Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Tuesday, July 5, 2005: It's
logical. High oil prices, high Arab
stock exchanges. The UAE market -- a combination of the Dubai Financial Market
and Abu Dhabi Stock Market -- is up 105% on the year. The Saudi stock exchange
is up 65%. Figuring this sort of stuff is what great investing is all about.
weekend cover story is "Too Much Money." It discovers what
I've written endlessly about -- too much money chasing too few opportunities,
with two results
1. Returns are
down (and will stay down).
2. Hedge funds and other investment vehicles are taking on increasingly risky
Results: You got
to pay increasing attention to capital preservation -- my contant mantra.
Frankly I'd pay zero attention to Business Week's other conclusions.
When reporters research a cover story they often talk to the wrong people --
Business Week talked to economists (Yuch!), who discovered -- surprise,
liquidity can disappear overnight if investors start getting skittish and
lose confidence, causing severe disruptions to markets that have gotten used
to cheap money. A unexpected rise in inflation or interest rates could tank
the bond market and burst the global housing bubble, which now stretches from
Barcelona to Shanghai to San Francisco. Doubt about the U.S. ability to finance
its huge trade deficit could trigger a steep downturn in the dollar and a
monetary crisis. And China's factory-building spree may leave it saddled with
excess capacity for years to come. Prices for cold-rolled steel and ethylene
have already dropped sharply, and auto prices have fallen as much as 20% in
the past 12 months. "It's going to be very tough for those guys who own
factories," says Morgan Stanley economist Andy Xie, "and a lot of
them won't pay the banks."
I don't buy into the doom and gloom story. I do buy into the world is changing
and we need to find investments for a changing world. But I don't have any brilliant
insights after an incredible July 4 weekend of great family, great weather, great
swimming, great tennis and some great insect bites. I itch.
I found some neat statistics in my weekend reading:
+ Hedge funds now manage assets worth $1 trillion and account for between a third
and a half of all trading on the New York and London stockmarkets. -- The Economist.
+ Since 1998, annual concert tour revenue has more than doubled, while CD sales
have remained essentially flat. In 2004, thirteen different artists grossed more
than $40 million each at the box office. Price made $87 million. -- The New
+ Renaissance Technologies Corp's $5 billion flagship Medallion hedge fund
has earned an average of 34% annually since it began in 1988, making it
the most successful fund during the period. These returns, which are audited,
come even after fees that now are -- get this -- 5% of assets and 44%
of all investment gains. That is more than double what other hedge funds typically
charge. -- The Wall Street Journal.
I found one neat forecast. It's from a New York Times interview with
Bill Gross, who manages the $85 billion Pimco Total Return bond fund -- the largest
in the world.
Q. Your forecast
is for yields on 10-year Treasury notes to be in the range of 3 percent to 4.5
A. Believe it
or not, that's a three-to-five-year forecast. We are expecting inflation at
1 to 2 percent, down from 2.8 percent. That ultimately is positive for
bonds. There are two dominant reasons. Asian labor has been arbitraged by U.S.
corporations hoping to contain wages here at home. The next big piece is the
expectation that Asians will continue to buy into our markets. The Chinese and
Japanese have been huge buyers of Treasuries and the demand from them is partly
responsible for the artificially depressed yields we see today.
Q. If your
forecast is right, what would burst the housing bubble?
A. If interest
rates stay low, there's no reason there has to be a disaster in housing. But
if housing prices stop going up, which would be my forecast, that makes
a substantial difference. Individuals have banked on that appreciation every
year. You should come to a point where owners of houses realize we're in never-never
land and stop buying on a speculative basis. Markets many times fall of their
own weight. That's what happened with the Nasdaq in 2000.
Q. What does
your forecast mean for investors?
A. In this new
world in which inflation is 1 to 2 percent, returns on all assets, from stocks
to bonds to hedge funds and private equity, will be low. A lot of investors
will throw up their hands and say, why are we pursuing this seemingly endless
struggle to produce double-digit returns when it can't be done? We might as
well buy Treasuries and sleep well. If yields are going lower, today's 4 percent
rate on Treasuries will look attractive 12 months from now.
Q: What is
the outlook for corporate bonds?
A: If inflation
comes down it means that profits will come down, too, and corporate cash flow
may not be as plentiful. That is not an ideal environment to own a corporate
bond. That doesn't mean there can't be an attractive situation. In May we were
buyers of three to four billion dollars of auto finance bonds.
Q. You run
the largest bond mutual fund. Is it a problem for you to invest that much money?
A. It's not. The
bond market is $24 trillion, so our $500 billion in total assets is about 2
percent of the whole pie. There have been innovations in derivatives. The mortgage
market is so large, and then there's international markets. The European bond
market is probably 4 to 5 times deeper than the U.S. Treasury market. I will
say this. One reason why rates are doing what they are doing has to be in part
self-reinforcing behavior on the part of Pimco. When Pimco at $500 billion turns
from bearish to bullish, even if we move in a measured way, we probably move
that market 10 basis points. You look in the mirror and say, Can that be true?
money out of your brokergage account? Watch
that they don't charge you interest, pending the sale of securities to cover
The end of the housing bubble down under:
Some experts think the end of the Australian housing boom could signal the end
of a housing bubble, not just in Australia, but also in the U.S., writes today's
New York Times. I don't believe a word of it. American housing has not
boomed percentagewise what Australian housing has done. Australia also lacks
the population growth the U.S. has. Reading the fine print, you find "But
so far, despite predictions that housing prices in Australia would plummet by
as much as 20 to 30 percent, there are no signs of a crash. Prices have leveled
off noticeably or dropped slightly, at least in Sydney, Melbourne and Canberra.
They continue to rise at a modest rate in Perth, Darwin and Brisbane, the major
cities in resource-rich states, where the local economies are being buoyed by
China's insatiable demands for raw materials." If you want to read the
entire piece, click
hates the Bank of America: I wrote I hated
them. I got flooded with emails from readers:
+ As for BAC,
I couldn't agree more strongly. I banked with them when I moved out to CA in
2000 and needed a new "local" bank. They had the largest ATM network
and were one of the few banks at the time with online billpay (believe it or
not, just 5 years ago this was uncommon). Anyway, they nickled and dimed us
to death and we finally switched banks about two years ago. We now bank at First
Republic Bank (FRC). I would HIGHLY recommend them. They have very few branches
(so keeping your BAC account open wouldn't be the worst thing) but the SERVICE
they give is second to none.
+ Bank Of America is the worst bank out there. I opened an account a year ago,
then decided I didnt want it anymore. So I withdrew my funds. Most banks,
when they see the account has been emptied they will close the account, but
not BAC. They began charging monthly fees of 15 dollars, after three months
they threatened to go to collection and ruin my credit rating. They said those
fees were considered to be loans. They are not professional or friendly to there
customers like Chase and Citibank.
If it weren't for the high 4.45% dividend yield, I'd bet my last dollar that
BAC is going much lower:
There's no way this incompetent bank can successfully absorb MBNA. That will
be a $35 billion disaster. On second thoughts, BAC is going lower.
LCD monitors plunge in price: This is incredible.
Costco is selling a 19" digital, 1280 x 1024 LCD computer monitor for $299.99.
I paid over $600 a year or so ago for an equivalent machine. Click
An incredible bargain. Whatever happened to inflation?
My son, Michael, graduated from Dartmouth. He is way
smarter than I am.
A young New York boy goes off to Dartmouth, but about 1/3 way through
the semester, he has foolishly squandered what money his parents gave him. Then
he gets an idea. He calls his father.
he says, "you won't believe the wonders that modern education are coming
up with! Why, they actually have a program here that will teach Fido how to
amazing!" his father says. "How do I get him in that program?"
him down here with $1,000," the boy says, "I'll get him into the course."
So, his father
sends the dog and the $1,000. About 2/3 way through the semester, the money
runs out. The boy calls his father again.
Fido doing, son?" his father asks.
dad, he's talking up a storm," he says, "but you just won't believe
this - they've had such good results with this program, that they've implemented
a new one to teach the animals how to READ!"
says his father, "No kidding! What do I have to do to get him in that program?"
$2,500, I'll get him in the class."His father sends the money.
The boy has a
problem. At the end of the year, his father will find out that the dog can neither
talk nor read. So he shoots the dog.
When he gets home,
his father is all excited. "Where's Fido? I just can't wait to see him
talk and read something!"
the boy says, "I have some grim news. This morning, when I got out of the
shower, Fido was in the living room kicking back in the recliner, reading The
Wall Street Journal, like he usually does. Then he turned to me and asked,
"So, is your daddy still messin' around with that little redhead who lives
on 63rd Street?'
The father says,
"I hope you SHOT that lyin' son of a bitch!"
"I sure did,
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 .
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