Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Friday, June 20, 2008: I'm
not trying to wreck your weekend. Promise. But this continues not to
be the time to be in the stockmarket. The best call I ever made was back in
November when I said, "Get out now." Since then, I've written
about the possibility of a big one-day crash. Now I'm increasingly worried.
There are too many bad things piling on top of each other -- from severe inflation
to the credit crunch to job losses to huge deficits to the declining dollar.
The whole litany. Two pieces are worth reading:
issues global stock and credit crash alert. From
the British Telegraph:
Bank of Scotland has advised clients to brace for a full-fledged crash in global
stock and credit markets over the next three months as inflation paralyses the
major central banks.
nasty period is soon to be upon us - be prepared," said Bob Janjuah,
the bank's credit strategist.
A report by
the bank's research team warns that the S&P 500 index of Wall Street equities
is likely to fall by more than 300 points to around 1050 by September as "all
the chickens come home to roost" from the excesses of the global boom,
with contagion spreading across Europe and emerging markets.
Such a slide on world bourses would amount to one of the worst bear markets
over the last century.
RBS said the
iTraxx index of high-grade corporate bonds could soar to 130/150 while the
"Crossover" index of lower grade corporate bonds could reach 650/700
in a renewed bout of panic on the debt markets.
"I do not
think I can be much blunter. If you have to be in credit, focus on quality,
short durations, non-cyclical defensive names.
"Cash is the key safe haven. This is about not losing your money, and
not losing your job," said Mr. Janjuah, who became a City star after
his grim warnings last year about the credit crisis proved all too accurate.
Wall Street to rally a little further into early July before short-lived momentum
from America's fiscal boost begins to fizzle out, and the delayed effects
of the oil spike inflict their damage.
was always going to risk putting G7 bankers into a dangerous corner at some
point. We have got to that point," he said.
US Federal Reserve
and the European Central Bank both face a Hobson's choice as workers start
to lose their jobs in earnest and lenders cut off credit.
cannot respond with easy money because oil and food costs continue to push
headline inflation to levels that are unsettling the markets. "The ugly
spoiler is that we may need to see much lower global growth in order to get
lower inflation," he said.
is in panic mode. The massive credibility chasms down which the Fed and maybe
even the ECB will plummet when they fail to hike rates in the face of higher
inflation will combine to give us a big sell-off in risky assets," he
Kit Jukes, RBS's
head of debt markets, said Europe would not be immune. "Economic weakness
is spreading and the latest data on consumer demand and confidence are dire.
The ECB is hell-bent on raising rates.
fall-out could be substantial as finance ministers from the weaker economies
rail at the ECB. Wider spreads between the German Bunds and peripheral markets
seem assured," he said.
the bank expects the oil price spike to subside as the more powerful force
of debt deflation takes hold next year.
much is your investment worth? From today's
That might seem
like a simple question on Wall Street, where the price of everything from
Apple to zinc flickers across computer screens every day. But inside Bear
Stearns, the answer was anything but clear last spring for investors who put
their money into two giant, but ultimately doomed, hedge funds.
who oversaw the funds, Ralph R. Cioffi and Matthew M. Tannin, did not disclose
that the funds were plunging in value until it was too late, the authorities
say. On Thursday morning, the pair surrendered to federal agents and were
charged with nine counts of securities, mail and wire fraud.
outcome, the case spotlights one of the most vexing problems confronting Wall
Street as the credit crisis plays out: How to value tricky investments
linked to subprime mortgages and other risky debt.
As the mortgage
market slumped last spring, authorities say, Mr. Cioffi valued one of his
funds as having lost 6.5 percent in April. But colleagues at Bear placed far
lower values on investments in that fund. They said the fund had lost 18.97
All across Wall
Street, similar battles are playing out inside banks, albeit without the legal
drama. Many banks are struggling to value the assets they hold, raising doubt
among many investors about those companies financial health.
a humongous problem for Wall Street, said Michael Young, a lawyer with
Willkie Farr & Gallagher. These days these valuation obstacles
are at the core of the write-downs.
Mr. Cioffi and
Mr. Tannin are the first Wall Street executives to face criminal charges linked
to the credit mess. But many other bank executives are grappling with far
bigger financial worries. Worldwide, banks have written down the value of
assets by $380 billion, as high-flying markets have crashed back to
earth. Some banks suggest that the write-downs have been conservative and
that some assets may be written back up in the future. Others say the bill
will keep mounting.
to say that valuing complex investments is part art and part science, but
four large firms have said recently that some employees have not been honest.
Credit Suisse found a group of employees who had bumped up the value of mortgage
assets by $2.65 billion during the fourth quarter last year and through the
start of this year. The employees were fired.
In March, Lehman
suspended two traders on its equity derivatives desk for overpricing bets
in the market by tens of millions of dollars. In May, Merrill Lynch disclosed
a similar incident that cost it about $18 million.
was the latest to find misconduct. On Wednesday, the investment bank said
it had lost $120 million this year because of a rogue trader. The trader,
Matt Piper, is British and has worked for Morgan Stanley in London for four
years. He was suspended while Morgan Stanley continued investigating his trades
in credit-index options.
sort of environment of stressed markets, one would expect to see people trying
to behave improperly, said Colm Kelleher, Morgan Stanleys chief
financial officer, on a conference call. Were very angry about
The level of
losses industrywide is sure to raise questions about how values were assigned
in the first place. Banks generally look at prices in the market first. But
when no market price is available, they turn to internal computer models.
The practice is similar at hedge funds, though in some instances, banks give
pricing out to hedge funds, allowing price levels to trickle through in nebulous
asset classes like mortgage bonds.
Now, bank executives
are increasingly scrutinizing their employees and trying to catch them if
they are too optimistic or downright dishonest about valuations.
But it is not
simply a question of catching rogue traders. Marking the book, as the industry
calls the pricing process, has become one of the more controversial topics
among finance executives, even in instances where no fraud has been alleged.
On Thursday, the chief financial officer of Citigroup said the company would
use internal models to price mortgage bundles known as collateralized debt
obligations rather than use the dismally low market prices as the only factor.
On the other end of the spectrum, firms like Goldman Sachs say that market
prices should be the driving factor in pricing.
models often use different data and produce different valuations. Investors
have complained recently that Wachovia and Washington Mutual are modeling
values with a housing price index that is more optimistic than the index used
by their competitors.
almost a definitional issue of what you mean by value, said Rick Antle,
an accounting professor at the Yale School of Management. Youre
really kind of behind the eight ball.
Away from Wall
Street, plaintiffs lawyers are circling. Suits over losses in funds
like Charles Schwabs YieldPlus Select assert that managers were
irresponsible in not knowing how risky the mortgage assets would turn out.
for Charles Schwab said the company does not comment on pending legal cases.
know if I could tie it to some kind of widespread conspiracy. Certainly the
fact that the write-downs have been so massive would mean that somebody was
optimistic, said Ryan Bakhtiari, a lawyer who has filed an arbitration
on behalf of investors against Schwab. It was true from the beginning
to the end of the food chain: everybody made inflated money.
Banks are sometimes
forced into write-downs because of selling in the market. Lehman Brothers,
for instance, said that the collapse of the hedge fund Peleton Partners in
February forced Lehman to write down the mortgage assets it owned similar
to ones held by Peleton. Some banks say the write-downs caused by fire sales
may be overkill.
is a bit of this atmosphere that says, Lets just mark it down,
no one is going to question it if we mark it down, said Christopher
Hayward, the finance director at Merrill Lynch, at a recent industry conference.
Not all banks
are eager to take their hits. In the fall, for example, a large city in the
Southeast asked Bank of America to write down the C.D.O.s the city held,
said Mr. Bakhtiari, who represents the city but was not authorized to identify
Bank of America
refused to mark down the C.D.O.s, Mr. Bakhtiari said, because it did
not want to create a mark-down domino effect in its other holdings. A spokesman
for Bank of America declined to comment Thursday.
increasingly complaining that banks have become too opaque about the assets
they own and the trades that make or lose them money. Financial
companies flocked en masse in recent years to trading assets that are far
harder to value than, say, shares of Microsoft.
And the problem
may be exacerbated by the way traders are compensated. Bank employees from
lowly associates to chief executives are paid bonuses each year based on performance.
But there is little recourse if their bets lose money the following year,
so long as the employee is deemed to have made an innocent mistake.
Some banks are
considering expanding the period in which traders are evaluated to longer
than a year, said Chip MacDonald, a partner in the capital markets group at
the law firm Jones Day.
to a Mac. The best news for Apple is that Bill Gates is leaving Microsoft's
future in Steve Ballmer's klutzy hands. Under Ballmer's watch we've had the
Yahoo idiocy (think huge lawyer and investment banking costs) and the Vista
disaster (think huge customer goodwill loss). From reader, John Buckheit this
Macs for the past several years come with a two button mouse with scroll wheel.
The buttons are not obvious as they are not outdented, but it can respond
to separate presses on the left and right. You tell it how you want to respond
in mouse preferences. I switched to a Mac last month (haven't used them for
ten years) after Vista gave me a hard time. I love my Mac. I have a program
called VMWare Fusion that allows me to run Windows applications
as windows on my Mac (on it I installed XP). Right now, I just use that for
Quicken as the Mac has a terrible version of Quicken. I think all the other
Mac software is better.
And so do an increasing
number of my other friends.
smuggler's dream. This was just a blur on the
radar of the British Coastguard as it crossed the English channel three times
a week. They were so astonished by
the speed of the unknown craft, they brought in a special high speed helicopter
to chase it. They found drugs, of course. Imagine the thrill of putting the
pedal to the metal.
psychology. Writing in the June issue of the Journal of Applied
Social Psychology, Colorado State University researchers suggest that people
with bumper stickers are more likely to be aggressive and angry people, or at
least aggressive and angry drivers.
Don't forget to download Firefox 3.0. It
really is a better browser. Download
for free here. And don't forget to get the Showcase
also free and also very useful. Don't be deterred by the slowness of Firefox
servers. There's huge demand.
Aaron and Jonathan, two businessmen both in their 80s, meet one day
in Brent Cross shopping center Aaron asks, "So nu, Jonathan, what's new?"
you ask me? Trouble, that's vat's new," replies Jonathan. "Mine secretary
is suing me for breach of promise."
"But I don't
understand," says Aaron. "At your age, what could you possibly promise
Moshe is lucky enough to meet Arthur Rubinstein, the famous concert pianist,
and within minutes of meeting him, Moshe persuades him to drop by his house
to listen to his wonderful daughter Emma play the piano.
As soon as Emma
finishes her favourite piano piece, she looks at Rubinstein and asks, "So
what do you think I should do now, Mr Rubinstein?"
replies, "I think you should get married."
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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