Monthly Archives: January 2012

The End of an Era

Today Eastman Kodak (EK), an icon of American capitalism, filed for bankruptcy.   The 100-year-old company had been in trouble for many years as the shift to digital imaging dramatically reduced the demand for its products.  

Early in my Wall Street career, I was a photography analyst.  I was the “guru” for my firm on the photography industry and covered stocks such as EK, Polaroid, Fuji Film and so forth.  I visited Rochester many times and met with EK management on numerous occasions.  EK, in many ways was a victim of its own success.  The silver halide technology which made photography possible also created a very, very profitable product – photographic film.  By all estimates, the gross profit margin on photographic film was around 80%.  EK tried over the decades to use all of its cash flow and profits to fund other businesses.  None were as profitable or stable as the film business.  

After a while it seemed that management was simply trying not to mess up a great business – the goal was not to move on to bigger and better things, but just try to maintain market share and hang on.  By the time the digital threat became serious, EK was already far behind.  It never caught up, and now the reality of the new digital age has caught up to it.

In many ways, EK is a poster child of Schumpeter’s idea of “creative destruction,” which is often used to describe capitalism’s messy way of delivering progress.  Because new, potentially disrupting technology always looms on the horizon, companies must not be afraid to make dramatic changes that may hurt in the short run, but which over the long haul often prove to be a saving grace.  Apple (AAPL) has done this many times over the last decade.  EK did not.

This is one reason predicting the future is so difficult.  The marketplace is constantly changing, and the best companies are prepared to change with it.  Being big or having a dominant market share provides no guarantee for future success. 

I love the idea that some large portion of jobs in the future will come from technologies not yet invented.  Who knew that social media companies would become so big and create so many jobs? 

One of the great pleasures I derive as an investment generalist is researching and analyzing a broad range of companies in many different industries.  Along the way, I learn a great deal about how good management teams run their businesses.  And the dynamism of the markets keeps me ever engaged and looking for the next bunch of really great investments.  So even as formerly great companies like EK fade away, new ones will be born, small ones will get bigger, and investors who can find the gems will be rewarded for their insight, diligence and patience.

Scared Straight by the IRS


To the average citizen, is there any scarier U.S. Government Agency than the Internal Revenue Service (IRS)?  For my entire life I have paid my fair share of taxes, on time, and in accordance with the law (as far as I could figure it out).  Despite a few yellow flags on my returns now and again (high levels of charitable contributions, for example), I have never been audited.  Yet, nothing gets my heart pounding like seeing something in the pile of daily mail from the IRS.  Once they thought I had been a soldier (!) in Iraq (working for the U.S. military, I assume) and was entitled to some kind of combat-related tax break.  It took a few phone calls and letters to convince them they had made a mistake.  One time, they informed me of a mistake I’d made and sent me a check.  I happily cashed it.  Another time, they informed me of a mistake I’d made and demanded more money.  I happily paid them.  In all these cheery exchanges I never really felt threatened or treated harshly by the nice folks at the IRS.

But now, “No More Mr. Nice Guy” appears to be the new theme song of the IRS.

As reported by Bloomberg this morning, the IRS is rolling out a third so-called amnesty program aimed at collecting taxes on foreign accounts held by U.S. citizens and other U.S. residents.  Unlike the first two programs, which by the way were wildly successful (or horribly painful, depending on which side of the deal one was on) – bringing in $4.4 billion in new revenue from 33,000 taxpayers, this one has no stated deadline, but there is no guarantee that the program will be available indefinitely.  The new program does have a higher penalty (27.5% on the highest balance in one’s offshore account) and the ever-consistent threat of criminal penalties for non-compliance.  The IRS has upped the ante in several other ways.  They are also targeting any and all tax-haven banks, bankers and other financial professionals who may have aided taxpayers who failed to disclose information about these accounts.

“Well,” you may be saying, “I have never been a member of an international crime syndicate, a gun runner or drug smuggler.  Surely this program does not and cannot apply to me!”  Much like the big nets tuna fishermen used in the past that would also swoop up dolphins, this program does target anyone who has ever, in the last 8 years  held any kind of undisclosed financial account (saving, brokerage, checking, deposit, etc.) anywhere outside the U.S. or whose name may appear on such account anywhere.  In many countries it is customary for a parent to include the names of children or even grandchildren on bank accounts.  If those children or grandchildren are U.S. citizens or maintain a U.S. address, guess what?  They are potential targets for this program.

Maybe you bought a small piece of real estate outside the U.S. years ago.  When you transferred the money from your U.S. bank to the local foreign bank, did you think to file all the required IRS and U.S. Treasury documents?  If not, you are a target for this program.  If you worked for your U.S.-based company for a few years as an expatriate overseas and opened up a checking account with a local bank for your daily needs, guess what?  You will be targeted by this program, if you failed to file the required paperwork.

“But,” you may be saying, “My company handled all that kind of stuff when I worked overseas.”  Maybe it did, maybe it didn’t, but for certain it will not face criminal penalties for non-compliance. You might.

“Yeah, but,” you may be saying, “I have a tax professional who handles all this stuff.”  I’m no tax expert, but my sense in talking to people who really know this stuff well, is that this program and all of the related regulations reside in the realms of deep esoterica.  Some of the details of the new program are still kind of fuzzy.  The “average” tax preparer may not know this stuff well enough to keep you safe from the growing aggressiveness of the IRS.

The language, tone and scope of this program scare me to death. I sense that many people still feel that somehow, some way it doesn’t really apply to them.  Or they think that the IRS is simply overreaching.  Or that the IRS really doesn’t care about their checking account in the Czech Republic.  I understand these feelings, but they are wrong.  In my view, the program can be summed up this way, “go to them before they come for you.”  If you think that’s hyperbole, consider this quote from Doug Shulman, the IRS Commissioner regarding this new program, “If we catch them [you] involuntarily, it’s going to be much worse for the taxpayer [you].”

Forewarned is forearmed. ‘Nuff said.

Scared Straight by the IRS

To the average citizen, is there any scarier U.S. Government Agency than the Internal Revenue Service (IRS)?  For my entire life I have paid my fair share of taxes, on time, and in accordance with the law (as far as I could figure it out).  Despite a few yellow flags on my returns now and again (high levels of charitable contributions, for example), I have never been audited.  Yet, nothing gets my heart pounding like seeing something in the pile of daily mail from the IRS.  Once they thought I had been a soldier (!) in Iraq (working for the U.S. military, I assume) and was entitled to some kind of combat-related tax break.  It took a few phone calls and letters to convince them they had made a mistake.  One time, they informed me of a mistake I’d made and sent me a check.  I happily cashed it.  Another time, they informed me of a mistake I’d made and demanded more money.  I happily paid them.  In all these cheery exchanges I never really felt threatened or treated harshly by the nice folks at the IRS.

But now, “No More Mr. Nice Guy” appears to be the new theme song of the IRS.

As reported by Bloomberg this morning, the IRS is rolling out a third so-called amnesty program aimed at collecting taxes on foreign accounts held by U.S. citizens and other U.S. residents.  Unlike the first two programs, which by the way were wildly successful (or horribly painful, depending on which side of the deal one was on) – bringing in $4.4 billion in new revenue from 33,000 taxpayers, this one has no stated deadline, but there is no guarantee that the program will be available indefinitely.  The new program does have a higher penalty (27.5% on the highest balance in one’s offshore account) and the ever-consistent threat of criminal penalties for non-compliance.  The IRS has upped the ante in several other ways.  They are also targeting any and all tax-haven banks, bankers and other financial professionals who may have aided taxpayers who failed to disclose information about these accounts.

“Well,” you may be saying, “I have never been a member of an international crime syndicate, a gun runner or drug smuggler.  Surely this program does not and cannot apply to me!”  Much like the big nets tuna fishermen used in the past that would also swoop up dolphins, this program does target anyone who has ever, in the last 8 years  held any kind of undisclosed financial account (saving, brokerage, checking, deposit, etc.) anywhere outside the U.S. or whose name may appear on such account anywhere.  In many countries it is customary for a parent to include the names of children or even grandchildren on bank accounts.  If those children or grandchildren are U.S. citizens or maintain a U.S. address, guess what?  They are potential targets for this program.

Maybe you bought a small piece of real estate outside the U.S. years ago.  When you transferred the money from your U.S. bank to the local foreign bank, did you think to file all the required IRS and U.S. Treasury documents?  If not, you are a target for this program.  If you worked for your U.S.-based company for a few years as an expatriate overseas and opened up a checking account with a local bank for your daily needs, guess what?  You will be targeted by this program, if you failed to file the required paperwork.

“But,” you may be saying, “My company handled all that kind of stuff when I worked overseas.”  Maybe it did, maybe it didn’t, but for certain it will not face criminal penalties for non-compliance. You might.

“Yeah, but,” you may be saying, “I have a tax professional who handles all this stuff.”  I’m no tax expert, but my sense in talking to people who really know this stuff well, is that this program and all of the related regulations reside in the realms of deep esoterica.  Some of the details of the new program are still kind of fuzzy.  The “average” tax preparer may not know this stuff well enough to keep you safe from the growing aggressiveness of the IRS.

The language, tone and scope of this program scare me to death. I sense that many people still feel that somehow, some way it doesn’t really apply to them.  Or they think that the IRS is simply overreaching.  Or that the IRS really doesn’t care about their checking account in the Czech Republic.  I understand these feelings, but they are wrong.  In my view, the program can be summed up this way, “go to them before they come for you.”  If you think that’s hyperbole, consider this quote from Doug Shulman, the IRS Commissioner regarding this new program, “If we catch them [you] involuntarily, it’s going to be much worse for the taxpayer [you].”

Forewarned is forearmed. ‘Nuff said.

Bold Predictions for 2012

Anyone who is a regular reader of this blog will know that I do not make predictions.  I have learned over the years that most predictions are wrong and that the more complex the issue being predicted (the weather, stock market returns or U.S. Presidential elections, for example), the greater the chance the predictions have of being wrong.

Yet, there is something in the human psyche that craves order in the midst of chaos.  Hence, we are all enthralled by any confident “guru” who claims to know where the S&P 500 will be at the end of the year or who the next President will be.  And who am I to not try to satisfy this basic human need?

So, with tongue firmly in cheek, I humbly present my “bold” predictions for 2012.

1)     The World will not end on December 21st.  I realize that handicapping the Apocalypse is a bit out of my pay grade, but my quick study of the Mayan calendar suggests that they really weren’t predicting the end of the world, just the end of another one of their calendar periods.  It seems that they could not imagine being around after the end of their 13th big calendar period (which ends on December 21, 2012).  They weren’t.  Despite their prowess at astronomy, they were not able to predict their own demise, much less the end of time.  Feel free to make long-term plans…

2)     The U.S. will either re-elect a Democrat or elect a Republican.  I am not a political “guru,” but I feel pretty confident about this prediction.  The good news here is that according to Ken Fisher, either of these outcomes is good for the stock market.  In fact, his research suggests that the best years for the stock market happen when either one of these things occur.  Feel free to vote for either candidate and buy stocks…

3)     A politician will become embroiled in a scandal.  Feel free to quote me on this one…

4)     The markets will continue to display volatility.  That is, that prices of publicly traded assets will change, fluctuate or otherwise move.  Note that I am not predicting the level of volatility or offering any opinion about the pace or rate of changes in volatility.  And as a nod to my last blog (here), I am not predicting declines in asset prices, just that they are likely to move around.

5)     The S&P 500’s return for 2012 will not be 10%.  Yes, I am aware that 10% is the long-term average for the market, but a quick look at history will show that the market rarely returns its average.  Stock market returns are lumpy and rarely provide the return expected on an annual basis.

6)     Most of the predictions about the S&P 500’s returns this year will be wrong.   It appears that the consensus from the professional forecasters is calling for a 7% return for the S&P 500 this year.  If the collection of forecasts falls into a normal distribution (as it usually does), and if the market tends to surprise the consensus (as it usually does), 7% is also probably not a good guess of the market’s actual return for the year. Consider this, if we only had two predictions, +24% and -10%, the average would be +7%, but this single number would tell us very little about the nature of the estimates from which it is derived.  I much prefer estimates that mention a range or simply a direction rather than a singular, simple number.

7)     Nouriel Roubini will find a compelling reason to be negative.  Okay, this may be a cheap shot, but those who choose to be bearish will always have grist for their mills.  The Utopian “all is well” scenario never exists.  At any point in time, there are significant problems or threats facing any given economy, nation or market.  People tend to believe what they want to believe and disregard any evidence contrary to these beliefs.  One of the most perverse things about the stock market is that pessimism is generally considered a positive.  The market tends to climb the proverbial wall of worry.  The more press coverage Mr. Roubini gets, the more bullish I become…

8)     The Kardashians will completely shun all media and effectively disappear from our view.  This is more of a wish than a forecast =)  Who are these people, and why are they famous?

Here’s to a healthy, prosperous and happy New Year!