November 30, 2012
Comment on Model Portfolio activity
In
the spirit of in for a dime, in for a dollar, we
continued to commit funds to value stocks. We added DreamWorks and St Jude to
some accounts and also bought a few shares of Old Second National bank in even
fewer accounts. We repurchased Dell, Sony and GE at lower prices than we sold
in September.
The
media continues to be infatuated with their creation called the fiscal cliff.
We believe a deal will be reached in time to avert any long term damage. As to
whether the deal is reached before the witching hour we are agnostic.
*****
November 23, 2012
Comment on Model Portfolio activity
We
added to positions in some larger accounts to bring them up to 40% top 50%
invested. We repurchased Facebook in some accounts and bought and sold Hewlett
Packard. We bought it at $11 per share when it dropped 10% on Tuesday last upon
announcement that the $10 billion Autonomy purchase of last year was a mistake
(reading between the lines). OOPS. After sleeping on the purchase overnight we
decided to eliminate the position with the reasoning that we avoided losing a
ton of money by selling the shares at $24 earlier in the year and we shouldn’t
be greedy. Moreover the mistaken $10 billion purchase suggests that management
is less than stellar.
*****
November 16, 2012
Comment on Model Portfolio activity
We
had to take a one day 30% gain in Abercrombie as shorts covered and popped the
stock higher on good earnings news. We also sold our anchovy stock
Facebook after it popped 10% when the lockup expired and the stock rose instead
of falling. We have been adding JC Penney to accounts at a multiyear low. JCP
is trying to reinvent itself and the bears are after it.
We
also added Microsoft with a 3.4% yield after it dropped on negative executive
news.
Investors
Intelligence last reported 38% bulls- the lowest in five months and 28% bears-
the highest in ten months. As contrarians that’s good news for our continued
buying into year end.
The
fiscal cliff remains a media obsession and handy media explanation for the
market doldrums. Our take is that the markets have experienced doldrums action
in November/early December for many years.
*****
Here is an interesting chart from
http://digbysblog.blogspot.com/
*****
A Former Hedge Fund Manager Breaks Down
How Wall Street Uses Its Favorite Tax Loop
When I set up my private limited investment partnership –
also called, inaccurately, a hedge fund[3] – my attorney insisted I set up not one additional Limited
Liability Company in Delaware, but rather two. I tried to resist him,
saying I felt most comfortable with just one new business entity.[4] I was so averse to two new entities that I asked
another attorney for a second opinion. He told me the same thing. I
needed two entities. I asked my accountant. His response was, of
course, “two entities,” and complete puzzlement at my resistance.
Clearly, they knew something that I didn’t. That something is the
awesomeness of the carried interest loophole. Needless to say, I got the
extra LLC.[5]
Why did my attorney and accountant insist I create a
separate entity? Because that separate entity can collect payments in the
form of ‘incentive allocation,’ also known as ‘carried interest,’ which is
taxed advantageously, at the same rate as long-term capital gains[6] rather than as ordinary income. Here’s how it works.
If
you set up a traditional hedge fund[7], first things first: you’ll want to charge the traditional
“2/20.”[8] Embedded in this short-hand lingo of “2/20” for hedge fund
fees are two types of income.
With
the two types of income, you need the two entities to keep the income tracked
separately. Entity #1 collects the “2,” which is taxed like regular
business income, and Entity #2 collects the “20,” which collects your totally
awesome income at a lower tax rate.
The
“2” refers to an annual management fee of 2% of assets under management.
On a small/medium-sized hedge fund of, for example, $500 million under
management, you will collect $10 million in management fees per year. The
purpose of this money is to pay for rent, staff, overhead, technology, research
– in short all the things you need to do as a fiduciary for the proper care and
feeding of the client’s money. This management fee income will net out
with business expenses, and may or may not ever generate “profit” for the
manager. In some fundamental sense, it’s not supposed to generate profit;
hedge fund managers are fine earning zero profits from management fees since
the $10 million is taxed like ordinary income at 35%, which is, as you know,
kinda lame.
The
“20” refers to the incentive allocation, meaning specifically that 20% of all
annual gains are retained by the manager, in entity #2, as ‘carried
interest.’ Here, the hedge fund manager takes full advantage of the
loophole. If the $500 million fund has a gain on investments of 10% this
year, fully 20% of the $50 million gain on investments – that is to say $10
million – gets earned by the hedge fund manager’s entity #2 as the ‘incentive
allocation’ or ‘carried interest.’
At
this point, that ‘carried interest’ gets treated at the rate of capital gains,
a 15% tax rate, rather than the 35% taxable rate of ordinary income.
Often, by design, the hedge fund manager leaves the entire 20% incentive
allocation inside the fund for it to grow long term. The manager only
owes $1.5 million in taxes (15% of $10 million, at the capital gains tax rate)
instead of $3.5 million (35% of $10 million, at the ordinary income tax
rate). As a result of the special
tax treatment for ‘carried interest,’ the small/medium hedge fund manager in
our example keeps $2 million more than he otherwise would have been entitled to
keep. That’s
a good deal, for him.
And
that’s just one year.
And
that’s just for kind of a small hedge fund.
You
can imagine the bigger, scale-able results available for when a John
Paulson-type fund manager scores big by shorting the subprime mortgages
market in 2007 (probably saved about $740 million in taxes with the loophole)
or buying gold in 2010 (probably saved about $980 million in taxes with the
loophole)[9]
You
can also see why my attorneys and accountant insisted that I set up a separate
entity that could take advantage of the tax loophole for carried
interest. My keep-my-life-simple approach made absolutely no sense in the
face of potential millions in tax savings year after year. And they knew
that.
Is carried interest deserving of
special treatment?
Is
there anything special about ‘carried interest’ that justifies the preferred
tax treatment?
Proponents
argue that because much of ‘carried interest’ stays invested inside of hedge
funds, still at a risk of loss, that additional risk justifies the 15%
preferred tax rate.
But
typically much of that ‘carried interest’ left in the market could be
liquidated and taken out by the hedge fund manager anytime.[10] (You know what else is risky? Having a job,
with a salary, that you could be fired from next week, but you have to pay a
much higher tax rate on that salary. That’s pretty risky too.)
Other
proponents of ‘carried interest’ argue that tax policy should incentivize the
accumulation of our economy’s scarce investment capital, basically the
Ed Conard argument for lower taxes on wealth and investments.
In
my opinion, that’s bunk. Capital is not that scarce for any truly
innovative segment of the economy. Most hedge funds and private equity
investments offer little value-added as innovative engines of the
economy. I know that’s my hypothesis, not a provable assertion, but I’ve
seen enough on the inside to know – these hedge funds are not the engines of
innovation you’re looking for.
At
the end of the day, the ‘carried interest’ money is treated better than salary
money because it’s been earned by a special class of people – hedge fund and
private equity fund managers – who are much more influential in the political
process than the average worker. Full stop.
All
of this is why I wrote last week that I would appreciate it if both sides of
the political aisle would just stop lying to us about
fiscal policy and loopholes and treat us like adults. I’m ready to be pleasantly surprised. But I’m
not going to turn blue holding my breath.
Read more: http://www.bankers-anonymous.com/blog/shhhhhh-please-dont-talk-about-my-tax-loophole/#ixzz2COfsvqid
*****
November 9, 2012
Comment on Model Portfolio activity
We
repurchased Alcoa, Deutsche Telekom, Ford, JCPenney and
Facebook in the Model and added to Walgreen, CSX, DuPont and Abercrombie to
bring equity exposure up to 50% in some larger accounts and more in smaller
ones.
The
election removes uncertainty and while the knee jerk reaction has been a lower
market the overall outlook is positive and so we are repurchasing issues sold
at lower prices and also adding a few new positions. The Fiscal Cliff is a
media creation. We watch Netflix rather than the news and feel much better.
*****
November 2, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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