txlaw

Here's a Bloomberg article on the beginnings of the XTO deal: http://www.bloomberg.com/apps/news?pid=20601109&sid=aAsD6B.ip9iU&pos=13 It's interesting to see how Exxon is taking an almost Berkshire-like approach to keeping XTO organizationally intact. And the fact that Bob Simpson went for an all stock deal also seems very much like a Berkshire style acquisition, only Simpson is getting shares in a diversified energy conglomerate rather than an diversified "any great business" conglomerate. Also interesting to see how Jefferies (major LUK investment) was involved with the deal. I wonder if they'll win more business because of this deal? Don't really know much about how the investment banking world works.

F---! Why did I fu----- sell XTO?! That's what I get for letting macro worries (carry trade reversing) overshadow the fundamental value of a company's stock. I bet Buffett continues to add more XOM over the next quarter or so. What a great deal!

Oldye, I thought that since this was a private placement, these preferred shares would just sit on FFH's balance sheet at cost. I can understand why the preferred would fluctuate if they were publicly tradable, but are they in this case? From the press release, it looks like they didn't have to register the transaction with the SEC. With regards to the stock dividend, I think FFH would be happy to get SD common stock dividends if the price is below their conversion price and definitely if it stays at $8 or below. Like, say that nat gas prices fall to $3.50 and the common goes down to $6. Then FFH could potentially get a tax favored distribution of SD stock that would actually be worth a lot more than what they would be able to sell it for as soon as it was distributed. If they get SD common stock dividends that are overvalued, I'm thinking that they would be able to sell it immediately at favorable tax rates. The small dividend amounts in comparison to the principal amount ($200 M) would mean that the entire investment would be less volatile than if they just bought common stock, assuming that the principal amount would be held at cost on the balance sheet. That's what I'm thinking at least. More thoughts about whether I'm right or wrong about the above? By the way, I don't own SD or any oil and gas companies at the moment.

From the Seeking Alpha transcript of the Feb. 27, 2009 conference call: For 2010 we have 80 Bcf hedged at 770 per Mcfe. At year end our hedges were worth $247 million and using the strip today, the value is $392 million and January and February are now closed out. This is important when considering the current PV-10 and our current asset value. Our current PV-10 which includes hedges and uses the commodity strip price is $4.33 billion versus the PV-10 used in the 10-K of 2.259. So the PV of their reserves is actually higher than $2.3 billion. If you take the PV-10 from the February conference call, add cash held from last quarter, subtract total liabilities from the end of last quarter, and divide by diluted share count, you get a liquidation value that is close to the conversion price of the FFH convertible preferred. I think it's safe to assume that the convertible preferred and common were issued as part of a value enhancing transaction. It sure sounds like it based on the press release. And FFH is involved, so that's a good sign too! This preferred buy looks like quite a safe investment to me with a lot of optionality involved. Sandridge is led by Tom Ward, co-founder of Chesapeake Energy (Aubrey McClendon was the other founder of CHK). His involvement with SD means that there could indeed be a bright future for this company. They are mostly focused on E&P in the West Texas Overthrust, and I believe they are the largest leaseholder in that area. The main reason that the WTO hasn't been utilized to the fullest extent possible is because something like 60% of the stream coming from wells in that area is made up of CO2, which nobody knew how to deal with until now. SD and Occidental Petroleum have signed a 30 year contract to process the nat gas/CO2 stream coming from their wells, where SD will get the nat gas and Oxy will get the CO2 for enhanced oil recovery operations in their Permian Basin assets. There will be tax credits and cap and trade benefits involved, as they will be using carbon sequestration in their operations. My theory is that FFH wants to participate in the upside as a common equity owner but that they do not want to have their BV affected by a potential collapse in energy prices due to the reversing of the dollar/yen carry trade and due to a potential glut of natural gas in the U.S. for the next couple of years. With this transaction, BV will increase from collecting dividend payments and in five years time, FFH will get their SD common without having to go through the aftermath of all this commodity speculation nonsense.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ax4zVVSzx8XM&pos=6 If you haven't used Lala before, you should check it out. It's a pretty cool music service. You can buy the right to stream songs forever for $0.10, and if you want to own the songs (i.e., download mp3s), you pay rates comparable to iTunes. Their music catalog appears to be pretty extensive. An acquisition by Apple makes a lot of sense to me.

Sort of interesting to see what happens when the home office decides to start actively managing one of its operating companies. http://www.nytimes.com/2009/12/04/business/04buffett.html?ref=business

Very interesting piece. He raises some of the same questions I posed last month about the mechanics of the dollar carry trade. It's hard to find the funding for such a carry trade on the balance sheet of the banks, as they appear to be reducing lending and hoarding cash. And it seems odd at first that the banks, who are deleveraging, would lend money out to traders/arbitragers when they are refusing to lend out money for real economy activities. But the dollar carry trade definitely appears to be going on based on statements by all sorts of policymakers. And Ben Hacker pointed out last month that there is anecdotal evidence to suggest that there is still lots of low interest securities lending capacity that is available to traders via the prime brokerages. On top of this, China has increased its money supply by a huge amount, and because the Yuan is pegged to the dollar, it is possible that there is a yuan carry trade going on, though Veneroso believes that the lending is primarily serving to inflate Chinese equities, Chinese real estate, and commodities located within China (which affects worldwide commodities prices due to China's buying power in the commodities market). Given the above plus the the fact that Rex Tillerson (CEO of Exxon) has stated that between $20 and $25 of the price of oil is due to dollar depreciation, we should be very, very careful when it comes to all sorts of useful commodities, and especially oil and natural gas. If the dollar carry trade reverses and the yuan remains pegged to the dollar, we could see a huge flight out of commodities that causes commodity prices to fall substantially. Rather than attempting to profit from any such fall, I'm opting to just stay away from oil, nat gas, and other non-ag commodities.

Perhaps we should distinguish between the spending and monetary policy aspects of the worldwide stimulus in trying to figure out their effect on the world equity markets. I'm of the opinion that the one-time housing tax credit, the purchase of RMBS, and Cash for Clunkers were good for the real U.S. economy because they helped industries that employ a lot of people get through a really tough environment while the banks get on sounder footing. Like Eric, I think that the main problem in these sectors is not necessarily with demand but rather with the extension of credit for purchases. Mike Jackson of AutoNation has said as much with respect to new car sales -- he says that there is more demand out there than credit because the banking sector still has not fully recovered from last year's meltdown. He expects car sales to get better starting in 2010 and normalize after 2012. The housing sector might be similarly situated, but it's a little less clear than with autos because who knows how many people will downgrade to renting from owning going forward. In any case, helping the housing and auto industries get rid of inventory through stimulus has allowed these firms to survive long enough to adjust to the business environment such that as many jobs <i>as possible</i> will be preserved. Getting the banks healthy again will be the second part of making sure that firms in these industries survive and keep people employed. I'm not sure about other spending measures such as the American Recovery and Reinvestment Act because I don't know the details of how money is being doled out (no doubt there's a lot of pork in that bill). But note that there is still a lot of money left to be paid out under ARRA, so we will have ongoing stimulus from that policy measure. What I'm trying to say is that I do not think that the spending part of the stimulus has caused equity markets to be overvalued. Instead, I think it's the low interest/money printing aspect of the worldwide stimulus that is causing equity markets to be overvalued. And this is exactly what policy makers want, as they need the banks' balance sheets to be propped up while loans get paid off and more cash comes into the banks' coffers.

Does Fidelity allow you to purchase and sell odd lots of foreign shares? I tried to buy some FFH.TO in my Etrade global account on Friday, and they don't allow odd lot purchases. I don't have enough money to buy 100 shares of FFH, so I guess I'm out of luck unless I switch to a different brokerage or someone issues an ADR.

Yes, exactly. Look, I have no idea what FFH.U is. It sounds like these are dollar denominated shares trading on the TSE. If so, I don't think that suggestion helps. The problem for me and for others, I'm sure, is that some discount brokerages do not execute trades on the TSE, at least in certain accounts. I can buy FFH on the TSE in my regular brokerage account. However, I cannot buy FFH on the TSE in my Roth IRA (according to Etrade). I'm not sure what will happen if the FFH shares in my Roth IRA convert to FFH.U, if that's even possible. I did not realize there was such a thing as unsponsored ADRs. I guess that's the way to go unless I decide to switch to another broker.

Sharper, the ADR idea is a good one. That would solve the problem for many of us in the U.S. who wish to hold FFH in accounts that don't currently allow foreign securities. FFH management should seriously consider having an ADR that trades over the counter. ----- With respect to the dividend, I'd prefer that FFH keep it as low as possible. I'm fine with it existing for compensation reasons, but I'm not too thrilled about the tax issues associated with it, especially since I cannot recover the full amount withheld by the Canadian government.

One thing I forgot to mention is that if you want to back out the excess cash in order to value the franchise, you have to make the assumption that the excess cash used to buy Perot Systems was not a value destroying acquisition. I don't think Perot Systems was that great as a stand alone company, so I'm thinking that Michael Dell will try to change that unit into a best in class company. He may succeed.

It doesn't say anything that explains the rationale, though I'm pretty sure he's selling because the intangible assets underlying Moody's business model might potentially be permanently impaired.

I don't own any DELL at the moment, though I'm considering purchasing some if it declines further. We'll have to see what happens to sales going forward now that Windows 7 has come out. I believe the company is expecting increased revenue due to a business refresh cycle, so this quarter is probably the cyclical bottom in terms of unit sales due to the delay in the new OS release date. A lot of hardware purchases were probably delayed by businesses and consumers in anticipation of Windows 7. DELL has increased its operating leverage through opex cuts, so if their sales bounce back, they'll generate quite a bit more owner earnings than this quarter, though that could of course be tempered by further gross margin declines. I think that margin declines are inevitable in the computer hardware business unless you're on the cutting edge like Apple. Hardware is definitely being commoditized in the personal computing space. I'm not so familiar with the networking hardware space, however. The key to Dell's hardware business will be whether they can stem their decline in market share in the U.S. and make further progress abroad. Unlike in the U.S., their name is not "mud" overseas, and they actually increased revenues sequentially in EMEA and Asia. Another wild card is whether they can come out with a decent Android phone. If they can come out with a good phone that can work on any network, who knows? They could do very, very well both in the U.S. and abroad. With respect to Perot Systems, they will need to use their salesmanship and operating expertise to increase market penetration in different sectors. Note that they already employ quite a few people in India, so I'm not sure that the offshoring phenomenon will be a big deal for Dell long term with respect to commoditizing services. On the contrary, they will want to try to make their services/consulting operations dovetail with their hardware operations in countries like India. Back out excess cash, and you have a company that is pretty cheap given the size of the untapped market.

Buffett probably would have added to COP if he couldn't take advantage of the tax code by selling COP and replacing with XOM. From the latest 10-Q: Other-than-temporary impairments (“OTTI”) of investments in 2009 predominantly relate to a first quarter OTTI charge with respect to Berkshire’s investment in ConocoPhillips common stock. The market price of ConocoPhillips shares declined sharply over the last half of 2008. Over the first nine months of 2009, Berkshire sold approximately 27.5 million shares of ConocoPhillips. Although Berkshire expects the market price for ConocoPhillips shares to increase over time to levels that exceed original cost, Berkshire may sell additional shares before the price fully recovers. Sales in 2009 were or may be in anticipation of other investment opportunities, to increase overall liquidity and to realize capital losses that can be carried back to prior years for income tax purposes. Capital losses can be carried back three years and carried forward five years for federal income tax purposes. Income taxes of approximately $690 million were paid on capital gains in 2006 and will be fully recoverable if capital losses of at least $1.98 billion are generated by the end of 2009. Since a significant portion of the decline in the market value of Berkshire’s investment in ConocoPhillips occurred during the last half of 2008, a significant portion of the other-than-temporary impairment losses recorded in earnings in the first quarter of 2009 was recognized in other comprehensive income as of December 31, 2008. WEB's thesis on energy, particularly with respect to oil, remains intact so he is putting money into Exxon to replace the COP he has sold. I'm a fan of both XOM and COP, though COP is probably more undervalued.

Thanks for the info, gaf63.

All Y'all, In looking at the tax forms I see no restriction to owning foreign stocks in an IRA. See http://www.ira.com/faq/faq-14.htm Where do you get the notion it's a problem? Tommm It's not a problem except that my particular broker (Etrade) does not have the capability at this time. According to some subsequent posts, other discount brokers do have this capability. With respect to tax withholding, my understanding (which might be wrong) is that the Canadian government withholds a percentage of the dividends distributed to foreign holders of Canadian companies. I was never really sure about how this worked, but it didn't really matter so much to me given my holding period and my position in ORH (versus FFH). But now I'm thinking it's a good time to try to figure out how one recovers the amount withheld by the Canadian tax authority (perhaps by taking a deduction on one's U.S. returns?).

I have an Etrade account, and at the moment you cannot hold foreign stocks in your retirement accounts. That may force me to move to someone like Interactive Brokers if I want to hold FFH for the long term. I'll have to look into it to see how the pricing works over there. Does anyone have any other suggestions for those who want to hold FFH in their retirement accounts other than IBKR? Also, this brings up another issue that I've been wondering about for a while. Does anybody know how tax withholding works for Canadian companies that issue dividends? Does tax withholding for foreign investors differ if you own a Canadian company via the TSX versus the NYSE? I've been trying to avoid Canadian stocks that issue dividends because I don't know how the distribution process works. Not asking for tax advice -- just general information about how tax withholding for dividends works for U.S. investors in Canadian stocks.

For those of you who follow ATSG, the pilots have ratified the pending collective bargaining agreement. Hopefully, this means that DHL and ATSG will conclude their negotiations on a new ACMI agreement sometime in the next few months. http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=ACBJ&data-ipsquote-timestamp=20091119&id=10749036

I don't see any bubble in the U.S. equity markets, though the market as a whole certainly appears overvalued. I'm not a huge fan of gold, but I don't think it's in bubble mode yet. Perhaps people who pay attention to foreign markets can give their assessment of what the valuations are like abroad?

Interesting take on BNI from Simon Johnson of the Baseline Scenario. See http://baselinescenario.com/2009/11/07/warren-buffett-and-the-g20/ .

I am sure there are lots of people who owned ORH who would not want to own FFH. Fairfax is a much more complicated beast than Odyssey Re. ORH was easier to understand, had a better combined ratio, and still reaped the benefits of HWIC's investment capabilities.

Thanks for linking to that article, Dowfin. There are many points I disagree with. Burlington is well-managed. Railroads are a bet against the U.S. dollar and in favor of higher energy costs. Railroads are a play on the trade deficit because this is how we haul all those containers of stuff imported from Asia. I agree with BNI being well-managed and being a bet against the dollar and higher energy costs. However, I don't think that BNI is necessarily a play on the trade deficit. On the contrary, if the dollar goes down relative to the BRIC currencies, as it should in the long run, the trade deficit should shrink as a percentage of GDP. And if interest rates go up, Americans (individuals and the government) won't be able to finance their consumption as easily, which could reduce the demand for imports on a percentage basis. Also, higher energy prices could potentially make domestic/local goods (or at least goods where most of the value add is in the U.S.) more competitive with foreign goods. I'm not saying that the containers of stuff imported from Asia are going away. I'm just saying that I see BNI as more of a bet on the trade deficit decreasing due to increased exports (such as coal exports). [A] motive of the Burlington deal is that it allows Buffett to protect his legacy by diluting Berkshire’s exposure to financial services. It is true that the BNI acquisition dilutes the financial services nature of BRK, but I don't like the way she frames it as an attempt to "protect his legacy" and being all "about Buffett's ego." Berkshire is Buffett's baby. It's his palette. He created the venerable institution, and he wants it to succeed. He always wants the company to be a collection of great businesses run by great managers. Perhaps I just don't agree with her choice of words, which seem to show a lack of understanding of the relationship that founders have with their companies/institutions. I admire and respect Sokol, but my comfort with him as chief executive officer is in inverse proportion to Berkshire’s exposure to financial services. Even brilliant CEOs often can’t manage such companies. The Burlington acquisition makes me a lot happier with Buffett’s choice of Sokol. I don't see why she should be so uncomfortable with Sokol being at the helm even if financial services continued to make up the current percentage of Berkshire's portfolio of businesses. After all, Ajit Jain is still at Berkshire, and the new CIO will certainly be someone that is a good fit for the job. Plus you have Bill Gates and other board members ready to step in to prevent wrong decisions from happening. Berkshire will probably be managed in a more collective nature after Buffett is gone, and I think it will work. Just my opinion, but I think that that will be one of the most surprising things about Berkshire after WEB is gone. People will be amazed at how well BRK still runs.

Yup, and I think that increased exports won't be canceled out by decreased imports in terms of volume for BNI because a great percentage of exports will be going to Asia rather than Europe. So here's why BNI will have increased volume relative to other U.S. railroads, particularly those on the east coast: 1. Lower U.S. dollar means higher exports in general, particularly to Asia and Australasia, where currencies will increase relative to the dollar over time 2. Diminishing importance of coal (due to carbon concerns) will mean more coal is exported to Asia. If the U.S. really is the Saudi Arabia of coal, BNI stands to benefit immensely from the coal export trade. Increased demand for railroad transport due to energy inflation plus BNI's West-coast toll road pricing power = great business.

Ben, I understand why money market rates are low, but I figured that after Lehman commercial paper caused the Reserve fund to break the buck, prime brokers would not necessarily get to borrow short term funds at low rates. But maybe Lehman was different because it was also an investment bank, CDS buyer/writer, and toxic asset owner. I guess if all you have is brokerage operations, you're a much better credit, since all your lending is secured by collateral. Also, you pointed out that these brokers can also lend out their own cash or clients' cash. Okay, I think I am beginning to understand how this carry trade works. Thanks for your input.