najdorf

Fear and Loathing in 2009

Nonsense after nonsense. The original post makes no sense: nothing but bearish sentiment followed by sticking to positions that the writer is married to because he's facing huge losses on all of them.

whisperonthewind: Do you know anything about banking? Why would banks pay 4 or 5% for standard deposits that could depart any day when the government is essentially handing out free money? Are you that stupid? Many banks are issuing new mortgages at 5% and below - where do you think their interest margin is going to come from if they start paying equally high rates on deposits?

I should know: You already know that you were wrong once (driven and derided by greed in July - selling WFC for 20? What did you think, that we were never going to have any banks again? You should go into business as a contrarian indicator!). Now you're wrong again. WFC is not the First National Bank of Purple Unicorn-Land. They were in every type of bad lending - interest-only, subprime, Alt-A, HELOC, no-doc, ARM, etc. Maybe they didn't go as far into the joys of negative-am ARMs as Wachovia, but they remedied that mistake by purchasing them. Why would you trust any bank's marks when all of them have had to take further writedowns and loss reserves every quarter for the past year? Of course financial bulls will eventually be right, but it doesn't really matter if you're right about one bank (which you accidentally sold) 10 years from now when your other investments have blown up along the way.

Kuwait and Dow Chemical Deal Will Get Done Despite Opposition

Look, no one is going to tell you that there isn't potential upside in a company like DOW down as far as it is and yielding 10%. But this author has been pumping since 40, regardless of the news. There are plenty of things that can go wrong with Dow, most of which involve completing bad deals due to stubborness. The worst case scenario is:

1. Dow gets hosed even worse than they already are by the Kuwaitis and ultimately has to accept poor terms in the K-Dow deal.

2. Dow borrows a ton of money at high rates.

3. Dow completes ROH deal at absurd full price.

4. Management pays itself huge bonuses for deal-making "success".

5. Dow fails to delivers synergies and struggles to endure a long downturn in the chemical industry.

In this scenario, Dow has no alternative but to cut the dividend and might have to sell assets at fire sale prices in order to service debt and keep capital-hungry businesses alive. Dilutive share issue probably follows. Bankruptcy is not likely but possible.

The problem here is that the Kuwaitis and ROH have all the leverage in the negotiations due to Dow's insistence of taking on transformative change in the midst of the worst economic downturn since the Depression. Without both deals Dow is just another plodding chemical company with no edge. The Kuwaitis have already been able to talk Dow way down on price, while Liveris and Co. have obviously indicated that they're so desperate for Rohm that they'll do anything. If management had any sense they'd go to Rohm and say "Take 70 or watch us release a statement saying we're re-evaluating the deal, followed by your shares going to 30." Of course, if they had any sense they never would have cut a deal at 78 (massive premium to ROH's all-time high, of course) during the worst market downturn since the depression.

Buying Dow for a Better Deal than Warren Buffett Got

Dow common may or may not be a good investment, but you're ignoring the advantages of Buffett's preferred investment that are not available to the average investor. First, an 8.5% dividend from a large, stable company is really, really good in today's climate. You can get that from financial companies, but you're taking on a big default risk. And you might say there's not much difference between 5.25% and 8.5%, but the difference is enormous. You could have gotten the 5.25% on a long treasury or CD last year. 8.5 may well be better than the total return of the stock market for quite a while.

Also, Buffett is in no way "underwater" based on any future common share price. The preferred is perpetual and is convertible entirely at his discretion. It's just an option on the common stock for him - the real point is the yield, since 8.5% is about all he expects to make in today's climate. He can collect 8.5% indefinitely (barring Dow bankruptcy or extreme crisis) while he waits for the share price to appreciate. You can collect 5.25% for as long as they feel like and are able to pay you (the company doesn't guarantee the regular dividend in the same way that they guarantee the preferred) while you hope for the share price to appreciate enough to make your investment better than his. Advantage: Buffett. Famous investors with 3 billion cash in a liquidity-starved environment get better terms than amateurs.