Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Wednesday, January 7, 2009:
I'm getting "buy signals" for the stockmarket from all manner of
newsletters, including Fred Hickey's normally ultra-bearish High-Tech Strategist.
Hickey's calling it a 1930-style Little Bull Market," which,"
he says, "could occur with the enthusiasm surrounding the new Obama administration."
ranks right up there with reading tea leaves. You could easily argue that
this bullish call is too late. The market's already up 20% from its November
lows. This chart plots weekly movements.
This chart plots
daily movements. You can clearly see the rise since November.
There are other
indications. For example, oil, which spiked last July at $145 a barrel before
plummeting around 79% to just over $30 in December, has come back sharply,
too. On Tuesday, it traded as high as $50.47, closing at $48.58 a barrel.
It's up over 40% from its low.
There is a raging
debate about this being a Sucker's Rally. It's hard to avoid the lousy continuing
news. When the economy goes awry and earnings drop, you simply can't have
a sustained long-term market rally. An example from today's Wall Street Journal,
Alcoa to Cut
15% of Work Force, Unload Assets. Alcoa Inc. announced the elimination of
about 15,000 jobs, more plant closures, plans to sell assets and a 50% cut
in capital expenditures to contend with the sustained recession.
Roubini, the famous Dr. Gloom, predicts in his RGE Monitor. (The logo is the
We believe the U.S. economy is only half way through a recession that will
be the longest and most severe in the post war period. U.S. GDP will continue
to contract throughout 2009 for a cumulative output loss of 5% and a recession
that will last close to two years.
One last look
at 2008 will reveal a very weak fourth quarter with GDP growth contracting
-6%, in the wake of a sharp fall in personal consumption and private domestic
investments. We see the real GDP growth contraction playing out through
the year as follows: Q1 2009 -5%; Q2 2009 -4%; Q3 2009 -2.5%; Q4 2009 -1%,
adding up to a yearly real GDP growth of -3.4% for the U.S. in 2009.
You have to
ask yourself, "Will Obama's massive upcoming trillion dollar deficits
save the economy and cause the stockmarket to boom?"
and I agree with him:
I'm not a
believer in the theory that massive amounts of government debt-driven spending
can simply replace the loss of consumer spending, allowing the U.S. economy
to go merrily on its way.
In short, I'm
skeptical and largely in cash. However, I am intrigued by Cramer's suggestion
last night that China has its economic stimulus act together a lot better
than the U.S. China is pumping jobs. The U.S. is pumping failed financials.
Cramer suggests buy the China EFT called FXI.
A happy story. Yesterday's email exchange
with my dear old friend:
Bought the gun business Nov 1st - did $1 million in sales in 38 days. Average
sale is $406. You should have bought in!
I'm seriously happy for you. I'm glad it's working out. How did you end up
financing the business?
I had one helluva time finding money, as you know. There wasn't a lender anywhere
that would buy in. I sold everything I owned, shoes, cars, horses, jewelry,
children, etc. to come up with a down payment. I borrowed $50K at 20% interest
as part of the down money, so that'll be the first money that gets paid off.
I had a neighbor come in for 20% which left me with 80% so it's a great deal
for me. The Seller graciously took back 50% of the financing which is what
made it work. I'll have him paid off in 9 months and then it's mine. It's
amazing the laws that won't let us ship ANYTHING to NYC so I can't even arm
mistrust is what we now face. Jim Surowiecki is a favorite writer.
He writes in the New York. His latest piece is excellent:
by James Surowiecki January 12, 2009
slashed payrolls, rising foreclosures, and plummeting stock prices, 2008
brought another unwelcome development: a surge in bank robberies, which
were up more than fifty per cent in New York. This wasnt shocking:
we typically expect property crimes to rise in hard economic times. There
is, though, one crime against property which bucks this trend: defrauding
investors. On Wall Street, fraudulent schemes tend to thrive during economic
booms, and to blow up when times turn tough. While bank robbers are getting
busier, the Bernard Madoffs are starting to get caught.
just the latest in a long line of fraudsters who took advantage of investor
euphoria. Time and again, as asset markets have become frothier, fraud has
flourished. During Englands South Sea Bubble, in 1720, a host of bogus
joint-stock companies arose, including one that described its enterprise
as nitvender, or the selling of nothing. The boom of the nineteen-twenties
featured men like Arthur Montgomery, who ran a Ponzi scheme promising investors
four-hundred-per-cent returns in sixty days, and the Match King, Ivar Kreuger,
who sustained match monopolies all over the world with forged bonds and
doctored books. More recently, the stock-market bubble of the late nineties
gave rise to enormous frauds at companies like Enron and WorldCom.
Fraud is a
boom-time crime because it feeds on the faith of investors, and during bubbles
that faith is overflowing. So while robbing a bank seems to be a demand-driven
crime, robbing bank shareholders is all about supply. In the classic work
on investor hysteria, Manias, Panics, and Crashes, the economist
Charles Kindleberger wrote that during bubbles the supply of corruption
increases . . . much like the supply of credit. This is more than
a simple analogy: corruption and credit are stoked by the same forces. Cheap
money engenders a surfeit of trust, and vice versa. (The word credit
comes from the Latin for believe.) The same overconfidence that
leads investors and lenders to underestimate the risks of legitimate investments
also leads them to underestimate the likelihood of fraud. In Madoffs
case, for instance, his propensity for delivering inexplicably consistent
returns month after month should have been a warning sign to his investors.
But in the past few years besotted investors were willing to believe lots
of foolish thingslike the idea that housing prices would just keep
of credulity doesnt last, of course; when the crash comes, and people
get more cynical and cautious, the frauds are exposed. As Warren Buffett
put it, You only learn whos been swimming naked when the tide
goes out. Did the share prices of Enron and WorldCom start plunging
after their fraudulent actions came to light? Actually, it was the other
way around: the financial mischief was exposed only after their stock prices
tanked. In Madoffs case, the steep across-the-board decline in asset
prices curbed investors appetite for risk, so that many started to
pull their money out. That effect may very well have forced Madoff to dispense
more money than he could keep bringing in, especially since recruiting new
investors, which you have to do to keep a Ponzi scheme going, would have
become harder after the crash.
When the Madoff
scandal erupted, some people argued that investor confidence would be further
shakenthat the scandal would make Americas markets look more
like Russias, notoriously rife with scams and suspicion. That hasnt
happened. After the Madoff story broke, the market jumped almost five per
cent, and its now well above where it was when Madoff was arrested.
One reason is that a stock market that lost seven trillion dollars in value
in 2008 knows how to take a fifty-billion-dollar loss in stride. And Madoff
was running money largely for an élite clientele, which gained access
to his services primarily through inside connections, limiting the market-wide
impact of his malfeasance.
But the main
reason that Madoff didnt destroy investor confidence is that it was
already gone, thanks to a year when just about every institution that the
market depends onrating agencies, accounting firms, regulators, Wall
Street C.E.O.s.had messed up. The whole web of intermediaries and
knowledge brokers that modern asset markets have come to rely on has become
frayed. That helps explain the current credit crunchbank lending has
dropped fifty-five per cent this yearand the dismal state of the stock
market. Discovering what the crooks have been up to is disillusioning, but
not as disillusioning as coming to terms with what the so-called honest
In David Mamets
movie House of Games, the grifter played by Joe Mantegna explains
to a former mark, Its called a confidence game. Why? Because
you give me your confidence? No. Because I give you mine. So the bankers
gave us their confidence, in the form of mortgages and other forms of credit,
and we gave them ours. This culture of credulity did plenty of damage to
the economy, but now it has given way to something even more corrosive;
namely, endemic mistrust. Because if theres one thing worse than too
much confidence its not enough. Fraud impoverishes a few; fear impoverishes
the many. As long as mistrust prevails, people will keeping pulling money
out of the systemsometimes even at gunpoint.
A young boy enters a barber shop and the barber whispers to his customer,
"This is the dumbest kid in the world. Watch while I prove it to you."
The barber puts a dollar bill in one hand and two quarters in the other, then
calls the boy over and asks, "Which one do you want, Son?"
The boy takes the quarters and leaves the dollar.
"What did I tell you?" said the barber. "That kid never learns!"
Later, when the customer leaves, he sees the same young boy coming out of
the ice cream store and says; "Hey son! May I ask you a question? Why
did you take the quarters instead of the dollar bill?"
The boy licked his cone and replied, "Because the day I take the dollar,
the game's over!"
A little boy says to his mother, "Mommy, how come I'm black and you're
His mother replied,
"Don't even go there! From what I can remember about that party, you're
lucky you don't bark."
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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