Harry Newton's In Search of The Perfect Investment, Technology Investor. Harry Newton
AM EDT, Friday, October 30, 2009: There
you have it. Conclusive proof I'm an idiot. Just as I'm telling everyone the
market is going down (yesterday),
the market bounds up 200 points. Why? Great economic news. Our GDP bounced up
3.5% in the September third quarter quarter.
number is bullshit. From today's Wall Street Journal:
product expanded at a 3.5% seasonally adjusted annual rate in the quarter
ended in September, a rise that leaned heavily on government spending. Some
of the largest components of growth came from spending on cars and house building
-- two areas propped up by federal programs.
programs such as "cash for clunkers" and a first-time homebuyer's
credit, "real GDP would have risen little, if at all, this past quarter,"
Christina Romer, president of the White House Council of Economic Advisers,
said in a statement.
Here's the Journal's
chart showing where the 3.5% came from:
can read the Journal's piece here.
Clusterstock's Chart of the Day. First their words:
If anyone mentions
the just-released 3.5% U.S. third quarter GDP growth, just throw this chart
in their face. Cash for Clunkers clearly distorted the U.S. economic figures
in an unsustainable fashion.
the Bureau of Economic Analysis (BEA), motor vehicle output spiked a seasonally-adjusted
157.6% quarter on quarter. This is completely unprecedented. Vehicle output
is clearly going off a cliff next quarter. The question will be how low can
the blue line below go.
we won't just be returning to business as usual for auto output. Don't forget
that Cash for Clunkers pulled future auto demand, ie. some of Q4 demand, into
Q3. Thus Q4 is likely to be very weak since many people who planned to buy
a car in Q4 probably took advantage of Clunkers and bought in Q3.
To put this
into GDP terms, according to the BEA the spike you see below added 1.66% to
the U.S. GDP growth figure reported. Thus without it, GDP growth would have
been only 1.89% (3.5% - 1.66%) in Q3.
if next quarter the blue line below goes down into negative territory as it
did just two quarters ago. Next quarter, not only are we unlikely to get Q3's
boost, but motor vehicle output data could subtract from GDP as well. So
watch out for the cliff. (My emphasis.)
short, we're still in a bear market.
day brings "Wall Street" a new sales opportunity.
By "Wall Street" I mean the entire financial product purveying community.
By "every day" I mean whatever the climate, whatever the prevailing
sentiment, whichever way the winds blow in the economy.
own parts of two "distress" funds. They're meant to do well when the
economy is not -- like now.
you guessed it, neither is doing well. They're both losing money. Today's story
is of a distress real estate fund. It buys buildings in trouble, fixes them
up. It buys mortgages on failing buildings, forecloses on them, takes over the
building, fixes it up, rents it out and sells it. Neat business plan, you think?
there's always a "Gotcha!" -- meaning Got Ya.
fund is down 3.65% this year and 9.38% from inception. If we're lucky, the fund
will "essentially" break even over its life, whatever that turns our
to be. Whoopee! Here's the explanation from yesterday's epistle to sad fund
holders (like me):
During the 3rd
quarter Fund II completed the foreclosure on one loan and took title to the
property. This is the first quarter since inception that no loan was paid
off. This is the result of the continuing illiquidity of the commercial real
estate market and the slow pace of foreclosures in New York (City), where
most of Fund II's loans are located.
of completing a foreclosure in New York has now manifested itself in various
ways for Fund II. It takes the Kings County (Brooklyn) Clerk's office up to
one year to process a motion to appoint a referee to compute the amount due
on a defaulted loan, one of the preliminary steps in the foreclosure process.
This motion then needs to be submitted to and signed by a judge, which can
take additional time.
With one of
Fund II's loans the borrower was able to prevent foreclosure by declaring
bankruptcy four times. Only after the fourth time did the Bankruptcy
Court dismiss the matter "with prejudice" thereby preventing a fifth
bankruptcy filing. In another foreclosure the borrower was permitted by the
Court to contest the foreclosure not only after the Court had granted a foreclosure
judgment, but after the foreclosure sale had taken place. (We were eventually
able to have this matter dismissed.)
(also called borrowers) don't like to lose their precious buildings. They believe
in hope. One day, the market will magically turn around. Their building will
be worth zillions. They'll sell it. They'll pay their lender off -- the bank,
GE, or whoever -- and they'll pocket the difference.
Now, markets do
turn around. Buildings can suddenly be worth more (or less). To many owners,
the cost of hope is the cost of lawyers delaying the foreclosure process.
The carousel goes
round and round.
The future doesn't
look bright. Commercial real estate prices have dropped 41% since their
peak in the third quarter of 2007 according to Moody's Investor Services. A
September 30 report by Goldman Sachs figured a further expected drop in commercial
real estate prices of 17% by the end of 2010 as a result of scarce credit
and rising vacancies.
part of commercial real estate is booming -- short-term, temporary retail stores.
These stores sell seasonal stuff -- like Halloween costumes, Christmas ornaments
and Easter eggs. They pay maybe one-third the rent of a full-time, long-term
tenant. But their lease is month-to-month. There are no tenant improvements
by the landlord. And the tenants typically make none, though some sweep the
floor and paint the walls.
The moral of this
story is simple: Stay away from fashionista funds -- funds created for a fashion.
happens when mineral prices drop. This is Kagara, an Australian mining
company I like. Australian companies end their financial year on June 30. (I
don't know why.) These are Kagara's latest financials:
This mess happened
when average copper and zinc spot prices fell by 36% and 46% respectively during
the financial year compared to the previous financial year. Since June 30, prices
have recovered a little.
This is what happened
to its stock:
This year copper
has doubled in price and zinc is up about 50% and the company is profitable
again. There's been a lot of heavy buying, suggesting the stock could go much
higher. The company is much stronger and bigger today than what it was in 2007.
So the hope is the stock price will rise strongly.
health care bill moves (ahead?). My
belief is simple: Get our country's priorities in order. Spend money on keeping
Americans healthy. Don't spend money on useless wars in Afghanistan and Iraq.
Don't spend money on keeping troops in peaceful, friendly countries like Japan,
Germany, South Korea etc. etc.
So, where do we
stand? We now have 1,990 pages of proposed legislation. You can read this 5
meg PDF monster. Click here.
legislation must now be passed by the House and when the Senate passes its version,
both bills go to joint conference to try to iron out their differences. It then
goes back to each body for a final vote and then to the President for signature
This could take
another several months; The final legislation may bear little relationship to
this monster. It could be even bigger. It's already doubled in size from a previous
version. Ithe end, the president could refuse to sign it, i.e. veto it, or Im
guessing, send it back for further changes.
I rememmber Obama telling us it was going to be free. Its
now estimated to cost $900 billion a year. And I bet several trillion by the
time it's all through. Owning a printing press has its charms.
a wonderful life.
My dermatoliogist has called me back for more slicing and dicing this morning.
I don't know if this will save my life. But it certainly would have saved Joey
from having his brain radiated. He didn't get his skin checked in time. He delayed
on visiting a dermatologist. His melanoma spread to his brain. Now he's on heavy
chemo and his hair is out. I pray he makes it.
weekend reading. Jeremy Grantham is a legendary money manager. His
latest quarterly report, "Just Desserts and Markets Being Silly Again,"
is withering in its criticism of the administration management of the economy
and his predictions depressing -- more booms and busts. Sample: The size of
the financial system continues to grow and shows every sign of being out of
For his 14-page
paper, click here.
The only jokes I can think of this morning all revolve around "Washington
being eight square miles surrounded by reality." You don't want to hear
the rest. I voted for the guy. Right now, I can't imagine him having the management
skills to organize a queue for an outhouse.
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
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