FULL DISCLOSURE

I was driving back from Las Vegas the day the Vioxx storm hit Merck, the giant drug maker.

At the time my partner and I had an office in Henderson, a burgeoning LV suburb, and our home base in Newport Beach. My partner had an extensive background in real estate and insurance, once having his own real estate school and multiple RE offices, before deciding to downsize and simplify life.

We split the blood, sweat and toil right down the middle at the firms. He handled the RE and I did the equity and commodity side. The bottom of the LV housing market had yet to drop. Three of our clients earlier requested a meeting to discuss timing.

All had leveraged multiple real state deals, buying up large numbers of houses to rent for the positive cash flow and later dump into strength. Variable interest rates were low and home prices were rising faster than Usain Bolt runs a 100 meters. It was a sweet, money-making deal.

A few years later things started to change. Prices were going up so fast that all of a sudden cash flows turned negative on any new deals. The low hanging fruit was all but gone. Our clients requested another meeting again to discuss timing. This time we urged them to TP&H. Take all profits and hide. And after some lively exchanges over two days, that's what they did. 

For the next several months prices continued up and we caught some hell. Then one evening the Fat Lady's limousine quietly rolled into the City of Lights.

The first thing we did when we returned to the office the afternoon of the Vioxx news is start looking at Merck puts, not to buy but to sell. We knew the stock was in deep, but it would most likely survive. Remember there are no absolutes. Sometimes most likely is the best you're going to get.

Pharmaceutical research was hardly new to me. Merck had once been a $90 number with an outstanding research crew. The MSM focused, as is their want, on the short-term drama, the heart attacks and the sensational side. The bigger issue was would Merck survive and in what form and what was their defense?

Several years ago a colleague got sued by his ex-live-girl friend. It was about the money. He hired a noted female attorney. Both sides remained intractable. Three days before the case was going to trial he settled. When I asked why over lunch one day, he told me they had negotiated a lesser, known amount, even though he didn't want to give her a nickel. The trial was set for the Palm Springs area.

Then he added: "I got one of the best female attorneys around telling me the jury will probably be nine women, all housewives, and three men. She'll take the stand, start crying, talk about your wealth, and then the number if she wins is open-ended. Do you want to risk it."

Some time later he laughingly told me he got off easy. We knew Merck wasn't going to get off easy. But selling puts with a decent premium at the right time, like those houses a few years later, to get the stock possibly put to us in the high 20s and low 30s even if they cut out the dividend looked like a good risk-reward scenario.

One of the attorneys who successfully argued Merck's case at the time is now CEO. Not too long ago he persuaded the former successful head of research during Merck's glory days to come out of retirement. 

Merck's like most of us, got some problems. But from where we sit, they got a lot more things going for them.

And for the sake of full disclosure, we still own some of that stock.