The Daily Alpha: Real Talk on Donald Trump, Mark Cuban, Etsy and Janet Yellen

May 3 2017 | 11:22am ET

Today, we talk about how hedge funds can laugh off chatter about carried interest, why Mark Cuban is buying Twitter stock, Etsy’s blunders and the Fed’s follies.


Quotes of the Day

“The hedge fund guys didn't build this country. These are guys that shift paper around and they get lucky. They make a fortune. They pay no tax. It's ridiculous, ok?"

That was President Donald Trump in August 2015 during an appearance Face the Nation. At the time, Trump was taking aim at carried interest. But as the Fiscal Times reported yesterday, the single-page tax plan put forward by the Trump administration makes no mention of carried interest. And that’s for a reason…

As it turns out, carried interest (which is taxed at capital gains levels of 20%) won’t matter.

Should the corporate income tax fall from 35% to 15%, many hedge funds and private-equity firms will just qualify as “pass-through” entities. That will drive their tax liability to 15%. 

The Fiscal Times goes on to list the number of current and former hedge fund and PE managers will close ties to the Trump administration. It’s a story about optics wrapped in a thin blanket of tax analysis.

Somewhere in a basement in Westchester, Keith Olbermann is putting on makeup and preparing his lengthy “resistance video” over “hedge fund tax breaks.”

Meanwhile, Elizabeth Warren will use this story to peddle her new book “The Fight is Our Fight” (that she probably didn’t write) and that no one will read.

“I just started buying recently because I think they finally got their act together with artificial intelligence."

Does anyone still own Twitter (TWTR) stock?

You do?

Well, at least you got some of your money back on Tuesday.

Shares added 4% yesterday and are climbing this morning thanks to a plug from Mark Cuban.

The Dallas Mavericks owner said that he has been purchasing the stock recently because he thinks the company has promising potential in artificial intelligence, deep learning and machine learning. 

He’s not the only one who recently showed optimism either. USA Today reports that CEO Jack Dorsey just picked up another 574,000 shares. Dorsey has now acquired 1 million shares in 2017.

"We are fully prepared to take any actions we believe are necessary to protect the best interests of all Etsy shareholders."

That’s hedge fund Black-and-White Capital LP.

The fund is pushing Etsy – America’s favorite place to buy wedding centerpieces (and that’s about all we know it for) – to explore strategic alternatives. That includes a possible sale.

The first challenge they have put to the firm is to fix its "horrendous search functionality." This is a standard frustration of every user of the online marketplace. When it was designed, Etsy was doing everything it could to promote the work of all craft makers in a way that forced you to explore every person’s store they could force you to stumble into.

It’s like walking into a 40,000 store brick-and-mortar mall with no story directory and every little outlet made something slightly similar. You will be lost for days inside the pure… madness.

But we also like the wording of the hedge fund’s statement. Notice that it is the fund saying that they are doing everything to protect the interest of shareholders, as if they have through the magic of press releases and board room pressure assumed that burden from the board of directors.

Etsy has already replaced its CEO and cut 8% of its workforce.

Retail Dive also covers the firm’s lackluster quarterly report.

As we’ve said before, as more and more companies like Etsy seek access to the public markets, it’s a fine time to get into shareholder activism defense. Etsy had no idea what they were getting into, otherwise they would have addressed all of the possible pain points in their operations long before seeking the IPO payday.

"I don't expect them to say anything dramatically different in terms of guidance. They'll have to acknowledge the weak first quarter. I think they'll be cautiously dismissive over the first quarter GDP number."

Luke Tilley, chief economist at Wilmington Trust, told CNBC that the Federal Reserve will likely ignore the fact that the U.S. economy barely grew during the first quarter…

How is this sentiment any different than how they have acted over the last eight years.

"Resolute in its commitment to communism and plagued by sanctions, North Korea has one of the most isolated economies in the world. And yet its economy is showing signs of expanding — potentially at a pretty decent pace," 

"Turns out North Korea's economy is actually doing pretty well."

Finally, if you want hard hitting economic reporting… head on over to Vox.com.

Wait… don’t do that.

The subject of our Shot and Chaser has done a very good job of embarrassing itself on global politics once again. Yesterday, the website engaged in a bit of click bait and misguided analysis on the state of the North Korean economy.

“Turns out North Korea’s economy is actually doing pretty well,” Zeeshan Aleem wrote.

The writer proceeded to offer virtually no evidence however to support that headline.

Vox has a history of hiring writers who have no background in economics to write stories about global economics. So, when they claimed in their first headlines that North Korea’s economy is “doing pretty well,” it didn’t take long with anyone with a background in economics at most or pulse at the least – to rip them apart.

North Korea’s economy is the least economically free economy in the world. They turn off all of their lights in the capital city at night. We don’t even need to get into the issues of starvation, command economies, and

Here’s the nugget:

Resolute in its commitment to communism and plagued by sanctions, North Korea has one of the most isolated economies in the world. And yet its economy is showing signs of expanding — potentially at a pretty decent pace.”

The key word in this sentence is “pace.”

Aleem cited a New York Times article in which it was stated that the nation was growing at one to five percent. First, one to five percent in a dirt-poor nation is nothing. It’s certainly not “doing well.”

Second, he made no mention – which the NYT had – about the quality of the economic data…

PRS Group CEO Chris McKee has told us repeatedly that reliable economic data from the nation is scarce.

Then, they changed the headline in the afternoon to day to “The North Korean economy is actually growing despite sanctions.”

But this fails to understand what is actually driving the growth: The government has an iron grip on the economy, but it is the black market and underground economy that is driving growth.

“If North Korea’s economy is actually growing at the higher end of that estimate – say, around 4 percent – the country would be showing surprising resilience in the face of international sanctions,” Aleem says.

(Once you pull your head from the desk, meet us back here…)

Vox is implying that the international economic sanctions are what is stifling economic growth – not the centralized planning and controlled economy of the Jung-Un regime.

It is staggering ignorance.

This is what happens when you fail to understand the basics of political economy.

Morning Reading List

Theranos settles with San Francisco hedge fund

“Theranos settled two lawsuits with Partner Fund Management, which backed the embattled blood-testing startup with a $96.1 million investment in 2014.”

Senate confirms Jay Clayton as Trump’s SEC chairman

The Senate on Tuesday approved President Donald Trump’s choice to lead the Securities and Exchange Commission, elevating a Wall Street lawyer who hopes to turn around the decline in the number of public companies over the past 20 years.”

John Paulson’s Fall from Hedge Fund Stardom

“Nonetheless, his assets under management continue shrinking. Paulson & Company manages just under $10 billion today, down from $36 billion in 2011. Nearly two years ago, some Wall Street banks began to recommend that investors redeem some of their money from the firm.”

Tracking Calls

Jeff Gundlach (5/2): Market Correction by Summer 2017

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Garrett Baldwin is the voice of the The Daily Alpha, the features editor for Modern Trader magazine, and the author of The Man with The Big Red Balloon. 


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