Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Thursday, January 31, 2008:
As predicted, the cockroaches continue. The Wall Street Journal this
up more than $100 billion in mortgage-related losses in recent months, banks
and their investors had hoped they were out of the woods. They aren't. UBS
AG's warning yesterday that its 2007 write-downs would be $4 billion
higher than it predicted last month signaled that further pain may
lie ahead for Wall Street banks still vulnerable to the U.S. housing sector's
times for bond insurers such as MBIA Inc. and Ambac Financial Group Inc. may
spell trouble for banks that rely on those firms to insulate their mortgage
holdings from losing value. Those concerns were in the spotlight yesterday
as Oppenheimer & Co analyst Meredith Whitney warned that Wall Street faces
at least $40 billion in losses if the insurers see their credit ratings
cut or file for bankruptcy protection.
becomes clear [as we think it will] that more charges are on the horizon,
we believe the market will take another turn for the worse," Ms. Whitney
the concerns, Standard & Poor's predicted yesterday that the carnage might
spread to a wider range of financial institutions, with total losses potentially
exceeding $265 billion.
Inc. and Merrill Lynch & Co. may be the most vulnerable to
the next wave of write-downs.
the rest of the Journal's gloom and doom,
here. My take: This is our first cockroach financial
crisis. We don't know its full magnitude -- it gets worse by the day. Hence
my present bearishness.
big traders manipulate the market:
Remember Ben Stein's assertion about big traders? See yesterday's
column. Reader Jimmy Wilkes emails me early this morning:
Any doubt you
might have had about the market being manipulated should have been answered
yesterday. After sitting for most of the day, the Dow took off like a rocket
after the Fed announced a .50 drop in the Fed discount rate and ran up for
about 200 points. About 50 minutes after the Fed announcement a rumor hit
the market that "Expectations of more downgrades of bond insurers like
Ambac and MBIA is likely" and the Dow dropped like a rock for about 300
points. 100 big Dow contracts short @ 3:07 PM would have netted you a cool
$750,000 by market close. The big boys know how to print money.
to screw up world stockmarkets: The management
of Societe Generale SA, France's second-largest bank, appears dumber by the
day. Not only did they not find their trader -- he'd been at it since 2005 --
not only did they not find bets totaling more than the bank's entire worth,
but they panicked like the dumbest of dumb investors. They handed all
Kerviel's positions to one trader who unwound all the positions in one
day of massive selling. As word got around about the massive unwinding, everyone
and his uncle stepped back and let the idiot sell at what became distress prices,
thereby tripling Kerviel's paper losses and exposing Societe Generale's management
for the idiots they were.
This morning MIT's Technology Review did an interview with Andrew Lo,
director of MITs Laboratory for Financial Engineering, His take:
week after Societe Generale disclosed a $7.2 billion loss by a single rogue
trader, Bank of France chairman Christian Noyer declared to a French senate
finance committee, "None of the controls within Societe Generale seem
to have worked as they should have."
But beyond the
evident failure of internal control technologies lie wider vulnerabilities
in the global financial system. It is possible that the deeds of 31-year-old
Jerome Kerviel at Societe Generale triggered global stock sell-offs, says
Andrew Lo, director of MIT's Laboratory for Financial Engineering. And that
points to widening systemic risk in ever more complex financial markets.
things will happen. I take it you are mainly concerned about the ripple effect
when they do?
The financial system as a whole is getting more complex. Financial institutions
rely on ever more elaborate systems architecture and electronic communications
across different counterparties and sectors. The number of parties involved,
the nature of transactions, the volume of transactions as the market grows--taken
together, the dynamics among these aspects of financial markets imply that
the complexity is growing exponentially. No single human can comprehend that
complexity. And as the system grows more complex, it is a well-known phenomenon
that the probability of some kind of shock spreading through the system increases
as well. Systemic shocks become more likely. Today, we are looking at some
significant exposure to relatively rare events.
TR: In what
way was the Societe Generale matter such a shock?
AL: One natural
hypothesis is that the global sell-off that happened early last week was a
direct outcome of Societe Generale's unwinding of these rogue trades. We don't
have any conclusive evidence yet, but it's not an outlandish conjecture given
the circumstances surrounding the massive fraud that was allegedly committed.
According to Societe Generale, the problem was discovered on Saturday [January
19], and the firm began unwinding their portfolio at the first possible opportunity.
If it turns out that this "unwind" was on the scale of a billion
dollars or more, it is plausible that the unwind itself triggered the global
sell-off--first in Asia, then in Europe, and then in the U.S.
TR: So one
person, in this case Mr. Kerviel, can move the entire global financial system.
AL: It's a larger-scale
version of what happened in August of 2007--in particular, August 7, 8, and
9. A large number of quantitative equity hedge funds lost money on those dates
simultaneously, yet there is no market event that you can point to that can
explain why these funds lost money at the same time. But looking at circumstantial
evidence, we [at MIT] pieced together a story that one large quantitative
equity fund decided to unwind its portfolio, for reasons we don't know
for sure, but which we conjecture to be related to credit problems from
the subprime mortgage market. Because the conjectured liquidation involved
a big fund that needed to be liquidated quickly, this implies that the impact
of the liquidation on other similarly positioned quantitative equity funds
would be negative--and large. You get a snowball effect. Everybody is heading
for the exit door at the same time, and you get a crash. But in August 2007,
it was not a crash of the market as a whole, but of portfolios that are similarly
structured to the fund that started the snowball. ...
metals -- copper, lead and zinc -- have dropped in price. Zinc
is down by 40%, copper by 20%, caused by oversupply, which most believe is temporary.
Time to re-look at Australian miners -- BHP, RIO, KZL, ZFX, MRE, OXR, AXM, WSA,
MEE, EQN and PNA.
your computing to The Cloud. This is big for
computing and huge for entrepreneurs. A startup walks into my office yesterday.
They have an incredibly sophisticated idea for a new service on the Internet.
I ask "Where will you get all the computing power you need?" They
answer "The Cloud." I look quizzical. They say "Google Amazon
Web Services." The first thing I get is this piece from the present issue
of Forbes magazine:
Why buy computers
when you can rent them from Amazon, EMC or Yahoo? Has Jeff Bezos got a bargain
else, the executives at gossipy real estate Web site Zillow have been anxiously
watching housing prices collapse. Hoping to spice up its offerings to a discouraged
consumer, Zillow recently recalculated the values on 67 million homes over
a 12-year period, a database of figures that took up 4 terabytes of memory.
The company figured it would need six months and millions of dollars to make
it happen. Instead, Zillow ran the job over the Internet, on 500 computer
servers rented from Amazon.com. It took only three weeks and cost less than
a computer-development playground," says Spencer Rascoff, chief financial
officer of 165-employee Zillow.
The next revolution
in high tech is taking place inside the "cloud" of the Internet.
Small outfits looking to do lots of computing in a hurry are not buying hardware
anymore; they're renting from established players that already operate vast
networks of cheap computers. Time-sharing, a concept from the dawn of the
computing age, is back with a vengeance.
its service in March 2006 by renting basic data storage and has since gone
into services like computing and databases. Storage-hardware giant EMC in
October paid $75 million for the consumer online storage service Mozy, which
it plans to expand into an industrial-strength business, possibly cannibalizing
its own hardware sales. In March Microsoft is expected to offer its own version
of cloud computing, likely aimed at big businesses. Yahoo will move into the
business later in the year. Google has shown no interest in leasing out its
vast infrastructure, but it is challenging Microsoft with a suite of online
applications akin to Office.
of the cloud darkens the outlook for traditional hardware makers such as Dell,
Hewlett-Packard and Sun Microsystems, which have already been buffeted by
fears of a U.S. recession.
Amazon Web Services
has already won over customers such as the New York Times, Red Hat and SanDisk.
Consultancies are also springing up, selling companies on ways to use Amazon
for things like online backup systems and database clusters to speed a Web
site's performance. The pitch is that if the downturn hits, hiring Amazon
is something a department can do with spare cash and no authorization.
15 cents for a gigabyte of storage and 10 cents an hour for a server, services
that customers say are up to 90% cheaper than rental alternatives from computer-hosting
companies like Equinix and Rackspace.
More than saving
on hardware purchases, companies like relieving their tech staffs of maintenance
chores. Ooyala is an online video company that offers thousands of hours of
high-definition video through Amazon Web Services. At Ooyala's usage levels,
Chief Technical Officer Sean Knapp says, it might be cheaper to buy servers,
but "this accelerates the speed of innovation."
It almost certainly
accelerates Amazon's historically rocky profitability. The company divulges
almost nothing about its costs or margins but is said to run its Web Services
business on huge networks of computers costing as little as $300 each. Ten
cents an hour adds up to $876 a year in revenue (assuming nonstop usage).
If hardware lasts two years and if, let's say, electricity and other overhead
cost as much as the hardware, Amazon would have a gross margin of 45%, better
than what it gets on books.
In the last
two months of 2007 the number of items stored at Amazon Web Services grew
40%, to 14 billion units. (Units vary in size from a couple of bytes to 5
gigabytes, and Amazon keeps the totals secret.) That's a faster growth rate
than in the April-October period. Amazon's s3 storage service now handles
30,000 requests to its database per second. "We feel really good about
our prospects, both for size and margins," says Adam Selipsky, vice president
at Amazon Web Services. They expect over the next several years the operation
will become a major business alongside its retail business. "We were
always a tech company: First we applied it to retail, now to this."
like ibm and Sun are struggling to move to the new model. Sun already offers
an online rental system and expects to keep selling hardware. "We've
got to be the infrastructure," says Greg Papadopoulos, Sun's chief technical
officer. If you can't beat them, arm them.
Go to Amazon's
web site and you'll find:
For more, go to Amazon.
Why Use Amazon
Amazon has spent 11 years and over $2 billion building the infrastructure,
technical knowledge, and operational excellence to operate a world class web-scale
computing platform. Amazon Web Services has now released a variety of web
services (programmatic access to its open APIs) that enable developers to
leverage Amazon's data and robust infrastructure, easily and inexpensively.
These fundamental services allow external developers and businesses to build
their web applications in a reliable, scalable, and cost-effective manner.
Amazon Web Services (AWS) provides customers the opportunity to replace existing
infrastructure and scale up or down based on resource demands. This flexibility
allows you to run your business at "web-scale"--uninhibited by growth
in the number of geographic markets. On average, businesses spend 70% of their
time building and maintaining and worrying about infrastructure, and 30% of
their time focused on the ideas that will propel their business forward. Web-scale
computing is helping to invert the 70/30 ratio, enabling you to spend your
energy creating the difference that will make your business successful.
- Elastic capacity
both up and down
- Fast response time
- 24/7 availability
- Rock solid reliability
For What You Use
With AWS offerings, you only pay for what you use. You dynamically scale your
system up and down, depending on your immediate requirements and only pay
for resources when you need them. This means there are no upfront costs, so
your developers can get started using web services without huge investment.
Developers don't need to give up equity or incur huge capital expenses, because
costs scale along with usage.
Free up your most valuable resource: time. Don't spend time worrying about
scaling data centers, buying hardware, negotiating lease contracts, dealing
with downed servers, or backing-up customer data. Amazon Web Services takes
care of those issues and does the "heavy lifting". Shifting the
focus from managing infrastructure to driving your business allows you to
concentrate on what matters. This business approach also levels the playing
field so everyone can now compete on ideas, not resources.
A growing community of 200,000+ developers, start-ups, and Fortune 1000 companies
are building robust applications using our technology. Browse through our
Success Stories to learn how organizations across a variety of vertical markets
are realizing the benefits of Amazon Web Services.
but wonderful cartoons:
his third trip to Mount Sinai, Moses arrived at the burning bush,
removed his sandals and prayed to God.
mighty God, King of the Universe, your people have sent me back to ask you a
question about the Ten Commandments."
question do they have for Me?" roared the voice of God.
want to know whether the commandments are listed according to priority."
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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