bargainman

Here's another more recent one from Schwab's site: http://www.schwab.com/public/schwab/research_strategies/market_insight/investing_strategies/portfolio_planning/hedging_tax_traps_for_the_unwary.html Constructive sale rules The constructive sale rules arrived as part of the Taxpayer Relief Act of 1997. In a nutshell, certain offsetting transactions can require you to recognize the capital gain on your original position even though you haven't actually sold it. These rules severely limit the usefulness of an old standby, the "short-against-the-box" strategy. Importantly, a put option used by itself to hedge the risk on an existing position should not trigger a constructive sale as long as the exercise price is at or below the price of the existing position. And there are a number of other viable hedging and diversification strategies which, when properly structured, can help avoid constructive sale treatment.

It depends -- the rules of whether or not it is treated as a sale depend on a few factors, such as when the put is closed out, when you purchase additional puts or hedges on that stock after closing out the prior hedges, the strike price of the put (whether it protects any gain), etc... For individuals the date at which you close out your puts will at the very least become your new date of acquisition for long/short term capital gains considerations. For example, if you hold the stock for 20 years and then buy puts on it today, but close the puts out next week and then sell the stock the next day -- that makes the holding period short-term and you owe tax as a short-term capital gain. The tax people aren't stupid -- they understand that by purchasing a KO put to protect your KO gains you are avoiding just selling the stock. So they treat you as if you are doing just that. Indirect hedging will avoid the constructive sale rules. Prior to 1997 (when these rules went into place) you could just short the stock in perpetuity to lock in the gain on the offsetting long position without EVER paying tax! Combine that with naked short selling (no borrowing costs) and you are in tax nirvana. Hmmm.. are you sure about that? The rules I read on constructive sales have to do with a real 1 to 1 offsetting position.. see: http://www.irs.gov/pub/irs-pdf/p550.pdf On page 39 titled "Constructive Sales of Appreciated Financial Positions". It sounds like you have to do a short position or futures contract where both the loss potential *and* the gain potential is eliminated.. See here also: http://www.fool.com/school/taxes/1999/taxes990730.htm it's a bit old so not sure if it's out of date, but here is what they say: "Remember that the constructive sale rules were implemented to impact transactions that had the effect of eliminating substantially all of your risk of loss and opportunity for income and gain with respect to the appreciated financial position. That's the standard and it's very clear. Applying this reasoning, Congress intended that transactions only reducing risk of loss or only reducing opportunity for gain would not be covered under the constructive sale rules. Example: You hold an appreciated financial position in a stock. You then enter into a "put" with an exercise price equal to the current market price (an "at-the-money" option). Because such an option reduces only your risk of loss, and not your opportunity for gain, the above standard would not be met, and this would not be considered a constructive sale. Again, remember that the transactions the constructive sale rules affect are those that reduce both risk of loss and opportunity for gain. So, if you hedge only one end of the transaction, the constructive sale rules wouldn't apply."

A few questions: "Sears closed a combined 34 Kmart and Sears stores in 2010 and added 122 specialty stores." what specialty stores, does anyone know? With regards to buybacks and the new CEO: "D'Ambrosio's resume includes serving most recently as CEO at Avaya Inc., a telephone and software technology company, where he was instrumental in taking the company private in a $8.2 billion deal with two private equity firms in 2007." "He noted D'Ambrosio's technology background would be a strength as Sears builds a business that's more focused online. He also highlighted that Avaya's going private helped deliver "attractive returns to its shareholders," raising speculation that Lampert may be thinking about such a move for Sears." buying back to take it private?

It's funny how boiler plate all of this is.. special committee, strategic alternatives, careful examination.. It's all vague and lawyerspeak.

Here's an interesting article on the middle class vs the upper class. Guess which one has done better in the last umpteen years.. http://money.cnn.com/2011/02/16/news/economy/middle_class/index.htm The article talks a bit about unions too: But union membership has declined rapidly over the past 30 years. In 1983, union workers made up about 20% of the workforce. In 2010, they represented less than 12%. "The erosion of collective bargaining is a key factor to explain why low-wage workers and middle income workers have seen their wages not stay up with inflation," Rodgers said. Without collective bargaining pushing up wages, especially for blue-collar work -- average incomes have stagnated.

Here's the transcript in case you don't have an hour+ to listen to it: http://cooper.house.gov/images/stories/here.pdf

While the rolling stone is not my first source of news this article is pretty brutal. Sounds like the sec is basically powerless... by choice... http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216

Well with equity fund flows taking the cake of course the stock market is going up: http://news.morningstar.com/articlenet/article.aspx?id=370495 Does anyone know where to get this source data? I would love to be able to see where the money is moving, although it's probably a lagging indicator since by the time you see the money move it's already moved the market... Or maybe not...

I'm surprised there isn't more commentary about this on this board. Yeah I think Joe's board response is amusing, ie ridiculous. It's amazing how boards under pressure by an activist always sound so shocked and incensed (Bruce isn't really an activist either!). The amazing thing is that they are pretending to be on the side of the shareholders which is hilarious because.. Bruce *is* the shareholder!! I mean he owns 30% of the company! The comment about 'controlling' the company is just ludicrous. He owns 30% of the shares, he should have a major say as it is. Also their poison pill doesn't make sense in that it doesn't protect them at all. I'm pretty sure that Bruce wouldn't buy more shares, he doesn't have to! He just needs to call up TRowe and the other couple mutual funds and he'll win. Amazing.. when push comes to shove what management will do and say. I'm not sure what Bruce has wrt operational changes, but my first bet is 'stop the bleeding'.. I mean they lost almost 100 million last year and their CEO makes 1.5 million? I would guess he asked everyone there to take a salary cut and they didn't want to.

Um.. "The supermarket tabloid National Enquirer claims to be publishing photos of Jobs taken Feb. 8 that show the Apple founder looking incredibly thin and frail." I'm not sure I'd be listening to the enquirer..

This is mildly amusing.. http://biz.yahoo.com/bw/110216/20110216006657.html?.v=1 “St. Joe adamantly opposes Fairholme’s efforts to obtain control of the Company without paying a control premium to all other shareholders. If Fairholme and its President, Bruce Berkowitz, want to take control of St. Joe, they should make an offer to all shareholders to buy it. Since the Fairholme representatives on the St. Joe Board voted to approve the decision to explore financial and strategic alternatives, we believe that Fairholme should support that process by participating in it, rather than seeking to obtain control of the Company through a costly and disruptive proxy contest. To date, Fairholme has not submitted for consideration any alternative business plan to enhance value for all St. Joe shareholders. If Fairholme and Mr. Berkowitz have an alternative business plan or strategic initiative that they believe to be in the best interests of all of St. Joe shareholders, they should propose it for consideration as part of the Company’s process for reviewing all strategic alternatives.”

http://tech.slashdot.org/story/11/01/19/1814237/Mail-Service-Costs-Netflix-20x-More-Than-Streaming?from=rss I always hear about the argument that content is going to cost more, but rarely do people bring up the fact that their postage costs are going down.

I agree that he seemed a bit evasive, but IMO part of it is that he's a director of the company now so I'm pretty sure he has to watch what he says legally speaking. I doubt he's going to do a tit for tat in pubic. If he wanted to do that he would have done it at the value investor's conference.

In a related topic, Jack Lalanne passed away just a few days ago at the age of 96!. The guy was the godfather of fitness. He had pretty simple advice for eating: If a man made it, don't eat it! if it tastes good spit out out! He worked out 2 hours every day at the age of 96! Invented a number of the machines in gyms, and did crazy stunts like: "To mark his 70th birthday, LaLanne towed a flotilla of 70 rowboats during a mile-long swim from Long Beach Harbor to the Queensway Bridge, both in Long Beach, Calif. The swim took around 2-1/2 hours, and several of the boats held passengers." Here are some videos http://www.youtube.com/watch?v=9EdRdoEsBPo RIP Jack!

Eric50 is another distinguished prophet, Junto. Normative reasoning or prophecy is not enough. You need to have a plan if you're wrong. Otherwise, you get stuck in the T-bone / Stove watsa_is_a_randian_hero confirmation bias whirlpool where no one can reach you, even if they read you aloud quarterly reports in an effort to bring you back to reality ;D Harry, I really don't know why you keep pounding on this, or at least on watsa. He clearly delineated earlier in the thread what his risk control mechanism was. Very small short position vs portfolio size, followed by a closing of the short and conversion into a bearish vertical put spread when it moved against him. (ie *closed out his unlimited risk*). That hardly seems out of whack or 'refusing to adopt risk control'. I really like the ideas you bring to the board but I think you overdo these kinds of posts sometimes. Plus the fact that you aren't willing to share your proprietary risk control methods, while you pound on others' who have shared what they do for risk control seems asymmetric.

Speaking of hard drive companies, here's an interesting article on innovation and what ends up driving companies out of business by missing the next wave of innovation... http://www.businessweek.com/chapter/christensen.htm

Where do you see this information? I don't see Tisch's name under yahoo, is it held under another name? On the other hand I don't see Eddie Lampert's name under yahoo either.. weird... http://finance.yahoo.com/q/mh?s=SHLD+Major+Holders

The Fairholme Allocation Fund (NASDAQ: FAAFX) started on January 3, 2011. Interesting.. expense ratio is lower than fairx! The annual fund operating expense is 0.75%

plus with the extension of lower income tax into the next 2 years it'll be a no brainer to pay the taxes in 2011/12 instead of in 2010.

The problem of course is, you don't know if they will earn it until after the fact. With Buffett's structure he didn't get it unless he earned it, since he got 0 unless he hit a hurdle. With a 2/20, especially the 2 part, it means they get it whether they earn it or not, and that's unknowable until later. I'm not saying Sprott isn't likely to earn it given their past, but it's still pretty high. Studies have been done on mutual funds showing that performance has an inverse correlation with fees in the long run, ie the lower the fees the higher the likely performance, Vanguard harps on this constantly. Anyway I think I'll spend some more time investigating them. Sprott Resource definitely looks like a very interesting set up focused on commodities which should be a good inflation hedge and good counter part to any equity focused portfolio. Gold, farmland, uranium, what's not to like? Swizzled wrote a piece on them a while ago too. Thanks

Woops sorry, missed the part about you looking at fedreserve already. Here's an interesting article on the top 1%: http://sociology.ucsc.edu/whorulesamerica/power/wealth.html Figure 1 is interesting wrt the top 1% Also here are a few graphs. http://www.businessinsider.com/15-charts-about-wealth-and-inequality-in-america-2010-4#the-gap-between-the-top-1-and-everyone-else-hasnt-been-this-bad-since-the-roaring-twenties-1 Tough to find what the actual $ cut off is though.. Lots of percentages talk... Would like to hear if you found out anything interesting... This pdf has some information on $ http://www.levyinstitute.org/pubs/wp_589.pdf see page 46. table 4 Looks like 2007 top 1% mean is 18.5 million, top 4% is 3.6 million net worth. Bargainman

As far as hedge or private equity funds go, their fees appear normal. I thought the problem with Biglari was that he changed the rules midstream - not sure how your comparison is valid. Care to clarify? As to hedge fund type fees, I do not quite get why there is such appears to be such dislike/disgust (it's just my impression; I might be mistaken) on this board for such performance-linked fee structures. WEB used it before and many managers that are spoken of highly here (Klarman, Chou, McElvaine, etc) charge performance fees. As long as they provide fair value in return, what is the problem? If I could go back in time and invest $100K with George Soros when he launched the Quantum Fund, why wouldn't I? Well Buffet didn't charge a 2% fee on net assets. He charged 0 below a certain hurdle rate, same as Pabrai and Sanjeev. Then he only charged 25% (I think) if he beat that hurdle rate. I actually have less of a problem with the incentive fee than I do with the 2%/year on nav fee. I mean that's a 2%/year headwind, regardless of yearly performance, and I'm not sure that's something that can easily be overcome by holding commodities like gold etc. Do you think it's a headwind that's reasonable enough? Especially for commodities? Personally I had less of an issue with Biglari than others on this board, but I never thought of him as the second coming of Buffett, I always figured he was out to get rich any way he could, and the incentive program while generous, doesn't make me feel cheated. The fact that he doesn't get an incentive regardless of performance (other than base salary) is the thing that made me say that Sprott's arrangement is worse. Ie.. BH book value grows by 0%, Biglari gets no payout. Sprott resource nav grows by 0%, Sprott gets 2% of assets, shrinking investable assets... Say for whatever reason NAV goes down, they still get 2% of nav.. I guess Biglari's incentive program in a corporate structure still resembles the Buffett Partnership, while the Sprott resource one resembles the new 2/20 hedge fund structure even though it's a company not a hedge fund. Oh, and the "he changed the rules midstream" thing doesn't bug me either since he originally said one thing when he was taking over the company, and then things changed, he rolled Western and his hedge fund into the company which was an entirely different situation. Anyway I don't want to get into a big long BH discussion, but I just want to point out that 2/20 on a public company structure with commodities strikes me as high... higher than BH But maybe I'm missing something?

Here's another few interesting articles: This one picks out some information from the reserve http://www.bargaineering.com/articles/average-net-worth-of-an-american-family.html article about the gap between rich and poor getting wider http://money.cnn.com/2010/12/23/pf/rich_wealth_gap/index.htm?source=cnn_bin&hpt=Sbin PDF version of Fed reserve information, I think it's the same as the other link but not 100% sure: http://www.federalreserve.gov/pubs/bulletin/2009/pdf/scf09.pdf Here is some of the info highlighted in the first article: Across all groups, the 2007 median net worth was $120,300 and the mean was $556,300 (guys like Bill Gates and Warren Buffett really mess things up). Here are a few of the more interesting ones (2007 median data, 2007 dollars): Current work status of head: Working for someone else: $350,100 Self-employed: $1,961,300 Retired: $543,100 Other not working: $124,100 Race or ethnicity of respondent: White non-Hispanic: $692,200 Nonwhite or Hispanic: $228,500 Housing status: Owner: $778,200 Renter or other: $70,600

Yeah good idea, how about I include that link ;-) http://www.federalreserve.gov/pubs/bulletin/2009/articles/scf/default.htm#t4

The only think that I don't like about Sprott Resource is their hedge fund fee arrangement with Sprott Asset management.. It's sounds worse than Biglari's.. "In consideration for providing these services, the Company agreed to pay SCL an annual services fee equal to 2% of the net asset value (as defined in the MSA) of the Company calculated and payable at the end of each calendar quarter based on the average quarter-end net asset value of the Company and an annual incentive fee equal to 20% of: (a) the pre-tax profits of the Company for the year minus (b) the average month-end net asset value of the Company for the year multiplied by the percentage return of the Canadian 30-Year Generic Bond Index. On December 1, 2007, SCL assigned the MSA to SCLP, the successor to SCL, as part of an internal reorganization involving SAM and its subsidiaries. No amount has been included in the above commitments schedule for fees payable under this agreement."