Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Thursday, March 20, 2008: Am
I "stupid" money? Is the commodities boom over for now?
In recent years,
we've learned three things about the search for the "perfect" investment::
1. There remains
huge monies chasing too few opportunities.
2. As the "opportunities"
get discovered, money pours in and the "opportunities" boom in price.
3. Then they get
"undiscovered" (or a new one gets discovered) and their prices fall.
The key is timing.
Get in early. Get out early.
Does this investment
philosophy now apply to commodities? I was thinking along these lines as I watched
my favorite commodities drop substantially in the past two days.
Is now the right
time to take some profits? The answer is Yes.
Is now the right
time to get out of commodities altogether? I'm not sure. You can draw some trendlines.
The top one is
a 50-day moving average. It shows we're close to breaking through. The bottom
one is a 200-day moving average. We're a ways from breaking that one.
I was mulling
this commodities thing this morning when this piece in today's New York Times
Latest Boom, Plentiful Risk
The booming commodities market has become increasingly attractive to investors,
with hard assets like oil and gold perhaps offering a safe hedge against inflation,
as well as the double-digit gains that have fast been disappearing from the
markets for stocks, bonds and real estate.
the kind of volatile downdrafts that sent oil plunging 4.5 percent
Wednesday, to settle at $104.48 a barrel, large funds and rich individual
investors have sent a torrent of cash into this arcane market over
the last year, toppling records for new money flowing in.
are plunging in, too, using dozens of new retail commodity funds to participate
in markets that by one measure have jumped almost 20 percent in the
last six months and doubled in six years.
But this market,
despite its glitter, offers risks of its own, including some dangerous weaknesses
that are impairing the ability of regulators to police fraud and protect investors.
Commodities are also vulnerable to the same worries affecting the rest of
Wall Street, where on Wednesday the Dow Jones industrial average plunged almost
300 points, erasing more than two-thirds of Tuesdays steep gains.
biggest speculators and lenders in the commodities markets are some of the
same giant hedge funds, commercial banks and brokerage houses that are caught
in the stormy weather of the equity, housing and credit markets.
As in those
markets, an evaporation of credit could force some large investors
especially hedge funds speculating with lots of borrowed money to sell
off their holdings, creating price swings that could affect a host of marketplace
prices and wipe out small investors in just a few moments of trading.
now is a very scary time for commodity market regulators, said Michael
Riess, a director of the International Precious Metals Institute, a consultant
to commodities investors for more than 30 years. Its not a question
of overregulating or underregulating. Its a question of just being swamped
by volume, volatility and a dramatic shift toward speculative interests.
on Wall Street in the last few days underscored the new risks. Both Bear Stearns
and its prospective new owner, JPMorgan Chase, are important clearing brokers
that process and guarantee their clients trades in the commodities markets.
the exchanges where those trades occur had to monitor Bear Stearnss
financial situation carefully throughout last week to ensure that its cash
shortage did not affect its commodity positions or those of its clients.
Walter L. Lukken,
who heads the federal agency that regulates most commodity markets, said his
staff had been able, so far, to cope with both the markets growth and
the recent tremors from Wall Street.
the enormous volume coming through, said Mr. Lukken, acting chairman
of the Commodity Futures Trading Commission, we think we have gotten
a very good handle on the market. You cant catch them all, of course,
and you worry that something will get past the goalie. But we have been able
to scale up the regulatory monitoring system to deal with increasing volume.
exchange officials take comfort from the rising commodity prices, which reduce
the risk that lenders will grow nervous about their collateral and withhold
new credit. Despite a broad commodities sell-off yesterday, a Commodity Research
Bureau index remains almost 40 percent higher than a year earlier.
But it has been
a roller coaster: commodity prices can record daily percentage changes that
dwarf typical movements in stocks. Yesterday, when crude oil gave back some
of its 85 percent annual gain and gold dropped almost 6 percent after
an annual gain of 44.5 percent, the Standard & Poors 500-stock index
fell 2.4 percent, leaving it down 7.4 percent over the last year. On its worst
single day over the last year, it fell 3.2 percent.
So stock market
investors seeking these formidable gains will find themselves on unfamiliar
terrain. The heart of commodities markets is the so-called cash market, a
professionals only setting where producers sell boatloads of iron
ore, tanker ships full of oil and silos full of wheat for immediate use.
that core are the commodities futures markets. Here, hedgers and speculators
trade various versions of a derivative called a futures contract, which calls
for the delivery of a specific quantity of a commodity at a fixed price on
a particular date.
trade both on regulated exchanges and in the immensely larger but less regulated
over-the-counter market, where banks and brokers privately negotiate futures
contracts with hedgers and speculators around the world.
The prices at
which all these contracts trade indicate the potential strength of demand
and supply for commodities still in the ground or in the fields. That makes
them important to everyone who produces, buys and uses those goods
wheat farmers, baking companies, grocery shoppers, oil companies, electric
utilities and homeowners.
can also influence the values of the increasingly popular exchange-traded
funds, or E.T.F.s, that focus on commodity investments. Born barely
four years ago, these funds had net assets of $32.8 billion in January,
compared with less than $4.8 billion in 2005.
But as the futures
markets have grown, the ability of federal regulators to police them for fraud
and manipulation has been shrinking, as a result of legislative loopholes
and adverse court decisions. And despite widespread agreement that these regulatory
gaps are bad for investors and consumers, they have not yet been repaired.
commodities market has not yet dealt with what some economists say are inherent
conflicts that have arisen as the futures exchanges, which have substantial
self-regulatory duties, have been converted into for-profit companies with
responsibilities to shareholders that could conflict with their regulatory
duties. (For example, shareholders may benefit when an exchanges regulatory
office ignores infractions by a trader who generates substantial income for
when the New York Stock Exchange and Nasdaq became profit-making entities,
they spun off their self-regulatory units into an independent agency, now
called the Financial Industry Regulatory Authority. ...
But some with
experience in the commodities market remain nervous about the new money pouring
in so quickly.
firms that have survived for any length of time have excellent risk-management
skills, said Jeffrey M. Christian, managing director of the CPM Group, a research
firm spun off from Goldman Sachs in 1986. Mr. Christian said he was less certain
how the newcomers would deal with risk.
have the stupid money coming into the market now, he said last week.
And I think the smart money is beginning to get a little frightened
about what the stupid money will do.
For the entire
Rate Securities (Update):
Two more class action suits got filed against issuers
of auction rate preferreds -- this time against
Wachovia and TD Ameritrade. The suits were filed by the San Francisco firm of
Girard Gibbs LLP. There's more on them in yesterday's
+ There is
increasing pressure to change closed-end funds into open-ended funds. An
explanation; Closed end funds trade through the day and usually at a discount
to the net asset value. Open-ended funds -- think standard mutual funds -- trade
only at the end of the day. If you sell, you get the precise net asset value,
as it's at the end of the day. Changing from a closed to an open may improve
the changes of us auction rate preferreds getting our money back. This came
down on Business Wire yesterday. Business Wire, it should be noted,
is not "the press," it's a place anyone and everyone pays money to
get their information made public:
Investment LLC Issues Open Letter to Directors of Cohen & Steers REIT and
Utility Income Fund.
NEW YORK, Mar
19, 2008 (BUSINESS WIRE) -- Western Investment LLC today issued the following
open letter to the Board of Directors of the Cohen & Steers REIT and Utility
Income Fund, Inc. (RTU)
RTU (the "Fund")
recently issued the latest in a series of letters to stockholders that included
numerous, and we believe deliberate, misstatements about Western Investment
LLC ("Western" or "we"). We doubt you would have permitted
these misstatements had you not been beholden to Cohen and Steers for your
seats on the Fund's Board.
Had you checked your facts before permitting your Chairmen to issue their
misinformed letters, you would have found that:
-- Western has been an investor in the Fund since shortly after its inception
- there is nothing "short-term" about our interests.
-- As of the
record date for the Fund's Annual Meeting, Western owned over 5% of RTU's
outstanding common stock. We are currently the largest investor in the Fund
and the largest shareholder you have a fiduciary obligation to represent.
-- Our efforts
to have the Fund take action to reduce the double-digit gap between the value
of the assets standing behind the common shares and their trading price is
not speculation. The discount is not just Western's problem - it is a problem
for every Fund investor who may at some time need or want to sell some or
all of their shares. At one time or another it could be any investor in the
Fund - the entire shareholder population you were elected to, and are responsible
for, serving - and we believe it is your fiduciary duty to use all available
means to have the market fairly value the Fund's underlying assets. ASSURING
STOCKHOLDERS OF A FAIR PRICE FOR THEIR INVESTED ASSETS WHEN THEY NEED THEM
SHOULD BE ONE OF THE BOARD'S PRIMARY AIMS.
Cohen and Steers really out to protect the interests of the Fund's stockholders,
we believe they would be working to see that the market price of the common
stock reasonably reflected the value of the assets they represent, instead
of spending shareholder money fighting to prevent three independent directors
from joining the Board.
We feel we must
take it upon ourselves as stockholders to have you recognize the serious problems
the Fund faces, and to take real, meaningful action to solve these problems.
We call on the Board to remember its obligation is to the Fund's stockholders,
and to ask yourselves the following:
has the Fund not adequately addressed its persistent discount to net asset
value or the liquidity crisis facing the Fund's Auction Market Preferred
We believe that
there are solutions to these problems, yet until now, the Board has been unwilling
or unable to address these problems.
solution is for the Fund to sell a portion of its underlying assets, use the
proceeds to buy back common stock and redeem the preferred shares, thereby
reducing the Fund's discount to net asset value ("NAV"), creating
liquidity and increasing yield. Alternatively, a publicly announced program
of open market share repurchases, set to go into effect whenever the discount
reaches an unacceptable, pre-defined level and limited to a certain percentage
of the trading volume, we believe would serve to benefit both holders wishing
to sell, by limiting the discount, and holders remaining in the Funds by increasing
the assets freed up by this program could be reinvested or used to repurchase
the Fund's preferred shares to provide some needed liquidity to preferred
shareholders and reduce the Fund's interest expense. MAXIMIZING BENEFIT FOR
ALL BY INCREASING NAV AND EARNINGS PER SHARE.
-- Who stands
to lose if the Fund were to make accretive stock purchases and proportionate
preferred share redemptions as Western proposes?
stockholders win. Our plan reduces the assets under management, which in
turn reduces the fees collected by management. We are not surprised such
a plan has been so viciously resisted by the current Board and the Fund and
we believe this explains why when we tried to address the Fund's issues from
outside the coziness of the boardroom we met with little success.
-- Why does the Board seem so unwilling to act in the best interests of stockholders?
With the Fund's shares trading at double-digit discounts for most of its history,
it should not be terribly complicated to find an acceptable set of solutions
that benefits all stockholders. However, we believe a solution has eluded
this Board because it is currently conflicted, leaving it beholden to management.
-- Current Directors serve on the boards of, and receive six-figure annual
fees for services from, a total of 21 other funds in the Cohen & Steers
-- Mr. Cohen and Mr. Steers serve as Directors and Co-Chairmen of the Fund.
They are paid by and serve as Co-Chairmen and CEOs of the Fund's manager.
That is why we have proposed three independent director nominees to be elected
to the nine member Board, with no allegiances to the Fund's manager or other
Cohen & Steers funds to hinder their decision-making. Since many of the
solutions to the discount problem are unpalatable to the Fund's manager -
because they necessarily involve decreasing the assets under management and
reducing the fees received for management services - we believe that stockholders
both need and deserve independent directors in the boardroom to ensure that
action is taken to have the market fairly value their investment.
We are now asking stockholders to send a message, and to elect our three nominees
to the Board. Maybe then the Board will get the message and take the steps
necessary to address the problems facing the Fund. What the Board requires
is the will, and an unconflicted voice for stockholders in the boardroom.
We are not seeking control of the Fund, but do believe that engaged and attentive
shareholder representation whose interests are aligned with all stockholders
+ Calamos issues
a Touch Feely statement and says it's having a conference call this morning:
Seeks to Refinance Auction-Rate Preferred Stock Issued by Closed-End Funds;
Announces Conference Call to Address Refinancing
Ill., March 19, 2008 -- Calamos Advisors LLC, a global asset manager, today
announced that it is seeking to refinance the leverage on the five Calamos
closed-end funds that have issued auction-rate preferred stock (ARPS).
Calamos is in
discussions with a variety of market participants regarding new debt financing
to refinance a portion of the ARPS. Within the next several weeks, Calamos
intends to begin announcing ARPS refinancings, subject to necessary approvals.
decision by major broker-dealers to withdraw their support of auctions and
the resulting failure in the auction rate market has created uncertainty for
both our preferred and common shareholders," said John P. Calamos, Sr.,
CEO of Calamos. "With our announcement today, we are looking to begin
to restore liquidity to our auction rate preferred shareholders and confidence
to all Calamos closed-end fund shareholders."
added, "At a time of unprecedented developments in the credit markets,
we nevertheless continue to believe that leverage for our closed-end funds
is beneficial to our common shareholders. At the same time, we recognize that
the lack of liquidity has created both uncertainty and frustration for our
preferred shareholders. We ask our valued clients for their patience as we
aggressively work to address their concerns and restore liquidity by developing
and securing alternate forms of leverage."
manages five leveraged closed-end funds with approximately $2.3 billion of
auction rate preferred securities outstanding in the aggregate. Calamos will
continue to work to provide solutions for the remaining auction rate preferred
shareholders following this initial refinancing.
will host a conference call at 10:30 a.m., central daylight time, on March
20, 2008, to discuss the refinancing of the funds' ARPS. Mr. Calamos noted,
"We have always prided ourselves on being fully transparent with our
shareholders; to that end, we believe both our preferred and common shareholders
must be kept apprised regarding the process and timing to refinance the outstanding
auction rate preferred securities."
high call volume and encourages attendees to access the call via the live
streaming audio link http://audioevent.mshow.com/343153/.
Attendees can access the teleconference on Calamos' web site, http://www.calamos.com,
or attendees who prefer to participate by phone can access the call by dialing
800.379.3942 or 706.679.7206 and referencing conference ID number 39992940.
+ Bulldog Investors
To UBS Fund: Don't Favor Preferred Holders. This piece is reported by Daisy
Maxey, the Dow Jones reporter, who has been following the auction rate securities
NEW YORK (Dow
Jones)--Hedge fund group Bulldog Investors, which has a significant investment
in the closed-end Insured Municipal Income Fund (PIF) sponsored by UBS Global
Asset Management, said it would be inappropriate for the fund to bail out
preferred shareholders. Bulldog suggests converting it to an open-end fund.
principal at Bulldog Investors, said his firm is concerned about the fund's
persistent discount to its net asset value. Goldstein made his comments in
a letter to Richard Armstrong, chairman of Insured Municipal Income Fund's
board of directors, dated Feb. 21.
included a copy of the letter with a recent filing it made to the Securities
and Exchange Commission to report that it owned 5.29% of the outstanding common
shares of Insured Municipal Income Fund as of March 17.
this is the best solution to help everybody -- to open-end the fund,"
Goldstein said Wednesday in an interview with Dow Jones Newswires.
UBS Global Asset
Management is an asset management subsidiary of UBS AG ( UBS). UBS declined
to comment on the matter Wednesday.
funds issue preferred shares as a way to boost their returns through the use
of leverage. For years, these preferred shares were considered by many investors
to be safe, liquid investments, and were routinely sold successfully at auction.
But in recent months preferred shareholders have found themselves unable to
sell their shares as many potential buyers, including the banks that had for
years supported the auctions, stopped buying the shares amid a credit crunch.
does not own any of the auction-rate preferred shares issued by the Insured
Municipal Income Fund, but "is sympathetic to their plight," Goldstein's
letter to Armstrong said. "Nevertheless, we believe it would be inappropriate
for the fund to bail out the APS (preferred) shareholders who, like the common
shareholders, are getting everything they are contractually entitled to receive,"
have been reluctant to sell any of their closed-end funds' underlying assets
in order to provide liquidity for preferred shareholders, saying it would
be unfair to their funds' common shareholders.
letter cautions the Insured Municipal Income Fund's board to "eschew
any action that would have the appearance of benefiting" preferred shareholders
at the expense of common shareholders or the fund as a whole.
The letter also
says that Bulldog Investors is concerned about the fund's discount, and "believes
the board should consider implementing measures designed to close the gap,
including open-ending the fund."
got common shares trading at a double-digit discount, and preferred shareholders
have no liquidity," Goldstein told Dow Jones Newswires. "So why
not just do the right thing and make everybody whole?"
mutual funds, closed-end funds sell a fixed number of shares in a public offering,
which then trade on an exchange. Many closed-end funds trade at a discount
to their portfolios' net asset values, which may frustrate shareholders who
want to sell.
Income Fund traded at nearly a 12% discount as of March 14.
he had received a reply from Armstrong, saying simply that counsel was advising
the fund on its fiduciary duty.
TV Schedule - 2008 Pacific Life Open at Indian Wells: Federer,
Nadal, Djokovic, Roddick and Blake are playing. Also Sharapova, Hantuchova,
Kuznetsova and Safina. The problem is finding Fox Sports Network on your cable
or satellite TV. Clue: Sometimes they hang out with MSG (Madison Square Garden).
This schedule is not accurate, but it's the best I can do.
As his wife was expecting their first baby, Rabbi Bloom went to the schul committee
and asked for a salary increase. After much consideration, they passed a resolution
that when the Rabbis family expanded, so would his payslip.
Six children later, it began to get expensive for the schul and they decided
to hold a meeting again to discuss the Rabbis salary situation. This time
there was much arguing and shouting.
Rabbi Bloom could take it no more. He got up and said, Having children
is an act of God.
The chairman replied, Snow and storms are also acts of God,
but when we get too many, we wear rubbers.
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.
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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
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