Harry Newton's In Search of The Perfect Investment
AM EST, Tuesday, December 2, 2008: Mulling is good. I'm mulling
on gold after yesterday's column. And, darn, the thing drops 5% --
in one day no less. Here are the two gold spiders yesterday:
Today, in early
trading, gold is up slightly 0.41% to $780. Is it going to $2,000? Citigroup
thinks so -- see yesterday's
column. Do I? Is gold a commodity? In which its going down like all
the other commodities. Is it a safe haven, a flight from the dollar and the
mattress? In which case it's going up big-time. Frankly I don't know. These
days, I'm like the banks, hoarding every nickel I have. I know not what tomorrow
will bring -- except it won't be pretty, in the short-term.
Last week the
stockmarket rose 18%. Yesterday it gave back one-third of that gain in a particularly
wrenching 680 point fall.
and Paulson spoke. I watched as much as I could stand. It's clear they're
making this up as they go along. They're obsessed with restoring financial
markets -- not helping Main Street . The stockmarket is not impressed. Every
time Bernanke speaks, the stockmarket craters. viz. yesterday's drop. Despite
Bernanke and Paulson's efforts, things have gotten worse. Bernanke admitted
yesterday, "Economic activity appears to have downshifted in the wake
of the deterioration in financial conditions in September." Bernanke
pointed to a litany of soft spots: in the job market, household finances,
exports and financial markets.
Meredith Whitney was the first to forecast the financial crisis. She went
on CNBC yesterday and said the financials had further to fall. She said one
further shoe to drop was banks pulling credit card lines. This will put "real
strains" on the economy. Says Whitney, "Just when the consumer is
losing their job -- their first source of liquidity -- then they lose their
second source, their credit card line. 90% of credit cards revolve one time
a year; 45% revolve many times a year. You cut that back and you do real damage
to U.S. consumer spending." She says "the (financial) system is
Meredith Whitney. It's unnerving to see such a beautiful face forecast
such gloom and doom.
the financial stocks are "very expensive." Her earnings estimates
are 30% to 50% lower than street estimates. She instanced Wells Fargo as the
On Friday she
wrote a comment piece for the London Financial Times (the pink newspaper):
must keep consumer liquidity flowing
As an analyst,
it is my job to do fundamental research and call it as I see it, and my
bailiwick is financials. My outlook has been negative for over a year and,
technically, I have been right on my calls. Seeing massive capital
destruction has brought me no pleasure, but unfortunately I see little on
the horizon that would change my outlook. In fact, after observing the US
economy so derailed, I feel that I must act as a citizen of this great country
to attempt to offer solutions to this economic train wreck we are all involved
First, I am
more bearish today than I have been in the past 18 months. In so far as
the market has impacted on the economy, capital destruction has been so
intense that multi-trillions in capital raised by institutions through both
private and public capital has gone to plug holes and not stabilise the
effects of shrinking liquidity to corporations and consumers. More than
$3,000 billion (€2,365 billion, £1,995 billion) of available
credit has been expunged from the markets and therefore corporate and consumer
borrowers so far this year.
that the mortgage market will shrink for the first time in US history and
that the credit card market will be 18 months behind it. While just over
70 per cent of US households have access to credit cards, 90 per cent of
these people use credit cards as a cash-flow management vehicle, or revolve
payments at least once a year. While the credit card market is small relative
to the mortgage market, it has grown to play a key role in consumer liquidity.
Declining liquidity here will have disastrous effects on consumer spending
and the economy. My primary concern is preserving liquidity to consumers,
who command more than two-thirds of gross domestic product.
There is no
doubt that time will be the greatest healer, but there is a strong argument
for putting the financial system through a methadone-clinic-style rehabilitation
as opposed to the cold sweats rehab that we face. The US government
appears to feel the same, which is why various versions of direct government
lending and quasi- as well as real bail-outs have been announced. Certainly,
credit was extended to unworthy borrowers, but the baby is now being thrown
out with the bath water. I expect more broad-based credit contractions but,
specifically, more than $2,000 billion in credit lines to be cut in reaction
to risk aversion, constrained capital and regulatory change.
Here are some
easily adoptable changes that would make a difference.
lending. Since the early 1990s, key bank products, mortgages and credit
card lending were rapidly consolidated nationally. Banking went from knowing
your customer or local lending, to relying on what have proven to
be unreliable FICO credit scores and centralised underwriting. The government
should now motivate local lenders (many of which have clean balance sheets)
to re-widen their product offering to include credit cards and encourage
the mega banks to provide servicing and processing facilities to banks that
sold off these capabilities years ago.
the Federal Deposit Insurance Corporations guarantee for bank debt.
Banks need to know they can access reasonably priced credit for an extended
period to continue to extend new credit lines. Any semi-conscious bank management
team knows that capital and liquidity are precious and therefore is hoarding
the introduction of accounting rule FAS 140 until 2011 or 2012. These moves
to bring off-balance-sheet assets back on balance sheet for the sake of
transparency are a mirage. The primary assets that will come back on to
balance sheets are credit card loans. Frankly, there is more transparency
in off-balance-sheet master trust data than in on-balance-sheet accrual
accounting. Banks cannot afford it now and it will further constrain credit.
the proposal on Unfair and Deceptive Lending Practices that is set to be
adopted in 2010. The proposal includes one major change that will lead to
a severe unintended consequence pulling credit from consumers. Restricting
lenders ability to reprice an unsecured loan will cause them to stop
lending or to lend less. This change could cut over $2,000 billion in unused
credit card lines, or over 40 per cent of unused credit lines. With so many
Americans relying on their credit cards as a major source of liquidity,
it would be equivalent to a major pay cut.
This is no
time for partisanship. The situation is too dire. These changes are ones
I would never have imagined endorsing a year ago, but these are extraordinary
remains king. You need at least two years of expenses. Now is not
the time to be in the market, except for shorting selective stocks on a very
short-term basis -- e.g. Best Buy, Google, and Wells Fargo. Now is not the
time to catch falling knives. Stocks are not "cheap."
to go shopping. Important to keep the economy thriving. There are
so many bargains out there.
leaving the house.
I haven't left
my house in days. I watch the news channels incessantly. All the news stories
are about the election; all the commercials are for Viagra and Cialis. Election,
erection, election, erection -- either way we're getting screwed! -- Bette
Q: What do
Wall Street and the Olympics have in common?
A: Synchronized diving.
a City bar:
'This credit crunch is worse than a divorce. I've lost half my net worth.
But I still have my wife.'
Q: What's the
capital of Iceland?
A: About $3.50.
Q: What is
the difference between an investment banker and a large pizza?
A: The pizza can still feed a family of four.
Q: What's the
definition of optimism?
A: An investment banker who irons five shirts on a Sunday night.
my friend $20 last week. I now qualify as the country's fourth largest lender."
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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