Fiduciary Magazine

Archive for the ‘Debits & Credits’ Category

From Finalternatives.com:

Omega Advisors founder Leon Cooperman said he was “mortified” when he received a $19 million tax bill that he claims was the result of bad tax advice.

Cooperman, who seeded hedge fund Jana Partners in exchange for a share of its fee income, turned over that stake to his charity, the Leon and Toby Cooperman Family Foundation, in 2001 and 2006. Each time, he had the future income streams professionally appraised, the first half at $15 million and the second at $28 million.

The only problem, as Cooperman concedes, is that you’re not allowed to deduct non-publicly-traded securities donated to your own foundation. He likely would not know that—and would not be on the hook for almost $20 million—if he hadn’t had his first Jana appraisal redone in 2006, after the second appraisal found the other half of the stake to be worth nearly twice as much.

Armed with a new $20 million appraisal from RSM Business Services, Cooperman filed an amended tax return in 2005. In return, he got the tax bill—for $15 million in unpaid taxes and $4 million in fines.

While Cooperman is formally disputing the whole of the bill, his lawyer told Forbes he’s hoping that the penalties will be waived. Richard Levine notes that Cooperman relied on tax professionals and should not be penalized for their mistakes.

Whether Cooperman’s tax preparer, Gittelman & Co., or RSM will be penalized remains to be seen. The billionaire will wait until the tax case runs its course before considering his legal options against them.

As you read this you might conclude that I am a contrarian, but the fact is I am not, I am a confusitrarian. You will see how I came to coin this word. What better place to start then with the sage of sages, Warren Buffet. At a May 1, 2010 shareholders’ meeting Mr. Buffett told his shareholders that “U.S. is recovering. He also said he was worried about “significant inflation” in the United States and elsewhere and that the Greek debt crisis has the potential for “high drama.” He went on to say that a large share of Berkshire’s fortunes was tied to the euro through investments in European companies. You will note that Euro has not been doing too well recently.

Mr. Buffett went on to say that very low interest rates in the United States cannot continue indefinitely, a statement I totally agree with, which I’m sure will excite Mr. Buffett.

But I go on to ask what impact will increased interest rates have on the economy of the United States, and especially on the economy of Los Angeles and California? California is the alleged 10th largest economy in the world and I recall reading that Los Angeles County is the 18th largest economy in the world and certainly West Los Angeles makes up a great portion of that economic engine.

Mr. Buffett says if huge budget deficits and easy money causes problems, Congress rather than the Federal Reserve should get the blame. I go one step further, I don’t want either to get the blame, I want the problem eliminated. Our investments are all in jeopardy due to the financial programs being driven by the U.S. Government.

Every day I read financial news reports that report happy news and not so happy news, all of which leads to my confusion. Let me share some of these with you. Certainly May 6th was a day that left many investors scratching their head and many very angry, such as a certain commentator on TV who said his stop loss orders kicked in when the market dropped 1,000 points in a few minutes, he lost a small fortune and then the market kicked back up but he no longer owned those shares. He questioned the wisdom of investing in the stock market, but then where else can you go to hedge against inflation?

Sellers of Gold are having a field day but I recall that Gold value stayed flat for some 15 years (that is a guess from memory) in the $300 to $400 range. It may have been longer than 15 years, but the Gold is irrelevant other than the fact that everyone should have a portion of their accumulated wealth allocated to gold you can hold in your hands as insurance against a worldwide financial crisis and runaway inflation. I have always considered Gold to be an insurance policy and not an investment.

Looking at a May 6, 2010 WSJ Evening Wrap, I find the following news: U.S. Productivity Gains Slow at a more modest 3.6% rate as the recovery continued to take hold. Separately, the number of U.S. Workers filing new claims for jobless benefits fell slightly, but they didn’t give the number. When only 300,000+ new people file for jobless benefits that is considered progress and a good sign. To me that is a big number, annualized that is 3.6 million new workers looking for work. And what about those that have given up.

This leads us to a 9.9 % unemployment (do you sometimes think the numbers received a close shave to keep them from hitting 10 % ?). Then people in the know, say the number of unemployed is really closer to 17 % when you include those that have given up looking for a job and those that are underemployed. This leads me to one of my favorite expressions as uttered by others; we are going through a “JOBLESS RECOVERY.”

You must excuse my doubtful nature, but I don’t consider a “jobless recovery” a recovery at all. I consider it a disaster in the making as millions of American’s cannot find a job. This means they can’t make their rent or mortgage payments, they can’t make their car payments and they certainly can’t make their credit card minimum payment that shoots them into interest rates that remind me of the bandits that used to rob the stage coaches as they traveled from city to city in the west. What happens to the lenders on these people’s homes, their cars and their credit cards? Will we once again be asked to bail out the banks/investment banks/ insurance companies?

We recently made a job offer to an administrative assistant, they used to be called file clerks, who had been unemployed for about a year. He had worked for a CPA firm that he said had gone from 140 people to 40 people. On the subject I have talked to fellow CPAs that have all undergone significant layoffs of personnel. Fortunately that doesn’t apply to our firm who finds itself as busy as ever, though collections have slowed as clients deal with their own financial problems.

Coming back to the Evening Wrap, it states that Retailers hit speed bump as U.S. consumers pulled back in April. Target and Gap were among retailer posting sales declines. Yet this Sunday my wife and I visited Bloomingdale’s in Century City and the store appeared very busy and the women were all carrying Bloomingdale’s signature bag, the little brown bag, a great piece of creative marketing.

Let us now jump to an Editorial by Cliff Smith of the Beverly Hills Courier, if you don’t read him you should. While I’m recommending reading material, I must recommend one of the finest business newspapers in the United States, The Los Angeles Business Journal and its editor Charlie Crumpley. If you want to know what is going on in the business world in Los Angeles, the Business Journal is the only place to get that news and it has a great Editorial section in the back of the Newspaper.

On April 9th Mr. Smith offered a number of interesting tidbits of information. There are 36 million people living in California. The state’s adult workforce is approximately 18 million, which means 50% of the population are either students or senior citizens. Of the 18 million people more than 2 million are out of work. Of the 16 million who have jobs, about 1.9 million works for the government, including schools and colleges, that is one out of every eight workers. If you step back and look at these statistics, it paints an interesting picture regarding your investment portfolio.

Continuing with Mr. Smith’s musings, he reports that a Stanford University study reported $535 BILLION in unfunded public employee pension funds or five full years of 100% of state tax revenue. This does not include the LA County and City Retirement System. This must be considered in the allocation of your investment portfolio. These are not just numbers on paper; we are headed for the day when payouts will exceed the total cash available. Where do you think it will come from? What impact will that have on our general economy? What about your investment portfolio?

Mr. Smith goes on to say, and I have written similar words, Go look at Beverly Drive, Pico , Beverly Blvd., Rodeo Drive, North Robertson or South Robertson and see the empty store fronts. I would add Melrose and Montana Avenue. I know a number of retailers in Brentwood that are suffering from downturns in business unlike anything they have experienced in the last 30 years, so yes I wonder about all the talking heads talking about the fact that the U.S. has turned the corner and is on the road to recovery.

Going back to the WSJ Evening Wrap, they report the MGM Mirage Swings to Loss, amid write downs at the casino company’s City Center. Yet I’m told that Maestros in the City Center is booming as is their entire chain, including the Beverly Hills location which my wife and I love to go to, we love to listen to Gary Shearer make music and we dance between the tables. We also love the food. Lest you think all is doom and gloom there is plenty of good news. The WSJ reports that the sales of luxury goods are on the rebound as Hermes quarterly sales jumped 19% (note the reference to sales but not to profits?).

The Evening Wrap also informs us that NY plans to cut 11,000 of its 300,000 workers, including hundreds of firefighters and thousands of teachers. I wrote a piece for CityWatch.com an Internet Newspaper focused on the city of Los Angeles, and it was entitled “LA Fiscal Crisis could Kill You” and I was serious. If you should have a medical condition that requires you to call 911 you might find that your local fire station is out on a call and one of its engines are moth balled due to financial problems, so the call rolls to the next closest station, but they too are out on a call so it rolls to the next station where again an engine is moth balled due to financial problems so it rolls one more time and you get lucky and they respond. By the time they reach you, you may have suffered irreparable damage or you might be dead. So much for the local financial crisis’ that you haven’t given to much thought to. Did you keep that life insurance policy up to date or did you let it lapse due to tight financial restraints?

On May 7th it was announced that the U.S. economy added 290,000 jobs in April. No further details were given in the news release I received. A week later it was reported that U.S. retail sales rise 0.4 percent in April, lower than March surge but lifted by surprise gain in motor vehicle purchases.

The next day, May 15, the Bank of England Governor, Mervyn King announced that the United States is facing the same fiscal problems as Greece.
Going back a month, on April 13, David Weidners column in Market Watch stated “the good news is that the bailouts worked. The bad news is the bailouts worked.” I think he may be in my group, a confuisitrarian.

I still have a half a dozen documents I have gathered as resource material for this article but I have already written too much. I close with the fact that I consider myself a pessimistic optimist. I think America has untold numbers of brilliant business people and inventors and we will continue to lead the world in innovations. How we overcome the problems our governments face is truly beyond my comprehension.

For the benefit of my children and grandchildren I hope the optimistic side of me comes out the winner, but I am very concerned about the pessimistic side of me.

All of this has to be considered when you are accumulating wealth and investing it for the future.

We’ve got it bad in Los Angeles, but the US is 12th on the list. Italy is the worst, but then again, it is estimated that up to 40% of the “business” is done in cash.

By Andre Peschong

Looking at the fallout on Wall Street, there has been great change in the financial industry and, in turn, some unintended consequences. The hedge funds that once numbered over 7,000 (my unofficial estimate as I couldn’t find a substantiated number) are now pared down to around 3,000. Venture Capital has retreated to higher ground by doing larger deals and more 2nd, 3rd and 4th rounds into existing portfolio companies. Private equity houses have largely been untouched, but they are suffering from the lack of exits. Three of the largest investment banking firms have gone under or been absorbed by larger traditional banks.

What are the unintended consequences of this current market upheaval for the financial sector? The most glaring one follows the first law of thermodynamics (and I paraphrase) which portends that nothing is ever created or destroyed but merely shifts forms. The shift I am alluding to is the movement of talent and deals at these former large tier investment banking firms to new firms, or to more aggressive mid tier boutique investment banks or specialty M&A houses.

This shift takes time, which is probably a contributing reason for the lack of IPO’s, PIPE transactions or any other type of liquidity events for the private equity/VC market.

Need proof? According to Price Waterhouse Coopers (PWC) the VC activity for the first quarter is down to levels not seen since 1997. VC and private equity funds have to consider the types of deals and companies they are willing to invest in based primarily on the extended holding time. The only current exit for a privately backed company is through an M&A transaction and those deals will be done at increasingly smaller multiples as this is a buyers’ market. The events of the past 12 months have really made professional investors and funds alike re-examine their investment model, pricing and exit strategies. The unintended consequence of these events are a boon to M&A boutiques that concentrate on buyside representation or that have top tier clients looking for bolt on acquisitions.

The market needs time to readjust to the new landscape in the capital markets. Deals will be under much heavier scrutiny from all sides, the accountants, VC’s, private equity groups, valuation firms, investment banks etc. This shift in due diligence on transactions will be significant. There will be a natural growth of service providers bringing additional transparency to the “deal” business. A true and needed unintended consequence.

I interviewed Barry Ritholtz yesterday. Here is a link to the podast

Morningstar had an interesting article on managing risk. Problem with the author’s methodology is that it is way too subjective. People are emotional about money. You need to have a pre-determined “puke” point where you get out no matter what. You cannot make decisions about money on the spot. Remember: Price moves first, then the fundamentals follow. Unless you’re a CFA and do this for a living, take your small losses regularly and move on.

The Financial Accounting Standards Board, or FASB, earlier this month quietly amended FAS 140, effective at the end of the year, eliminating qualified special purpose entities, or QSPEs. If you thought mark-to-market accounting changes had an effect on the banks, hold onto your hats.

The special purpose vehicles allow banks to stash things like asset-backed securities and other unwanted assets, reducing the amount of reserves they need to hold. The QSPEs also are a great way to hide losses.

Citigroup (C Quote) had $822 billion in QSPE exposure last year, according to its annual report. That’s tops among the four largest banks.