Miller has lost his touch.