Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Friday, August 3, 2007: I
would be a lot richer if I had figured this out ten years earlier. I'd been
playing around with the idea for the past week. Then today Wall Street Journal
headline triggered it. The headline read "Hedge Funds That Predicted
Home-Loan Woes Cash In." I knew about these woes eons ago. But I didn't
systemically pursue the investment implications. My idea in publishing this
chart regularly (maybe even every day) is that it will highlight sectors I should
do trolling in for things to buy or things to sell. If I can find a sector early
enough I stand to make huge gains quickly -- just as many of the hedge funds
did this year. The Journal today talks of hedge funds rising 60%, 150%
and 240% this year. This is not a heat map. That's a diagram/chart (whatever)
looking backwards. I'm trying to look forwards to predict, not to report.
Australian miners and explorers
Oil Services and oil explorers
Real estate syndications**
top performing fund this year is its Emerging Markets Index (VEMAX), which is
up 20.9% so far this year and which I've recommended repeatedly.
** Commercial buildings are now too pricey.
*** Consumers pulled money out of their homes by refinancing mortgages. That
is over. Hence, consumer spending will drop.
I put my name and a link on the table because I figured everybody and their
uncle will forward this table to their friends. I wanted their friends to be
able to get to my column. (Readers bring feedback.)
deep is the sub-prime crisis? From
reader Steve Pedian:
As I analyze
the current credit problems, I am reminded of Junk Bonds in the 1980s. Although
unproven over a complete economic cycle, newly issued junk bonds were hailed
as a safe investment that provided a very attractive return to investors.
By 1990, however, the concept of newly issued junk bonds had been exposed
as seriously flawed, defaults reached record levels, and the prices of many
issues plunged. Historically many financial-market innovations have gained
widespread acceptance before being exposed as ill conceived.
In the early
1980s deregulation enabled thrifts to expand into new and riskier areas of
lending. Further, thrifts were not required to value their investment portfolios
at market prices; they could continue to report high net income regardless
of large and growing unrealized losses on their junk bond portfolios. The
largest thrift owners of junk bonds: Columbia Savings and Loan, CenTrust S
& L, Imperial S & L, Lincoln S & L, and Far West Financial Corp.
were insolvent or on the brink of insolvency by the end of 1990. By 1990 a
number of leading insurance companies had to take multimillion dollar write-offs
on their junk bond investments and some teetered on the edge of insolvency.
The point I am trying to make is that know one knows how far the current credit
problems will flow. As the old saying goes, "You can't tell who is swimming
naked until the tide goes out."
from credit disasters past. FromBusiness
Week by Michael Mandel (who's a really top-notch economist).
Housing Activity & Lower Prices Point to Mounting Credit Losses. That's
the title of a new report just published by The
Banc of America Securities. I don't have a copy of the report by Robert Lacoursiere,
mortgage market is toast, at least for the foreseeable future. And now the
turmoil at American Home Mortgage Investment Corp.which made loans to
home buyers with decent creditsuggests that the troubles are spreading
to the broader mortgage market. Fearing the worst, investors are nervously
demanding higher rates for bonds from corporations with no direct subprime
exposure. But the history of the past 20 years indicates that the subprime
debacle, as spectacular as it is likely to be, wont knock out the broader
flow of credit in the economy. Since deregulation took hold in the 1980s,
the U.S. has developed a financial system with a high degree of redundancy.
Worthy corporate and individual borrowers have more than one avenue for raising
funds. The financial system has become like the Internet: able to reroute
credit around damaged sections with relative ease.
Pain Moves Beyond Subprime. FromBusiness Week, also.
and leveraged-buyout markets have stalled, and more trouble lies ahead
by Matthew Goldstein and David Henry
The flu in the
financial sector has sapped the U.S. stock market of more than $200 billion
since the start of the year. The question on investors' minds is: How far
will it spread?
On July 31 the
stock market resumed a downdraft that had begun a week earlier, and once again
bad news from a financial company triggered the sell-off. Shares of American
Home Mortgage Investment (AHM) plunged 88% after the Melville (N.Y.) lender
to homeowners with decent credit histories warned that it's facing serious
liquidity issues and may be forced to close. For the year, the widely followed
KBW Bank Index of the 24 largest lenders has fallen 10%, caused mostly by
the meltdown in the subprime mortgage industry. And because financial shares
make up 20% of the Standard & Poor's 500-stock indexits biggest
componentthe pain has spread. Without them, the S&P would have been
up 5.6% in 2007 through July instead of the 2.6% it logged.
Yet as challenging
as conditions have gotten for financial-services firms, signs point to even
more trouble in the months aheadtrouble that may continue to weigh on
the broader equity market.
Financing at Risk
have moved far beyond the mortgage industry. Already, at least five hedge
funds have blown up. The latest worry is that a recent slump in the markets
for corporate loans and junk bonds will deepen, jeopardizing the financing
of leveraged buyouts, a big profit driver for investment banks. What's more,
fears are growing that banks may be on the hook for some of the $300 billion
in loan commitments they've made for buyouts already in the pipeline. The
mood has gone so somber that derivatives traders are betting that bonds issued
by major investment banks will tumble to near junk territory. Goldman Sachs
Group (GS) and Lehman Brothers (LEH) are being seen as no more creditworthy
than casino operator Caesars Entertainment, according to an analysis of derivatives
trades by Moody's Credit Strategies Group.
probably isn't that bleak for the nation's biggest investment banks and brokers.
The major rating agencies, Moody's Investors Service (MCO) and Standard &
Poor's (which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP)),
are sticking with their credit ratings for most financial institutions. Peter
Nerby, a Moody's senior vice-president, says investment firms are good at
managing risk and have ample resources to endure. "The key to risk management
is avoiding body blows and big shocks, and that means staying very liquid,"
Even so, dark
clouds loom over Wall Street. Nearly two dozen major financings for pending
deals have stalled out, including already postponed issues for the buyouts
of Chrysler Group (DCX) and General Motors' Allison Transmission (GM).
Falling Victim to the Turmoil
is banking on the credit market improving in September after big institutional
investors return from summer vacations. But that's hardly a given. Says Martin
Fridson, CEO of FridsonVision, a high-yield-debt research firm: "Investment
bankers and [private equity] sponsors say: 'Once we get past Labor Day, everything
is going to be fine. We just need time for everyone to cool off a little bit,
and then we'll be back in business.'" But given the new problems in the
markets, he adds, "you can't have great confidence in that."
If debt investors
remain wary, banks may have no choice but to reprice loans and junk bonds
at higher interest ratesand eat the difference. Deutsche Bank (DB) analyst
Michael Mayo estimates that lenders could lose as much as $6 billion for this
There's a good
chance that some pending buyouts simply won't get done, analysts say. That
would be bad for investment banks for another reason: They collect their mergers-and-acquisitions
advisory fees only after deals are completed. In the first half of 2007, private
equity firms paid a record $9.6 billion in investment banking fees, a 35%
jump over the first six months of 2006, according to M&A tracker Dealogic.
Now, Wall Street firms are facing the prospect of some of those revenues drying
up. Says analyst Brad Hintz of Sanford C. Bernstein: "The Street faces
an earnings headwind as it enters the second half of 2007."
in the credit markets, meanwhile, is likely to continue to claim new hedge
fund victims both in the U.S. and overseas. Two big Bear Stearns (BSC) hedge
funds imploded in June, and a third ran into trouble in late July. Meanwhile,
the $11 billion Raptor Global Fund, managed by James Pallotta, posted a one-month
loss of 9%, while two hedge funds run by Australia's Macquarie Bank were off
25% this year. And Sowood Capital Management is throwing in the towel. The
onetime $3 billion fund lost nearly half its value in recent months after
making bad bets on "credit spreads"the difference between
the yields on Treasurys and corporate debt.
'Too Much Liquidity'
worry is that the trouble in the junk-debt markets will spread to the traditional
corporate bond market and create a full-fledged credit crunch that would threaten
the economy. That scenario may be unfolding. Issuance of investment-grade
corporate bonds fell 72% in July from June's level and 34% from July, 2006,
according to Dealogic. And some say the subprime-mortgage and leveraged-loan
markets are harbingers of wider credit troubles. Greg Jensen, co-chief investment
officer for money-management firm Bridgewater Associates, wrote in a July
31 client note: "Both problems are just the symptoms of
financial fragility built on too much liquidity for too many years."
Adds Leslie Rahl, president of Capital Market Risk Advisors in New York and
former co-head of Citibank's (C) derivatives group: "Nothing stays rosy
forever. We've been in a rosy world, with credit spreads at historically tight
levels for some time now. But we seem to be leaving it."
The blowup at
American Home is a reminder that the mortgage market remains a major threat
as well. American Home's customers, after all, were borrowers with generally
good credit historiesan indication that the mortgage mess is no longer
confined to risky subprime borrowers. Through the rest of this year and into
next, a raft of adjustable-rate mortgages will begin adjusting to higher interest
rates. The higher monthly payments could squeeze even borrowers with good
credit histories, leading to a new round of mortgage defaults.
All this could
mean more pain for the financial sectorand for the broader stock market.
Warns Bradley Golding, a managing director at Christofferson, Robb & Co.,
a money manager that invests in bonds: "The stock market has not caught
up to the severity of the situation."
you make a fortune in commodities? Remember
the hedge fund that lost billions betting on natural gas to rise, when it actually
fell? I've never felt I could gamble on one commodity. There are two "gotchas."
Like corn is in high demand because of ethanol. Its price should rise. Right.
No, wrong. Its high prices convinced farmers to plant more. And the price fell,
down 18.6% this year. Another approach is to buy a fund which buys a basket
of commodities. (Remember my old adage: the only free lunch in investing is
diversification). I am in one commodities fund. Last year it was flat. And I
was disappointed. This year it's up 13.17% so far. And I'm happy.
commodities moved in the first seven months
for a trip out west -- really west. From today's
Sydney Morning Herald:
Western Australian town of Kalgoorlie will play host to hundreds of mining
executives and investment types next week as the annual Diggers and Dealers
talkfest kicks off.
Kalgoorlie (green arrow) is a big gold mining town in Western Australia,
a state that's several times larger than Texas and even more remote.
In its 15th
year, Diggers 2007 will be the largest event in the forum's history, with
1700 delegates descending on Kalgoorlie's Goldfields Arts Centre.
forum has a golden tinge about it. Well-renowned gold bull and former Newmont
Mining Corp president Pierre Lassonde is making the trip from the United States
to officially open the event.
The forum will
also hear presentations from 18 gold-focused companies, including majors Barrick
Gold Ltd, Newmont Mining Corp and AngloGold Ashanti Ltd.
Mining Company Ltd chairman Michael Kiernan, who has attended 12 Diggers'
forums to date, said the event was a perfect venue for networking
love to bump into guys I haven't seen for 100 years, have a couple of tinnies
and chat," Mr Kiernan told AAP.
networking, commercial networking, making sure the company is in the public
eye and I always look from a mergers and acquisitions point of view, like
a little piranha."
While Mr Keirnan
will be singing the virtues of his gold play Monarch, all eyes will be on
his takeover battle involving his other company, Territory Resources Ltd,
for Consolidated Minerals Ltd.
on day one is sure to draw a crowd.
director of gold explorer Apex Minerals NL, Mark Ashley said the event would
allow his company to speak to other operators in the Eastern Goldfields of
WA about consolidation opportunities.
brings a lot of people that you don't see during the year together,"
Mr Ashley said. ...
When it's time
for delegates to unwind from a day full of talking, they can wet their whistle
at one of Kalgoorlie's two biggest pubs, the Exchange or the Palace, which
have stocked up on staff and beer to accommodate the influx.
brothels are almost as famous at the town's rich mining history, with Langtrees
adding a couple of extra girls for the three-day event.
run five to six (girls) and I've got a couple of extra girls coming up for
the event," Langtrees Kalgoorlie manager Sharon Hallam said. ...
Dealers runs from August 6-8.
in Iraq: WASHINGTON, Aug. 2 Defense Secretary Robert M. Gates
said Thursday that he was discouraged by the resignation of the Sunnis from
Iraqs cabinet and that the Bush administration might have misjudged
the difficulty of achieving reconciliation between Iraqs sectarian
hot new technology
Apple Computer announced today that it has developed a computer chip that can
store and play high fidelity music in women's breast implants. The iTit will
cost between $499.00 and $699.00 depending on speaker size.
This is considered
to be a major breakthrough because women have always complained about men staring
at their breasts and not listening to them
of women are against marriage. Why? 13 Reasons:
1. Men are like
Laxatives ..... They irritate the crap out of you.
2. Men are like
Bananas. . The older they get, the less firm they are.
3. Men are like
the Weather . Nothing can be done to change them.
4. Men are like
Blenders You need One, but you're not quite sure why.
5. Men are like
Chocolate Bars .... Sweet, smooth, and they usually head right for your hips.
6. Men are like
Commercials ....... You can't believe a word they say.
7. Men are like
Department Stores ..... Their clothes are always 1/2 off!
8. Men are like
Government Bonds .... They take soooooooo long to mature.
9. Men are like
Mascara . They usually run at the first sign of emotion.
10. Men are like
Popcorn ..... They satisfy you, but only for a little while.
11. Men are like
Snowstorms .... You never know when they're coming, how many inches you'll get
or how long it will last.
12. Men are like
Lava Lamps ... Fun to look at, but not very bright.
13. Men are like
Parking Spots All the good ones are taken, the rest are handicapped.
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 .
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