Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Friday, July 25, 2008: It
was hard tennis. I lost. I'm drowning my sorrows with a Coke and a slice of
pizza. The pizza shop owner has the TV set tuned to CNBC. It used to be his
favorite channel until he lost all his money owning George Gilder's tech stocks
in the Tech Wreck of 2000-2002. Now he watches CNBC out of perversity. I'm watching.
It's 4:40 PM or so. I hear these words:
today gave the Federal Government a triple AAA rating.
My brain is reeling?
Wasn't Moodys the rating agency that gave all the financials, including Freddie
and Fannie, the great ratings before they all collapsed in a sea of red
I go to the Wall
Street Journal's MarketWatch
and I find this. (Remember I don't make this stuff up.)
(MarketWatch) -- Although extending aid to Fannie Mae (FNM) and Freddie Mac
(FRE) could test the resiliency of the U.S. government balance sheet,
it would not endanger the U.S. government's strong Aaa rating, Moody's Investors
Service said Thursday. The prospective issuance of bonds by the Treasury to
cover Fannie and Freddie's losses would result in a only small percentage
increase in gross bond issuance, and a relatively small increase in federal
government debt, said Steven Hess, Moody's vice president, in the report.
At the same time, Moody's noted that there are other risks to the government's
balance sheet although they aren't likely to be realized. Nonetheless, the
ratings agency believes the government has sufficient financial flexibility
to deal with these risks and maintain its Aaa rating.
into some really serious territory when we starting betting with the finances
of the U.S. Government to save two corrupt and grossly mismanaged private companies
-- Fannie and Freddie As I write this I'm starting to shudder. Are we really
New York Times ran a long piece titled House
Approves Sweeping Effort to Help Housing. In the piece were the following
significantly, the legislation hardens the governments long-implicit
assurance that it would step in to rescue the two mortgage giants who together
own or guarantee about $5.2 trillion of the nations $12 trillion in
mortgages. Currently, Fannie Mae and Freddie Mac guarantee financing for about
80 percent of new mortgages.
accommodate a potential rescue for Fannie Mae and Freddie Mac, the bill raises
the national debt limit to $10.6 trillion, an increase of $800 billion. (That's
Treasury Department has said it hopes never to use the authority to spend
unlimited taxpayer funds perhaps hundreds of billions of dollars
to maintain the solvency of the mortgage giants because they are in
sound financial condition. Still, shares in the two companies rose sharply
on Wednesday in a sign of the markets positive view of having a federal
rescue plan in place. (The following day -- Thursday -- they plummeted.)
Congressional Budget Office said on Tuesday that the rescue plan for the mortgage
finance companies should appear on the federal budget as a $25 billion charge
in fiscal years 2009 and 2010, but officials conceded that this was only
an estimate based on complicated probability calculations.
What is Washington
smoking? Washington believes Fannie and Freddie "are in sound financial
condition." How can anyone honestly know? The one and only thing we know
about this financial crisis is that it's riddled with cockroaches. The losses
and the writedowns just keep on coming. Many of the mortgages Fannie and Freddie
own are still low-monthly payments (e.g. interest only). These are about to
ramp out and then become unaffordable, at which point hundreds of thousands
more will abandon their homes. Mr. Market is saying they're not in sound
financial condition. Yesterday, Fannie's stock fell 19.9% and
Let's go back
to my column
on Tuesday. I talked about an important report on bank finances called,
"Who is next?" by Richard (Dick) Bove. As I wrote on Tuesday:
Bove is clearly one of the most talented analysts whose work I've ever read.
He's been covering this sector for eons. His report is actually far more optimistic
on the banks than on the Federal Government which he clearly regards as clueless.
(He's right.) Reading between Bove's lines, you get the feeling that the man
is seriously worried about the health of the United States' financial system.
Read his words:
It is clear
that Fannie and Freddie are too big to fail. They are also too big for the
United States government to support. Referring to the numbers above, if the
debt and the known guarantees of the GSEs (Government Sponsored Entities,
i.e. Fannie and Freddie) are added to the public debt of the United States,
that debt would grow by 104% to an estimated $10.8 trillion.
This might cause the value of dollar to decline. It might force interest rates
throughout the economy higher, not just those of the mortgage sector. It might
force Congress to raise taxes.
Add to the entities that are not big enough to protect Fannie and Freddie,
the Federal Reserve. This agency is approximately the same size of each of
the GSEs (Fannie and Freddie). The Fed has $940 billion in assets. Fannie
has $883 billion and Freddie has $803 billion. In theory, the Fed has $6 billion
in equity and the GSEs together have $60 billion.
It is for these reasons, the risks to the United States financial system,
that the former Fed Chairman, Alan Greenspan, repeatedly went to Congress
during his tenure to ask that these agencies be reduced in size. He was supported
by Treasury Secretaries Paul ONeill and John Snow. The current Treasury
Secretary Henry Paulson did not argue for a cutback.
Mr. Paulson has publicly stated that he does not want to see the structure
of Fannie Mae and Freddie Mac changed. This view is wrong. It may be Mr. Paulson's
way of recognizing that he has no ideas about how to run these organizations
other than to argue that big financial companies should fail.
metrics above clearly indicate why these companies must be restructured. They
are now so large they dominate activities in the mortgage markets impacting
not just financial institutions but also housing, and through housing, the
United States economy. ...
It is also clear
that these institutions are so large that they are impacting the funding of
the United States government and possibly the value of the U.S. currency.
They may have reached a size that allows them to interfere with the normal
functioning of the government itself, if the government actually does the
unthinkable, and guarantees their debt.
have argued for decades now that these institutions raise interest rates in
the overall economy by diverting funds away from commercial activities into
Elsewhere in his
report, he has a section on "What should be done with Fannie and Freddie?"
of the dilemma are:
+ The GSEs (Fannie
and Freddie) cannot be allowed to fail without putting the financial system
of the United States at risk.
+ The Unites
States government cannot nationalize these companies nor guarantee their debt
explicitly, and, maybe now, even implicitly.
+ They cannot
be allowed to continue in their present form because they have a long record
of complete mismanagement and fraud, and they are simply too big.
+ They must
support growth in the housing industry.
all this (and yesterday's
column), it is clear that the best place for my and your investible
funds is in government securities in a safe foreign country in local (i.e. non-US)
currency. Australia, with its huge mining and commodity resources, seriously
To read his entire
report, "Who is Next?" by
at bottom. Don't believe it. That's the title
of Jon Markman's interesting piece on MSN Money. He wrote the piece on Wednesday,
before yesterday's selloff. It begins:
The recent updraft
is probably an illusion. There's no indication the bear market has ended and
plenty of evidence it has a long way to fall yet.
Investors praying that the most inept federal government since the Hoover
administration has engineered an end to the credit crisis with a plan to rescue
Fannie Mae and Freddie Mac may be on track to see their delusions shattered.
can read his entire piece on MSN
Money. It's seriously depressing, but I suspect he's right. He concludes:
To give you
an idea of how persistent a bear market can be, consider that Cisco Systems,
Intel and Sony, three of the finest, strongest companies in the world, have
never actually left their 2000 bear markets. We'll probably look back at the
financial stocks in five years and say the same thing.
to get 8% on your money in Australia: This
morning I am moving $1 million to Australia. I will move more on Monday as I
free up more monies. Obviously I am seriously worried about two happenings:
First, a 10% to 20% one-day drop in U.S. stockmarkets and second, a 20%+ overnight
decline in the value of the dollar.
yesterday's column, I wrote that big,
stable Australian banks are paying 8% for on-demand money. There are two benefits
to doing this: First, the interest rate is far better than here. Second, owning
Australian dollars is a good hedge against the U.S. dollar and what further
idiocies Washington might do to our dollar, and worse, the day sentiment turns
against the U.S. dollar, just as it turned against Bear Stearns and IndyMac
Bank (and others). Washington believes printing money is the panacea to our
every problem. It gives insanity a whole new meaning.
I spent yesterday
checking the Australia story. It gets better. Australia only taxes non-residents
(that's you and me) at the rate of 10% on our interest income. That brings our
rate of return down to a still-hgh (by U.S. standards) 7.2%. Even better,
the taxes you pay in Australia are a deduction on what you owe here in taxes.
You need to find
a banker in Australia. That's not difficult if you have a friend there. If you
know me (and send me an email) I can introduce you. Just remember, I'm not a
banker. I'm not a financial adviser. I'm not making a nickel on this. There
is a form to fill out. It's called "Reference by An Acceptable Referee."
It's a Commonwealth Government Requirement. That's what the form says.
on Australian taxes, go the Australian
Taxation Office. That's where you'll see the 10%.
foreign cars have their odd idiosyncrasies. It
all started when we left my wife Susan's E500 2004 Mercedes wagon in the garage
for six weeks. When came back, the parking attendants said the battery was flat.
This was common, they said, among expensive exotic cars like Mercedes, BMW and
Audi. They had electronics which drained the battery continuously -- whether
the car was moving or not.
it turns out we're going through tires like there was no tomorrow. I query our
local mechanic. Expensive exotic car makers typically put "performance"
tires on their cars. The original tires on the car had a treadwear rating of
280. They're optimized for driving on autobahns at 130 MPH. We replaced them
with tires with a treadwear rating of 440, which will last much longer and will
not affect handling one iota, since we're not driving at 130 mph. You can read
about treadwear on Wikipedia
turns out that our Mercedes also came with "low profile tires." These
run well on German autobahns, but are lousy on New York City streets, where
the potholes make huge dents in the metal rims, causing the tires to lose their
air and the need to regularly replace the rims.
drive a 2002 Subaru Legacy Outback wagon, which can sit for three months in
the depth of the winter without losing its charge. It has normal tires and normal
get a lot of junk mail. I delete them instantly. But yesterday's
was the first "keeper." The headline read "Angelina Jolie
Set to Destroy Own Vagina." Inside was a photograph of an attractive
topless lady with the words "Watch The Video."
Had I clicked, I would have loaded an awful virus.
Once again, don't open email attachments.
joy of filters: Central airconditioners have two parts that need
cleaning -- their air filter and their condenser. It's easy to replace the air
filter. To clean the condenser requires a man with a power hose and soap. I
dropped by Home Depot to buy a washable air filter. They didn't have a filter
called "washable." But the nice man suggested an alternative: buy
Home Depot's one-time use filter and "wash it."
Oh yes, the moral
of this story. Air conditioners work much better (and much cheaper) when you
change (or wash) their filters and clean their condensers.
P.S. You can get
washable filters at Air
joy of being 96
Just before the funeral services, the undertaker came up to the very
elderly widow and asked, 'How old was your husband?'
'98,' she replied.
'Two years older than me.'
'So you're 96,'
the undertaker commented.
'Hardly worth going home, is it?'
joy of being 104
Reporters interviewing a 104-year-old woman: 'And what do you think is the best
thing about being 104?' the reporter asked.
She replied, 'No
have changed. This one used to be Bloomingdales.
An elderly woman decided to prepare her will and told her preacher she had two
final requests. First, she wanted to be cremated, and second, she wanted her
ashes scattered over Wal-Mart.
'Then I'll be
sure my daughters will visit me.'
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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