Steelhouse: Tell me what are the pros/cons in buying the debt vs the equity in a company (and vice versa with buying the equity vs the debt).

** Debt **
Depends what interest.
1st paid in bankruptcy.
Interest is fully taxable, unless you buy debt like a hedge fund, you most likely would be in an overseas account and pay only carried interest on it of 15%.

** Equity **
dividend uncertain, based on how corrupt the management is.
earnings generally rise with inflation, thus dividends and price too.
many unknowns to what the true owners want to do with the stock, sell it to private equity buddies that give them kickbacks, take it bankrupt to clean out the shareholders, load it up with debt, and re-issue it.
subject to 35% corporate tax and capital gains tax. Obama wants to raise the true capital gains tax for upper bracket to above 100%, 28% corporate + 3% health care + 39.6% capital gains +30% inflation = 101% tax.

The true owners are bondholders because in bankruptcy, they are not wiped out and may have stake in new ownership. Take GM for example.

Let's add more!

Debt:
Bondholders will be paid coupon even if earnings aren't that great otherwise there will be default. Stockholders don't get a dividend and their capital will probably have a negative return in a period of poor earnings.
Debt is much cheaper to raise than equity. And easier.

Equity:
You get a piece of all future earnings so if the company explodes and becomes like Apple, you make a **** ton. Potential return isn't capped like it is in holding debt.

Given all the pros and cons, why do you want bondholders to get nerfed in the capital structure and in investing?

Who loses in an unfair system? The cash holders. When you buy a house for 3% interest who ultimately will pay for 1/2 the house? The cash holders. They don't even get to live in the house.

When you have a system where one group pays one tax, and another pays another tax. You over time will find someone that uses that to exploit the hole. The problem with having zero taxes on debt for a corporation, is that private equity has the edge, and they may have even written the edge into law as you don't see takeover mutual funds for $10K investors popping up.

The edge to exploit is the corporate income tax, bond interest tax difference. Private equity finds an undervalued stock with less than optimal debt, then manipulates it down to get the lowest price possible using the media outlets and forums to bring the price as low as possible. Then they make an offer. Maybe the offer does not go good or it is the deception offer to the real offer that will come later. So they wait 6 months try to take it down further then hopefully the last of the shareholders get tired and give up. At this time, maybe with the management and who knows maybe the lawfirm representing the shareholders eventually gives or takes a cut on the deal (Note: companies don't have any cash they have 8x more debt).

In this case the shareholder gets screwed on the deal. PE exploited the debt for themselves. When PE owns the stock, they usually run the stock like champions, they often are the best stocks to own with rising dividends and repurchases. PE runs the stock like the original board should have, with optimal debt.

But, the problem is the optimal debt can often be used to exploit the stockholders too or the company could start to lose market share. Then the stock goes to bankruptcy and the stockholders lose everything. While the hidden bondholders retake the company.

The problem arise new holes are found. All these firm in the Caymans are just exploiting the high corporate taxes. Thus, you got firms and foreigners pay 0-15% tax, with the housewife paying $20,000 a year is paying 44.7% taxes.

Yes, small stockholders benefit from the debt. But they would be far better off with a fair system where the tax wack-a-moles are bolted in their holes. Debt interest is paid after corporate income taxes. Yes, I will probably be a net loser in this scenario as a stockholder, but I will gain putting all investors on equal footing. It would be nice to pay the same tax as a foreign dictator for once that kills and eats children (that probably pays zero tax on U.S. equity and bonds).

The solution. Interest paid after corporate income taxes. End the dividend and capital gains taxes. End tender offers or buyout offers.

I did notice the good private equity can do. Private equity put in a bid for WCRX. WCRX fought the offer by issuing a special dividend of $4. There was an earlier takeover offer in 2010 where they did a $8 special dividend. Without the private equity action, the management would be taking planes, having parties, hiring hookers, with all the cash lying around.

Someone went off the meds again.

WCRX is a hilarious example. Do you know who the big holders in WCRX are? PE guys, all of who have been in the investment for 7 years and, therefore, are likely dying to sell it. The didnt do a dividend to stave off a deal, they did it because there wasnt a buyer.

Good job steelhouse! Good effort!

If they are dying to sell it then why don't they? It is publicly traded. i would like to get some shares of this stock on the cheap.

April 30th. "Warner Chilcott Plc (WCRX) is weighing options including a possible sale after receiving interest from strategic and private-equity buyers, according to people with knowledge of the matter. The shares jumped in early trading." There was an offer 1st and they did not accept it or advertise it.

The price for 90 days- 1 year before April 30th was about 16. Yet, they wanted to sell in the 30s so they say. Everybody wants to sell for the right price. The takeout rumor was $32.

BBY at $150 is a good price. BBY at $90 is not good and my as well issue a $20 special dividend.

As someone who traded Consumer/Retail stocks at an i-bank, I can tell you that BBY is a piece of crap. It isn't a $150 stock, just LOL. You realize that it's business model is destroyed by the likes of Walmart and Amazon right? You are living in a fantasy world if you think BBY is a good stock.

And with regards to your claim that PE guys will go short a stock and then use media to crush it: there is a nice driver in stock prices called earnings. PE guys can "manipulate" as much as they want but they don't control earnings and when they come out, the stock price moves irregardless of what PE does. In addition there are usually monthly channel checks or comps to give a picture in between earnings.

http://in.reuters.com/article/2012/0...8761IQ20120807

EDIT: and LOL at BBY at $90 is no good. 4.5x your money for a stock that's never traded above $50 that now has a challenged business model. Seems terrible, turn it down.

Not even addressing the fact that you didnt realize that it was already a PE stock

Steelehouse is experiencing severe cognitive dissonance imo, http://psychcentral.com/blog/archive...ell-ourselves/

But I do not think he is capable of changing his thought process. It really is interesting and also kinda sad.

If WCRX had sold for $25, steelhouse would have ranted and said it was worth like $85.Without any bid apparantly the previous PE firms would give up and just do hooker and blow with steelhouse's money and plot how to steal steelhouse's 8 shares on the cheap.

There should be only 1 stock market.

If you want to buy a stock you can pay the retail price like everyone else on the stock market. There are bid and ask and if people want to sell their shares the can and do. You don't need friends and BBY making deals with other peoples shares.

When you control about 95% of the stock and there are less than 300 shareholders, you can take it private. What ffin right does the board have to go and sell your shares like it is their stock.

All they are going to do is put the entire deal on the books as debt. When they bought HCA for $51 in 2006, with all the debt they added to the books, I said $42.69 before. but, if you look at the actual debt and final shares outstanding it would have been closer to $50.

There was no reason for the board of HCA, to tell them to buy the shares on the open market like everyone else. They are welcome to offer a tender offer so shareholders can sell them to a specific price. No need to contact the board.

If BBY is sold for $120 I am still suing. I am going to sue because things have got out of hand. These private equity jerks, clowns, losers have no right to ruin our stock market to get inside deals so they get to ride jetskis on taxpayers dime.

There is a stock market to buy stocks. Any board should not even answer these takeovers at obscenely low prices.

I offer to buy BBY at $0.000001 and if you don't accept I am suing.

It is the brat culture.

It should be illegal to even offer a takeover price. If congress was not bought and paid for. Just like they did with carry interest. My as well raise capital gains for those making over 200K a year to 100% a year and confiscate overseas accounts, it is just as fair.

Steeeeeeeeeeelllllllllhouuuuuuuuuussse

lol, amazing

HCA giving a $41 dividend as soon as they buy it for $51. Such a sad case people watch Cramer, but can't even read. Using the debt, to pay everyone before corporate income tax. Reloading the company with magic debt, taking it public where there are covenents they can't do anything until the debt is paid off.

Every company in America could at least issue a bond for every share you own. And if the dividend is 4%, the could give you 6.15%, send the bond interest money first to a Cayman island company where you also own a share and pay you the 6.15% as carried interest. An auto boost in your dividend. The balance sheet would be exactly the same. you pay the low dividend taxes.

Unfortunately this is done, except you own the shares with no dividend and they send your dividend to the Caymans for themselves and their bondholder friends.

1) Find magic debt
2) ????
3) Profit!