Harry Newton's In Search of The Perfect Investment
AM EST, Friday, December 12, 2008: Skip
treasuries, buy CDs. Treasuries
are paying zilch. But FDIC-insured CDs are paying 4%. Instead of schlepping
from one bank to another, there's a better way to buy CDs -- online with
The Senate rejected
the auto bailout. Wall Street won't like that today. Overseas, the signs today
are awful: The MSCI Emerging Markets Index lost 3.4%, extending its
2008 drop to 56%. Chinas CSI 300 Index sank 4.2% after
a government official said growth will slow more sharply next quarter. Says
Bloomberg, bank stocks led todays drop in the European benchmark, losing
that the S&P 500 P/E is 18.9. As I wrote yesterday, that's much
too high to make stocks a bargain yet. For that to happen, we need to
see single digits. We have a ways down to go.
Watch out for
the financials' fourth quarter. My Elite black car limo driver yesterday told
me his business is down 50%. His clients? J.P.Morgan, Nomura and Morgan Stanley.
I flagged him on the street and he gave me a cheap ride (for cash). Writes
my friend Mike O'Rourke, BTIG's chief market strategist:
we have a secret
the Financials are going to post bad 4th quarter
earnings, its something about one of the worst financial markets since
1929. Well, at least the confidence in the market today was undermined by
the executives of the Financial firms themselves and not garbage rumors.
It started with U.S. Bancorps CEO Richard Davis expounding that, The
TARP money will not save anyone from an earnings problem. The broad
market was able to handle that but the Financials came under pressure. Later
in the day, BlackRocks CEO Larry Fink added that 4th Quarter earnings
were going to be shockingly bad. The nail in the coffin was
JPMorgan CEO Jamie Dimons CNBC interview in which he described December
as pretty terrible. All three of these gentleman have had the
distinction of being recognized by the markets as having done a superior
job in steering their companies through the turbulent environment of the
past year. Such stature and confidence affords them the luxury of speaking
candidly to the markets, although their shares paid the price with declines
in excess of 10% across the board. If the Financials are going to come under
pressure and take the broad market down with them, it better be based on
factual statements of executives rather than rumors and speculation. Of
course, we find it difficult to believe that anyone can be surprised that
Q4 earnings will be a bust, not just for the Financial firms but for all
like in other bear markets, someone of prominence has been caught very naked
with the tide out. It will be hard to gauge the markets reaction until
details are released. History repeats itself, on March 10, 1938 Dick Whitney
was indicted for fraud. Whitney was the former President of the NYSE, and
the hero of the Crash of 1929. As the broker for the JP Morgan Bank he started
the buying for the banks to help stabilize the market in the midst of the
crash. He had bilked his firm, friends, relatives, wife and charities of
millions to support his lavish lifestyle.
is referring to yesterday's amazing Madoff arrest:
Dec. 12 (Bloomberg)
-- Bernard Madoff (former Nasdaq chairman) confessed to employees this week
that his investment advisory business was "a giant Ponzi scheme
that cost clients $50 billion before two FBI agents showed up yesterday
morning at his Manhattan apartment.
here to find out if theres an innocent explanation, Agent Theodore
Cacioppi told Madoff, who founded Bernard L. Madoff Investment Securities
LLC and was the former head of the Securities Industry Associations
is no innocent explanation, Madoff, 70, told the agents, saying he
traded and lost money for institutional clients. He said he "paid investors
with money that wasnt there and expected to go to jail. With
that, agents arrested Madoff, according to an FBI complaint.
commercial real estate value gets wiped out. When you buy an office
building, you typically borrow money. Borrowing money juices up returns. If
a building earns 10% raw -- i.e. with no borrowings. It can earn as much as
22% if you borrow 85% of the building's price and pay 6% interest on the loan.
Fast forward to today. Things have changed. Let's take a performing building
-- lots of tenants paying their rents and the rents being sufficient to pay
all the expenses and the loans. (There may be more than one loan to get to
85% or 90%). Here's what can happen:
One or all
of the loans become due. You have to refinance. Today you won't get 85%. You
may get 65%. But you need to repay the bank its 85%. Where do you get the
money for the 20%? Out of your own pocket? Out of your investors' pockets?
Or do you simply hand the building back to the bank? In which case you've
lost your entire investment. You could theoretically sell the building. But
for what? The value of the building will now have dropped, for two reasons:
1. Rents are
dropping. Vacancies are rising. Subleases are proliferating, especially as
the financials keep firing. Standard recession stuff.
2. If a buyer
can only borrow 65%, then his return is lower. If his return is lower, then
the building is worth less to him. He will offer to buy the building for less.
Moreover, there are now fewer buyers because there are simply fewer buyers
who can invest 35% in a building.
My real estate
friends say new construction of commercial real estate has ground to a halt,
since construction loans are no longer available. A friend in the business
explained to me yesterday, "You could easily have spent the last five
years developing your plans, paying architects, getting permits, begging for
variances, getting tax deals.. You could have spent millions. Now it's all
for naught. You can't move ahead."
dumb real estate lending: It wasn't only
sub-prime. It was also super high-end. Among the highest end was the Yellowstone
Club where someone once planned a $130 million+ home -- the most expensive
in the nation. You can read about ownership troubles at Forbes.
The latest article focuses on the idiocies of Credit Suisse. This comes from
a web site called New
of a "Toxic Asset"
At the Yellowstone Club and other big resort projects around the West, Credit
Suisse has offered a case study in high finance gone wrong.
Tamarack Resort, To Be Continued?
My friend visited
Yellowstone Club said it was "even more over the top than his tastes could
handle." Amongst other extravagances, in the winter they delivered room
service on skis.
If you want
a stark example of the kind of lending practices that created the global
credit crisis, you can hardly do better than banking giant Credit Suisses
adventures in luxury mountain resort financing. At Tamarack in Idaho, at
Promontory in Utah, and at the Yellowstone Club in Montana (to name just
the few that Im most familiar with) the bank doled out hundreds of
millions in loans, which were than syndicated out to investors (just like
those famous sub-prime mortgages). If the Yellowstone Club situation is
typical, those loans were made with minimal due-diligence or oversight,
and no plan for what might happen if the real estate market hit the skids.
Club owes Credit Suisse (or rather its unfortunate clients) $307 million,
and Id say theres a better than even chance that only a fraction
of that will ever get paid back. If youd been wondering what the toxic
assets that are of such concern to the Treasury Department and the
Federal Reserve actually consist ofand why they threaten the solvency
of the entire banking systemtheres one answer.
of recklessness in Credit Suisses resort lending - and sources say
it did more than dozen similar resort loan deals in the U.S. and overseas
- is only now becoming clear. Even if you take the most charitable view,
much of Credit Suisses Yellowstone Club loan financed exceptionally
wasteful spending by the club and its owners, as well as a dubious scheme
to develop a super-luxury vacation time-share operation called the Yellowstone
World Club. Any busboy in Big Sky could have told Credit Suisse that its
money was being squandered.
in Idaho, the situation is a little less scandalous, but similarly dire.
The resort is now operating under a receivership, and is probably just a
bad snow season away from total insolvency. One way or another it will probably
survive, but you definitely wouldnt want to be holding a $270 million
note. Promontory, in Utah, is also staying open while in Chapter 11 proceedings,
but as with its brethren, the financial model (and repayment of $275 million)
depends on a real estate recovery that looks distant indeed.
now conventional wisdom that the financial industrys risk-assessment
methods were fatally flawed because they understated the probability of
a dramatic shock to the systemlike, for example, a 30 percent fall
in real estate prices. And Credit Suisse was hardly alone in its follies:
Lehman Bros., for example, lavished $170 million on the Yellowstone Clubs
Big Sky neighbor, Moonlight Basin. (We know how the Lehman part of that
ended, and the Moonlight Basin part is still to be determined). Financial
institutions of all stripes, looking to meet investor demand for loan products
in the easy-money days of the 2002-2006, thought they could spread the risk
by slicing the loans up into investment instruments (often collateralized
debt obligations, or CDOs) that in some cases could then themselves be insured
against default (via credit default swaps). Nobody thought too much about
what might happen if underlying asset values collapsed across the board.
Yet all it
took was a commonsense look at a resort market like Big Sky, where prices
tripled from 2003 to 2007, to suspect that the buying frenzy wasnt
going to last. Credit Suisse only had to analyze its own portfolio to recognize
that there was an awful lot of supply of multi-million-dollar mountain homes
And even if
you accept the everyone was doing it defense, it still seems
amazing that an institution like Credit Suisse, with access to the best
legal and financial minds in the world, apparently had nothing remotely
resembling a Plan B for these projects. For a while I wondered what the
banks strategy might be as the loans defaulted: Did Credit Suisse
think there was long-term upside, in which case it would be looking to own
and operate the properties for a while? Or was it just aiming to get whatever
it could as quickly as possible, even if that meant big losses?
the proceedings in the Yellowstone Club bankruptcy, I think its now
safe to say there was no strategy at all. First, Credit Suisse stood by
while the club slipped into Chapter 11 in the first place. Then, it came
forward with a $4.4 million debtor-in-possession financing that would last
about three weeks, with no clear indication of what it planned to do then.
When then arrived, about 10 days ago, Credit Suisse first said
it would offer a few more weeks of funding, then said it couldnt even
raise the money for that, then proposed floating things for a week so it
could shut the club and sell the assets.
judge, not surprisingly, decided that was a pretty dumb plan, and approved
a $25 million interim financing from CrossHarbor Capital Partners. (A liquidation
plan involving the shut-down of the club would almost certainly destroy
much of its remaining value). In fact, the restructuring specialist that
Credit Suisse installed as part of the three-week loan deal actually testified
against the banks proposed new interim financing plan. That has to
be pretty rare.
Suisse lawyer, from Skadden Arps, has certainly been dancing energetically
in the courtroom; top-dollar lawyers are evidently something the bank can
still afford. But its apparent lack of attention to how it might rescue
a series of loans that total in the billions is baffling. A cynic would
say that since Credit Suisse doesnt actually hold most of the paper,
its just in it for the fees anyway, and therefore the more running
in circles, the better. Im not that cynical: I think its just
point and shoot camera under $300. Heh. Great
minds think alike. David Pogue, New York Times technology whiz, also loves
the Canon SD880 IS.
SD880 IS ($252). This camera has a 4X zoom, wide-angle lens. Customizable
top button; it can be a Movie button so you dont have to change modes
for video. Huge, bright three-inch screen, but too bad theres no optical
solid. Controls are beautifully thought-out. New processor chip makes this
camera very fast. Not many gimcracks, but wow, those photos in any
kind of light, they have a presence, detail and vibrancy that puts the other
cameras to shame.
Canon. It wins this contest every single year. Cmon, people
wheres the suspense?
I also love
the Canon G10. But it's $430 and heavier. It has a bunch of features that
make it more of the professional's point and shoot, including the semi-useful
optical viewfinder, a flash shoe and excellent manual controls. It also has
the three inch screen, a new processor chip and shares Canon's excellent software,
also on the SD880. Buy it at Abe's
donkey and Wall Street.
Young Chuck moved to Texas and bought a donkey from a farmer for
$100. The farmer agreed to deliver the donkey the next day. The next day he
drove up and said, "Sorry son, but have some bad news, the donkey died".
Chuck replied, "Well, then just give me my money back". The farmer
said, "Can't do that, I went and spent it already".
"Oh, then, just bring me the dead donkey".
The farmer asked, "What ya gonna do with him?"
Chuck said, "I'm going to raffle him off." The farmer said, "You
can't raffle off a dead donkey!" Chuck said, "Sure I can, just watch
me. I won't tell anybody he's dead."
A month later,
the farmer met up with Chuck and asked, "What happened with that dead
donkey?" Chuck said, "I raffled him off. I sold 500 tickets at two
dollars a piece and made a profit of almost $900."
The farmer said, "Didn't anyone complain?"
Chuck said, "Just the guy who won, so I gave him back his two dollars."
Chuck now works
for Credit Suisse, Lehman Brothers, Goldman Sachs ... substitute your favorite
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
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