Trading Tax Stiffs the Little Guy

By Eric Jackson, Senior Contributor

11/27/09 - 11:15 AM EST

Jim Cramer came out earlier this week with the view that he could live with a trading tax that imposed a 0.25% surcharge on any trade made in America. The main reason he cited for being willing to go along with the tax was that he thought it would help the government create jobs.

He said,

"If we do not create jobs in this country we will fall horribly behind all others in the world. I think we will be doomed to permanently low growth, if no growth at all. I believe that it is incumbent upon everyone to sacrifice at this time."

Cramer also said that if sacrifice is needed, people trading stocks can afford to pay such a tax.

While I support Cramer's interest in seeing job creation flourish in America, I completely disagree that the "trader tax" will accomplish this aim. To the contrary, I think allowing such a tax to take root here would accomplish just the opposite. In my view, such a tax would encourage large amounts of capital to relocate outside of America, jobs would be lost (not gained) and total government tax revenue would likely go down.

For a preview of what could happen in the U.S. if this trader tax was imposed, look at Britain. At the moment, the U.K. is in even worse fiscal shape than the United States. Because of that, its Labour government recently introduced additional taxes that specifically target hedge funds' trading profits. Government bureaucrats assumed this was an easy way of generating tax revenue. What they failed to appreciate is that capital has never been more fungible than in today's global market.

London-based hedge funds immediately announced they were relocating to Switzerland in droves, where they would face none of the new taxes levied in the U.K. With those funds go certain administrative and back-office jobs. But more important, ask London bankers how they feel about losing the many profitable revenue streams attributable to doing business with hedge funds that will now be sent to Swiss banks.

The U.K. banks also will likely lose jobs tied to serving those hedge funds. And the U.K. government, in one fell swoop, just lost a host of capital gains, personal income and payroll taxes. Congratulations. An article in a London hedge fund industry newsletter from earlier this week had the headline: "Will the last hedge fund manager leaving to leave London please turn out the lights?"

Should the U.S. impose a trader tax, we'll see a similar exodus of U.S.-based investment firms and hedge funds to locales that don't require such a tax. And, believe me, many jurisdictions will be competing for the tax revenue those firms bring with them.

But this trader tax also will weigh heavily on smaller traders, as well as the big hedge funds. It's not fair that this tax will stick it to the little guy while the big banks got to run themselves like badly managed hedge funds, taking in mom-and-pop deposits and then leveraging up those assets 32-to-1 so they could trade and then lose billions of dollars on bad bets. If these big banks had actually been hedge funds, or smaller traders trading their personal accounts, they'd be gone right now. They wouldn't have been shown any sympathy. They'd be toast. Instead, they get bailed out, made whole, lent money at zero interest indefinitely, and now they get to report record profits for the year. Their taxes aren't raised, but small-time traders have to pay for their mistakes? Come on. The fairness of that escapes me.

Can you imagine if someone like Rupert Murdoch, chairman of News Corp.(NWS Quote), had been running the Federal Reserve or acting as Treasury secretary when the financial meltdown occurred last year? When the banks came running for a bailout, Murdoch (or any business executive) overseeing the taxpayers' money would have said, "Sure, we can arrange for a loan, but I want equity and warrants, I want control over management, and before you guys pay any bonuses to yourselves for the next 10 years, you're going to pay out a special dividend to me first. If you don't like my offer, try to find another U.S. federal government to help you."

I saw a story the other day that FDIC chief Sheila Bair was urging banks to start lending to create jobs. Urging. I thought of Murdoch again. Do you think if he had control of any bank he would "urge" management to take certain actions? No, he'd tell them what he wanted. And at the moment, he'd be telling the banks to lend money instead of stockpiling cash.

Finally, as much as I want to see job creation (as Cramer does), I don't see how paying any more taxes to the government is going to directly lead to creating more jobs. Look at the track record so far. After Congress approved $800 billion in stimulus last year, only 24% of that amount has been spent to date. We have no new jobs -- just slowing job losses. The administration keeps telling us about jobs saved. I can't recall ever hearing that statistic quoted before this year. Wouldn't it be quicker and more immediate if the Fed told the banks -- which they control -- to start lending out money to small businesses again, instead of stockpiling cash and cutting their credit lines?

There is a problem looming on the horizon for the U.S. and all Western countries. Debt as a percentage of gross domestic product is on the rise, big time. The current spending trends, combined with expected lower tax revenue, cannot continue indefinitely. The time to pay the piper will come. As a society, we are going to need to sacrifice in the years ahead. This sacrifice will come through lower benefits due to lower government spending on programs, or it will come from higher taxes.

Personally, I'd rather see less government spending, which would allow taxes to stay lower to spur business investment. This will require politically unpopular decisions, however, and it's not clear that short-term-thinking politicians will have the stomach for that.

If higher taxes are needed, we should all pay up -- not just traders. But the banks who got us in this mess -- and who are still on the government dole while paying themselves record bonuses -- should pay more.

At the time of publication, Jackson had no positions in any stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Reuters: Do social networks like Twitter belong in media?

Fri Jul 10, 2009 3:34pm EDT

By Alexei Oreskovic - Analysis

SUN VALLEY, Idaho (Reuters) - If there's one group of executives at this week's Sun Valley media and technology conference who ought to be in good spirits, it's the handful steering the fleet of Internet social networks.

The buttresses of old media institutions, from print to television, are under stress from the advertising downturn, but social media is thriving as the world flocks to the likes of Facebook, Twitter and LinkedIn.

But the glow of social media is tempered by the hazy business models underlying the Internet's latest trend. The world is talking about Twitter, but as far as anyone knows, the San Francisco-based microblogging site has yet to earn a dime.

So even as Twitter's Evan Williams and Facebook's Mark Zuckerberg were seen conversing with CEOs from Google Inc to DreamWorks Animation SKG Inc and Amazon.com Inc to Dell Inc, there were no signs these talks would soon lead to the deals that have made the Allen & Co conference famous.

Indeed, Rupert Murdoch said Twitter would be a tough investment to justify for News Corp because it has not yet come up with a sustainable way to make money.

"Be careful of investing here," Murdoch told reporters.

Sony Corp Chief Executive Howard Stringer was similarly blunt.

"A lot of people are doing very well making very little money," he said, when asked about opportunities in social media. "That's not a club I'm willing to join."

Early combinations between old and new media, such as News Corp's acquisition of MySpace for $580 million in 2005, offer reasons for caution.

Once the top dog in social media, MySpace's popularity has been overtaken by Facebook. And when MySpace's $900 million advertising deal with Google comes to an end in July 2010, it's not clear what the future holds for the site.

Google CEO Eric Schmidt was coy when asked if he would renew the three-year deal with MySpace at $900 million.

"Never say never," he told reporters, but then talked about changes in the marketplace that could affect the terms of any deal. "We have more tricks up our sleeve now."

PAID VS FREE

Sales of traditional media staples such as newspapers and DVDs are in a multiyear and seemingly inexorable decline. By contrast, Facebook's active users doubled in eight months to top 200 million in April and U.S. visitors to Twitter surged 83 percent that month over March, according to comScore.

Social media and user-generated content have achieved a level of legitimacy in recent months as people turned to Twitter and Google's YouTube for up-to-the-minute information about major news events such as Iran's post-election protests.

"Everybody is talking about Twitter," Liberty Media Corp Chairman John Malone said. "It's got wonderful promotional juice because so many celebrities are talking about it and using it."

But he added: "It's pretty hard to think of an advertiser base for Twitter, but maybe some creative person will come up with it."

Much of the talk at Sun Valley revolved around whether social media should be free for consumers and supported by advertising, or if a fee-based business model was better.

What is also unclear is whether social networks belong under the roof of Internet companies or traditional media.

Internet entrepreneur Marc Andreessen and others have criticized MySpace under News Corp for focusing too much on selling ads and not enough on innovation.

"The issue is how do you continue to run Internet companies as Internet companies and making sure you keep that DNA," said LinkedIn founder Reid Hoffman at Sun Valley.

While News Corp's acquisition of MySpace may not be a home run, Google's $1.6 billion purchase of YouTube shows tech companies have not fared much better -- most analysts believe YouTube operates as an unprofitable unit within Google.

Still, Ironfire Capital's Eric Jackson, a former shareholder of Yahoo Inc, thinks social networks fit better with Web services offered by the likes of Google or Yahoo, than within declining traditional media businesses.

"There are questions around the revenue-generating horsepower behind some of these social networking sites," he said. "And just kind of bolting on a Twitter to a Viacom or a Time Warner, that's not going to do it."

(Additional reporting by Robert MacMillan and Yinka Adegoke, editing by Tiffany Wu and Andre Grenon)

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Big Media: Big Yawn

The advertising market continues to be severely weak. Yet, the fact that we're not in freefall has caused some of the most beaten down and debt-laden companies to be bid up in the last 6 weeks.

Names such as Harley Davidson (HOG), Royal Carribbean (RCL), Cemex (CX) and Lamar Advertising (LAMR) are all up big since March 6th (65 - 167% vs. 25% for the S&P).

Comparatively speaking, Big Media's returns over that time period look more modest. Yes, CBS is up 70% since early March, but it's still trading at less than $6, giving it -- to put it in perspective -- only a little more than double the market cap of what it agreed to buy CNET for last year.

News Corp (NWS) and Viacom (VIA) are up 35% since early March but lag the S&P over the last 6 months. Disney's (DIS) return since March 6th is 2 points less than the S&P's. And Time Warner (TWX) stock price (not including the dividend from the spin-off of Time Warner Cable (TWC)) is only up +2% since the great Bull Run began 6 weeks ago. Memo to Jeff Bewkes: where did my rally go?

The truth is that, although Big Media has been pummeled since this bear market began, it was never really priced for extinction (except maybe CBS, which is why it has bounced back as much as it has) like some of the other consumer discretionary plays. This "rise from the dead" rally hasn't let them participate.

Big Media is left priced for a severe long-term painful future, which is probably accurate.
Therefore, it's a space I'm avoiding.

Position: None.

Originally published in RealMoney.com on 4/28/2009 11:30 AM EDT

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Van Natta a Good Hire for News Corp's MySpace

The two co-founders of MySpace, Chris DeWolfe and Tom Anderson, have stepped aside or been pushed out by News Corp's (NWS) Rupert Murdoch and new digital boss Jonathan Miller.

Kara Swisher is reporting that former Facebook No. 2 Owen Van Natta will get the top job.
It's a good move for NWS. After buying MySpace for $500 million, and hearing cat-calls from critics, Murdoch's purchase was soon viewed as one of the biggest steals of the decade, given the social networking site's early explosive growth. Soon, MySpace signed a $900 million advertising deal with Google (GOOG), which essentially paid NWS back for the entire purchase and then some.

Yet, the GOOG deal is coming to a close, and there's little chance of renewal at similar terms. MySpace, despite huge traffic, has stalled in terms of its growth relative to Facebook and Twitter. It's no longer the shiny new toy it once was.


Van Natta is a well-respected exec who has worked closely with Jeff Bezos (his former boss) and Steve Ballmer (with whom he worked on partnership deals when he was the No. 2 at Facebook). On paper, he's the right guy with the right experience to lead MySpace now (and hopefully stick it to his former boss, Mark Zuckerberg).

MySpace may be a laggard in the social networking space, but its size and user base could still be turned around to the benefit of the NWS mothership again.

Originally published in RealMoney.com on 4/23/2009 7:53 AM EDT

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TheStreet.com: Activist Investor: Liberty Global's Spinning Wrong Way

From TheStreet.com
By Eric Jackson
10/28/08 - 11:17 AM EDT

About 10 days ago, Liberty Media (LINTA Quote - Cramer on LINTA - Stock Picks) Chairman John Malone sold $18 million worth of stock in Liberty Global (LBTYA Quote - Cramer on LBTYA - Stock Picks), a video and broadband service provider catering to Japan, Europe and Chile. Although Liberty Global's stock price is down 55% in the last month, you should follow his lead and get out now ahead of earnings, which will be announced in early November.

Malone's multiple Liberty-related entities (e.g., Liberty Communications, Liberty Global, Discovery Communications (DISCA Quote - Cramer on DISCA - Stock Picks)) have one thing in common: a love for opaque corporate structures with multiple classes of voting shares. In early 2007, before the words "CDS" and "subprime" had entered our collective lexicon, such complexity mattered little compared with high-growth businesses fueled by acquisitions. Liberty Global complied with this preference and its shares peaked at $44 in July 2007. However, there's been a slow descent since then until this month when the stock has fallen off a cliff. They traded yesterday under $13.

Malone's large stock sales this month are not unique for corporate chiefs these days. Sumner Redstone of Viacom (VIA Quote - Cramer on VIA - Stock Picks) and CBS (CBS Quote - Cramer on CBS - Stock Picks) and Aubrey McClendon of Chesapeake (CHK Quote - Cramer on CHK - Stock Picks) both had to unload large amounts of shares in the face of margin calls a few weeks ago. Malone gave no explanation for his sale, although he presumably faced similar pressures, considering that Liberty Global had spent $1.621 billion repurchasing its shares in the first six months of this year at weighted prices between $34.37 and $35.55.

That cash spent on share repurchases at triple the current market price could come back to harm Liberty Global in the coming quarters, as it only had $1.2 billion in cash at the end of June and just under $20 billion in debt.

Liberty Global is essentially a Comcast (CMCSA Quote - Cramer on CMCSA - Stock Picks)for non-U.S. markets. It delivers video and Internet via broadband instead of traditional cable. It derives no revenue from subscribers in the U.S.; its customers are principally in Japan, Western and Eastern Europe, Chile and Australia. In the first half of 2008, when the notion of emerging markets being decoupled from a flagging U.S. economy was in vogue, such a portfolio would be envious. Now, it appears all these countries are in for a longer recession than the U.S.

Aside from country recession risk, Liberty Global is exposed to currency risk. Virtually all the currencies tied to Liberty Global's customers have weakened significantly between June 30 and Sept. 30. In October, the pace has dramatically increased. Hungary's forint is down 30% this month vs. the dollar, the Chilean peso is down 22.5%, and the Aussie dollar is down 31%. These three countries counted for 16.4% of Liberty Global's total revenue last quarter.

Liberty Global does have extensive derivatives to mitigate this currency fluctuation risk. And some of its debt held in these currencies will surely benefit from the strengthening of the dollar in the past few months. However, the explanations given in the most recent 10-Q make don't make clear the extent to which the company is protected. We will probably have to wait for a more complete explanation during the company's next analysts' call. What is clear is that many companies that believed they were protected from currency risk have experienced deep pain in the last few weeks (such as Citic Pacific's $2 billion loss on a wrong bet against the Aussie dollar).

Liberty Global's assets also include stakes it owns in Sumitomo and News Corp. (NWS Quote - Cramer on NWS - Stock Picks). These investments were worth $682 million at the end of June using fair value accounting. Both companies dropped 25% in the third quarter, and more in October.

When you stack up Liberty Global vs. Comcast, Liberty Global's valuation still appears too rich. Liberty Global's trailing price-to-earnings ratio is 98, with a forward P/E of 26. That is starkly higher than Comcast's trailing P/E of 16.8 and forward P/E of 13. Liberty Global also has a much lower operating margin, return on assets, and return on equity compared to Comcast. Additionally, Liberty Global's debt-to-equity ratio stands at 3.84 vs. 0.81 for Comcast.

We have seen highly levered companies with high P/E ratios -- such as Las Vegas Sands (LVS Quote - Cramer on LVS - Stock Picks) and MGM (MGM Quote - Cramer on MGM - Stock Picks) -- punished in the last few weeks, even though they had both experienced significant sell-offs over the last eight months. (Las Vegas Sands' debt-to-equity ratio is only slightly larger than Liberty Global's.) Liberty Global needs to win back the trust of shareholders by simplifying its corporate structure and fully explaining the extent of its currency exposure in next month's analyst call. Until then, investors should follow John Malone's lead and stay away from Liberty Global.

At the time of publication, Jackson's portfolio was short Liberty Global, CBS and News Corp.
Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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