OID: Why then don't you sound more enthusiastic?
    Nygren: Well, three things have turned negative for them this year. First of all, everybody in the world expected wallboard prices to fall this year because USG and a couple of other producers had new plants coming on. Wallboard was not going to be in as short supply as it was last year. So the expected result of that was some weakening in wallboard's price - from $165 at the end of last year to something around $120 by the end of 2000 and then be more or less stable down around that level.
    But the price has fallen further than that despite relatively little weakening in housing construction. Wallboard prices are now down between $100 and $110. So the first thing I'm worried about is that the decline has been more than I was expecting.

OID: Although that doesn't sound so bad.
    Nygren: No. And I wouldn't be too troubled by that. However, I think that it would still be something to watch - because the key question is the one you asked, which is, "How do we get comfortable that it bottoms at $70?"
    Anytime you try to guess the bottom for a commodity product, you're basically trying to guess just how rational all the market players will be. And in a rational world, I think that $70 is a very logical bottom.

OID: What about on planet Earth? As Third Avenue Value Fund's Marty Whitman has told us many times, understanding market fluctuations requires expertise in abnormal psychology.
    Nygren: Agreed. By the way, Marty has the pleasure - if that's the right word - of sharing USG with us today.

    [Editor's note: According to Portfolio Reports, USG was the second largest purchase in two of Whitman's funds, Third Avenue Value Fund and Third Avenue Small-Cap Value Fund, for the quarter ended July 31st, 2000.

    Interestingly, it was also the third largest purchase of Southeastern Asset Management for the quarter ended September 30th. Southeastern, incidentally, reported owning over 9% of USG's shares.]

OID: I guess misery loves company. But do you really have to drag Whitman's name through the mud, too?
    Nygren: I do worry about whether somebody will be irrational and make it a more difficult pricing environment - at least over the short term.
    Then, the second thing that's turned negative for USG this year has been energy costs. And that $3-10 range that I cited was with what we had come to consider "normal" energy prices over most of the last decade - which was oil prices somewhere around $18 per barrel.
    Basically, during the decade, whether the near-term price of oil was $10 or $25, if you looked out a year or two on the futures market, it always reverted back to $18 or thereabouts. Therefore, we never got too concerned about what was going on with oil prices because it always looked like it was just a short-term blip.

OID: And it looks different today.
    Nygren: That's right. Today, you can go out much further in the futures market and still be in the mid-$20s for oil. And wallboard production is very energy intensive - from three forms: natural gas, oil (which is less of a factor than natural gas) and electricity. I do think USG is probably better hedged than most industrial companies. But if you had to take the full hit of bringing energy prices up to the level they are today - from the $18 per barrel level that we'd been comfortable using up until very recently to the present price - that would take about $3 per share out of USG's earnings. Therefore, instead of a $3-10 range, you'd probably be talking about something between breakeven and $7.

OID: And $30 per barrel is the figure you're assuming to come up with your $3 earnings haircut.
    Nygren: That's right.

OID: Which still doesn't sound all that bad given the current stock price.
    Nygren: No. Plus, $30 per barrel is not a long-term market clearing price for oil. A mid-to-high $20s oil price over a very long-term period creates too much production and too much conservation for it to be sustainable. So I can live with that negative, as well.