Eddie Lampert is an investing genius. He is this generation’s Warren Buffett. Just take all the other hero worship language and insert it here. Lampert found ways to make more money on Sears and Kmart than anyone else did and he did it at a time when almost everyone else saw a bunch of crumbling retailers. So now that we have all the ass kissing out of the way, let’s get to the point. I am seriously thinking of removing SHLD from the retail industry classification in HEDGEfolios and putting it into the Investment Management group.

Today, SHLD said that 4th quarter earnings could rise about 30% despite the fact that their retail sales figures are sucking wind. Oh well - investors are cheering today and giving a 3% push to the stock. I have no problem with what Lampert is doing as it all appears legal and investors seem to love worshipping him. I just need to make sure I put them in the right category. The board has given Lampert free reign to use excess cash for investments outside of retail and it seems, whatever Eddie wants to do with it, he can. Sounds like a publicly traded hedge fund to me. One difference between Buffett and Lampert is that Berkshire has been accused of being a big mutual fund and I don’t think anyone ever accused BRK/A of being a hedge fund.

Last year, SHLD generated about $3 billion of excess cash in the 4th quarter. This year, it appears they are going to generate only $1.5 billion or so. Last quarter, approximately half of their earnings were from investments and they had about $100 million in profits from something called “total return swap investments.” Returns are big in retail but these kind of returns have nothing to do with bringing back merchandise that you didn’t want and the swaps have nothing to do with in-store credit so you can swap an ugly sweater for a less ugly sweater. The real definition goes something like this….”derivative contracts that synthetically replicate the economic return characteristics of one or more underlying marketable equity securities.” Clearly, SHLD is in the business of derivatives trading and sometimes, like last quarter it works great. However, this quarter the company is reporting that it’s going to have a gain of about $20 million pretax from the net of real estate asset sales and losses on derivative transactions. Not much detail other than that and if you were counting on Lampert to generate $100 million in recurring revenue from running a hedge fund every quarter you might be disappointed. But no matter, the stock is going up anyway. Hopefully, there will be enough real estate to sell every quarter that derivatives trading doesn’t go so well.

With all the hubbub about hedge fund regulation these days, I like the brilliance of Lampert. Just buy an operating entity like Sears / Kmart and then run it like a hedge fund. If the hedgies have to disclose all their positions, will the SEC be fair and start demanding any public company will have to provide the same level of detail? If not, they should follow the SHLD model.