Friday, June 22, 2007

Hedge Fund Taxation

The taxes are coming! The taxes are coming! Are Fortress (NYSE:FIG) and Blackstone (NYSE:BX) really worried? Will they change their modus operandi? What about the other funds? Will they abort their plans to go public?

The tax code is enormously complex. Most executives and investors do not truly understand the document in its entirety. The public debate is a populist reaction to profits which run in the hundreds of millions while workers and suppliers are restructured out of their livelihoods. What did you expect would happen in a democracy as the presidential election cycle starts to kick into high gear? However, no one will win the presidency because he or she will or will not increase hedge fund taxes.

Most analysts do not understand the tax issue. They normally rely on management to select an effective tax rate and everyone stays with it.

The current tone of the tax debate assumes that huge profits will continue. The left wing is appalled that the fair share is not collected. The right wing is appalled that productivity is being penalized. All arguments are so predictable.

Consider this. Will hedge funds and associated vehicles continue to make tons of money? Many expect the bubble to burst. When bubbles burst the financial consequences are ugly. Hedge funds will find tax relief to be a valuable business tool as they will need to engage in financial engineering and restructure their problems.

Nothing stays the same for very long. Huge profits and guaranteed home runs just because you show up at the office will not continue for ever.

I would be long tax practitioners. Career prospects look very good. Second choice, hedge fund restructuring experts, also looks like a good career choice.

Thursday, June 21, 2007

H&R Block Lost Money

H&R Block (NYSE:HRB) lost a lot of shareholder money. Losses of approximately $85.5 million have been reported as a result of losses in the sub-prime mortgage market. The company is attempting to spin the results focusing only on continuing operations. they need you to forget about mortgage problems.

A large sale of Option One is pending to Cerberus. So the problem will be amputated away. The cost will be determined in the last moment. Therefore we may expect more bad news when the deal is to close. Cerberus does not have a mandate to overpay and by now everyone knows the sub-prime market is damaged goods.

H&R is having reasonably good news in its area's of core expertise. Preparing taxes.

The problem with sub-prime is that as the market continues to fall apart the purchase price will worsen. There will probably be post closing conditions. Remember what happened to General Motors. GM was stung with approximately one billion dollars of post closing charges because of its involvement in sub-prime. Hey was Cerberus the purchaser of GM's finance unit.

As I mentioned in my post of June 7, 2007 management knows that bad news is coming and they have set up the dividend to pay Oct 1 to record holders of Sep 10. This is approximately the same time frame as the anticipated Cerberus closing.

Wednesday, June 20, 2007

Home Depot Cure Worse Than Disease

Home Depot (NYSE:HD) announced the sale of their wholesale division to who else but a consortium of private equity firms. The wholesale division has been a disappointment and has Nardelli's finger prints all over. Therefore the news was not unexpected. No one was really counting on wholesale for anything (Bob what were you thinking with your GE and Six Sigma background)

Management has also announced a monster share buyback to the point where they have to borrow substantial funds on top of anticipated proceeds from the wholesale disposition.

Credit raters S&P and Moody's Investor Services have announced plans to reduce Home Depot's credit rating. Just what the lenders want to hear as they consider the credit application.

The question now becomes what does Home Depot look like going forward. We are going to rip out wholesale and then borrow a lot of money and then cancel a lot of shares. timing timing timing. Very hard to make a reasonable call that will have some time line consistency.

By the way, the housing market is still problematic. Sub prime mortgage loan problems will probably become a bigger problem than we realize. These external factors will be more important to Home Depot than where they are in their share buy back. One may fear that Home Depot burns cash trying to move the stock short term and then not be ready when the building cycle becomes favourable.

Tuesday, June 19, 2007

Yahoo Repositions Semel.

Yahoo (Nasdaq:YHOO) finally shook off Semel. One is reminded of the Marley inspired tune that goes "I shot the sheriff but I did not shoot no deputy" Yes after six years Semel was not successful. Yahoo avoided a Nardelli style whirlwind by keeping Semel around to avoid triggering another obscene compensation package controversy.

Jerry Yang co-founder takes over the CEO duties and Susan Decker advances another step upwards. But its all Semel's fault. The board who let him operate for six years did nothing until shareholder activists and investors at large started to heap scorn and contempt on Semel for getting whooped by Google.

Be yee afraid as the Semel excuse no longer exists. Yahoo may pull out of its death spiral and become respectable. Google (NASDAQ:GOOG) has become strong because it played against a weak competitor. That probably will change now and Google may have to become more of a street fighter.

There is too much controversy about potential deals for Yahoo. One speculation more interesting than the last rumor. The true test of Yahoo's future prospects will be employee loyalty. Yahoo has been bleeding talent. If this wound heals and morale is restored than we have something. Watch for a short term patch with increased stock options and other goodies for the troops.

Any merger deal will have to keep the Yahoo troops financially motivated.

Monday, June 18, 2007

Dow Jones Newsroom Integrity

Rupert Murdoch (NYSE:NWS)does some serious backroom negotiating with the Bancrofts (NYSE:DJ). We are led to believe that editorial integrity is the key issue. In the last 24 hours reports of a competing offer from General Electric (NYSE:GE) and Pearson PLC which may include the Bancrofts have been been grabbing public attention.

These breathless headlines lead us to believe its because the Bancrofts get to stay in the game in some way. (Is this really important to anyone other than the Bancrofts. They will not be able to keep up with additional capital requirements anyway.)

For most of the Bancrofts the investment is just that an investment. They are not truly involved in the day to day operations and do not wish to be. (Either from an editorial or business point of view.)

Continued involvement under both scenarios may provide a major disappointment to the Bancrofts. The Bancrofts are not culturally attuned to operating within the structure of partnership with savvy strong willed and well capitalized partners. Bancrofts and Six Sigma do not intersect as concepts.

Other media outlets continue to throw stones at the Murdoch newsroom integrity issue. Yes Murdoch may have some editorial agendas.

Consider this. The finance/investment world is an information seeking culture. If you lose money or are duped into a position because of less than adequate reporting or analysis the investor will remember. The consequences will be decreasing relevance as readership and subscriptions decline. The decline will correlate with increasing scorn. In a few cases vicious lawsuits and SEC investigations will be spawned.

Its not about the occasional op-ed piece or political bias on the editorial page. Readers and subscribers are looking for business and investment information. Too much disappointment provides the opportunity for the strategic alternatives. Brands can easily tumble. So Bancrofts and Murdochs and all others watch what you think you are wishing for. Your product is judged publicly minute by minute.