F$%&#ing citibank (C). Thanks to Alex at Contrarian Value Investing
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The world which has tried the past ~60yrs to apply science and math to the stock market as if it were something one could study this way. The current MBA curriculum as it stands, is almost worthless for what it teaches or does not teach. What I learned was that people really did not know the basic market drivers.
No one knew this on Wall Street; not a single author of the many Wall Street books including Warren Buffett really knew. What is so confusing is that many like Buffett and so many others is that they “gut” invest. When they write about what they do and how they do it, the words are vague. You could not make a blue print of what these people say they do and apply it to a situation and find that it makes sense. Some say cash flow and then buy something when the cash flows are nil. Some say P/E and then like Miller buy Google (GOOG), Yahoo (YHOO) and still call themselves value investors. Chris Davis uses a formula and totally missed AIG (AIG) and MBIA (MBI). Then Davis thru Miller liked stocks into this Opportunity Fd. and just blew it with Garmin (GRMN), Google (GOOG) and others. It boggles the reasoning.
The Wicksell theme is truly basic and has been lost in time. Modern math has confused the view as it has been improperly applied. The market cannot be parsed with statistical analysis. One needs the empirical approach as is used in Chemistry. You observe data, look for logical explanations and if you don’t find them, then re-ask the questions, look deeper, look broader, look for other relationships with common sense. A straight mathematical analysis in which tons of facts are thrown in the hopper will never throw out the right answer because they never seem to make the right connections. This is the failure of mathematics is that it will not make the human connections that only humans can make. Academics don’t think this way, so we find ourselves down the academic path with much slicing/dicing, value vs. growth argumentations and truly none of this makes sense.
The use of Growth vs. Value Indices is likewise based on false premises. If you take any group of stocks, i.e. R1000, and sort them once a year via value criteria, you will ALWAYS produce better returns for the Value category vs. Growth. I don’t see how people don’t see this as complete nonsense.
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This is an amazing video….
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Dow Chemical (DOW) and Rohm & Haas (ROH) have confirmed they are back at the bargaining table. To accentuate the “a deal is close” scenario, Dow announced in an 8K filing that they have renegotiated their loans with the syndicate and the key point is that the loan can be extended for an additional year under certain conditions.
On September 8, 2008, The Dow Chemical Company (the “Company”), as borrower, entered into a Term Loan Agreement (the “Original Agreement”) with the lenders party thereto and Citibank, N.A., as administrative agent for the lenders, in order to partially finance the acquisition by the Company (the “Acquisition”) of Rohm and Haas Company (the “Target”), to retire certain debt of the Target and to pay related costs and expenses. On March 5, 2009, the parties to the Original Agreement entered into a First Amendment to Term Loan Agreement (the “First Amendment”) in order to amend the Original Agreement (as so amended, the “Loan Agreement”).
Under the Loan Agreement, the lenders have committed to lend to the Company an aggregate principal amount that will not exceed the sum of each of their commitments, the total amount of which was reduced by $500,000,000 to $12,500,000,000 pursuant to the First Amendment, in a single term borrowing on the date of the closing of the Acquisition. The Loan Agreement will mature on the earlier of (a) the first anniversary of the closing date and (b) April 14, 2010; provided, however, that the original maturity date of the Loan Agreement may be extended to the date occurring one year following the original maturity date, at the option of the Company, subject to the satisfaction of certain conditions precedent, including (i) the absence, since December 31, 2008, of a material adverse change in the financial position or operations of the Company and its consolidated subsidiaries, considered as a whole (except for the Acquisition and the financing thereof and except for any changes disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008; provided that any changes or developments relating to matters so disclosed (and the effects thereof) that arise after December 31, 2008 may be taken into account in determining whether a material adverse change has occurred), (ii) compliance with the total leverage ratio covenant described below as of the original maturity date, if such covenant is applicable on such date, (iii) the reduction of the aggregate principal amount of the loans under the Loan Agreement to $8,000,000,000 or less, and (iv) the payment of an extension fee equal to 2% of the aggregate principal amount of the outstanding loans after giving effect to the extension.
The Loan Agreement permits loans bearing interest at a rate per annum equal to either the prime rate or LIBOR plus, in each case, a margin that varies based on the Company’s credit rating (the “Applicable Margin”); provided, however, that if the original maturity date of the Loan Agreement is extended as described in the preceding paragraph, then the Applicable Margin shall increase, as set forth in the Loan Agreement, on the date of extension, on the 90th day following such date and on each successive 90th day thereafter.
The Company has agreed to pay to the lenders a structuring fee equal to 1.25% of the aggregate amount of the lenders’ commitments. Additionally, under the Loan Agreement, the Company is obligated from time to time to pay certain duration fees to the lenders, as set forth in the Loan Agreement. Higher rates will apply to certain of these fees (i) unless, on or prior to the 90th day following the date of the closing of the Acquisition, the Company consummates one or more sales of certain equity interests or equity-linked securities for which it receives aggregate gross cash proceeds of at least $1,500,000,000 (calculated, in the case of equity-linked securities, based on the amount of “equity credit” accorded thereto by certain rating agencies) (a “New Equity Issuance”) or (ii) if a New Equity Issuance does occur on or prior to such 90th day following the date of the closing of the Acquisition, but the outstanding indebtedness under the Loan Agreement has not been reduced to the extent specified under the Loan Agreement.
I would still be very surprised if this went to trial. The benefit of the deal to the 3 principle shareholders of Rohm and Haas will not, under any circumstances win out over the potential job losses in this economy a forced merger would likely cause.
That is why Rohm is back at the table. Now the key is the loan extension. Dow can extend the $12.5 billion loan an additional year provided the keep their credit rating investment grade. Forcing the merger now under the original terms would void that. Also, Dow has cut the dividend and said it will raise another $3 billion through debt sales. In short they have taken away any argument Rohm has claiming Dow has not sought alternative avenues in which to complete the deal. They clearly have.
Yes I know Rohm has an “iron clad” agreement. But, in a Delaware Court the Judge decides what is “equitable” or “fair” for both parties. He is required to find a solution that is “best for all parties”, employees included. He has already told Dow and Rohm to “find a business solution” more than once. That translates to: “Dow, you are going to do this deal” and “Rohm, it won’t be now or under the original terms”.
This is why Rohm has decided to talk, even they now realize the outcome they face in court in far less favorable than it was a month ago.
Disclosure (“none” means no position):Long DOW
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Look at the following charts. The amount of cash sitting and waiting for a home is staggering. When it decides to flow into equities, the upside could be like nothing we have ever seen.
What makes me think that? Well, the downside we have just seen is a once in a generation event (at least history tells us these are events that happen about every 90-100 years). We also have not seen cash levels this high in a generation.
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Now when does this happen? Hell, I don’t know and anyone who tells you they do is full of it. But, what this does tell us is that the market is becoming a coiled spring. It is pulled back about as far as it can go and the cash buildup is the building tension.
The billion dollar question is how long can it stay pulled tight before it snaps back (the big rally). A month, 6 months , a year? If I had to guess (by the way, anyone doing something like this is guessing) I would say at least 6 months but less than a year….again, just a guess but we are getting to levels in certain equities that imply obliteration. That just is not going to happen to whole swaths of the economy…
Now do not get me wrong. I am not saying that everything is great and the economy is in perfect shape. Far from it and it will be so for years. What I am saying is equities are being priced as if -6% GDP is the given for the whole year and into next. Even if we go to just 0% growth in say Q3 or Q4, that is a huge improvement and will call for a recalculation of equities, fast.
We are at the point where the news flow is bad everyday. A couple of good weeks for unemployment, GDP, retails sales etc. could cause the negativity to turn. Caveat: Ignore any good news from housing. We need months in a row of good news before anything here matters. The month to month variations are so extreme right now in part because of new constant monthly government “rescue” programs that until there is a clear trend in housing, a monthly number has ZERO meaning.
It may not be Mardi Gras in the market for a while but it certainly will not be a funeral for eternity either..
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“Davidson” makes a great point here. Things are getting a bit overdone here and the “who is selling and why” questions are the cause.
Todd,
The current selling is pushing the SP500 down to 1xBV (~550). This occurred in 1974 and 1982 when the Wicksell Rate was ~14%(3.2% Real US GDP + 11% core inflation) and represented realistic pricing of the earnings yield for the SP500. Today, we are priced at ~10% on reduced ttm SP500 earnings in an environment of a 5.4% Wicksell Rate. This is equivalent to a Real Rate of Return for SP500 of 7.5%(10%-2.4%). This figure is at a historically high level for an inflation adjusted return back through the 1940’s.
To throw out basic financial reasoning and pricing that has been in place for ~70 years as we have done today, means that some one with little discipline is selling portfolios wholesale. I suspect foreign sellers who have used too much leverage are now delevering. Our markets have no transparency to this and are trying to make sense of something for which we lack adequate information. We are trying to garner information from price movements and making many, many wrong assumptions about risk that is not likely present. GE (GE) is a prime example.
GE’s Sherin noted that $35mil of trades over 2 days caused the fear that forced GE to lose $21bil market cap this week. GE has taken an extraordinary step to open up the books later this month to show all that they do not have the issues rumored in the market. But, note that there is great leverage in the CDS market when $35 mil can be levered into a $21bil move. That is a 600 multiplier.
I believe that GE’s Immelt is an extraordinary astute and honest manager. The insider buying in this company is so high at this time that the term “of historical proportions” does not express the true meaning. I was once a GE insider and I know the culture. It is much, much better now than when under Welch and in sound hands in my opinion.
I think we are seeing much selling from sources not transparent to us and attributing this to some one knowing more than is widely available. This is the “Boogy Man in the dark room” syndrome. If we had a benchmark which is not susceptible to emotional pricing, then we could fairly compare returns on all assets and then discount for financial risk rather than be in this overblown panic. I propose the Wicksell Rate which is based on longer trending economic fundamentals and not subject to emotional volatility.
At the current level the SP500 provides extraordinary returns. I think we are seeing liquidation by foreign companies that took cash on the books and traded it in our markets to boost earnings. This occurred during the “Japanese Bubble” and was known to have been going on with the recent boom. It is my belief that these corporate treasurers are panicking and selling to recover much needed cash.
I would be buying with cash in both fists if I were not already in. Perhaps the world should step back from the precipice and see the current activity as crazy and go in the opposite direction.
I have sent you a chart via another email of the Percentage of MM Funds vs. MM Funds and Corp Equities. The panic is clear.
“Davidson”
Here is the chart:
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Disclosure (“none” means no position):Long GE
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Bottom line, we are at depression levels for new car sales and Jackson still has his company profitable with strong cash flows. I have hammered this point here before and will do so again. The market share gains AutoNation (AN) is achieving in this environment as thousands of rival dealerships have closed the past two years assure a strong recovery for the company.
Jacskon: “At $2 a gallon gas, people are not buying “green” vehicles and the migration back to big cars and SUV’s is already underway”
Jackson: If you want to sell “green” vehicles, you need to place a higher floor under gasoline prices.Let’s also not forget nearly 60% of the share are held by two people, Sears Holdings (SHLD) Eddie Lampert and Microsoft (MSFT) Founder Bill Gates. Auto demand does not disappear, it wanes and surges. While folks today will hold into their vehicles a little longer and repair them (witness recent sales at AutoZone (AZO))eventually they need to be replaced. Jackson and his company will be a much larger player in that field when it does happen.
Disclosure (“none” means no position):Long AN, SHLD, none
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Now, I’m not going to sit here and say that Amazon (AMZN) is a “valueplay” by any means. I am going to say Bezos is a one of a kind entrepreneur who has cost a lot of folks who bet against him a lot of money. He just keeps refreshing his company and continues to innovate.
Disclosure (“none” means no position):None
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Oil, Onion, Value Investors, Israel
– A great post. what is happening to supply is very scary
– FUNNY
Congressman Offers Preemptive Apology For Extramarital Affair
– Someone tell Hillary she can’t play both sides here
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CFO Keith Sherin had some very interesting things to say..
Now, before we start remember we have a GE employee interviewing his employer.
Here is a follow up to it…
What to think? First, GE is not going under. BUT, that also does not mean that an investment in it today might not fall another 50% or more in the coming months. Back in January I did a post in which I quoted a trader saying GE could go to “$7 or $8” a share. When it hit people said he was crazy…turns out with shares at %6 and change, he was too optimistic.
We also do not know if GE in its present form will be the same GE in 6 months. It was just a months ago management said the dividend was safe and then cut it 70% spurring a lawsuit from investors who bought shares based on that statement. The suit does have merit and bear a very close watch. Cutting the dividend so soon after the public support for it is a problem. We are not talking 6 months later, we are talking 10 business days.
The bottom line in GE will make it through this…..eventually… I just think buyers are likely to get a far better price shortly.
Disclosure (“none” means no position):Long GE
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There is rapidly becomes three classes of retail. The high end (specialty) that will be hit or miss, the middle that will suffer and Wal-Mart (WMT) that will prosper.
Specialty and high end retailer with either crater like Abercrombie & Fitch (ANF) or Tiffant (TIF) or have same store sales that drop dramatically but due to a 50% store count increase hold profits flat like True Religion (TRLG). This area due to the smaller size of the participants will produce wildly erratic results.
In the middle, Sears Holdings (SHLD), Target (TGT), Macy’s (M) and JC Penny (JCP) among other are experiencing large declines in same store sales (high single to double digit falls). These retailers are viewed currently as essentially different versions of each other and in a poor climate, share the same fate to slightly differing degrees. Now, their individual eventual fates will be the results of managements stewardship of finances but as far as sales go, they are in the same boat. Those with the strongest balance sheets will survive and be stronger at the end.
Don’t be surprised if Macy’s files Chapter 11 this year. Aside from falling sales, the company has $1.3 billion in cash, a $3 billion market cap and over $9 billion in debt…these numbers cannot hold. Right now the interest expense ($560 million) on that debt is over 50% of last year’s operating income. One has to expect income to fall more this year…the bad news is the debt interest won’t.
Then there is Wal-Mart:
Wal-Mart Stores reported a strong surge in February sales Thursday that trounced analysts’ expectations, citing falling gas prices for helping boost its discount customers’ shopping budgets.
Wal-Mart (WMT, Fortune 500), the world’s largest retailer, said same-store sales, or sales at its stores open at least a year, jumped 5.1% last month. That was more than double analysts’ estimates for a 2.4% increase, according to sales tracker Thomson Reuters.
Wal-Mart last reported a same-store sales gain over 5% in June 2008, when its sales increased 5.8% on the back of robust back-to-school merchandise sales. The retailer said same-store sales at its Wal-Mart stores rose 5% and increased a stronger 5.9% at its Sam’s Club warehouse clubs. Net sales for the month rose 2.8% to $30 billion.
“We exceeded our own expectations for the period,” Eduardo Castro-Wright, vice chairman of Wal-Mart Stores said in a statement. “We believe falling gas prices significantly boosted household disposable income in February and therefore allowed for both more trips and more spending towards discretionary categories.”
Wal-Mart is the clear winner. Just drive through your town. Where I live the Wal-Mart and the Target are across the street from each other. Look at the parking lots. I can pull up to the door at Target. At Wal-Mart? I bundle up for the long walk to the door.
Retail will turn, though not likely until the fall at the earliest. There will be more casualties and that is perversely good. We need to weeding out. Until then, Wal-Mart is the winner and the rest will fight for survival…
Disclosure (“none” means no position):Long WMT, SHLD
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RIMM, The TAP, Blockbuster,Satellite to desktop
– Should apps be free or not?
– Spinal Tap will live forever
– “Hey, we are not going out of business, we just suck”
– A neat idea
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Having a stunning track record is a very good thing in bad times…
Baupost Group LLC, a Boston-based hedge fund run by Seth Klarman, gained the most assets in 2008, with money under management rising 49 percent to $16.8 billion, according to the magazine.
Disclosure (“none” means no position):None
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This situation is getting really fun to watch…It also gives us more clarity into the value of General Growth Properties’ (GGP) assets.
Bloomberg Reported Yesterday:
General Growth Properties Inc.,(NYSE:GGP) the mall owner at risk of bankruptcy, received offers of almost $400 million for properties including Boston’s Faneuil Hall and New York’s South Street Seaport, according to a person familiar with the matter.
General Growth, the No. 2 U.S. shopping-mall owner, put the two properties and Harborplace & the Gallery in Baltimore up for sale in December. More than 10 offers were received, including offers for the entire portfolio and for individual properties, said the person, who asked not to be identified because the sales process isn’t public.
So, in 2004 GGP acquired the Rouse Company, who owned the above properties. It included a total of 40 million sq. feet of retail space plus another 9 million of land for $11.3 billion.
From the press release:
The Rouse Company acquisition adds 37 regional shopping malls, four community centers, and six mixed-use projects totaling 40 million square feet to General Growth’s portfolio of owned shopping centers. There is also a portfolio of office, industrial and other commercial properties totaling approximately 9 million square feet and considerable undeveloped land in some of the most successful master planned communities in the country, such as Summerlin, Nevada, Columbia, Maryland and The Woodlands outside Houston.
If we look at it, GGP paid $11.3 billion for 49 million square feet or $230 per square foot. Yet, if the numbers in the Bloomberg article are accurate (no reason to assume otherwise) they are selling just over 1 million square feet of it for $400 million or $389 a square foot.
Remember GGP carries all real estate on it books at cost. This potential transaction gives us more confidence that the $28 billion asset value on the books of GGP is far below the actual value. With $27 billion of debt, there is plenty of value left for shareholders.
Disclosure (“none” means no position):Long GGP
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This is always great stuff….Fairholme’s (FAIRX) Bruce Berkowitz is featured
Disclosure (“none” means no position):None
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