No Profits? No Problem! (Uber)

Posted On Apr 12, 2019 By Dave Gonigam

  • Peak lunacy: Financial media shrug at Uber’s stunning disclosure
  • The Masters tax exemption (also available outside Augusta)
  • Ikea’s new logo — big bucks for tiny tweaks
  • Not “essential”? Swiss send tremors through coffee market
  • Iran sanctions vs. rising gas prices (can’t have it both ways)
  • Strong start to earnings season… the worst place for Julian Assange’s trial… salt in the wound at tax time… and more!

That’s it. We’ve reached peak lunacy for the entire post-2008 economic expansion.

Uber IPO tweet

After the market close yesterday, Uber made its much-awaited IPO filing public.

The firm did not disclose how it will price its shares once they start trading on the New York Stock Exchange. But it did disclose its sky-high operating expenses will “increase significantly in the foreseeable future” and the company “may not achieve profitability.”

And the establishment financial media like Reuters report this as if it’s, well, something completely normal…

Uber is “constantly losing money, and its capital-raising strategy is a Ponzi scheme,” said the Australian wealth manager Hamish Douglass in 2017.

Mr. Douglass was one of two financial renegades we profiled that year who were calling BS on Uber.

“All they do is keep increasing their private-market valuation, and someone always says, ‘I’ll put some money up, because next time they raise, it’ll be at a higher price.’”

The other renegade was a transportation consultant named Hubert Horan. Based on the publicly available numbers from Uber at the time, he calculated that all those gullible venture capital types were subsidizing 61% of every Uber fare. (You know, the same crowd who also bought the blood-testing song and dance of Theranos fraudster, er, founder Elizabeth Holmes.)

Hey, if the business world’s allegedly best and brightest investors are willing to pour money down a rathole, why not retail investors too!

Douglass lays 99% odds of Uber going bankrupt by 2027. Sounds about right.

Program note: After a week of heavy topics in The 5 — Trump and the Fed, the new tax law, IPO valuations, alleged job losses from automation, to say nothing of Julian Assange — we’re taking it easy going into the weekend.

Herewith a few oddities from the financial world that came to our attention this morning…

This weekend is bringing a huge tax windfall to a select group of wealthy property owners.

It’s Day 2 of the 2019 Masters Tournament — one of the “big four” events in professional golf. “Augusta National Golf Club is famous for more than green jackets and pimento cheese sandwiches,” writes Nicole Kaeding of the nonpartisan Tax Foundation — “legend has it that it’s the impetus for one of the tax code’s many exemptions.”

Under Section 280(A) of the tax code, the expenses of owning your primary residence are not tax-deductible — aside from mortgage interest and property taxes. But if you own rental property, most of your ownership expenses are deductible — which goes a long way toward reducing the taxes from your rental income.

Buried within Section 280(A) is an intriguing loophole. Read carefully: “[I]f a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then… the income derived from such use for the taxable year shall not be included in the gross income.”

Augustans tend to skip town during Masters week to avoid the crush of people. Many of them rent out their homes while they’re away. A five-bedroom house close to the golf course can generate a quick $10,000, tax-free.

“The story goes,” explains Ms. Kaeding, “that when Congress debated the taxation of rental income in the 1970s and which deductions should be allowed, the well-to-do residents of Augusta, Georgia, lobbied to have this exemption added. They previously had been allowed to collect the rent tax-free, and they wanted that treatment to continue. As the story goes, they succeeded, keeping their tax break.”

Hmmm… It occurs to us this arrangement could work out handily even if you’re not well-heeled but you live in a big college football town. Six weekends every autumn, and the income is tax-free? Boom.

Adventures in corporate rebranding: Take a look at Ikea’s old logo on the top… and its new and improved logo on the bottom.

Ikea Before and After

No difference, you say, other than moving the registered-trademark symbol inside the oval?

Yeah, that’s what I thought too. But apparently I lack keen powers of observation… and an appreciation for the considerable efforts of a Stockholm-based design firm called the Seventy Agency.

The folks at a website called Under Consideration have looked more closely: “Most ‘notable’ is the increased height of the oval that allows the letters to be a tad bigger. The flares in the letters have been reduced, which were particularly busy in the old ‘E,’ making that letter look heavier. The counterspaces of the ‘A’ have been opened up and the angles of the ‘K’ have been modified. The ‘I’ still floats a little on the left, but that’s a hard word to kern.”

Revolutionary stuff, huh? All we want to know is how much Seventy Agency collected for its handiwork…

The Swiss government has just set off a minor disturbance in the global coffee market.

As you might know, the Swiss are rigorously well-prepared to fend off foreign invasion. Among other measures, young men who complete the compulsory military service are then expected to keep their military-issue firearm at home.

In the years after World War I, Switzerland implemented an “Ordinance on the Compulsory Storage of Foodstuff and Animal Feed” — a stockpile of essential goods just in case the worst were to happen. You know, like World War II.

As of 2022, however, coffee will no longer be considered an essential good. “Coffee contains almost no calories and therefore does not make any contribution to food security from a nutritional point of view,” says a statement issued Wednesday by the Federal Office for National Economic Supply.

As a practical consequence, Nestle and 14 other importers, roasters and retailers would no longer be required to store bags of raw coffee.

That’s three months of the country’s coffee supply that would come onto the world market — from a country whose per-capita consumption is twice that of America’s. Well, assuming the decision is made final later this year after a public comment period…

The markets today, you wonder? Sanguine on this first day of earnings season.

JPMorgan Chase delivered a big earnings “beat,” as did Wells Fargo. Meanwhile there’s merger news in the energy sector: Chevron is shelling out $33 billion to buy Anadarko Petroleum. APC shares are up 32% as we write.

The major stock indexes are all in the green, with the Dow leading the way. The Big Board is up nearly three-quarters of a percent as we write at 26,329. Still, even if that gain sticks, the Dow will end the week slightly in the red.

  • For the record: The White House’s choice of Herman Cain for a spot on the Federal Reserve’s Board of Governors appears to be a dead letter. Four GOP senators now say they’ll vote against him, which would send a nomination down to defeat. Trump will have to find someone else to help him keep the “big, fat, ugly bubble” from deflating…

Gold is licking its wounds after yesterday’s latest smackdown at $1,294.

Crude is back above $64 a barrel — a level that’s going to make it mighty difficult for the Trump administration to tighten its embargo on Iranian oil exports.

Last year, Washington imposed sweeping sanctions on Iran’s oil sector — aiming to reduce its exports to zero. The sanctions were set to take effect in November. But when crunch time came, the White House granted six-month waivers to most of Iran’s biggest crude customers — including the biggest by far, China. In the end, Team Trump decided a full-on embargo would drive prices too high for American fuel consumers.

Those six-month waivers are set to expire next month. At this stage, it looks as if they’ll be renewed for five of the eight countries — including China.

Little wonder: This morning AAA says the average national price for a gallon of regular unleaded is $2.81 — up 8 cents in a week.

Last year, respondents to a AAA survey said $2.75 was the pain point at which 20% of drivers would either drive less or cut back on other expenses. The national average crossed that threshold again last week.

Gasoline Chart

For another 40% of drivers, the point of no return is $3. Citigroup issued a report yesterday saying that’s entirely plausible this summer. The West Coast states are already there, and many Californians are paying over $4.

Iranian oil exports are down from this time a year ago, for sure… but the drop has gone as far as it can unless Washington wants to incur the wrath of the American driving public.

On Assange, writes a Platinum Reserve member, “it’s obvious that the media ignore the threats to freedom of the press because they figure that ‘they’ will never be subject to any negative consequences, since they’re in bed with swamp creatures in the DOJ and Congress.

“That may not be the best insurance policy. Honesty really is the best policy. You only pay the premium once.”

The 5: Many mainstream reporters are performing intellectual gymnastics so they can declare Assange’s actions to be somehow different from those used by their own organizations.

Trevor Timm from the Freedom of the Press Foundation isn’t buying it. “While the Trump administration has so far not attempted to explicitly declare the act of publishing illegal, a core part of its argument would criminalize many common journalist-source interactions that reporters rely on all the time.

“Requesting more documents from a source, using an encrypted chat messenger or trying to keep a source’s identity anonymous are not crimes; they are vital to the journalistic process. Whether or not you like Assange, the charge against him is a serious press freedom threat and should be vigorously protested by all those who care about the First Amendment.”

And forget about a fair trial whenever Assange is extradited. Not given where the feds brought the case.

“No national security defendant has ever won a case in the Eastern District of Virginia,” says CIA whistleblower John Kiriakou — who was prosecuted there and wound up doing two years in the federal pen.

This week during a podcast interview with our acquaintance Scott Horton, Kiriakou described how his lawyers brought in a phenomenally successful jury consultant — one who’d helped win acquittals for O.J. Simpson, William Kennedy Smith and George Zimmerman.

As Kiriakou recalls it, the consultant said anywhere else in the country, he’d advise going to trial and not copping a plea. But in the Eastern District of Virginia? Forget it. “He said, ‘Look at who your jury’s going to be made up of — either employees of or relatives of employees of the CIA, the FBI, the Defense Department, the Department of Homeland Security and intelligence community contractors. You don’t have a prayer.’”

Neither does Assange…

“Though most, if not all, of your readers would understand the basic math associated with tax liabilities, withholding and refunds, the virtue signaling exhortations on the subject grow tiresome,” a reader writes in response to yesterday’s mailbag.

“Are we who pay attention so wrapped in our own perspectives that we can’t appreciate the thought process of the Judge Judy crowd? Reality check: Many filers knowingly overwithhold as a forced saving program, knowing that they lack the discipline to save on a paycheck-to-paycheck basis and look forward to the lump sum each spring. Of course there are more financially savvy moves than interest-free loans to the government, but why judge?

“And as far as the Tax Cuts and Jobs Act goes there is a negative impact to those who organized their lives and finances around itemized deductions that were eliminated or top-stopped in the new code. The inaptly named ‘Taxpayer First Act’ promises to rub salt in the wound by ensuring that most who file the simplified returns with standard deductions will have to buy software or engage a tax preparer. That’s our Congress… always looking out for the little guy!”

The 5: Washington reserves the authority to change the rules at any time and with no warning. It’s why your editor is personally leery of Roth IRAs despite their purported advantages.

And yes, the House Ways and Means Committee recently cleared legislation that would prohibit the IRS from setting up a free electronic tax filing system.

“Companies like Intuit, the maker of TurboTax, and H&R Block have lobbied for years to block the IRS from creating such a system,” reports ProPublica. “If the tax agency created its own program, which would be similar to programs other developed countries have, it would threaten the industry’s profits.”

The timing is uncanny. As you point out, millions fewer Americans have reason to itemize under the TCJA. But they’ll still have reason to shell out for tax-prep costs…

Have a good weekend,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

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