Tax-Efficient Exchange via Sec. 1031 . . . Safe Ex?

The Section 1031 Exchange mechanism has been a means of affluent people getting and keeping fortunes since the 1920s. Though it has in recent years been reaffirmed by the IRS, one has to be concerned that the device may not survive the coming drive for higher tax revenue from high-income earners.

But on the other hand, the Obama administration is keen on big thinking. This is small beans in the overall scheme of things, and may just escape their attention. So for as long as it lasts, one ought to know what it is and how to use it.

I believe my article on Section 1031 Exchanges is the clearest, most informative, and overall best brief treatment of the subject. It is available for free for a limited time at http://www.dhsmith.net/1031s.pdf and I am glad to consult with readers on it.

Japan's Golden Week Is Almost Upon Us

Back when I was working for Argonaut Capital in the 90s, Japanese stocks were part of my coverage. It was four or five years into the bear market that followed the 80s boom. The Japanese authorities had noticed that doing almost anything was better than opening the exchange for trade, so they multiplied meaningless holidays and started taking any excuse to close. Or so I remember the manner in which Golden Week became almost an entire week off from the end of April into the first week of May.

I noticed that one of the most powerful seasonal tendencies in the financial markets was for the Nikkei stock index to break shortly before or after Golden Week and decline meaningfully in percentage and time terms. "Sell in May and Go Away" is an adage quoted by stock traders everywhere, but counter to that there is also the market lore of the summer rally, which endures because it works sometimes. But not, it seemed, in Japan, where the very name "Golden Week" seemed a black joke. Leaden Week for financial markets was more like it.

This observation was bankable. In every year of the decade of the 90s, the Nikkei dropped substantially from its pre-Golden Week highs; the biggest drop was 39%, the smallest 9%, the average about 20%.

In 2000 I presented original research on the effect in the late lamented worldlyinvestor.com (hey there Jeremy Pink! Lay off the Dim Sum, will you?) I forecast the same thing to happen that year, and it did: a 20% drop a few weeks after Golden Week, a 30% drop within a few months.

In 2001, the Nikkei peaked in May and plunged.

In 2002, it rose in May but collapsed later that summer.

In 2003,the pattern failed for the first year in fourteen as the index rose 10% in May and kept on trucking.

In 2004, there was a modest 10% loss.

In 2005, there was again no playable decline around Golden Week. However in 2006 there was a rapid loss of 2500 Nikkei points.

Then in 2007, the peak did not arrive until the first week in July, and in 2008 the market rallied in May but began the collapse from which it is still suffering in early June.

One might conclude that the pattern is no longer reliable. Possibly as the effect became more widely known it has been arbitraged away through the action of traders. I always felt things changed since 2000 with the inclusion of a number of key technology shares in the Nikkei that year at very high weightings and the near disappearance of financial sector weightings. Over time the Nikkei has become more like a Nasdaq proxy, and the Nasdaq is having a pretty good year in 2009, all things considered.

I'm positioning for the thing to work again this year, even though at time of writing the Nikkei is only at 8686. That's still 1900 points above its low for the year, at a time that the economy is contracting at rates approaching 10% per annum, world markets may have run out of puff, and there are few redeeming factors in sight.

Freddie Mac CFO -- Apparent Suicide

Freddie Mac's Acting CFO David Kellerman, age 41, has been found dead in his home this morning in an apparent suicide.

I wonder if Senator Charles Grassley (R-IA) will now step forward to cite Mr. Kellerman's example with approval.

Worst Market Day in Six Weeks

I know a lot of market participants have been looking for this break long before today. My sense has been that they are wrong and the market recovery in the six weeks through Friday can carry a long way, surprise everyone, and ruin the bears' year as the prices will be set by investors looking beyond the current recession earnings trough. At the moment, I am holding on to that view. But I can be persuaded that I am wrong, and switch my position accordingly.

Recently I have had correspondence with Professor Christopher Mayer of Columbia Business School, regarding his Mayer-Hubbard Plan and my Household Initiative Plan. He says he has been in Washington lately and senses a real loss of momentum for all these plans. I think you can generalize that. There has been a loss of momentum for all the administration's economic schemes as they have had other things on their plates such as foreign summitry, stem cells research, climate change, torture memos, and so on and so forth. Also, Congress has been on Easter recess. It may be a coincidence that the market took a swan dive on the day Congress returned and the administration held its first cabinet meeting. But on the other hand it may not -- market participants have ample cause for concern about the administration of the TARP, the independence of the Federal Reserve, the possibility that Ben Bernanke is not reappointed, and the dawning realization of the scale and scope of the budget deficit to come. And with government back in full domestic operation, players may be pricing that in, and the previous six weeks could turn out to have been a pleasant holiday from hard reality.

Standard and Poors 500 Index going to 100?

My correspondent Ted Kavadas writes great stuff at Prosperity by Pen, which is on the blogroll. He has an article entitled "A S&P500 Target of 100? Impossible, Improbable, or Impending?" It relies on the fact that there is little technical support between recent S&P 500 Index lows and 100, and little in the way of current earnings to prevent the index from crashing to such a level.

It's interesting as his work always is. And from the point of view of gaining publicity for an idea it never hurts to be extreme . . . wasn't Harry Dent calling for Dow 45,000 before he decided that the Dow has strong support down around zero? (I did this myself once, calling for an Indonesian Rupiah at 10,000 to the dollar at a time when it was around 1,700 -- but I was not extreme enough as it ultimately went north of 15,000)

The first material critique I make to the argument is that markets do not look only at current year (year 1) earnings, but look beyond the earnings trough, whether that is this year or next year or whenever. Market participants can be wrong about that and need to reset expectations, but there is no way they drive the S&P to 100 based on current year earnings estimates, without other things happening (e.g. the financial system collapses despite all efforts, terrorism hits us at home in a spectacular way, Obama embraces Chavez-ism.)

Second, market participants have already largely discounted the work product of the analysts, who have proven again that as a group they are no use under deeply cyclical conditions. The shock value of their downgrades is more limited now. Certain analysts who have made particularly good calls are exempted from the criticism that they don't know how to analyze in this economy, but even they are finding it hard to shock the market at this point.

Third, given the cyclical conditions, participants will prefer to consider earnings over a longer segment of a full cycle than just one year. I have heard of people calibrating valuation to an average over ten years. No one can forecast year 10 earnings for any company, but if investors are finding this approach works for them that's great.

Fourth, and maybe the big one. Let's not forget that current earnings are heavily penalized by non-cash charges. This is the central problem of our markets today, the fact that charges required by mark-to-market accounting have demolished the capital of the financial system, requiring markdowns and charges on assets even if they are performing. It's madness, but it's the system we have now. If you are of the opinion, as I am, that much of this capital destruction is unreal and unnecessary, then true earnings, though depressed, are still higher than reported. It is not only financial companies that are taking these charges because they are forced to. Other companies are "kitchen-sinking" their earnings in order to get out whatever bad news they could conceivably ever have at a time when markets are inured to bad news. Hence Nike recently wrote down Umbro, which they bought mere months ago and now declare impaired, taking a heavy hit to earnings in the current period. This charge is wholly discretionary. They did not have to take it now or probably ever. This is why some participants prefer cash flow to manipulable reported earnings. Earnings lie, cash flows tell the truth.

Chinese Business Naming: Baby Banana Fettewql, etc.

I once met with a company in China. It had a great business plan for its proprietary skin care products for men, terrific sales pitch to go with the products, attractive product design and logo. Altogether pretty credible, until you got to the name. Who told them it was a good idea to pick a Chinese name that transliterates to something that sounds exactly like "Lady Man"?

A lot of regular guys feel mildly conflicted about using any product beside the traditional soap and shaving cream on their skin. Offering them Lady Man brand products is going to queer the deal, probably for good.

The Lady Man men have an elaborate explanation of how they came up with their names, trademarks, and trade dress, all of which is really beside the point. They have made the mistake of being unintentionally ridiculous in a major world language. Of course they are not the first or the biggest to do so. Many of us have heard how General Motors struggled to sell Nova’s in Latin America at a time that it apparently had no Spanish speakers on staff to point out that “no va” is Spanish for “doesn’t go.”

There are hundreds of world languages, and no doubt almost everything is ridiculous to some linguistic community or other. For the brand manager it might be OK if your name is smutty in Sinhalese, hilarious in Hittite, or politically incorrect in Papuan, as long as it is OK in all the majors. On the other hand, if you sell Iran’s market-leading detergent Barf, you don’t worry because your customers do not know or care why Americans think that is so funny.

But back to Lady Man. This is one small particular instance of problematic product/business naming in China, where companies are thinking big, trying to graduate from producing dollar-store fodder and white-label products for foreign brand owners to developing international brands in their own right. They need to know that getting the right name is the first and most important part of this, because you are not a brand unless customers ask for you by name.

Some Chinese companies are going international with their Chinese name, transliterated into foreign script -- for example Huaxin Cement, Hai'er Appliances, and Tsingtao Beer. This follows the example of many Japanese and Korean competitors (e.g. Toyota, Samsung). It takes confidence and a willingness to hear foreigners mispronounce your language. It is working pretty well for Hai'er as they establish their brand worldwide.

Other Chinese companies venture out into the wide world with their Chinese name translated into foreign language -- Snow Lotus Cashmere, White Cat Laundry Detergent. These brand names can seem quaintly "Chinese-y" to foreign ears.

It is common for companies and brands all over the world to bear the name of their founder or animating spirit, and this seldom presents any problems. With the growth of individual enterprise and entrepreneurial culture in China, we can expect to see more labels and brands bearing the name of the real people behind them. Yue Sai-Kan had turned herself into a brand before the personal branding consultants in the U.S. ever thought of such a thing. Han Feng, the Shanghai-based fashion designer, is my favorite example in the fashion industry, one of the businesses I know best.

For fashion and allied businesses such as cosmetics and salon and spa services, the Chinese consumer values foreign experiences and foreign brands far above homespun Chinese, so the smart domestic entrepreneur picks an evocative personal name, place name, or foreign language word. In big city malls, the fashion brand Sao Paulo is side by side with Only, Less, and a Korean competitor that rejoices in the name of Mojo S. Phine NY. But it remains to be seen whether Sao Paulo the Chinese fashion brand can gain a following in Sao Paulo the Brazilian business capital.

How about using the Chinese proprietors' names together with foreign language words? Cindy Luo's label Omnialuo reaches for the classics -- the name of her line is literally "all things Luo" in Latin. Will Omnialuo mean anything to modern consumers in the western world? It just might, if they can learn to say it.

But from there things go downhill in some significant respects.

For purposes of this discussion we are concerned with legitimate business, rather than the products of intellectual property theft, made-in-China copies of foreign products with stolen brands and trademarks that make up 7% of global branded consumer product sales according to one estimate. This is criminal activity, understood as such by all concerned.

But in China and even in China's near-abroad, many Chinese companies sell own-design products under close facsimiles of well-known foreign brand names and trademarks -- there are Prader, Pal Zingeri, Dunhïll, and dozens of others, including countless variations on the name and trademark of Valentino, the leading IP victim according to my research. The foreign brand owners object to this abuse of their IP too, but the purveyors of this stuff go about their little activities unmolested. To the extent that these near-knockoffs make it into mainstream outlets such as Isetan in shopping Meccas like Kuala Lumpur, the IP originators can legitimately complain of real displacement and lost sales.

There are facsimile trademarks that rely for their effect on the font style rather than the actual names. In Guangzhou I saw a Frognie Zila store with the name rendered unmistakably in the font style used by Ermengildo Zegna.

One other case that fascinates me is the "Polo" name. There once was a bright, ambitious chap from the Bronx named Ralph Lifshitz who understood the value of names. He changed his own name to Ralph Lauren and called his fashion lines Polo. Ralph has tried to claim a proprietary right to the name and has even disputed the use by the sport's governing body of a polo player logo in its licensed apparel. But because Polo the sport has been around longer than Polo the brands, there is a little space for others to squeeze into, especially outside the U.S. where Ralph and other litigious parties are less likely to prevail. So in China, "Polo" has become a name applied indiscriminately and in dozens of variations to every kind of luggage and leather goods – “New York Polo”, “Polo Club”, “Polo Golf” -- if you can’t identify fifteen different Chinese Polos at a baggage carousel in any mainland airport, I’ll eat a polo mallet. The original and best Chinese Polo is simply Polo, and the proprietor is a friend of my family. His leather goods are excellent and his business operations in Beijing and Guangzhou are substantial. If his brand name did not bring him into conflict with industry heavyweight Lifshitz, er, Lauren, he would have a sure shot at success in international markets.

If abuse of foreign trademarks is a concern, abuse of foreign language is just a laugh. Visitors to China derive hours of amusement from the weird and wonderful uses to which random foreign letters, words, and texts are put there. In the men’s room in Jinan’s airport is a sign that says “Protect Environment Saving Bumf.” I don’t know what Bumf is, but sure, let’s save it. And while we’re at it let’s also save Chinese brand owners some grief by letting them know that silly confections such as Marisfrolg, Baby Banana Fettewql, and Biemlfdlkk are probably not going to work at the Mall of America.

My father told me, “Don’t try to be clever sonny, just be yourself.” It is good advice, which many in Chinese industry lack the self-confidence to employ despite the good progress of Hai'er and others: Just be yourself. The Japanese are always and everywhere themselves. At some early stage, Toyota decided to be Toyota rather than Forb or Fiak (or Fiaklfdlkk). Shiseido did not try to pass itself off as Channel. Yohji Yamamoto did not change his name to Johhny Valentino. Would it be too much to ask our Chinese friends, in just this one respect perhaps, to look at the Japanese and take a page from their book?

Tax Filing Day Tea Party, Morristown, NJ.

So I went. I had business at my brokers, right across from the Morristown Green . . . but let's face it, I would have gone anyway.

Here are some pictures. There's the crowd in front of the dais (I arrived late for most of the speechifying):



There were some young guys carrying rather erudite signs noting a website called campaignforliberty.com -- I should check it out. One of them has a great hat.



The hat close up says GOLD IS MONEY. John Galt!



There was a Morristown Minuteman. I hear Morristown had a prominent role in the earlier American Revolution of 1776.



What I wore to the Tea Party to hand out anti-Corzine stickers was actually my own silkscreen design. Or rather, a take-off of Shepard Fairey who is known for his, um, sampling. Sarah Palin is the man . . . the best of the four top ticket candidates in 2008.

Buy a suit at Jos. A. Bank, let them give you a bank!

Gosh, I'm so sick of their commercials. Where do they get the goofball with the infinitely joyful sing-song voice, who is always offering ever more fantastic deals on clothing that no one needs!

Buy three suits, get five free!!! For what, dude? Don't have no job, don't need no suit!

Or if you had a job to which you might otherwise have worn a suit, the Security Department of your company has sent out a memo telling you to dress like a plumber or electrician just in case demonstrators think you're a bonus recipient and throw garbage at you, or worse.

This is my modest proposal to Jos. A Bank. It's a variation of the old wheeze where you open a CD at the bank and they give you a toaster. I'll buy the goddam suit, and I'll allow you, Jos. A. Bank, to give me a bank. You've got banks, right? That's why you're called that! Plus, if you don't have enough banks to give to the thirteen men in America today who might be persuaded to buy a junky suit if they got a bank with it, you can get more from the TARP. A suit is body cover, and what better to cover bodies than TARP?

Great deal. You unload surplus suits, government unloads surplus banks, I recapitalize my bank by taking Bazooka Joe wrappers and S&H Green Stamps to the Fed discount window. Everyone's a winner.

Coming Soon: New Currency Order

Whatever you think of the young administration of President Barack Obama, you have to admit the man does not lack for ambition. He promised that sea levels would fall and the lame would walk, and everyone understands that will take at least a couple more months. But taking over the motor industry, well that's just the work of a couple of the President's bright sparks over the weekend. It's great knowing that I'll be able to go into my Congressman's constituent services office when I need parts for my old Dodge truck.

My sources in Washington tell me that the next thing to come out of the salvation lab is a major currency reform. The American Dollar, the Yankee Greenback, it has served us so well for so long, but now it's lame too. Better just to repudiate all claims and start over, as they are wont to do in the countries of South America that have lately emerged as models of public administration.

I hear the new buck will be called the O-buck, and this is its symbol: