Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Monday, June 16, 2008: Lehman
Brothers rose $3.11 on Friday. On Wall Street they call that "a dead cat
bounce." I'm still short. LEH remains the classic cockroach stock. See
Except for special situations, cash remains king. I'm fearful of two things:
Funds going increasingly to cash and dumping what they own. We've seen this
in biotech where big owners have sold big.
What might happen if margin calls start to accelerate, and broad stock dumping
I forecasting a 20% drop in one day? No. Am I fearful one might happen? Yes.
Street is a product machine. It
creates products which it sells to us -- from little you and me to big institutions.
All of us increasingly don't understand what the products really are, how they
work are or what they're backed by. Still, we buy them because we're lazy, trusting
and greedy. (I speak from personal, painful experience.) The new products, and
the new "creative" ways of using them (like securitization and high
leverage), inevitably blow up. Hence, we roll from one financial crisis to another.
A great summary of what's happened and what will happen is in this new book:
Remember Long-Term Capital Management? A big hedge fund blows up. The Fed steps
in and organizes a rescue. Why? Writes Morris:
the world largely accepted the party line that a disorderly failure would
be violently disruptive, many remain skeptical. An equally plausible reason,
perhaps, was to avoid a full airing of the real scandal: that at the
very epicenter of American finance, a tiny group of people were able to borrow
hundreds of billions of dollars from banks, and that neither the banks, nor
the banks' regulators, had any idea how much they had borrowed or what they
were doing with it.
Morris is not
optimistic. He writes:
crisis is often compared to Long-Term Capital Management debacle, which rattled
global finance in 1998. But that involved about $100 billion in positions,
with no more than $10 billion or at risk in a worst case. It was settled when
New York bankers met in the New York Fed's boardroom and agreed to cough up
$3.6 billion. Today, the at-risk values are at least 100 times higher. There
is no room big enough for a meeting, and no list of who should be at the table.
that Wall Street has not admitted the scale of its problem and has not purged
"absurd valuations, phony triple-A ratings, inflated balance sheets and
the hidden liabilities that are marbled though financial balance sheets."
He figures we're
facing a trillion dollar writedown. (Right now we're less than halfway there.)
Personally, I think it will be more. As to the lessons which I see after reading
1. Stay away from
financials. Don't even think they're cheap. Read below about catching falling
2. Stay away from
companies masquerading as industrial, when they're really financial. The prime
example is GE.
3. Stay away from
things that rely on huge dobs of borrowed money. I hope no one who reads this
column is invested in a hedge fund that uses borrowing. I'm just checking. I
hate leverage. I hate borrowing. It puts you at someone else's mercy.
4. Stay away from
Wall Street's new products. My mantra is simple: If I don't understand it, I
say "No." Take private equity funds. Writes Morris:
equity kings insist that they are management wizards, not financial engineers.
But at least in its most recent phase, the numbers show that the private game,
like subprime CDOs (collaterialized debt obligations), is just another arbitrage
on cheap money and rising asset markets. Researchers at the University of
Pennsylvania's Wharton School have built a large database of private equity
returns from reports furnished to clients. Fund partners (i.e. Wall Street)
earned twice as much money from transaction fees and fixed fund management
fees as they did from deal outcomes. The rewards, in other words, flowed to
people who excelled at raising funds and executing deals..." And not
to you and I.
You should read
Morris' book. It's good, short history. The events since he wrote (late last
year) -- the increasing cockroach-like writedowns -- confirm his predictions.
knives are dangerous. Catch a falling knife:
I haven't done a big study but it seems to me that all the people and institutions
who stuck their money into financials to save them in recent months are now
facing substantial capital losses as the market has continued to slide. Take
Washington Mutual, the nations largest savings and loan.
The company received
a $7 billion capital infusion in April. The investors paid $8.75 for
each WaMu share 26 percent below the stocks price the day of the
deal. You'd think that was a deal? Wrong. On Friday the stock closed at $6.65.
They've lost 24% already.
about the Lehman Brothers reverse Midas touch -- In
which everything turns to dodo. There are two things you'll learn
from this story: First, the rating agencies generally change their mind after
the event -- good or bad. Second, the much of what Wall Street creates sucks.
From Australia comes another delicious LEH story:
EQT Lehman Brothers fund to wind down slowly (from InvestorDaily)
Fund to get new manager
Investors may have to wait a while to recoup their investments due to current
credit market conditions.
(EQT) has indicated there is no set timeframe in which investors will be able
to recover their investments from the terminated EQT Lehman Brothers Wholesale
High Income Fund.
The EQT Lehman
Brothers Wholesale High Income Fund was terminated in May. A month later United
States securities firm Lehman Brothers closed its Australian funds management
arm, Lehman Brothers Asset Management (LBAM).
EQT will continue
to manage the fund for the next 45 days, after which time another as yet unknown
manager will take over, EQT business development manager Boyd Peters told
an adviser briefing on Friday.
The fund will
remain open for as long as it takes to sell the assets at a reasonable price,
tough past 12 months in credit markets the fund will take a longer-term view
with winding down assets; LBAM chief executive Paul O'Halloran still believes
" the credit in these portfolios is strong".
have seen some improvement over the last two months and the markets should
recover enough in the next 6 months to warrant selling off assets, O'Halloran
The fund's assets
are expected to continue to generate income and investors can expect to receive
distributions, according to EQT and Lehman Brothers.
closure of the EQT Lehman Brothers High Income, research house Standard and
Poor's has withdrawn the fund's three-star rating, while Morningstar dropped
its rating from recommended to avoid.
Planners may face loss on Lehman fund, Follows asset management closure
Financial planners may be forced to take losses as Lehman Brothers begins
selling assets in its income fund.
may be forced to take losses as Lehman Brothers begins liquidating its local
flagship product, the EQT Lehman Brothers High Income Fund.
losses may arise after the New York-based investment bank closed its Australian
asset management division earlier this week, effectively leaving no-one to
manage the fund.
local operations were based in Melbourne and known as Lehman Brothers Asset
LBAM chief executive
Paul O'Halloran and company portfolio manager Damon Shinnick were made redundant
by the group's United States parent.
EQT [listed-firm Equity Trustees] distributed the strategy, which had $150
million under management, through its platform and most of the inflows came
interest is managing things in a fair and equitable way for the unitholders,"
EQT managing director Peter Williams told InvestorDaily.
who made an investment at the start of the six months to April 30 might get
around 7 per cent less back, Morningstar data showed.
made one year ago might be worth 5 per cent less, but an investment made five
years ago might be worth around 37 per cent more, it showed.
the parent of LBAM, ordered the closure as part of its plan to cut more than
5000 jobs - 15 of them in Australia - in response to the "challenging
a shame because we thought O'Halloran and Shinnick had a pretty good process
and were good investors," Morningstar head of adviser and research Anthony
a loss for the industry and it will be a disappointment for many planners."
will change the rating of the fund to avoid from recommended, while Standard
and Poor's withdrew its former three-star rating.
is facing a lawsuit from Wingecarribee Shire Council for allegedly putting
money into failed sub-prime products.
family loves artist Tom Otterness. This is a piece
he did for someone's backyard as a private commission. It's not small. Check
out the kid in the center.
This is one of
the legs. Tom does these wonderful little figures.
This is an installation
in the New York City subway. It's in the 14th Street station. Every New Yorker
has heard stories about the neighbor who went to Florida, brought back a baby
alligator, grew it in his apartment until it became too big, then flushed it
down the toilet into New York's sewage system.
These are also
in the 14th Street subway station. A fellow avoiding paying the toll to ride
the subway is caught by a policeman.
exam -- part 1
A woman, in her fifties, is at home happily jumping unclothed on her bed and
squealing with delight.
Her husband watches
her for a while and asks, "Do you have any idea how ridiculous you look?
What's the matter with you?"
The woman continues
to bounce on the bed and says, 'I don't care what you think. I just came from
having a mammogram and the doctor says that not only am I healthy but I have
the breasts of an 18 year old.'
The husband replies,
'What did he say about your 55 year old ass?'
'Your name never
came up,' she replied
exam -- part 2
A woman and a baby were in the doctor's examining room, waiting for
the doctor to come in for the baby's first exam. The doctor arrived, and examined
the baby, checked his weight, and being a little concerned, asked if the baby
was breast-fed or bottle-fed.
'Well, strip down
to your waist,' the doctor ordered.
She did. He pinched
her nipples, pressed, kneaded, and rubbed both breasts for a while in a very
professional and detailed examination. Motioning to her to get dressed, the
doctor said, 'No wonder this baby is underweight. You don't have any milk.'
I know,' she said,
'I'm his Grandma, but I'm glad I came.'
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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