hjmann.com Blog

Mark Cuban suggests that we should tax stock trades 10 cents per share. My reply below:

Mark,

This is not as well thought-out as most of your posts are. And it’s a lousy idea.

At a macro level, if you are so unconcerned about the amount taxes cost, then I am sure you will be publishing your 2007 tax return, wherein we will find that you have waived every deduction and simply paid the full amount of taxes.

We both know that won’t happen. You don’t manage your money this way, so why should you expect anyone else to?

When people speak of “limousine liberals” they are talking about people who behave exactly this way. Al Gore who screams about the environment and has a swimming pool that costs $2000 a month to heat; George Clooney who drives his Prius to the airport and then boards a private jet which then spews pollution and burns way more fuel; people like you who are so wealthy taxes would have very minimal impact prescribing tax increases for everyone.

At a micro level, 401k accounts are made up of mutual funds which are made up of stocks. I already pay 1% per year management fee for 401k account. Many people pay more. This will certainly drive up that cost at a time when almost no one can afford any further impact to their account.

And, when you are talking about a stock below $10, and this is where most small investors first look, this is more than a 1% tax… on top of the 15%-20% people already pay in cap gains.

A horrible idea. Sorry Mark.

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See here. The polls say Obama won the debate. Are you surprised? Well you shouldn’t be.

Can someone tell me the last time any poll indicated that a Republican Presidential Candidate won a debate? Reagan vs. Carter? And yet the Republican nominee has won 7 of the last 9 presidential elections.

In fact, other than that debate– highlighted with Reagan’s legendary “there you go again…,” a parry steeped with the perfect balance of pity and disdain– I cannot recall a single time in my lifetime that polls revealed that a Republican won a debate.

An ice cream to anyone who can tell me if it has ever happened any other time in the in the history of Presidential polling.

Disclosure: I am a neo-conservative who is fed up with McCain and never liked Obama to begin with.

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A new website helps to answer the question.

My answer: Over four years, I will pay $9500 more in taxes under Obama than I would if McCain were President. Let me know how you fare.

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See below… At this point this is just an overly-reported rumor. 

But unrelated to this story, Barron’s reported this morning that the pricing for Wachovia to insure certain credit instruments went up 350% literally overnight. I don’t understand the finer details of how these instruments work, but what is clear is this: What it costs Wachovia to acquire lendable capital far exceeds the profit they can make lending that capital out. 

This situation is the exact inverse of what a bank does to make money. When you hear about a bank “seizing up” this is what they’re talking about. 

Wachovia is going to need a find a way out soon, or their collapse is coming. 

Both articles here and here.

Disclosure: No positions.

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In one of my very first posts, I wrote about a woman who was sued by the Recording Industry Association of America (RIAA) for loading some songs onto Kazaa. A jury in Minnesota ordered her to pay $222,000 in damages.

At the conclusion of my post, I said the following:

“Oh yeah, and that ridiculous award amount? Won’t hold up in a million years. I don’t know what the hell these people were smoking, but how in God’s name can they divine that much damage by a lousy 24 songs sitting on Kazaa… with no actual proof anyone downloaded them or that any actual ”sharing” occurred?”  

Well forget a million, because it took less than one year for an appeals judge to overturn the verdict. Money quote: “Her status as a consumer who was not seeking to harm her competitors or make a profit does not excuse her behavior. But it does make the award of hundreds of thousands of dollars in damages unprecedented and oppressive.” 

His further conclusions mirror my thoughts as well. He concludes that just placing the files on a server that others access does not constitute ‘distribution,’ blowing one of the major contentions of the RIAA out of the water. Quoting again: “The Court’s examination of the use of the term ‘distribution’ in other provisions of the Copyright Act, as well as the evolution of liability for offers to sell in the analogous Patent Act, lead to the conclusion that the plain meaning of the term ‘distribution’ does not include making available and, instead, requires actual dissemination,”

Interesting. Now if the RIAA will do as I previously suggested and focus their time and effort putting out a better product and working on a decent price point, and less time chasing people around the block, we’d all be better off for it.

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Again, Mark Cuban writes, and asks a very important question:

“I dont know why anybody thinks that the Bankers who got us into this mess are going to take 700B of taxpayer money and  know how to loan us out of this mess. It makes no sense at all. We need to set standards for how the money will be used by banks”

My reply is below:

Hi Mark,

A few points to consider:

First, remember it was the Congress who mandated to Fannie and Freddie that a) their loans be 50% to minorities and the poor, and 2) that food stamps, unemployment and other transfer payments must be considered as income on the applications (NO, I AM NOT KIDDING. LOOK IT UP). So what makes you think they are smart enough to know exactly what to do to fix this? Have you met your Congressman? Like most of them are, he’s probably a moron just trying to hang onto the best job he’s ever had or ever gonna have. Not much incentive to drive real change, even if he was smart enough to do so, which he likely isn’t.

Second, while these clowns debate where and how to place the pump, the boat is taking on ever more water. Whatever they do, they better do it damn quick before the boat sinks and no amount of money will fix the problem.

Remember: the heart of this wasn’t lack of intelligence, but lack of due diligence. When these guys saw the AAA rating on these securities, they bought and sold them all over the world (foolishly as it turns out) expecting that the paper was in fact AAA. The rating agencies failed at due diligence. The banks who bought and sold these failed at due diligence. And the insurance companies who insured these (think: AIG) failed at due diligence.

Final point: It is more than possible… dare I say likely… that if managed correctly, the Feds could make alot of money on this deal. The government’s power is the length of their time horizon, and it probably would not take more than 8 or 10 years to work this completely out.

The problem the last time with the RTC? An S&L would fail and go into the Fed’s hands, and the same guys who handed the failed institution over to the feds–literally– would form another corporation, and buy back from the Fed the identical assets at pennies on the dollar. Disgusting.

Want to focus on something? Focus on who in the hell is going to manage these assets on behalf of the American people and do so in a way that gets us the maximum profit, even if it takes 10 years or more to work it all out.

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Forget the long-winded explanations. Here it is in a nutshell, as concisely explained as I have heard it, from one of the absolute smartest guys on Wall Street or any street. Original link here.

“Those loans were packaged into CDOs rated AAA, which led the investment-banking firms [buying them] to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting.

“When they started defaulting, out of bad luck or bad judgment, we implemented fair value accounting….You had wildly different marks for this kind of security, which led to massive write-offs by the commercial banking and investment-banking system.

“In the face of those losses…you needed to raise new equity…which came from sovereign-wealth funds in part, which then caused political resistance to sovereign-wealth funds, who predictably have withdrawn from putting money into the system….It seemed pretty obvious that would happen. We now find ourselves with a liquidity crisis where fundamentally the cost of money for financial intermediaries [such as investment banks] is significantly in excess of their cost of lending it. So several institutions found themselves in a structurally impossible position. We had a series of bankruptcies, whether Bear Stearns or Lehman, or forced sales like Merrill. Goldman reverted to a banking charter for a lower cost of funds, which today is still not low enough for the business.

“So that’s the story of how we got there.” 

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Mark Cuban, who writes his thoughts on BlogMaverick.com, is indeed one of the smart guys. 

In a recent post about the financial crisis, he writes: “And one last thing I have to mention. Does everyone realize how much bigger a disaster last week would have been had Social Security been privatized?”

I posted the following comment in response. In addition to my comment, a homework assignment for you: pick any day in Q1 2002 when the idea of investment of these funds into the market was first seriously being bandied about. Then, find and write down the value of the Dow on that day. Then, take the lowest intraday point value of the Dow last week (which would be the lowest in two years) and write it down. Tell me what the percentage return is. Then read below.

Mark,

Have to disagree on the issue of Social Security. Does it occur to any of you that the only organization out there with worse accounting practices than Lehman Brothers is the US Government?

The odds of the entire investment being wiped out are negligible, whereas instead the money has been placed into a “Trust Fund” that is and remains within arm’s reach of politicians who have “borrowed” and keep “borrowing” from it. The “borrowed” money is gone and is never coming back. At least in the market, the politicians would not be able to put their greedy hands on money in the Trust Fund.

I would go as far as to say this: if you went back five years and you put every dollar that came into the Trust Fund into the market as it entered the Trust Fund, and kept the government from “borrowing” or otherwise leveraging against it, even after the recent carnage there would still be more raw dollars left in the Trust Fund than what are actually in the trust fund today (today, it’s just a pile of IOUs that are worth about as much as Lehman bonds).

By the way, not to compound the bad news, but you know what? Don’t count on Social Security to provide anyone any kind of retirement. It won’t be there for any of us under 40.

Spreading the good cheer,

H.J.  

Let me add one more point

Do you know what drove the markets so high in the 1990s? The advent and eventual widespread acceptance of the 401K account. Money came into markets like crazy, and money was put to work. And no one who put money in a 401k in 1990 is regretting the decision today. 

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Michael Moore’s latest reeking pile is not in theaters, but on the net, and at price even the most strapped consumer can afford.

However, no word yet on how/if you will be compensated for the time you will never get back.

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After the single wildest week in the markets that I have ever seen… With the goverment bailouts to the rescue… With the SEC ban on shorting stocks… What happens now?

A couple of predictions:

AIG Gets A Private Bailout, Markets Don’t Know What To Think

Hank Greenberg and company will figure out a way to intervene and get there before the $85B federal bailout does. This will bode well for markets… maybe. While generally seen as positive news, it will also be seen as “there goes money that could have bailed out or bought someone else.” Ridiculous thinking in my opinion, but that’s the way it goes.

Markets Will Stabilize Mostly Because Of One Thing

Because the Feds said they would assure the cash value of money market assets to their dollar-for-dollar value. This is important because without it, there is a great chance for a run on banks. A run produces substantial deposit withdraws. Deposit withdraws must be covered by selling assets (admittedly mostly short term assets, but this selling would have a directly negative impact on stocks) which drives markets lower. This stabilization was the most critical piece.

The Short Selling Ban Is A Huge Mistake

An outright ban was just too much. Temporarily reinstate the uptick rule (but only temporarily) and police the naked short selling until it’s stopped. Stopping the naked shorts will stop the dramatic swings we saw in stocks like Morgan Stanley and Goldman Sachs and Zions.

Remember that shorts perform an important service in the market. First and foremost, they give all investors a way to make money regardless of the market’s direction. I would say that over my lifetime as an investor that 40% of my profits have come from short selling. My single most successful trade was a short sell (In very late 2004, shorting TZOO at $115 and covering in the $20s less than six months later). It takes a fusion of many elements to get a stock to go up, and the failure of only one element to make a stock go down.

Second, it was the shorts who have been saying for more than two years that this was coming. Jim Rodgers, the famous commodities trader, said two years ago that Fannie and Freddie were toast. At the time, Fannie was trading at more than $60 and people thought he was nuts. In May of 2006, Barron’s wrote a cover story on this mess. At the time, they pointed to more than $3 trillion in ARMs that were due to reset at drastically higher interest rates, and the chaos that would ensue.

The shorts warned us, not with rumor mongering or manipulation or sensationalism, but with cold hard data. Now because they profited we blame them. Stupid.

What Happens Now?

At the macro level, look for more of the same wildness in the coming weeks. After election day, look for a rally if McCain wins and no rally if Obama wins. Christmas will just plain suck for retailers, so those stocks are dead money or worse, unless you are WalMart or Costco. Over the next two weeks, the hedge fund dollars that were poured into shorts will now focus on commodities, so look for a big jump in oil in the immediate term. Same with coal and nat gas, but not to the same level as oil. Look for gold to run up like freakin’ crazy.

Two more things: First, the write downs are at about $400 billion. But there is likely more than $600 billion of additional illiquid assets that cannot be sold, so they will likely be written down… unless the government soaks them up, which is a possibility. So unless the government soaks up this slop, the worst is not nearly over. So don’t go loading up on bank stocks. Buy only the big drastic dips and sell into the inevitable surge that follows. Trade them, do not own them, until the picture is much more certain. 

Second, pray… I mean literally pray… that people who own homes and have the ability to pay don’t resolve their negative equity problem by throwing the keys back to the  bank and walking away. If people who have the ability to pay choose not to, it will be a disaster.

So how am I playing this?

Early Friday morning I sold alot of stuff into the strength (some shares of LVLT, BX and some GS that I picked up in the low $120s on Wed… what a ride that was), and I will continue to be situational. I will be looking hard at BTU, OIL, GLD. 

Two pieces of final, somewhat unrelated commentary

First, my last post on Wachovia got pounded, particularly the advice that you should buy if it dipped under $10. The post appeared on seekingalpha.com, for who I am an occasional contributor. You should see the lambasting I took. Some funny stuff.

Then, about three weeks after I made this suggestion, Jim Cramer said the same thing… that you couldn’t ignore Wachovia under $10.

Well guess what? If you bought it when it closed under $10 on Tuesday, you could have unloaded it for more than $18 before the week was over. Last I checked, that’s nearly a double in just a few days, and my most successful prediction to date. So to my detractors I simply ask: Who was right?

Second, I have been an account holder at TD Ameritrade for 12 years… first as Datek, then Ameritrade, then TD Ameritrade. When their systems failed on Friday, for the third time in a year I found myself unable to log into my account when I most needed it. The last time this happened was in January, and on that occasion, I talked to friends of mine who had Etrade accounts that were working just fine. Same with Friday… Etrade was fine while TD was failing. So yesterday, when I finally got in, I began unwinding what was my longest standing financial relationship by transferring out of my account all of my cash. The shares I am holding will come a little later.

When I spoke to the rep at TD this afternoon, I told him that for this to happen three times in a year, someone ought to be calling for not just the CIO’s head, but for the CEO’s head as well. This is their business. This is what they do. How can they allow a single failure, let alone three in a year?

I don’t know, but I can tell you that the next time they go down, I won’t be worried because my money will be somewhere else.

Disclosure: As of publication I am have no positions in the stocks mentioned here, but positions can change at any time. I am not a professional, but I am trying this at home. It is highly recommended that you consult a licensed financial advisor or broker before making any and all investment decisions.

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