Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Wednesday, December 12, 2007: Yesterday,
the Dow fell a hefty 294 points. You have two choices.
Commit suicide, now that the end of the world is at hand. Or,
ignore the pain. Keep living your life. Look for some "new bargains,"
e.g. Monsanto, BHP, Iron Mountain, Raytheon and some neat ETFs -- EWA (Australia),
EZU (Europe), EWG (Germany) and EWC (Canada). Ditto for the Vanguard index funds
I've talked endlessly about.
are so many ETFs (index funds) out there that it's a serious waste of time to
screw around with individual stocks. You can even use ETFs as part of your hedging
strategy -- i.e. going short on some sectors, going long on others. And given
how fast the world changes these days, hedging (and broad allocation) are the
only way to go.
For example, I've written of my love for shorting an ETF called XLF. This ETF
covers the financial sector. It's coming down nicely as the cockroaches in the
financial sector increasingly pop out of the woodwork. Notice how quickly fashions
have changed in the financial sector:
Here are my three
favorite financial stocks -- Ambac, MBIA and Security Capital.
These three wonderful
companies insure debt. They have a simple sales proposition: Pay me to insure
your debt. You will pay less interest on your debt. Everyone will come out ahead.
One of their longtime businesses is insuring muni bonds. If your town is worth
only a single-A rating, go to these guys, pay them some money. Bingo your debt
is now triple-A rated. That's what it means when you see insured muni bonds.
The first thing
you should do today is to sell all your insured bonds (they were all
up strongly yesterday after the Fed cut rates). You don't want to own bonds
(or other debt instruments that are insured by the likes of these guys. I don't
personally think we're going to see a wave of muni bond defaults -- but, on
the other hand, you didn't buy muni bonds for the agony and the worry.
insurance stocks have fallen not because they insured muni bonds, but
because they insured CDOs (collateralized debt obligations) and SIVs (structured
investment vehicles). And these things include subprime housing loans and a
bunch of other loans about which little is known.
Street is not in the long-term business any longer. They're in the product
creation business for selling to someone else. The faster they can move their
product to some other hapless person or institution, the less they have to worry
about the quality of what they're selling.
There are hundreds
of institutions who took the insurance as gospel and forgot to ask the question,
"Does the insurance company have the money to pay me when things go awry?"
Sadly, most also forgot to ask, What actually am I buying?"
Daily, we see
financials discovering further writedowns, especially in subprime. Despite the
gurus on CNBC arguing that the end of the writedowns is at hand, the end of
the writedowns is not at hand. Simply because no one knows what they
bought, whether the insurer has enough money to cough up the insurance money,
had a great piece:
Commence Their Countdown to Armageddon: Commentary by Joe Mysak
Dec. 11 -- Buddy,
can you spare a few billion?
That's the question
the nation's bond insurers are asking after Moody's Investors Service put
them on notice that it will conclude its analysis of the troubled business
by Dec. 19. At stake are the insurers' AAA ratings. At stake is the future
of the bond-insurance business.
In an update
comment published Dec. 5, the rating company in a barrage of its usually tortured
prose said that it saw FGIC Corp., Security Capital Assurance Ltd. and Ambac
Financial Group Inc as ``somewhat likely to exhibit a capital shortfall.''
Of MBIA Inc.,
``additional analysis of its direct RMBS portfolio leads Moody's to believe
the guarantor is at greater risk of exhibiting a capital shortfall than previously
communicated; we now consider this somewhat likely.'' RMBS means ``residential
mortgage-backed securities'' for those not in the know.
by Moody's really rocked the stock market, with MBIA falling 16 percent, while
Ambac declined 8.9 percent.
The next day
MBIA said it was ``pursuing capital contingency plans,'' and the stock rose
$2 a share, as if saying it and doing it were the same thing. What did people
expect the company to say? ``Sorry, gang, it looks like we're done''?
On Sept. 25,
you may recall, Moody's said that it expected ``a highly rated financial guarantor
with a strong ongoing franchise would likely take whatever action is feasible
to preserve its rating during times of stress.''
I presume here
that Ambac, MBIA and FGIC (which isn't publicly traded) all consider themselves
strong, ongoing franchises, which means they are all out there looking for
money. They are looking for money, and lots of it, at a time when those who
have it seem not particularly willing to part with it. MBIA, at least, found
some, announcing yesterday that it would as much as $1 billion from private-equity
firm Warburg Pincus LLC.
That's a nice
start. How much do the insurers need? The answer seems to range in the billions
to tens of billions of dollars. And of course the situation is pretty fluid.
Have we seen the worst of the mortgage-market collapse, or are there more
losses and write-offs to come? The news yesterday that UBS AG is going to
write down some U.S. subprime mortgage investments by $10 billion suggests
there is more pain brewing.
How much is
the bond insurance franchise worth? Is it damaged beyond repair? At what point
would a potential investor say, You know, this is a nice business, but I can
use my $5 billion or $8 billion or $10 billion to set up my own new financial
guarantor and not worry about the bad decisions these guys made?
The funny thing
-- if you can call anything about what's going on with the bond insurers right
now funny -- is that the municipal bond market seems not to be especially
About half of
all the new municipal bond issues sold in a given week are still being insured,
and not just by FSA, the New York-based bond insurer that has so far avoided
the subprime swoon, but by Ambac, MBIA and the rest of them.
In order for
bond insurance to make sense, an issuer has to demonstrate that it is saving
money by getting the insurance. If an issuer sells bonds at auction, the underwriter
usually makes the decision and pays for the insurance.
times, logic dictates that the value of bond insurance goes up. Is that still
the case with this bunch of insurers? Are investors still willing to accept
lower yields in return for a AAA rating that may be downgraded to AA tomorrow?
Or are some
of the insurers practically giving the stuff away, slashing premiums in order
to stay in business, or to demonstrate that yes, it's all business as usual,
don't worry about that iceberg.
As a potential
investor, I would have to ask some serious questions about that business model.
it will complete its review by next week. If, as it suspects, the insurers'
capital falls below what a AAA rating demands, Moody's will then take a look
at their ``capital remediation plans.'' Those plans, says the rating company,
have to be ``reliable'' and ``credible'' and presumably take not longer than
one quarter to put into effect.
us all it will ``communicate further with the market,'' when it is done; either
with an affirmation or a real bombshell.
Look for big
changes at the bond insurers no matter what. If someone rides to the rescue,
that someone is going to insist on significant restructuring. Got your resumes
(Joe Mysak is
a Bloomberg News columnist. The opinions expressed are his own.)
news on Christmas from Washington
There will be no nativity scene in Washington, D.C. this year.
searching, residents have not been able to find three wise men and a virgin
in the nation's capitol.
There is a modicum
of good news: They have been able to find more than sufficient asses to fill
the entire stable, and the surrounding states of Maryland and Virginia.
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,
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