Harry Newton's In Search of The Perfect Investment
AM EST, Tuesday, January 6, 2009: Todd loves
DXO, double long oil, because he thinks oil is going up soon. He also
loves the ProShares UltraShort Lehman 20+ Year Treasury (TBT) that
is twice (200%) the inverse (opposite) of the the Lehman Brothers 20+ Year
U.S. Treasury Index. Here's the story: Recently, there's been an artificial
"flight to quality, i.e. panic buying of treasuries. The price of treasuries
has gone up and the yields have come down.
believes, one of two things will happen;
+ The economy will stabilize and today's bubble on treasuries will burst.
Prices will fall. Yields will come more normal. Already we see a little of
this. Yields have gone from 2.30% to 2.55% in the past couple of weeks. Todd
believes the 20-year treasury will go back to 4%
If the economy doesn't stabilize, the Feds will print even more money. There'll
be monstrous liquidity and yields will skyrocket. Treasury prices will fall.
I put these
ideas to you. I have two personal problems: I don't trust ProShares EFTs any
longer, especially the ultrashort ones. And I seem to have lost my taste for
gambling at present.
cannot be measured. The long cover story
of this weekend's New York Times magazine section was on Risk.
Once upon a time,
banks were, well, banks. They took our deposits and loaned us money. Then Congress
allowed them to become something else. And they became gamblers, trading our
money, making bets. Their bets became so many and so complex they needed a way
to figure their exposure. So they started measuring "risk." They measured
risk on what happened in previous years when things were lovely. They never
figured on 2008. This piece by Joe Nocera details what happened. It's long,
but you must read Joe Nocera's Risk
story that I have to tell is marked all the way through by a persistent
tension between those who assert that the best decisions are based on quantification
and numbers, determined by the patterns of the past, and those who base
their decisions on more subjective degrees of belief about the uncertain
future. This is a controversy that has never been resolved.
THE INTRODUCTION TO AGAINST THE GODS: THE REMARKABLE STORY OF
RISK, BY PETER L. BERNSTEIN
Automakers suffer. Chrysler's U.S. December sales fell 53%. Everyone
is doing poorly, but some less worse than others:
Motors U.S. sales plunged to a 49-year low in 2008. December was another poor
month, down 31%;
U.S. deliveries down 37% percent;
Motor fell 32%
was down 31%.;
was off 24%
sales fell 9.3%
sales were down 7.7%; (We have three Subaru Outbacks in the family and absolutely
AG said its December sales fell 14%;
was the worst annual volume since 1992;
will be the first year in which the U.S. automakers' combined market share
was less than 50%;
was the first drop in sales for Japanese automakers for Toyota since (1995)
and Honda (1993);
problem: From son, Michael on boondoggle, "You can really
feel the recession here in Mexico. Tons of people coming back from lack of
work in the US. Remittances, which make up 35% of the Oaxacan economy, were
down 11% last month. Fewer tourists, too.
Maybe our recession
will solve our illegal immigration "problem"?
a crook, always a crook. Assistant United States attorney Marc
O. Litt said Bernie Madoff had mailed packages of valuables to his sons, his
brother and his friends. By sending the packages containing stuff worth over
$1 million, Mr. Madoff violated the terms of his bail agreement, which barred
him from disposing of any assets, Mr. Litt said.
Predictions About 2008. Be wary of predictions -- making them and
believing them. From January 10's BusinessWeek Magazine:
everybody got wrong-footed by 2008, but some forecasts were spectacularly
off the mark. In no particular order, here are 10 of the worst predictions.
"A very powerful and durable rally is in the works. But it may need another
couple of days to lift off. Hold the fort and keep the faith!" -- Richard
Band, editor, Profitable Investing Letter, Mar. 27, 2008
At the time
of the prediction, the Dow Jones industrial average was at 12,300. By late
December it was at 8500.
AIG "could have huge gains in the second quarter." -- Bijan
Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008
up losing $5 billion in that quarter and $25 billion in the next. It was
taken over in September by the U.S. government, which will spend or lend
$150 billion to keep it afloat.
"Freddie Mac and Fannie Mae are fundamentally sound....
I think they are in good shape going forward." -- Barney Frank (D-Mass.),
House Financial Services Committee Chairman, July 14, 2008
later, the government forced the mortgage giants into conservatorships.
"I'm not an economist, but I do believe that we're growing." -- President
George W. Bush, July 15, 2008
shrank at a 0.5% annual rate in the July-September quarter. On Dec. 1, the
National Bureau of Economic Research declared that a recession had begun
in December 2007.
"I think Bob Steel's the one guy I trust to turn this bank around, which
is why I've told you on weakness to buy Wachovia" -- Jim
Cramer, CNBC commentator, Sept. 15, 2008
later, Wachovia nearly failed as depositors fled. CEO Steel eventually agreed
to a takeover by Wells Fargo. Wachovia shares lost half their value from
Sept. 15 to Dec. 29.
"Existing-Home Sales to Trend Up in 2008" -- Headline of a National Association
of Realtors press release, Dec. 9, 2007
On Dec. 23,
2008, the group said November sales were down 11% from a year earlier in
the worst housing slump since the Great Depression.
"I think you'll see $150 a barrel [of oil] by the end of the year." -- T.
Boone Pickens, June 20, 2008
Oil was then
around $135 a barrel. By late December it was around $40.
"I expect there will be some failures.... I don't anticipate any serious
problems of that sort among the large internationally active banks." --
Ben Bernanke, Federal Reserve Chairman, Feb. 28, 2008
Washington Mutual became the largest financial institution in U.S. history
to fail. Citigroup needed an even bigger rescue in November.
"In today's regulatory environment, it's virtually impossible to violate
rules." -- Bernard Madoff, money manager, Oct. 20, 2007
On Dec. 11,
Madoff was arrested for allegedly running a Ponzi scheme that may have cost
investors $50 billion.
"There's growing evidence that parts of the debt markets...are coming back
to life." -- Peter Coy and Mara Der Hovanesian, BusinessWeek,
Oct. 1, 2007
office space is suffering. High unemployment means less demand
for office space. If you bought an office building in recent years with 75%
borrowing, i.e. you put down 25% and your office building has now fallen 26%
in value (not uncommon), your entire equity is wiped out. This is from yesterday's
New York Times.
As Vacant Office Space Grows, So Does Lenders Crisis
By CHARLES V. BAGLI
in office buildings exceed 10 percent in virtually every major city in the
country and are rising rapidly, a sign of economic distress that could lead
to yet another wave of problems for troubled lenders.
With job cuts
rampant and businesses retrenching, more empty space is expected from New
York to Chicago to Los Angeles in the coming year. Rental income would then
decline and property values would slide further. The Urban Land Institute
predicts 2009 will be the worst year for the commercial real estate market
since the wrenching 1991-1992 industry depression.
other financial companies have not had the problems with commercial properties
in this recession that they have had with residential properties. But many
building owners, while struggling with more vacancies and less rental income,
will need to refinance commercial mortgages this year.
chill in lending from banks to the credit markets will make that difficult
even for borrowers who are current on their payments setting
the stage for loan defaults.
bodes ill for banks, along with pension funds, insurance companies, hedge
funds and others holding the loans or pieces of them that were packaged
and sold as securities.
chief executive of the Real Estate Roundtable, a lobbying group in Washington,
is asking for government assistance for his industry and warns of the potential
impact of defaults. Each one by itself is not significant, he
said, but the cumulative effect will put tremendous stress on the
say commercial real estate is the next ticking time bomb for banks, which
have already received hundreds of billions of dollars in capital and other
assistance from the federal government. Big banks like Bank of America,
JPMorgan Chase and Morgan Stanley each hold tens of billions of dollars
in commercial real estate securities. The banks also invested directly in
may be an even bigger concern. In the last decade, they barreled their way
into commercial real estate lending after being elbowed out of the credit
card and consumer mortgage business by national players. The proportion
of their lending that is in commercial real estate has nearly doubled in
the last six years, according to government data.
Just as home
loans were pooled, then carved up and sold to investors as securities over
the last two decades, commercial property loans were repackaged for the
financial markets. In 2006 and 2007, nearly 60 percent of commercial property
loans were turned into securities, according to Trepp, a research firm that
tracks mortgage-backed securities.
Now that the
market for those securities has dried up, borrowers cannot easily roll over
the loans that are coming due.
property owners will face a dilemma similar to that of todays homeowners
who cannot easily get mortgage relief because their loans were sliced and
sold to many different parties. There often is not a single entity with
whom to negotiate, because investors have different interests.
By many accounts,
building owners have been caught off guard by how quickly the market has
deteriorated in recent weeks.
rates were expected in Orange County, Calif., a center of the subprime mortgage
crisis, and New York, where the now shrinking financial industry dominates
office space. But vacancies are also suddenly climbing in Houston and Dallas,
which had been shielded from the economic downturn until recently by skyrocketing
oil prices and expanding energy businesses. In Chicago, brokers say demand
has dried up just as new office towers are nearing completion.
economic recession is so widespread that we believe virtually every market
in the country will see a rise in vacancy rates of between 2 and 5 percentage
points by mid-2009, said Bill Goade, chief executive of CresaPartners,
which advises corporations on leasing and buying office space.
There is no
relief in sight for Orange County, where subprime lenders and title companies
once dominated the market but are now shedding space because their business
has dried up, and big banks are now shrinking because of a wave of mergers.
The vacancy rate has soared from 7 percent at the end of 2006 to 18 percent,
a rate that the Tampa area should match this month, local real estate brokers
In New York,
where rents had risen the highest as financial companies gobbled up office
space, vacancy rates are floating above 10 percent for the first time in
like the worst possible case a few weeks ago for Chicago now appears to
be the most likely outcome, said Bill Rogers, a managing director at Jones
Lang LaSalle, a real estate broker. The vacancy rate, which was fairly stable
at 10 percent, is now rising quickly and could hit 17 percent in 2009, he
said. A lot of companies are trying to shed excess space ahead of
what is expected to be a worse market in 2009, Mr. Rogers said.
Frank, a real estate broker, expects the vacancy rate in Dallas to rise
to 19 percent this year, from 16.3 percent.
Dallas, held up while many other cities were showing the strains of an economic
slowdown. But job growth and the brisk business of oil and gas exploration
have come to an abrupt halt.
unfinished shopping centers dot the highways. Among the 8.4 million square
feet of office space under construction or recently completed in the metropolitan
area, 80 percent has not been leased. As a result, the vacancy rate is 11
percent and rising.
a wave of troubled assets coming out of Texas in the near future,
said Dan Fasulo, managing director of Real Capital Analytics, a real estate
rents, after free rent and other landlord concessions, have already started
to fall and are expected to decline 30 percent or more across the country
from the euphoric days of the real estate boom, according to real estate
brokers and analysts.
That is making
it all the more difficult for owners, who projected ever-rising rents when
they financed their office buildings, hotels, shopping centers and other
commercial property. Owners typically pay only the interest on loans of
5, 7 or 10 years and refinance the big principal payments necessary when
the loans come due.
financing, owners will have few options other than to try to negotiate terms
with their lenders or hand over the keys to banks and bondholders.
properties, the most troubled have been hotels and shopping centers, where
anemic sales and bankruptcies by retailers are leading to more vacancies
and where heavily leveraged mall operators, like General Growth Properties
and Centro, are under intense pressure to sell assets. But analysts are
increasingly worried about the office market.
The Real Estate
Roundtable sees a rising risk of default and foreclosure on an estimated
$400 billion in commercial mortgages that come due this year. In recent
weeks, a group led by the New York developer William Rudin has pleaded with
Treasury Secretary Henry M. Paulson Jr., Senator Charles E. Schumer, Democrat
of New York, and others to have the government include commercial real estate
in a new $200 billion program intended to spur lending.
the roundtables leader, said building owners are by and large making
their loan payments. It is the refinancing that is worrisome.
he said, were made at 50 percent to 70 percent of property values. At the
top of the market in 2006 and 2007, though, some owners took advantage of
available credit and borrowed 90 percent or more of the value of a property,
a strategy that works only in a rising market. Since then, property values
have dropped 20 percent, Mr. DeBoer said.
owners are trying to extend loans. A lender might agree to extend the term
on a 10-year commercial mortgage, for example, if the borrower remains current
on payments and can make an equity payment to compensate for the decline
in the buildings value.
billion worth of office towers, shopping centers and hotels are in some
form of distress, ranging from mortgage delinquency to foreclosure, according
to a report by Real Capital Analytics.
the biggest market by far, leads the pack with 268 troubled properties valued
at $12 billion. But there are 19 more cities, including Atlanta, Denver
and Seattle, with more than $1 billion worth of distressed commercial properties.
especially concerned about buildings like 666 Fifth Avenue, One Park Avenue
and the Riverton complex in New York, the Pacifica Tower in San Diego and
the Sears Tower in Chicago, which were acquired in 2006 and 2007 with mortgage-backed
financing based on future rents rather than existing income.
of those buildings are basically underwater, said Mr. Goade of CresaPartners.
The price they paid was too high to begin with. Theres no way
anyone would lend that kind of money today.
best hat for cold weather: One morning last week t was 4 degrees
fahrenheit. It was way below freezing. My mad bomber hat saved me. Highly
This is LLBean's
$39.50 model. You can get cheaper versions, including $7 at your local gas
station. But LLBean's is the warmest.
A man walks into a bank, walks up to the mortgage manager and says,
"I want a loan to buy a house. I am not sure what the house is worth,
I have no down payment and I just lost my job."
replies, "Sign right here."
Oh wait, this
was supposed to be a joke.
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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