Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Tuesday, January 13, 2009:
Uncertain But Not Uncharted. That's the headline on Goldman Sachs "Forecast
2009." Normally I dismiss this stuff as fantasy, as blowing smoke
up its clients' tushy. But this piece by Sharmin Mossavar-Rahmini is great
because t says things are awful, but they've been awful before. And
it has examples:
mortgages, in fact, date back to the mid-1880s when various railroad companies
enticed settlers to Kansas, Nebraska, and the Dakota Territory by offering
a menu of mortgages including, for example, an 11-year mortgage with interest
only for the first three years and only 10% down. Sound familiar? Such easy
credit led to a peak in land prices in 1887; in real dollars, those prices
are still 5.5 times higher than the price of farmland in the region today
after 110 years.
trend purported to be unprecedented today is the high debt-to-equity leverage
ratios and size of private equity deals. But it might surprise you to know
that the amount of leverage in the late 1980s was significantly greater
than the peak leverage ratios of private equity deals in 2006 and early
2007. In 1988, equity as a percentage of total capital in leveraged buyout
deals averaged a mere 10%. The lowest level of equity contribution in the
most recent credit cycle was 32%, reached in 2005. Similarly, the size of
deals in the late 1980s certainly rivals the size of deals done in the last
couple of years. Kohlberg Kravis Roberts & Co.'s leveraged buyout of
RJR Nabisco Inc. for $25 billion in February 1989 was achieved with $2 billion
of equity (i.e., only 8% equity); in today's equivalent dollars, the RJR
deal is still the second largest leveraged buyout deal in US history.
+ What about
the unprecedented collapse of several Wall Street firms and the merger or
acquisition of financial institutions such as Lehman Brothers, Bear Stearns,
Merrill Lynch, Wachovia, and Washington Mutual? This is not the first time
that mortgage derivatives, hedge fund debacles, or the bursting of a credit
bubble have taken down major financial institutions. Where are the likes
of Kidder Peabody, Manufacturers Hanover, Bank of New England, First Executive
Corp, MCorp, Financial Corp of America, and Drexel Burnham Lambert Financial
Corp of America ran the largest savings and loan operation in the US. At
its height, Drexel was the fifth largest investment bank in the US and had
a 75% share of the high yield market. At the time of its demise, high yield
securities were not only referred to as junk bonds but as "toxic waste."
+ What about
the seizing up or freezing of credit markets? Is this unprecedented? During
the 1973-74 period, the credit markets fared much worse. While we are amazed
by the recent high levels of the TED spread, (the incremental yield between
3-month Libor and 3-month Treasury bills, which peaked at 4.64% on October
10, 2008), these spreads pale in comparison to 1974 levels. After the Arab
Oil Embargo of October 1973, the TED spread reached 6.22% and stayed above
5% for four months in 1974. Longer-dated corporate securities also exhibited
worse performance in 1974 than in 2008. Our best estimate of the price drop
in BBB-rated long corporate utilities and industrial bonds from peak to
trough in 1974 is about 23%, while BBB-rated long corporate bonds have dropped
about 16% in price so far in this cycle.
In the 1973-74
period, the US economy had a cumulative decline in GDP of 2.7 percentage
points, equities dropped 48%, and unemployment increased from a low of 4.6%
to 9%. Interestingly enough, unemployment troughed at 4.4% in this cycle,
and is expected to peak around 8.5-9.5%. But to really compare the current
crisis to the early 1970s, you may want to envision cars lined up at gasoline
stations, big "no gas" signs plastered over hundreds of gasoline
stations, and depending on the state you lived in, having to check your
license plate because motorists with even-numbered license plates were allowed
to buy gas only on even-numbered dates and those with odd-numbered plates
were allowed to buy gas only on odd-numbered dates. Now that was unprecedented!
You can read
the entire document here.
in finance. A
young 27-year old friend asks "I'd like to work in finance. Am I crazy?"
My answer, "No." But you'd better seek out the new companies
-- the ones formed in the last 12 months. The ones with fresh capital, fresh
ideas and untainted loans. New banks are popping up. New finance companies
are being formed. Their sales mantra: "We're not like our older brethren.
We have no weird, no toxic investments. We're clean and new."
economy continues imploding. Items:
Once I published magazines.
The rule of thumb was 50% ads, 50% editorial.
That was how you figured the size of that week's or month's magazine. The
size was determined by how many ads you had. No more. Magazines are struggling.
The January issue of BusinessWeek has 68 pages plus a four page cover, for
a total of 72 pages. It has 15 pages of advertising. That's a 21% ad-edit
ratio. BusinessWeek is losing money. When I worked at BusinessWeek, it was
McGraw-Hill's crown jewel.
Maria Bartiromo talks with Columbia's Amar Bhidé and NYU's Nouriel
Roubini in the latest skimpy issue of BusinessWeek.
There are the usual doom and gloom forecasts for 2009, including Roubini's
"I expect job losses of at least 2.5 million." What I found
most interesting was the following:
You don't agree with the current stimulus ideas?
Bhidé: I am deeply skeptical. I certainly thought [the Troubled Asset
Relief Program] was a terrible mistake. I have enormous confidence in the
institutions of America, and I hope they will override the mistakes individuals
make. But this whole business of TARP reminded me a lot of the WMD business
in Iraq: "Oh my God, just trust us. There are these WMDs, and unless
you give us the authority now and right now to bomb them, disaster will
befall us all." Giving Wall Street or Detroit or the banks money with
virtually no personal accountability erodes the legitimacy of the system.
Ultimately, the great strength of this economy is the belief that the game
is not rigged, that we can all get ahead if only we try harder. The destruction
of that belief could be an awful consequence of this desperate shoveling
lessons. All the lessons are obvious. But a remarkable number of
otherwise intelligent people ignored them.
1. Base your
due diligence on "the investment is a disaster." Then try to convince
2. Don't give
more than 3% of your money to anyone or any one thing.
3. Magic doesn't
exist. If you don't understand how it's done, how it works or what it is,
you don't want it. Ordinary mortals should udnerstand it.
4. If it's too
good to be true, it isn't true.
is a risky business. Anywhere you put your money is risky.
6. You can't
rely on government regulators or industry watchdogs to protect you. Talking
of his agency's failure on Madoff, SEC Chairman Chris Cox said the agency
inappropriately discounted allegations, the staff did not relay concerns to
the agency's leadership and that examiners relied on documents volunteered
by Madoff rather than seeking subpoenas to obtain critical information. Cox
said the agency's inspector general would investigate whether personal relationships
between Madoff's family and SEC staff played a role in the failed oversight.
findings have been deeply troubling," Cox said. "I am gravely concerned
by the apparent failures over at least a decade to thoroughly investigate
these allegations or at any point to seek formal authority to pursue them."
Sign of the
On Saturday, January 10, between 1,200 and 1,500 New Yorkers dropped their
drawers for the 8th Annual No Pants! Subway Ride, from Foley Square to Union
Square. When spectators would ask why there were so many people without pants,
the response was usually, "It's hot" or "I forgot."
Pantsless passengers make their way to the downtown NQRW line at the Times
Square Station on Saturday.
global meltdown has hit Japan. Recently,
+ The famous Origami Bank has folded!
+ The Sumo Bank has gone belly up!
+ The Bonsai Bank plans to cut some of its branches!
+ Just yesterday, the Karaoke Bank is up for sale and likely to go for a song.
+ Even shares in the Kamikaze Bank have been suspended after they nose dived
+ 500 staff at the Karate Bank have got the chop.
+ Finally, many analysts report there is something fishy going on at the Sushi
Bank and it is feared that customers may get a raw deal.
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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