Harry Newton's In Search of The Perfect Investment
AM EST, Tuesday, December 30, 2008: The New Reality.
I've done only four things in the last months of 2008:
1. Write down
each of my illiquid investments to $1. This may be nuts. But it's today's
2. Go to cash
as much as I could.
3. Buy a few
solid muni bonds as their prices dropped.
4. Waited impatiently
for the next opportunity. My ultra-smart son-in-law, Ted Maloney, analyzes
investments for a living. He analyzes many (about 100) before he finds a good
one. I asked him over Christmas, "Isn't this boring?" He answered
presciently, "Better to be bored than broke."
cash. No one has any. Many people want it. That gives you a big advantage
IF you have some. The following story is from one ostensibly reliable
home builder has just bought two big parcels. The first consisted of 3300
housing lots in the San Francisco Bay Area. He paid $20,000 a lot. Two years
ago, each lot was selling for $250,000. He bought the second lot in southern
California for $10 million from a home builder who had invested $100 million
in the lot (purchase price plus infrastructure expenses). Our friend plans
on sitting on the properties for at least five years. If they double in value,
he'll have made a handsome return -- 14.9% a year on his money. If they triple,
he'll make 24.6% a year.
You can do your
own maths by clicking on Financial Calculators in the left hand column
and clicking on rate of return.
Why would a
company sell land at such a great loss? Clearly, it needs cash. It will get
cash from the sale and it will get cash back and cash benefits from the IRS.
The IRS has rules about tax loss carrybacks and tax loss carryforwards.
Go back, get back the taxes you paid in previous years. Go forward, save
on taxes you will pay in the future. IRS rules are better if the loss is ordinary
income. If you're a home builder in the business of buying land and building
on it, you'll get more back than if you're an individual (like a doctor) who
develops on the side. I checked with two tax accountants yesterday. One was
in the Caribbean. The other needed to research further and never got back
to me. I found this on Answers.com:
tax benefit allows a taxpayer to use losses from one year to reduce tax
liability in another year. A Taxpayer may carry a Net Operating Loss back
to the two immediately preceding years for the purpose of obtaining a refund
of taxes previously paid. After applying the carryback, a net operating
loss may be carried forward up to 20 years.
may carry a net Capital Loss back for three years, then carry over any remaining
losses for five years. The capital losses may offset Capital Gains only
and not operating income. The carryover is treated as a short-term capital
loss and may not increase a net operating loss in the carryback year.
may not carry back a capital loss but may carry it over to offset future
capital gains and to reduce ordinary income by up to $3,000 annually until
the loss is exhausted.
I don't have
my $10 million bargain "land deal" lined up. My "land deal"
is unlikely to be cheap land. I'm not in that business and don't see those
opportunities. My "land deal" is unlikely to be listed stocks. They're
not cheap enough, yet. I believe we'll see lower prices as corporate earnings
continue to fall. In fact, I'm not sure what my "land deal" will
be. The only thing I know for certain is that I'll keep looking.
bad are things? And how long will the "badness"
last? Foreign Affairs has covers piece on the Financial Fallout.
it, Roger Altman, Chair and CEO of Evercore Partners and erstwhile U.S. Deputy
Treasury Secretary in 1993-94, argues that things are pretty rotten and will
take many many years to fix. Here are a couple of excerpts. They're my boldings:
Treasury Secretary Lawrence Summers has observed, this recession will be
prolonged partly because of the unusual nature of this downward financial
spiral. As the value of financial assets fall, margin calls are triggered,
forcing the sale of those and other assets, which further depresses their
value. This means larger losses for households and financial institutions,
and these in turn discourage spending and lending. The end result is an
even weaker economy, characterized by less spending, lower incomes, and
also will be prolonged because the usual government tools for stimulating
recovery are either unavailable or unlikely to work. The most basic
way to revitalize an ailing economy is to ease monetary policy, as the U.S.
Federal Reserve did in the fall. But interest rates in the United States
and Europe are already extremely low, and central banks have already injected
unprecedented amounts of liquidity into the credit markets. Thus, the impact
of any further easing will probably be small.
fiscal stimulus, will also likely be used in the United States, Europe,
and Japan -- but to modest effect. Even the $300 billion package of spending
increases and tax rebates currently under discussion in the U.S. Congress
would be small in relation to the United States' $15 trillion economy. And
judging from the past, another round of stimuli will be only partially effective:
the $168 billion package enacted last February improved the United States'
GDP by only half that amount.
in Europe is expected to be every bit as severe. European consumers are
spending less for the same reasons American consumers are. The financial
sectors of European countries, relative to those countries' GDPs, have suffered
even more damage than that of the United States. The British government
reported a contraction of its economy last fall, and the eurozone countries
are now officially in recession.
financial system has also been devastated. The IMF estimates that loan
losses for global financial institutions will eventually reach $1.5 trillion.
Some $750 billion in such losses had been reported as of last November.
These losses have wiped out much of the capital in the banking system
and caused flows of credit to shut down. Starting in late 2007, institutions
became so concerned about the creditworthiness of borrowers, including one
another, that they would no longer lend. This was evidenced by the spread
between three-month U.S. Treasury bills and the three-month LIBOR borrowing
rate, the benchmark for interbank lending, which quadrupled within a month
of the collapse of the investment bank Lehman Brothers in September 2008.
freeze has brought the global financial system to the brink of collapse.
The IMF's managing director, Dominique Strauss-Kahn, spoke of an imminent
"systemic meltdown" in October. As a result, the U.S. Federal
Reserve, the European Central Bank, and other central banks injected a total
of $2.5 trillion of liquidity into the credit markets, by far the biggest
monetary intervention in world history. And the U.S. government and European
governments took the previously unthinkable step of committing another $1.5
trillion to direct equity investments in their local financial institutions.
THE ROAD TO
As of this
writing, there has been a modest thaw in credit-market conditions. But
a return to normalcy is not even on the distant horizon. The West's
financial system is already a shadow of its former self. Given ongoing losses,
Western financial institutions must reduce their leverage much more just
to keep balance sheets stable. In other words, they will have to withdraw
credit from the world for at least three or four years.
In a classic
pattern of overshooting, markets are swinging from euphoria to despair.
Now, the psychology of financial institutions has swung to a conservative
extreme. They are overhauling their credit-approval and risk-management
systems, as well as their leverage and liquidity ratios. Stricter lending
standards will prevail for the foreseeable future.
lending patterns will be further constrained by sharply tightened regulation.
It is widely acknowledged that this crisis reflects the greatest regulatory
failure in modern history -- a failure that extended from bank supervision
to U.S. Securities and Exchange Commission disclosures to credit-rating
oversight. The recriminations, let alone the criminal prosecutions, are
just beginning. There is unanimity that broad regulatory reform is necessary.
Obama and the new U.S. Congress will surely pursue legislation to implement
reform this year. European authorities will undoubtedly take similar steps.
Minimum capital and liquidity standards for regulated institutions will
likely be tightened, among other measures.
is any guide, however, financial reform will go too far. The Sarbanes-Oxley
legislation that followed the collapse of Enron and WorldCom is an example
of such an overreaction. Should something like this occur again, tighter
restrictions on the U.S. and European banking systems could delay their
return to robust financing activity.
States will be further constrained by gigantic budget deficits, the product
of sudden government spending designed to fight the financial crisis and
of the sharp drop in revenues caused by the recession. It now appears
that the United States' deficit for the fiscal year that began in October
2008 will approach $1 trillion, more than double the $450 billion for the
year before. This would be by far the largest nominal deficit ever incurred
by any nation and would represent 7.5 percent of U.S. GDP, a level previously
seen only during the world wars.
On the private
side, Western capital markets will not return to full health for years.
For the indefinite future, large financial institutions will shrink as
losses continue and as they reduce their leverage further. The overshooting
pattern that occurs after crises will also make markets averse to risk and
leverage for the foreseeable future.
U.S. capital markets were far deeper and more liquid than any others in
the world. They were in a league of their own for decades, until European
markets also started developing rapidly over the past 10-15 years. The rest
of the world was dependent on them for capital, and this relationship reinforced
the United States' global influence. They will now be supplying proportionately
far less capital for years to come.
economic credibility of the West has been undermined by the crisis. This
is important because for decades much of the United States' influence and
soft power reflected the intellectual strength of the Anglo-Saxon brand
of market-based capitalism. But now, the model that helped push back socialism
and promoted deregulation over regulation -- prompting the remaking of the
British Labour Party, economic reforms in eastern Europe, and the opening
up of Vietnam in the 1990s -- is under a cloud. The U.S. financial system
is seen as having failed.
the United States and countries in the eurozone have resorted to large-scale
nationalist economic interventions that undermine free-market doctrines.
The U.S. government has taken equity stakes in more than 20 large financial
institutions and, according to Treasury Secretary Henry Paulson, may eventually
invest in "thousands" of them. In addition, it has temporarily
guaranteed the key debt of its entire banking system. France, Germany, and
the United Kingdom have intervened even more extensively, each in a slightly
different way, with Germany, for example, backing the full amount of all
private deposits. The British government's banking interventions, when measured
in relation to the country's GDP, are even larger than those of the U.S.
government relative to U.S. GDP.
interventions will stop the global shift toward economic deregulation. As
President Sarkozy put it, "Le laisser-faire, c'est fini." Or,
as Chinese Vice Premier Wang Qishan said more diplomatically, "The
teachers now have some problems." This coincides with the natural and
very long-term movement away from the U.S.-centric world that started after
the fall of the Berlin Wall two decades ago.
can read Altman's entire article at
and their uncle is going to cash. The interest rate on six-month
U.S. Treasury bills dropped to its lowest level on record at the weekly Treasury
auction, the government said Monday. The Treasury Department said it auctioned
$27 billion in six-month bills at a yield of 0.25 percent, an all-time low.
That's down from a rate of 0.285 percent last week.
have fallen to historic lows as the worst financial crisis in 70 years has
triggered a rush by investors to the safety of government securities. Higher
demand for such securities pushes their yield, or interest rate, down.
and shoot cameras, updated. My favorite advanced
point-and-shoot Canon camera remains the G10. But it's heavy and complex.
Its instruction book is over 300 pages. For simpler point-and-shoot, the Canon
SD990IS is best. It's light and easily slides into a pocket. You won't notice
its minuscule weight. You will notice the G10.
My G10 has a
flaw. It occasionally shuts itself off. It's going back to Canon for fixing.
I'm really impressed with their service. Another reason to buy Canon.
+ If it tastes good, it's probably not kosher.
+ WASPs leave and never say good-bye. Jews say good-bye and never leave.
+ If your name was Lipschitz, you'd change it, too.
+ Always whisper the names of diseases.
+ If you don't eat, it will kill me.
+ Anything worth saying is worth repeating a thousand times.
+ There comes a time in every man's life when he must stand up and tell his
mother he's an adult. This usually happens at around age 45.
+ If you can't say something nice, say it in Yiddish.
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 . You can't
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