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Harry Newton's In Search of The Perfect Investment Technology Investor. Harry Newton Previous Columns
9:00 AM EDT, Wednesday, October 14, 2009: "You're wrong, Harry. Real estate today is the greatest opportunity around." The speaker had five big advantages:

1. He knew the area he was buying in -- intimately. He could close his eyes and "see" every building, on every street, on every corner. He'd been buying and selling in that neighborhood for 30+ years. He'd gotten rich in that neighborhood.

2. He had cash. Nothing he bought was contingent on borrowing money from a stingy bank.

3. He had no urgency. He could make an ultra low-ball offer and sit back.

4. He had no emotion. He didn't need the property because his wife loved the place.

5. He had a deal flow. The local brokers and bankers knew he was buying and could make a quick decision.

The fall of our discontent: This autumn the chickens are coming home to die. Many of us invested in businesses that looked good -- at the time. But in hindsight, they made three fatal mistakes:

1. They borrowed far too much money.

2. They relied on their lenders to act rationally.

3. They assumed infinite expansion. This assumption meant ramping up overhead, like leases, factories, etc.

As a result many of these brilliant investments are now filing for Chapter 11. We are all waking up to letters like this one which I received yesterday from the CEO:

I regret that my first communication with you is the unpleasant task of notifying you that we have filed a petition to reorganize the company under Chapter 11. This was unavoidable and necessary for the company’s survival.

I have been with the company for ten months and joined XYZ (named changed) because I was convinced that the company could be rescued from its historically ill-advised management decisions that resulted in imposing severe and substantial debt burden on its balance sheet; a crushing cost structure from a lease for facilities beyond its needs and its means; and three straight years of eroding sales due to the implementation of confusing and conflicting sales and marketing strategies. I was so confident of being able to succeed that I agreed to make a personal investment to provide needed working capital to achieve these objectives. Unfortunately, we were unable to reverse all of the negative factors aligned against us.

In addition to the problems attendant to the conduct of business in the current recessionary environment, there are four specific reasons which compelled the commencement of this Chapter 11 filing.

1. In 2004, XYZ entered into a lease agreement for space in excess of 100,000 square feet in contemplation of massive future expansion – the annual fully loaded cost of which is approximately $1.5 million. Unfortunately, sales growth did not materialize (since 2005 sales have been declining at an annual rate of almost 20%). As a result, we utilize only a mere fraction of the total leased space and the facility cost makes profitability unobtainable at our current level of sales. Despite our efforts we were unable to negotiate any relief of this financial burden with the landlord.

2. In 2007, ABC LLC agreed to lend $6 million to XYZ, of which ABC advanced only $3 million of the loan. ABC has contended that XYZ a was in covenant default of the loan, a contention which XYZ has disputed. As a consequence, ABC initiated litigation in federal district court against XYZ, seeking to recover approximately $3.7 million. Insufficiency of the advances under the loan and the costs attendant to the litigation have severely burdened XYZ and inhibited our ability to raise investor capital. Moreover, the legal fees and the distraction associated with the lawsuit have been a detriment to the company's operations. This litigation also limited my ability to communicate with you, as I was instructed by the company’s outside lawyers not to reveal financial information that would be used by ABC against the company in court.

3. Subsequent to receiving the $3 million advance on the ABC loan, the company, lead by the former CEO, invested significant amounts in re-branding by retaining consultants to change the design of the product. The re-branding campaign was launched in the first quarter of 2008 but failed due to, among other things, customer confusion with respect to the new labeling, bottle quality and appearance, coupled with an ill-advised pull-out from the grocery sector. After only four months in 2008, the re-branding strategy was abandoned and all new product shipments were halted, resulting in significant financial losses and substantial erosion of customer confidence.

4. Although the summer has historically been XYZ’s best selling season, and notwithstanding our efforts, the current recessionary climate resulted in disappointing summer sales numbers, especially over the July 4th and Labor Day weekends, with a resultant impact on our cash flow.

We have spent the past several months soliciting some of our current investors and explored new sources for the capital necessary to maintain operations and grow the company. Unfortunately, we received absolutely no interest in funding the company. Investors old and new declined to invest because of our debt load and burdensome cost structure.

Based on these factors the Board of Directors decided that the most prudent course of action was to file for bankruptcy protection in order to stabilize our operations; focus on how best to address our contractual, financial and operational burdens; to assess the practicality of our current business model; and to attract investor capital.

During the Chapter 11 reorganization we will continue to operate our business as usual with the goal of emerging with a stronger and more viable company. I will communicate with you throughout this process and keep you apprised of the status of our company.

This letter could have been stated as a one-liner, viz, "Harry, you just lost your entire investment in the company."

The Message of Dollar Disdain. The Australian dollar is up from 55 cents to 91 cents. The Euro is $1.49. It once was under a dollar. Our American dollar is slumping. There are three easy ways to play this -- the ETFs: EWZ (Brazil), EWA and GLD.

But, don't go overboard. Everyone and their uncle is so aware of the dollar collapse that it's possible to see a short-term bounce in the dollar. It's happened before. A couple of years back I moved money to Australia at almost the U.S.'s nadir. It then rose strongly and it's only now that my Australian dollars are coming back close to where I bought them. (Fortunately, I'm up on the whole deal because I was earning 8% in Australia until recently when they dropped their rates.)

Writes Clusterstock:

The growth of government debt has "decoupled" from the rest of the economy.

While households, businesses and the financial sector reduce leverage, public sector debt growth has simply exploded. As you can see from the chart, every non-governmental sector of the economy is now in debt reduction mode while governmental debt is growing a breakneck speeds.

The message of dollar disdain: Judy Shelton writes in today's Wall Street Journal:

The Message of Dollar Disdain
With U.S. debt set to exceed 100% of GDP in 2011, it's no wonder people are looking for alternative ways to preserve wealth.

Unprecedented spending, unending fiscal deficits, unconscionable accumulations of government debt: These are the trends that are shaping America's financial future. And since loose monetary policy and a weak U.S. dollar are part of the mix, apparently, it's no wonder people around the world are searching for an alternative form of money in which to calculate and preserve their own wealth.

It may be too soon to dismiss the dollar as an utterly debauched currency. It still is the most used for international transactions and constitutes over 60% of other countries' official foreign-exchange reserves. But the reputation of our nation's money is being severely compromised.

Funny how words normally used to address issues of morality come to the fore when judging the qualities of the dollar. Perhaps it's because the U.S. has long represented the virtues of democratic capitalism. To be "sound as a dollar" is to be deemed trustworthy, dependable, and in good working condition.

It used to mean all that, anyway. But as the dollar is increasingly perceived as the default mechanism for out-of-control government spending, its role as a reliable standard of value is destined to fade. Who wants to accumulate assets denominated in a shrinking unit of account? Excess government spending leads to inflation, and inflation plays dollar savers for patsies—both at home and abroad.

A return to sound financial principles in Washington, D.C., would signal that America still believes it can restore the integrity of the dollar and provide leadership for the global economy. But for all the talk from the Obama administration about the need to exert fiscal discipline—the president's 10-year federal budget is subtitled "A New Era of Responsibility: Renewing America's Promise"—the projected budget numbers anticipate a permanent pattern of deficit spending and vastly higher levels of outstanding federal debt.

Even with the optimistic economic assumptions implicit in the Obama administration's budget, it's a mathematical impossibility to reduce debt if you continue to spend more than you take in. Mr. Obama promises to lower the deficit from its current 9.9% of gross domestic product to an average 4.8% of GDP for the years 2010-2014, and an average 4% of GDP for the years 2015-2019. All of this presupposes no unforeseen expenditures such as a second "stimulus" package or additional costs related to health-care reform. But even if the deficit shrinks as a percentage of GDP, it's still a deficit. It adds to the amount of our nation's outstanding indebtedness, which reflects the cumulative total of annual budget deficits.

By the end of 2019, according to the administration's budget numbers, our federal debt will reach $23.3 trillion—as compared to $11.9 trillion today. To put it in perspective: U.S. federal debt was equal to 61.4% of GDP in 1999; it grew to 70.2% of GDP in 2008 (under the Bush administration); it will climb to an estimated 90.4% this year and touch the 100% mark in 2011, after which the projected federal debt will continue to equal or exceed our nation's entire annual economic output through 2019.

The U.S. is thus slated to enter the ranks of those countries—Zimbabwe, Japan, Lebanon, Singapore, Jamaica, Italy—with the highest government debt-to-GDP ratio (which measures the debt burden against a nation's capacity to generate sufficient wealth to repay its creditors). In 2008, the U.S. ranked 23rd on the list—crossing the 100% threshold vaults our nation into seventh place.

If you were a foreign government, would you want to increase your holdings of Treasury securities knowing the U.S. government has no plans to balance its budget during the next decade, let alone achieve a surplus?

In the European Union, countries wishing to adopt the euro must first limit government debt to 60% of GDP. It's the reference criterion for demonstrating "soundness and sustainability of public finances." Politicians find it all too tempting to print money—something the Europeans have understood since the days of the Weimar Republic—and excessive government borrowing poses a threat to monetary stability.

Valuable lessons can also be drawn from Japan's unsuccessful experiment with quantitative easing in the aftermath of its ruptured 1980s bubble economy. The Bank of Japan's desperate efforts to fight deflation through a zero-interest rate policy aimed at bailing out zombie companies, along with massive budget deficit spending, only contributed to a lost decade of stagnant growth. Japan's government debt-to-GDP ratio escalated to more than 170% now from 65% in 1990. Over the same period, the yen's use as an international reserve currency—it clings to fourth place behind the dollar, euro and pound sterling—declined from comprising 10.2% of official foreign-exchange reserves to 3.3% today.

The U.S. has long served as the world's "indispensable nation" and the dollar's primary role in the global economy has likewise seemed to testify to American exceptionalism. But the passivity in Washington toward our dismal fiscal future, and its inevitable toll on U.S. economic influence, suggests that American global leadership is no longer a priority and that America's money cannot be trusted.

If money is a moral contract between government and its citizens, we are being violated. The rest of the world, meanwhile, simply wants to avoid being duped. That is why China and Russia—large holders of dollars—are angling to invent some new kind of global currency for denominating reserve assets. It's why oil-producing Gulf States are fretting over whether to continue pricing energy exports in depreciated dollars. It's why central banks around the world are dumping dollars in favor of alternative currencies, even as reduced global demand exacerbates the dollar's decline. Until the U.S. sends convincing signals that it believes in a strong dollar—mere rhetorical assertions ring hollow—the world has little reason to hold dollar-denominated securities.

Sadly, due to our fiscal quagmire, the Federal Reserve may be forced to raise interest rates as a sop to attract foreign capital even if it hurts our domestic economy. Unfortunately, that's the price of having already succumbed to symbiotic fiscal and monetary policy. If we could forge a genuine commitment to private-sector economic growth by reducing taxes, and at the same time significantly cut future spending, it might be possible to turn things around. Under President Reagan in the 1980s, Fed Chairman Paul Volcker slashed inflation and strengthened the dollar by dramatically tightening credit. Though it was a painful process, the economy ultimately boomed.

Whether the U.S. can once more summon the resolve to address its problems is an open question. But the world's growing dollar disdain conveys a message: Issuing more promissory notes is not the way to renew America's promise.

We're playing Where's Waldo? in my mouth. Yes, there is one live tooth in my mouth. Only one remaining. And for the past two days -- guess what? It's hurting. So, I'm off to early morning "emergency" dentist appointment. The last time I visited him, he had three dentists eyeing my mouth;

Harry (with mouth wide open): "My mouth is a disaster."

Lead dentist (after some thought), "No, Harry. It's an annuity."

Hence, with this morning limited time (and aching mouth), I offer you...

The inevitable (easy) blonde jokes.

+ During a recent password audit, it was found that a blonde was using the following password:


When asked why such a big password, she said that it had to be at least 8 characters long.

+ Two blondes living in Oklahoma were sitting on a bench talking, and one blonde says to the other, "Which do you think is farther away... Florida or the moon?"

The other blonde turns and says "Helloooooooooo, can you see Florida?"

+ A blonde pushes her BMW into a gas station. She tells the mechanic it died.

After he works on it for a few minutes, it is idling smoothly.

She asks, "What's the story?"

He replies, "Just crap in the carburetor"

She asks, "How often do I have to do that?"

+ A police officer stops a blonde for speeding and asks her very nicely if he could see her license.

She replied in a huff, "I wish you guys would get your act together. Just yesterday you take away my license and then today you expect me to show it to you!"

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.