<p><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"><p class="source"><span>AP</span></p><p class="caption">Donald Trump.</p></div><p></p></div></div>At a rally Tuesday in Arizona, Donald Trump sought to blame Hillary Clinton for his own low tax bills. He asked:</p><p style="padding-left: 30px;">"After years of failure, she complains about how I've used tax laws of this country to my benefit. Then I ask a simple question: Why didn't she ever try to change those laws so I couldn't use them?"</p><p>Well, maybe Clinton didn't just <em>try</em> to change laws Trump used, but actually got them changed, when she was in the Senate in 2002.</p><p>According to <a href="http://www.taxnotes.com/tax-notes-today/cancellation-debt-income/news-analysis-donalds-double-dip/2016/10/04/18619431">a Tuesday column by Lee Sheppard in the tax industry publication Tax Notes</a>, Trump may have benefited greatly in the 1990s from a tax loophole related to forgiven debts - a loophole that would have allowed him to deduct business losses on his personal income tax return, even if those losses were actually borne by banks that loaned Trump money and never got it back.</p><p>People often use the term "loophole" to refer to tax deductions they don't like, but this one was a loophole in the true sense of the word: a tax break created by legislative accident.</p><p>This loophole was the subject of <a href="https://en.wikipedia.org/wiki/Gitlitz_v._Commissioner">a 2001 Supreme Court case</a>, Gitlitz v. Commissioner, in which the IRS argued the relevant tax law could not have possibly meant what it appeared to say, which was that business owners could in some cases deduct losses they had not actually borne.</p><p>After the IRS lost that case, the loophole was closed by the <a href="https://www.congress.gov/bill/107th-congress/house-bill/3090">Job Creation and Worker Assistance Act of 2002</a>, a bill that then-Sen. Hillary Clinton voted for and President George W. Bush signed. But that law only stopped taxpayers from using the loophole going forward; they were still allowed to benefit from tax losses they had booked through it in prior years, such as 1995.</p><p>Here's how the loophole could have allowed Trump to create a paper tax loss that he could use to offset his real income for over a decade, avoiding hundreds of millions of dollars in taxes in the process.</p><h2>I forgive you</h2><p>In general, if someone cancels a debt you owe them, you're supposed to count the amount forgiven as income. Let's say you buy a building worth $1 million, using $200,000 in equity and an $800,000 mortgage. Then, the building is destroyed and you have no insurance. Now, your investment is worthless, and the bank gives up all attempts to collect on the mortgage.</p><p>Your loss, for tax purposes, should generally be just $200,000, not $1 million.</p><p>One of the big mysteries about Trump's 1995 tax returns is how he managed to run up such a large tax loss ($916 million) when so many of the losses related to his business implosion of the early 1990s ended up being borne not by himself, but by banks and other creditors that forgave Trump's debts or otherwise didn't get paid back.</p><h2>No debt parking</h2><p>John Hempton of Bronte Capital has drawn some attention for <a href="http://brontecapital.blogspot.com/2016/10/some-comments-on-new-york-times-story.html">his theory</a> that Trump could have engaged in "debt parking." In essence, instead of Trump's debts being canceled, an entity controlled by Trump could have bought the debt for pennies on the dollar, and then held it without either forgiving it or trying to collect on it.</p><p>With the debt suspended in limbo like this, Hempton suggested, Trump could have claimed there was no debt forgiveness to report. Under Hempton's theory, this would have allowed Trump to deduct from his taxes the full amount of losses related to his businesses, including those that really ended up being borne by the creditors who sold their debt for pennies on the dollar.</p><p>The main problem with Hempton's theory is that this strategy is illegal. The IRS is not perfect, but it is pretty good at identifying and disallowing such tax strategies, especially when they involve huge sums of money.</p><p>But what if the loophole at issue in the Gitlitz case allowed Trump to deduct his businesses' huge loss without needing to report the associated debt forgiveness as income - that is, what if Trump found a perfectly legal way to take credit on his personal income taxes for losing money he didn't really lose?</p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>AP</span></p><p class="caption">Donald Trump.</p></div><p></p></div></div></p><h2>The theory</h2><p><a href="http://www.taxnotes.com/tax-notes-today/cancellation-debt-income/news-analysis-donalds-double-dip/2016/10/04/18619431">That Tax Notes column</a> <span>by Sheppard, a </span><a href="http://www.nytimes.com/2007/08/31/business/31tax.html?_r=2&amp;ex=1190260800&amp;en=7379aee0130babf9&amp;ei=5070">prominent tax commentator</a><span> who previously practiced tax law, is behind a paywall. But it provides the best theory I've seen to date of how Trump could have come to run up such a big loss on paper, so I'm providing a summary below, and I'm hoping you'll bear with me.</span></p><p>The Gitlitz loophole - the one Congress closed in 2002 - was related to the taxation of S Corporations.</p><p>The S Corporation is corporate form for businesses that have only one or a few owners. Often, these are small businesses, but they don't have to be. S Corporations do not pay taxes directly - instead, they pass their profits and losses through to their owners, who pay tax on those profits (or deduct those losses) on their individual income-tax returns.</p><p>When an S Corporation loses money, its owners in general may deduct those losses against other income they report on their tax returns. However, there are supposed to be rules in place to ensure that taxpayers cannot deduct losses from an S Corporation that exceed what they invested in the S Corporation in the first place, plus the prior profits they have earned from the S Corporation.</p><p>That is, let's say you invest $100,000 into an S Corporation of which you are the sole owner. In the first year, the S Corporation earns profits of $50,000, of which you enjoy 100%. In the next year, the S Corporation loses money. Then, you may deduct these losses from your taxes, but not to the extent they exceed $150,000.</p><p>Or, at least, that's how it's supposed to work.</p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span><a href="https://www.youtube.com/watch?v=RfprRZQxWps">NBC via YouTube screengrab</a></span></p><p class="caption">"You double-dipped the chip!"</p></div><p></p></div></div></p><h2>The 'double dip'</h2><p>Sheppard sketches out a situation in which an S Corporation owned by Trump is the general partner in his casino businesses, which went into bankruptcy in 1991 and 1992. That S Corporation likely lost a great deal of money. It also likely owed debts related to the casino businesses that it could not pay and that were canceled as part of the bankruptcies - and/or as part of Trump's subsequent out-of-bankruptcy restructurings, which continued into 1995.</p><p>Ordinarily, canceled debts would count as taxable income to the S Corporation. But if the S Corporation were insolvent (which you would have expected it to be, if its sole assets were its equity interests in Trump's bankrupt casinos), the debt cancellation would have been excluded from its taxable income.</p><p>This exclusion makes sense if you think about the personal case: Let's say you have $300,000 in debts and no assets, and you declare a Chapter 7 liquidation bankruptcy. Your debts would be discharged. It would be silly for the government to call that discharge $300,000 in income and seek around $100,000 in taxes from you, since you have no money.</p><p>In the situation described by Sheppard, the S Corporation's massive business losses would have passed through to Trump as personal losses. The offsetting debt forgiveness enjoyed by the S Corporation would not have passed through to Trump as taxable personal income, because it was excluded from the S Corporation's taxable income. In total, Trump would have harvested a huge loss that exceeded his initial investment in and prior profits from the S Corporation.</p><p>"But wait!" I hope you are saying. "Wouldn't that put Trump afoul of the rule that his tax losses from the S Corporation can't exceed what he invested in it in the first place plus the prior profits?"</p><p>Yes, it would - except that, prior to the 2002 loophole fix, the debt forgiveness enjoyed by the S Corporation would have passed through to Trump <em>for the purposes of calculating the amount of profit the S Corporation had earned on his behalf</em>, even though the same debt forgiveness did not pass through as actual taxable profit to him.</p><p>Sheppard refers to this as a "double dip" - the tax loophole would have allowed Trump to claim losses on his individual income tax return that were ultimately borne by creditors, not by him.</p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Justin Sullivan/Getty Images</span></p></div><p></p></div></div></p><h2>The ultimate fix</h2><p>If that rule sounds stupid, that's because it was stupid. The IRS sought to disallow such tax deductions since they were obviously contrary to the intent of the laws around S Corporations. But the Supreme Court ruled in 2001, <a href="https://en.wikipedia.org/wiki/Gitlitz_v._Commissioner">by a majority of 8-1</a>, that the letter of the law allowed investors to use this tax strategy even if it made no sense. The only way to close the loophole was to change the law.</p><p>So in 2002, as a part of a broader, bipartisan package of business tax reforms, Congress did that. The new law ensured that if the cancellation of an S Corporation's debt doesn't count as taxable income, it can't increase the shareholder's basis in the S Corporation, creating additional headroom for the shareholder to deduct other losses he didn't really bear.</p><p>This package of reforms <a href="http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=107&amp;session=2&amp;vote=00044">passed the Senate</a> by a vote of 85 to 9. One of the senators voting in favor was Hillary Clinton.</p><p>I don't know that Trump benefited from this loophole, but it would fit the available evidence very well. And it would help explain how he managed to run up a tax loss so big that it amounted to nearly 2% of all the net operating losses taken on individual income-tax returns in the entire country in 1995.</p><p>It would also blow up <a href="https://www.bloomberg.com/view/articles/2016-10-03/trump-s-1995-return-shows-good-tax-policy-at-work">the narrative</a> that Trump's huge loss just reflects the tax code working properly, letting businesspeople offset their real profits with their real losses.</p><p>If Trump didn't use the Gitlitz loophole, and he really did enjoy a bona-fide economic loss of nearly $1 billion, he could prove that by releasing his tax returns in their entirety.</p><p>Until he does that, we can't just assume Trump "<span>used the tax code just the way it's supposed to be used," as his running mate Gov. Mike Pence claimed Tuesday night. After all, like the rest of us, Pence has not seen the entire tax returns he is purporting to bless.</span></p><p class="tagline">This is an editorial. The opinions and conclusions expressed above are those of the author.</p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/map-shows-how-religion-spread-around-the-world-2016-9">This animated map shows how religion spread across the world</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="F5aHR4dTob1y4-cHP5qNzXITGcq1vPVW" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

Here's the best theory we've seen of how Trump paid so little tax

<p><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"></div><p></p></div></div>As far as medical technology goes, there's never been a better time to be alive than the present.</p><p>Before antibiotics were discovered, diseases caused by bacteria (like tuberculosis, diphtheria, pneumonia, and various infections) <a href="http://www.cdc.gov/mmwr/preview/mmwrhtml/mm4829a1.htm">were the leading causes of death in America.</a></p><p>What if all those people who died had somehow been able to benefit from our modern technology?</p><p>Today, some people are <a href="http://cryogenics.nist.gov/AboutCryogenics/about%20cryogenics.htm">freezing their bodies or heads at death</a> in hopes of future cures for what ails them. Their goal is to be revived and cured. While several companies will take your money to freeze your body or head, there isn't solid <keyword id="41551" type="ENTERTAINMENT" weightage="100" keywordseo="science">science</keyword> showing that this will work.</p><p>We know it's even crazier to think that we could have successfully cryogenically frozen people in the past, when medical technology was far behind what we have today, but let's have a little fun, shall we?</p><p>Here are seven historic people (of thousands - likely millions) who died of things we could treat today, theoretically, if we had their thawed, freshly-dead and somehow rejuvenated bodies to work with:</p><h2>Jane Austen</h2><p>Jane Austen, that beloved author of "Pride and Prejudice" and five other novels, <a href="http://www.jasna.org/info/about_austen.html">died in 1817</a> at the age of 41. She'd been ill for quite a while, according to letters she sent in the last year of her life. Sir Zachary Cope was the <a href="http://www.orchard-gate.com/bmj.htm">first to diagnose Austen</a> with Addison's disease, in a 1964 article in the British Medical Journal. Interpreting the weakness, back pain, stomach upset, faintness, and skin discoloration Austen described in her letters (and symptoms she didn't mention), Cope thought Addison's disease was probably what killed her.</p><p>In people with <a href="http://www.mayoclinic.org/diseases-conditions/addisons-disease/basics/definition/con-20021340">Addison's disease</a>, the adrenal glands don't produce enough of the hormones cortisol and aldosterone. These hormones help coordinate metabolism and blood pressure to keep the body running smoothly. When there's not enough of them in the body, people with Addison's suffer from weak and painful muscles, blood pressure low enough to faint, discolored skin, nausea, diarrhea, and vomiting. If the hormone levels get low enough, it <a href="http://www.mayoclinic.org/diseases-conditions/addisons-disease/basics/treatment/con-20021340">can trigger a life-threatening "addisonian crisis"</a> as blood pressure and blood sugar drop, which may have been what happened to Austen.</p><p>If she did indeed die in an addisonian crisis, today doctors would treat Austen with an IV of hydrocortisone, saline, and sugar to bring her back, then she'd have to keep taking the hormones her adrenal glands weren't producing. Perhaps she would be able to <a href="http://www.jasna.org/info/about_austen.html">finish a seventh novel</a>, "Sanditon," that she'd started but didn't finish before she died. We'll never know how that one ends.</p><h2>Vivien Leigh</h2><p><div class="KonaFilter image-container display-table float_left"><div><div class="image on-image"></div><p></p></div></div>Vivien Leigh is perhaps best known for her Oscar-winning performance as Scarlett O'Hara opposite Clark Gable as Rhett Butler in "Gone with the Wind."</p><p>Before she <a href="http://life.time.com/culture/vivien-leigh-on-her-100th-birthday-portraits-of-a-movie-legend/#1">died of tuberculosis</a> in 1967 at age 53, she'd had the disease for several years. Mycobacterium tuberculosis is <a href="http://report.nih.gov/nihfactsheets/ViewFactSheet.aspx?csid=31">to blame for tuberculosis' symptoms</a>: fever, a flushed complexion, and a dry, persistent cough that brings up blood.</p><p>Though drug-resistant tuberculosis is a concern today, it's likely Leigh's historical case could be treated with antibiotics, if we were able to bring her back.</p><p>Before Leigh's time,<a href="http://www.cmnewsletter.com/article/S0196-4399(09)00048-8/fulltext">tuberculosis also did in Emily Bronte</a>, Edgar Allen Poe, Walt Whitman, Henry David Thoreau, and John Keats. It's not that the disease was especially popular among authors in the 19th century, it was just that common for everyone. Thanks to effective antibiotics and changes in living conditions, deaths from tuberculosis have <a href="http://report.nih.gov/nihfactsheets/ViewFactSheet.aspx?csid=31">gone down steadily</a> since the beginning of the 20th century.</p><h2>James Garfield</h2><p>America's 20th president didn't even hold the office a full year before he was <a href="https://www.whitehouse.gov/1600/presidents/jamesgarfield">assassinated in 1881</a>. But it wasn't really the assassin's bullet that killed him - it was the <a href="http://www.nytimes.com/2011/10/02/books/review/destiny-of-the-republic-by-candice-millard-book-review.html?_r=0">doctors who didn't wash their hands</a> or instruments before they tried to remove the bullet from his back. Garfield's wound became infected, and he hung around 11 excruciating weeks before dying. It's more a change in medical practice to sterilize wounds and medical tools with antiseptics (which were around at the time) than an actual technological advance that could've saved Garfield. Still, he'd have a better shot today with modern antibiotics.</p><p>Though Garfield's case is one-of-a-kind, he's not too different from the thousands of <a href="http://www.sciencedirect.com/science/article/pii/S0891552004000236">Civil War soldiers who died from wound infections</a>. Antibiotics, antiseptics, and sterile operating and examining procedures would have saved a lot of lives.</p><h2>Prince Leopold</h2><p><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"></div><p></p></div></div>Hemophilia <a href="https://www.hemophilia.org/Bleeding-Disorders/History-of-Bleeding-Disorders">ran in the genes of Europe's royal families</a> in the 19th and 20th centuries, likely because Queen Victoria of England was a carrier, had many children, and in those days royals had a tradition of marrying other royals. Her own son, Prince Leopold, had the disease, meaning his blood <a href="http://www.mayoclinic.org/diseases-conditions/hemophilia/basics/definition/con-20029824">lacked the proteins to make it clot</a> after a cut. He <a href="https://www.hemophilia.org/Bleeding-Disorders/History-of-Bleeding-Disorders">died</a> in 1884, age 30, after a fall that caused him to bleed heavily.</p><p>We don't have a cure for hemophilia today, but we know <a href="http://www.mayoclinic.org/diseases-conditions/hemophilia/basics/treatment/con-20029824">how to treat</a> it. Prince Leopold could get regular treatment that would help his blood clot, and he could get an emergency dose of clotting factors if he started bleeding profusely. He would have a much better chance of making it past 30.</p><h2>Peter Ilich Tchaikovsky</h2><p>Though there's controversy surrounding the death of the composer who brought us "Swan Lake" and "The Nutcracker," <a href="http://www.bbc.co.uk/radio3/classical/tchaikovsky/atoz/tchaik_d_death.shtml">cholera is most likely what killed Tchaikovsky</a>. He probably got cholera from drinking water or eating food with Vibrio cholerae, the bacteria <a href="http://www.cdc.gov/cholera/general/index.html">responsible for the disease</a>, in it. Tchaikovsky reportedly took ill the evening of October 20, 1893, and was diagnosed with cholera the next day. His symptoms might have included diarrhea, vomiting, and leg cramps before dying of kidney failure as a complication of all the body fluids lost.</p><p>Today, cholera is treated primarily by drinking or getting an IV (if it's an emergency) of a solution of salts, sugars, and water to <a href="http://www.cdc.gov/cholera/general/index.html">replace the lost </a><a href="http://www.cdc.gov/cholera/general/index.html">bodily fluids and electrolytes</a>. Antibiotics would have also helped Tchaikovsky, if they had existed. But if he was actually killed by poisoning, as some <a href="http://www.bbc.co.uk/radio3/classical/tchaikovsky/atoz/tchaik_d_death.shtml">conspiracy theories suggest</a>, all bets are off.</p><h2>René Descartes</h2><p>You probably know at least one thing Descartes said: "I think, therefore I am." The famous philosopher <a href="http://www.egs.edu/library/rene-descartes/biography/">died in 1650 of pneumonia</a>, apparently contracted as his health declined from living in Sweden's harsh climate and getting up at 5 a.m. to tutor the queen in philosophy.</p><p>We can't know whether it was bacteria, a virus, or a fungus that infected Descartes's lungs to <a href="http://www.mayoclinic.org/diseases-conditions/pneumonia/basics/definition/con-20020032">make them fill up with fluid</a> so he couldn't breathe, but if was bacteria, <a href="http://www.mayoclinic.org/diseases-conditions/pneumonia/basics/treatment/con-20020032">antibiotics could have helped</a> him. While pneumonia is still a concern today, especially for people over 65, we have a lot more resources to treat it than the likes of Charlemagne, Robert E. Lee, Victor Hugo, and Benjamin Franklin had when <a href="http://www.cmnewsletter.com/article/S0196-4399(09)00048-8/fulltext">they died</a> of it long ago.</p><h2>Wilbur Wright</h2><p><div class="KonaFilter image-container display-table Full"><div><div class="image on-image"></div><p></p></div></div>One of first men to fly <a href="http://airandspace.si.edu/exhibitions/wright-brothers/online/age/1914/typhoid.cfm">died</a> from a very common cause for his time: typhoid fever. <a href="http://www.cdc.gov/nczved/divisions/dfbmd/diseases/typhoid_fever/">Infection with the bacteria S</a><a href="http://www.cdc.gov/nczved/divisions/dfbmd/diseases/typhoid_fever/">almonella Typhi</a> not only causes the fever the disease is named for, but also weakness, stomach pains, headache, and a rash. Wilbur Wright was 45 when he died in 1912, but today doctors could treat him with antibiotics and he'd probably recover.</p><p>While we're dreaming big, let's also consider the 27,058 Union soldiers who <a href="http://www.sciencedirect.com/science/article/pii/S0891552004000236">died of typhoid fever</a> during the Civil War, about 36% of all the Union soldiers diagnosed with the disease. Two thirds of the soldiers who died in the Civil War died from disease, not battle wounds. We'd be able to treat them much more effectively today.</p><p>All that's not to say no one dies of any of these diseases anymore, unfortunately.</p><p>The <a href="http://report.nih.gov/nihfactsheets/ViewFactSheet.aspx?csid=31">WHO reported</a> 1.8 million deaths from tuberculosis in 2008, making it one of the leading causes of death in the world. People with HIV are more vulnerable to infection by tuberculosis, and antibiotic-resistant strains of the bacteria responsible for the disease are increasingly problematic.</p><p>Really, antibiotic-resistant <a href="http://www.businessinsider.com/antibiotic-resistant-superbugs-are-causing-bacterial-infections-2014-12">bacteria are a terrifying prospect</a> across the board. But at this moment in time, we should definitely appreciate how far we've come in the past century, and look forward to making a longer list in another 100 years.</p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/how-to-get-famous-youtube-superstar-bethany-mota-2015-1">This is what it takes to get famous on YouTube</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="F2YjZjcjqQw8BFVT6EJbzBGqNpt3nvOa" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

7 famous people who should have been cryogenically frozen when they died

<p><div class="KonaFilter image-container display-table float_right"><div><div class="image"><p class="source"><span>Bloomberg, screenshot</span></p><p class="caption">Jim Chanos</p></div><p></p></div></div>NEW YORK (Reuters) - After years of hiding under their desks, short sellers are re-emerging - slowly.</p>
<p>Investors who make a living betting that stock prices will fall are happy to forget 2013: The S&amp;P 500 gained nearly 30 percent while Credit Suisse's index of hedge funds with a dedicated short bias lost 25 percent.</p>
<p>Buying the most heavily shorted stocks was a much better bet than the S&amp;P 500: A list of top shorted stocks from SunGard's Astec Analytics beat the S&amp;P 500 by 26 percentage points on average last year.</p>
<p>But with the Federal Reserve beginning to cut back on its bond buying - in a withdrawal of the stimulus that underpinned the rally - there's hope for short sellers in 2014.</p>
<p>Jim Chanos, president and founder of Kynikos Associates and one of the most prominent short sellers, said the market is primed for people like him and as a result he has gone out to raise capital.</p>
<p>"Now I think is not a bad time to be raising capital for what we do. When we got a rough going in the mid-90s, that was exactly the time to raise capital," Chanos said, adding it was better to do this when critics viewed him as "like the village idiot and not an evil genius."</p>
<p>Already, there are signs 2014 may be different. Stocks haven't been rising as a herd in the way they did in 2013, and some of last year's high-profile winners are being re-examined.</p>
<p>Electronics retailer Best Buy Co shares suffered their worst day in 11 years on Thursday, falling almost 30 percent after disappointing sales undermined the bullish thesis that helped the stock triple in 2013. It fell further on Friday.</p>
<p>The 50-day rolling correlation between the S&amp;P 500 and its components peaked last year in May at 0.73, soon after Fed Chairman Ben Bernanke first broached winding down the stimulus.</p>
<p>It dropped to 0.5 in October before bouncing back late in the year, but has since resumed its decline after the Fed announced cuts to its monthly bond buying, according to data from Bespoke Investment Group, a financial research firm based in Harrison, New York.</p>
<p>Bill Fleckenstein, president at Fleckenstein Capital Inc in Seattle, a notable short-seller who closed his short fund around the time the market bottomed in 2009, said he was about to start the process of raising money for a new short fund.</p>
<p>"We're about done with the document and I'll be marketing it officially very shortly, like within a week," he said.</p>
<p>That's not to say he is brimming with confidence - not yet.</p>
<p>"It's dangerous to be short still, but we might be building toward a moment - whether it's two weeks from now or 10 months from now I don't know, where the market becomes quite vulnerable," said Fleckenstein.</p>
<p>Don Steinbrugge, chairman of Agecroft Partners, a global consulting and third party marketing firm for hedge funds, said "long/short" equity - a strategy betting both on and against stocks - will see the most demand among all hedge fund strategies this year.</p>
<p>Long/short equity represented more than 40 percent of the hedge fund industry assets before 2008. The sector then experienced large outflows to other hedge fund strategies including commodity trading advisers (CTAs) and various fixed income-oriented strategies.</p>
<p>Its market share of industry assets bottomed out at approximately 25 percent in the beginning of 2013.</p>
<p>"Last year saw this trend reverse, and we expect very high demand for long/short equity in 2014," Steinbrugge said.</p>
<p>In fact, 2013 saw record inflows to long/short funds of more than $20.5 billion, up from $5.7 billion in 2012, according to data compiled by Morningstar.</p>
<p>Neuberger Berman Group LLC is taking advantage of the environment. The New York-based investment firm recently launched its second mutual fund that employs external hedge fund managers to manage its assets. The Neuberger Berman Long Short Multi-Manager Fund will employ the "long/short" strategy.</p>
<p>Long/short funds are slowly shifting toward the short side, though for now they're still aligned bullishly.</p>
<p>Their long/short ratio sits at 55 percent, according to Credit Suisse, down modestly from the beginning of the year. They had built short positions late in 2013 and the ratio did fall to about 47 to 48 percent in mid-November, until the year-end rally caused hedge funds to cover those positions.</p>
<h3>UNDER THE MICROSCOPE</h3>
<p>In the last week, S&amp;P 500 companies that have seen the biggest increase in shares borrowed for short bets according to Markit include Borgwarner, BB&amp;T Corp, and Best Buy, all of which recently touched 52-week highs.</p>
<p>Internet retailers TripAdvisor Inc and Expedia Inc, big winners in 2013, have seen an uptick in interest as well.</p>
<p>"There's growing interest on (shorting) a number of stocks, concentrated in areas that did well last year," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.</p>
<p>In 2013, just one of Astec Analytics' 10 most shorted stocks of the year made it to Markit's list of top 20 performing North American shorts - department store group J.C. Penney.</p>
<p>Still, going short Penney, whose sales collapsed after bad missteps by management, was enough for some.</p>
<p>Suvretta Capital Management, founded by a former portfolio manager for top investors George Soros and Steven A. Cohen, told clients this week its bet against Penney shares helped contribute to solid returns for its long/short strategy in the last two years.</p>
<p>"On the short side, we have now generated profits three times (generating a total return of approximately 130 percent) in the past two years with our J.C. Penney positions," Suvretta Chief Investment Officer Aaron Cowensaid in a client letter obtained by Reuters.</p>
<p>Ariad Pharma and Aveo Pharma, down 64 percent and 77 percent last year, respectively, were also among the few bets that worked for short sellers in 2013. Some see more opportunities in the sector.</p>
<p>"Biotech is in full bubble mode, meaning companies that have no prospects of a drug continue to grind higher," said John Hempton, chief investment officer and founder of Bronte Capital, a Sydney, Australia-based asset management firm that often takes short positions.</p>
<p>Short sellers say they believe bulls may be getting too confident. The S&amp;P 500's forward price-to-earnings ratio is at its highest since mid-2007.</p>
<p>Goldman Sachs, in a recent note, expressed concern that investors expect P/E multiples to continue to expand to a level that would match the 1997-2000 technology bubble.</p>
<p>"Short selling over the last two years has been a hedge against profits," said Douglas Kass of hedge fundSeabreeze Partners Management Inc. But he said recent disappointments from companies as varied as Ford, Intel, and Elizabeth Arden are signs that the "tide might be turning."</p>
<p>(Reporting by Rodrigo Campos and Sam Forgione; Editing by David Gaffen, Jennifer Ablan, Martin Howell and Sophie Hares)</p>

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<p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>China Daily/Reuters</span></p><p class="caption">The Alibaba office in Hangzhou, Zhejiang Province.</p></div><p></p></div></div></p><p>Last weekend, <a href="http://www.barrons.com/articles/alibaba-why-it-could-fall-50-further-1442036618">Barron's published<span> a brutal 3,000-word cover story</span></a> on why Alibaba's business and stock looked like trouble.</p><p><span>In addition to saying the stock could experience "a decline of up to 50%," author Jon Laing suggested the Chinese online marketplace and its CEO, Jack Ma, were actually making up some of its flashy performance numbers.</span></p><p>Laing made three claims about Alibaba that stuck out:</p><ul><li><strong>"Dream" stock:</strong> Alibaba is overvalued at its current 25x price-to-earnings multiple. It should be valued closer to eBay's 15x forward price-to-earnings since the businesses have similar operations.</li><li><strong>"Puzzling" user numbers:</strong> Alibaba's user numbers seem too high. The government says there were 361 million online shoppers in all of China during 2014, while Alibaba claims to have 367 million active users buying just from their site. The article questioned the accuracy of Alibaba's number.</li><li><strong>"Hard-to-square" user spending:</strong> The amount Alibaba says users spend on its site is too high. Barron's said that US consumers spend $1,655 per shopper online, while Alibaba claims that its customers spend $1,215 a year on its site alone. Given the higher relative income of the US population, those numbers are too close. Initially, Laing wrote that Alibaba claimed its average shopper spent 26% more than the average US online shopper. That error was later corrected by Barron's.</li></ul><p><span>"In the end, gaudy financial reports can only work for so long before reality intrudes," Laing wrote. "This hard lesson figures to be driven home to Ma and his trusting investors in the coming years, and it won't be pretty."</span></p><p>As expected, this drew a significant reaction from media sources and eventually an <a href="http://www.alizila.com/alibaba-responds-barrons-story">open-letter rebuttal</a> from Jim Wilkinson, Alibaba's senior vice president of corporate affairs.</p><p>Business Insider considered the claims and evidence presented by both sides. We also spoke to investors and analysts. It seems that while the statistics remain murky, the doom and gloom over Alibaba's business is unfounded.</p><h2>It's a mistake to compare shares of Alibaba and eBay today</h2><p>One of the first issues Laing takes up with Alibaba is on its price-to-earnings ratio, or how much of a premium investors pay for the company's profits.</p><p>As Laing noted, Alibaba's current <a href="http://quotes.wsj.com/BABA">P/E ratio is around 25x</a>, but the company notes that it's around 20x if you're considering projected 2016 earnings. Laing would argue it's too high considering that eBay's forward P/E ratio is only 15x, and the companies have similar business models.</p><p>Comparing the two companies, however, is unfair considering where each company is in its evolution and where each company operates.</p><p>In a note to clients Monday, SunTrust analyst Robert Peck called the comparison "nonsensical."</p><p>"It neglects the drastically different growth rates which would justify higher multiples," wrote Peck. "Further, we would also note that eBay traded at higher multiples vs. its current multiple in higher growth periods."</p><p>Alibaba's primary market in China is still in its infancy and has exceptional room to grow. Only <a href="http://www1.cnnic.cn/AU/MediaC/rdxw/2015n/201507/t20150727_52663.htm">around 48.8% of people living in China</a> have access to the internet, and that number is expanding rapidly.</p><p>By comparison, eBay's primary market in the US had <a href="https://www.census.gov/prod/2005pubs/p23-208.pdf">that level of internet penetration in 2000</a>, and the day eBay <a href="http://investor.ebay.com/common/mobile/iphone/releasedetail.cfm?ReleaseID=31808&amp;CompanyID=ebay&amp;mobileid=">reported its earnings for 2000</a>, the company's P/E ratio was 227x, based on <a href="http://finance.yahoo.com/q/hp?s=EBAY">historical stock data</a>.</p><p>Even moving a few years past the tech bubble, eBay's P/E was around 82x in January 2003 and 60x in January 2006, which is around the time the company reported earnings for <a href="http://investor.ebay.com/common/mobile/iphone/releasedetail.cfm?ReleaseID=99663&amp;CompanyID=ebay">2002</a> and <a href="http://files.shareholder.com/downloads/ebay/0x0x40071/85A41A2F-DD13-40DD-9EBD-61454B020800/EBAY_News_2006_1_18_Earnings.pdf">2005</a>, respectively. <a href="https://www.census.gov/prod/2005pubs/p23-208.pdf">By 2003</a>, internet penetration was 59% of US households, and 68% in 2005.</p><p><div class="KonaFilter image-container display-table"><div><div class="image"><p class="source"><span>Business Insider/Andy Kiersz</span></p><p class="caption">You could argue Alibaba is expensive, but it's easy to argue that Alibaba is cheap.</p></div><p></p></div></div></p><p>"The argument that Alibaba should have the same P/E multiple as eBay is absurd," Mark Mahaney, an analyst covering tech companies for RBC Capital, told Business Insider. "Their growth rates are dramatically different, you can't compare the two."</p><p>Mahaney said that due to the way the market views companies, one such as Alibaba that is still growing by leaps and bounds will always have a higher P/E value than a company like eBay which has slower, steadier annual growth.</p><p>Furthermore, an Alibaba spokesman told Business Insider that comparing eBay to Alibaba is unfair because person-to-person selling is just one part of the business, Taobao. The company also has TMall, which sells business-to-consumer, more like Amazon.</p><p>"You're only comparing one part of the business and that doesn't encapsulate all of what Alibaba does," said the spokesman.</p><h2>Yes, it's imaginable that Alibaba's user numbers are that huge</h2><p>Another large concern raised in Laing's piece is just how many people are using Alibaba, and t<span>his is where suggestions of shady record-keeping come in</span>.</p><p>Alibaba, in multiple presentations and again in Wilkinson's response, claims that it had 367 million active buyers in 2014. Laing countered that the China Internet Network Information Center, the official internet tracking branch of the Chinese government, reported only 361 million total online buyers in 2014 for all of China's ecommerce sites.</p><p>While the numbers are close enough to seem compelling, Laing is comparing two different things.</p><p>According to the Alibaba spokesman, the 367 million is the number of accounts that made a purchase on Alibaba during the previous 12 months. They noted that the accounts could be businesses, since there is an important business-to-business aspect of Alibaba. Furthermore, it's possible for individuals to have more than one account.</p><p><span>This isn't a stretch, considering even Facebook estimates that <a href="http://venturebeat.com/2014/02/03/facebook-has-no-idea-how-many-fake-accounts-it-has-but-it-could-nearly-140m/">between 5.5% and 11.2%</a> of its users are fakes or duplicates, and the model of Alibaba lends itself to more duplicate accounts.</span></p><p><span><div class="KonaFilter image-container display-table"><div><div class="image"><p class="source"><span>China Daily China Daily Information Corp/Reuters</span></p></div><p></p></div></div></span></p><p>John Hempton, chief investment officer of Australia-based hedge fund Bronte Capital, told Business Insider that while he has concerns about Alibaba's business, the number isn't one of them.</p><p>"That doesn't bug me much," he said. "Alibaba is ubiquitous in China, and if there are 370 million online shoppers in the country, it wouldn't surprise me if there are that many active accounts."</p><p>The CNNIC number, however, is the number of humans shopping online and only in a six-month period, two elements that would logically make the number lower.</p><p>There's also the issue of the reliability of China's official statistics, which are notorious for being inaccurate.</p><p>"I wouldn't be surprised if there was under-counting the number of consumers on the CNNIC's part," RBC's Mahaney said.</p><h2>How much consumers are spending on Alibaba</h2><p>Another point of contention between Laing's article and Alibaba was the amount that consumers spend annually on the site, especially as it compares to e-commerce spending in the US.</p><p>Originally, Laing's post claimed that US consumers spent less than $1,000 shopping online per year compared and Chinese consumers spent $1,215 per year on Alibaba. Citing US Census Bureau data, Alibaba said in its response that US consumers actually spend $1,655 annually online.</p><p>Alibaba also said Chinese consumers on average spend $1,056 on Alibaba. Barron's corrected the article to match the US number from Alibaba's response, but maintained its estimate of spending on Alibaba.</p><p>Based on analysis of <a href="http://www.businessinsider.com/women-are-driving-growth-in-mobile-commerce-heres-how-2015-9">reports developed by BI Intelligence</a> and <a href="https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf">data from the US Census Bureau</a>, Business Insider estimated that the average US consumer spent roughly $1,400 online shopping annually.</p><p><div class="KonaFilter image-container display-table float_right"><div><div class="image"><p class="source"><span>Sean Gallup/Getty Images</span></p><p class="caption">Alibaba founder Jack Ma.</p></div><p></p></div></div>Laing wrote that it "strains credulity" to expect that Chinese consumers spend almost as much only on Alibaba as US consumers spend total online in a year.</p><p>"<span>That $1,215 average spend at Alibaba also seems high in view of the total average annual per capita expenditure in China, online and at physical stores; that stands at about $2,260," said the Barron's article. </span></p><p><span>"It strains credulity that the average Alibaba user would spend over half of his consumer outlays on Taobao and Tmall, given that the sites have a negligible presence in categories that account for the bulk of consumer spending, like food and beverages, housing, transportation, home health products, and restaurant dining," it continued.</span></p><p><span>RBC's Mahaney doesn't think this is so far-fetched. </span></p><p><span>"Alibaba has a dominant share of the market, somewhere in the magnitude of 80 to 90%," Mahaney said. "The spending amount just shows how dominant they are."</span></p><p>Mahaney also points out, as did Laing in the article, that Chinese consumers purchase more items online than US consumers do. This includes everything from household staples to high-end luxury goods.</p><p>Another critical factor is that the average Alibaba user is not the same thing as the average Chinese consumer. Alibaba users are only those 47% with internet access, and poorer consumers in rural areas that would deflate the consumer spending numbers are not Alibaba customers.</p><p>Additionally, the consumer-spending numbers from the government are, again, <a href="http://www.bloomberg.com/news/articles/2014-05-27/china-online-spending-power-unmasked">probably understated</a>.</p><h2>Ultimately ...</h2><p>You can never know for sure who's right or wrong because data can be revised, consumer behavior can turn, competitors may rise, etc.</p><p>But if you're going to call into question a company's financial reporting, you better have substantial and convincing evidence to that effect. In Alibaba's case, the numbers don't seem to be outside the realm of being reasonable for a company that has such a dominant footprint in a growing market.</p><p>Investors and traders seem to agree. The stock ended the week up 3% since its open Monday.</p><p>When asked for comment, Barron's said it stands by the article.</p><p>If you missed any of that, here it is summed up in chart form:</p><p><div class="KonaFilter image-container display-table"><div><div class="image"><p class="source"><span>Andy Kiersz/Business Insider</span></p></div><p></p></div></div></p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/global-market-meltdown-stocks-oil-2015-8">RED EVERYWHERE: It's a global market meltdown</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="F3NTU1dzpxuF4acJ9B_9g5mwKWDZ5O4E" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

Barron's said Alibaba's numbers look unreal. We looked into it ...

<p><div class="image-container" style="width:612px"><div class="image"></div><p class="source"><a href="https://www.youtube.com/watch?v=PEORpjVNJQk">YouTube</a></p></div></p>
<p>Everyone has been talking about the hedge fund war over <keyword id="380994" type="ORGANIZATION" weightage="60" keywordseo="Herbalife">Herbalife</keyword> — a multi-level marketing firm that sells weight loss and nutrition products.</p>
<p>One one side we have hedge fund titan <keyword id="1150206" type="PERSON" weightage="60" keywordseo="Bill-Ackman">Bill Ackman</keyword>, the founder of <keyword id="1651980" type="COMPANY" weightage="60" keywordseo="Pershing-Square-Capital-Management">Pershing Square Capital Management</keyword>, who is shorting the stock.</p>
<p>After Ackman publicly declared his short, hedge fund heavyweight Daniel Loeb, the founder of Third Point LLC, took out a 8.24% stake in the company on the long side.  Some other fund managers have also gone long Herbalife after disagreeing with Ackman's short case.</p>
<p>Ackman's rival <keyword id="15937" type="PERSON" weightage="60" keywordseo="Carl-Icahn">Carl Icahn</keyword> hasn't publicly said if he's long Herbalife or not, but he slammed him on <a href="http://www.businessinsider.com/icahn-shreds-ackman-on-bloomberg-tv-2013-1">Bloomberg TV for his <span>"holier than thou" short calling him "disingenuous."</span></a></p>
<p>It's definitely been a real-life clash of the titans.</p>
<p>The most important thing you have to realize is that Herbalife itself is just the "McGuffin" in this story. It's a plot device that moves the story along, but in itself means very little. A classic McGuffin was the unidentified glowing item in the briefcase in Pulp Fiction, which Marcellus Wallace was so eager to have returned to him. What was it? Nobody knew or cared. But a fabulous story hinged on it.</p>
<p>So, if you're just coming into this story, we've put together a comprehensive guide of everything you need to know about the Herbalife hedge fund war: </p>
<ul>
<li><a href="http://www.businessinsider.com/cnbc-bill-ackman-is-short-herbalife-and-the-stock-is-diving-2012-12">On December 19, 2012, CNBC's Kate Kelly first reported</a> that hedge fund titan Bill Ackman, who runs Pershing Square Capital Management, has been shorting Herbalife because he considers the company to be pyramid scheme. </li>
<li>People knew for sometime that Ackman was short a company, but it wasn't clear which one. Ackman, who is known for being a long-only investor, had <a href="http://www.businessinsider.com/bill-ackman-new-short-2012-6">told investors in Pershing's Q1 letter</a> in June that he had new short position.  Then, in October, during a CNBC appearance on "Squawk Box" he wouldn't reveal his short, but said <a href="http://www.businessinsider.com/bill-ackmans-patriotic-short-2012-10">the country would be better off when it goes out of business</a>.</li>
<li>After CNBC reported Ackman's short, the stock began to tank.  That day, <span>shares of Herbalife fell $5.16 yesterday, or </span><span class="skimwords-unlinked">12.14</span><span>%, to close at $</span><span class="skimwords-unlinked">37.34</span><span> a share. </span><span><br /></span></li>
<li><a href="http://www.businessinsider.com/herbalife-ceo-the-us-will-be-better-when-bill-ackman-is-gone-2012-12">Herbalife's CEO Michael Johnson told CNBC in a telephone interview</a> that Ackman's "pyramid scheme" claim is a "bogus accusation" and that it's "blatant market manipulation." </li>
<li>The next day on December 20, 2012, Pershing Square gave an <a href="http://www.businessinsider.com/bill-ackman-short-herbalife-2012-12">extremely in-depth three-hour long, 342-slide presentation at a special Sohn Conference event</a> in Midtown Manhattan.  Ackman explained that he thinks Herbalife is a pyramid scheme.  He has a price target of zero and has pledged to donate any personal profits to charity.  He also refuted Herbalife's claim of market manipulation saying they didn't own options. </li>
<li>Herbalife <a href="http://www.businessinsider.com/herbalife-not-an-illegal-pyramid-scheme-2012-12">responded to Ackman's presentation</a> later that day calling it a "malicious attack" and accused him of using "outdated" and "inaccurate information."  The company also stated in a release that it is "not an illegal pyramid scheme." The company said that it would hold an analyst/investor day to rebut Ackman's claims. </li>
<li>Ackman's attack on Herbalife didn't stop with his presentation.  He unveiled <a href="http://factsaboutherbalife.com/">FactsAboutHerbalife.com</a>.  The website features documents, promotional material from the company, videos and depositions.  He also <a href="http://www.businessinsider.com/ackman-buying-google-ads-for-the-term-herbalife-2012-12">took out some Google Ads</a> when people search terms related to "Herbalife." </li>
<li>On January 9, Daniel Loeb, the founder of Third Point LLC, filed a 13D with the Securities and Exchange Commission that his hedge fund had taken a 8.24% stake (8.9 million shares) in Herbalife.  In a <a href="http://www.businessinsider.com/dan-loeb-herbalife-thesis-2013-1">letter to investors</a>, Loeb said Ackman's pyramid scheme claim had "no merit" and called his short "preposterous." The New York Post later estimated that Loeb bought <a href="http://www.businessinsider.com/dan-loebs-herbalife-bet-profit-2013-1">Herbalife at $32 a share</a>. </li>
<li>Other fund managers such as <a href="http://www.cnbc.com/id/100349790/Activist_Takes_on_Ackman_Over_Herbalife">Robert Chapman of Chapman Capital</a> and John Hempton of Bronte Capital disagree with Ackman's short case, too.  <a href="http://www.businessinsider.com/john-hempton-rips-into-bill-ackman-2013-1">Hempton even published a blog post lambasting Ackman</a> saying that he screwed up his short because he has a "misplaced silver spoon" and can't talk to poor people.</li>
<li>There was also speculation that David Einhorn of Greenlight Capital might be short.  Back in May, Einhorn raised some questions during an HLF conference call and the stock dived. <span>The </span><a href="http://online.wsj.com/article/SB10001424127887323539804578260023090699616.html?mod=WSJ_latestheadlines">Wall Street Journal's Juliet Chung reported</a> <span>that Einhorn shorted Herbalife last year and it was  profitable for Greenlight.  Einhorn does not currently have a bet on the </span><span>multi-level marketing firm that sells nutrition products.  It's also unclear how big his short was and what the profits were, the report said. </span><span><br /></span></li>
<li>The world's greatest short seller <a href="http://www.businessinsider.com/jim-chanos-on-herbalife-hedge-fund-battle-2013-1">Jim Chanos weighed in on the hedge fund war</a> between Ackman and Loeb in a Reuters TV interview.  He said he thinks it will come down to who can prove it's a good business proposition or not.  Chanos, who said he's looked at the MLM industry, wouldn't say if he's short Herbalife. </li>
<li>On January 10, Herbalife hosted its analyst/investor day in Midtown Manhattan. The company gave a 102-slide presentation that aimed to debunk the points that Ackman made about their distribution, retail sales and accounting methods, among other things.  <a href="http://www.businessinsider.com/herbalife-investor-day-presentation-2013-1">Herbalife also claimed that Ackman was "misleading" and used "misinformation."</a></li>
<li>Then, Ackman fought back.  He said <a href="http://www.businessinsider.com/ackman-respond-to-herbalife-presentation-2013-1">"the company distorted, mischaracterized, and outright ignored large portions"</a> of Pershing Square's mammoth presentation. He said Pershing Square would publicly release a series of questions and have another presentation. </li>
<li>On January 14, shares of Herbalife <a href="http://www.businessinsider.com/shares-of-herbalife-have-rallied-back-2013-1">rallied back above the pre-Ackman short levels</a>.  They're currently up about 1.7% since December 18, the trading session before Ackman confirmed his short.  On December 24, the stock hit a 52-week low of $24.24 a share. </li>
<li><span>The most recent news is that Ackman's rival Carl Icahn, who hasn't publicly said if he's long Herbalife or not, slammed him on </span><a href="http://www.businessinsider.com/icahn-shreds-ackman-on-bloomberg-tv-2013-1">Bloomberg TV for his "holier than thou" short calling him "disingenuous."</a>  Ackman <a href="http://www.businessinsider.com/bill-ackman-fires-back-at-carl-icahn-2013-1">fired back in a press release</a> saying Icahn is a good investor, but doesn't keep his word.</li>
</ul>
<p>We'll keep following this story as it develops. </p>
<p><strong>SEE ALSO: <a href="http://www.businessinsider.com/ackman-icahn-hallwood-contract-2013-1">The contract that started a huge feud between Bill Ackman and Carl Icahn &gt;</a></strong></p>

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