Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
9:00 AM EST, Monday, March 23, 2009. A
hummingbird has built her nest next to the front door of our rented house
in La Quinta, California.
She is nesting
two tiny white eggs. Each day we watch for the new hatchlings.
While the economy (and our government) act weirdly, our hummingbird tells
me life continues.
bus tours of AIG executive homes in ritzy Fairfield, CT.
AIG exec James
Hass' home on top. AIG exec Douglas Polling's home on bottom. Both in Fairfield.
government paid $173 billion for 80% of AIG, . Our Congresspeople are outraged
over $165 million of bonuses. There's a lot more to be outraged over -- like
who got the $173 billion. At the top of the list -- surprise, surprise --
is Goldman Sachs, the same place our previous Treasury Secretary, Hank Paulson
Chart from the Economist.
not outraged by the bonuses or the payments. I'm outraged by how badly our
adminstrations -- this one and the previous one -- have bungled the financial
crisis. When I first heard the phrase "systemic meltdown,"
I knew we, the American public, were about to be sold something fast and something
run businesses for one very good reason. It can't.
The sad part
for all of us is that so much of our investing lives are now basically
controlled by bureaucrats spending vast quantities of our money (and our children's
money) in dubious ways. Should I be surprised that our money is ending up
in Wall Street executives' pockets?
no match for the smarts of Wall Street.
futures are up. Bonds are down. Last Friday the market was down. Bonds were
up. This is not easy to play, though my friends continue to gamble with "cheap"
bank stocks, like American West Bancorp (AWBC), up from 30 cents on March
6 to 90 cents last Friday. The bank is desperately undercapitalized. But,
perhaps it will follow Citigroup's bounce -- up from $1 on March 6 to over
$3 early last week, now down to $2.60. Can I play this? No! Do I think bank
stocks are going higher? Answer: stranger things have happened.
buy muni bonds? They're safe. Historically
they've been safe. But the black swan has arrived -- dramatically falling
revenues driven by huge jobless, lower sales taxes, etc. Worse, munis are
a black hole for many investors. There's no public market. Information is
scarce. The moral of the following story -- from Gretchen Morgenson of the
Sunday business section of the New York Times -- is buyer beware.
Red Flags That Muni Investors Cant See
turbulent stock prices, investors have retreated in recent months to the
relative safety of good old municipal bonds. Trading in this $2.7 trillion
market rose 22 percent in 2008.
investor protection in this arena is so spotty that there is potential for
that bedrock of fair securities markets, is the heart of the problem facing
municipal investors. Indeed, municipal issuers often fail to file the most
basic reports outlining their operating results or material changes in their
hospitals, cities and states that borrow money are required by their bond
covenants to make such filings, nondisclosure among the nearly 65,000 issuers
is common, municipal market authorities say. One out of two issuers is more
than a year late in its filings, according to DPC Data, a company in Fort
Lee, N.J., that collects information on municipal securities transactions.
One out of four is chronically delinquent, by three years or more.
You may not
be surprised to learn why better disclosure falls through the cracks in
the muni bond market: lax regulation. For example, legislation from the
1970s restricts the Securities and Exchange Commission from going after
issuers that do not make required disclosures; the commission can spring
into action only if fraud is suspected.
print: The S.E.C. can take action against brokerage firms that underwrite
muni bonds if the brokers let an issuer sell debt without being up to date
on filings for the most recent five years. But such actions are unusual.)
With the S.E.C.
largely on the sidelines, disclosure enforcement in the muni market is left
to participants. And guess what? They dont really want to police themselves
the disclosure requirements is left to individuals trading the securities,
the investors and the dealers, said Thomas Doe, chief executive and
founder of Municipal Market Advisors, an independent strategy and data firm
in Concord, Mass. There is little penalty to be suffered for not complying.
are the obvious losers in this setup. Especially at risk are individual
investors, according to a recent study by DPC Data. The study has been supplied
to Congress, which is considering whether the regulatory apparatus in the
muni market should be changed.
DPC Data is
one of four firms recognized by regulators as municipal securities information
repositories. For the study, Peter J. Schmitt, DPCs chief executive,
examined trades that involved issuers that had recently filed so-called
distress notices, indicating that they were experiencing financial problems.
found that an alarming number of these beleaguered issuers securities
were purchased by individual investors at nondistressed prices 100
cents on the dollar (known as par value) or higher. This indicates that
brokerage firms executing the trades may not have been aware of the issuers
troubles or failed to give investors full disclosure about them, Mr. Schmitt
fact that these rules, which were meant to stimulate disclosure, have been
swept under the rug and that the market has been allowed to go forward on
poor and inconsistent information doesnt say a lot about how assiduously
regulators are pursuing investor protection, Mr. Schmitt said.
as no surprise that defaults and other stresses on municipal issuers rose
significantly in 2008 as the credit crisis deepened. Some 348 distress notices
were filed last year, up from 187 in 2007.
economy was tanking, DPC data found that almost 28,000 trades took place
in securities that issued a distress notice at some time during the year.
Some 9,643 of those trades were sales to customers, both institutions and
individuals; more than half of them 5,798 were bought at par
value or higher.
dug deeper, analyzing how many customer purchases were made after a distress
notice was filed by the issuer. He found 1,782 such trades, of which 667
were sold at par or more.
when evidence emerges that a debt issuer is under stress, one would expect
the price of its bonds to fall. And yet hundreds of trades of exactly this
kind of debt were priced at par or higher, which Mr. Schmitt finds troubling.
details emerge in his study. For example, October was the biggest month
for sales of distressed bonds to customers at par or premium prices. And
41 percent of the 667 purchases in distressed bonds appear to have been
made by small investors, indicated by the size of each trade $50,000
behind almost half of the 667 issues tracked by Mr. Schmitt had not filed
financial statements in either 2008 or 2007, he said.
enforce disclosure rules in the municipal market has created a no-penalty
environment, Mr. Schmitt said, that leaves investors defenseless
against questionable practices by dealers.
before the Senate Banking Committee on March 10, Mr. Doe of Municipal Market
Advisors said muni investors needed more protection. He recommended that
Congress require the S.E.C. to oversee bond issuers compliance with
disclosure requirements and identify those that are not following the rules.
that this would be an enormous task, Mr. Doe suggested that the S.E.C. take
over the Municipal Securities Rulemaking Board, the entity established by
Congress in 1975 to devise rules for brokerage firms and banks that sell
and trade municipal bonds. The board is a self-regulatory organization and
is already subject to S.E.C. oversight.
If the S.E.C.
integrated the rulemaking boards operations, its fees from bond transactions
would offset the costs of increased oversight. Last year the board generated
around $20 million, Mr. Doe said.
It could not
be more basic: investors need up-to-date information in order to make astute
decisions. The DPC Data study certainly seems to indicate that investors
are often in the dark on distress notices and may be paying up when they
buy bonds of troubled issuers.
need to know what is going on with an issue they are purchasing whether
directly or through a managed fund, Mr. Doe said. Pointing out
the flaws in these transactions highlights the problems with current regulation.
the new head of the S.E.C., already has a lengthy to-do list. Heres
hoping that disclosure enforcement in the crucial and increasingly popular
municipal market ranks high on it.
bother with Internet Explorer 8: I tested
it. It was hard to install and took too long to install. And when it was finally
done installing (and messing with my Windows XP operating system), I kept
thinking "this is like Firefox, only less flexible." In short, stick
with Firefox, which you can download for free from here.
to the Indian Wells tennis yesterday. Finals are never very interesting,
since everyone is so exhausted from a two-week tournament. My trusty Canon
G10 recorded some of the fans. Amazing to me how many of them ate their way
through the matches.
impressions. My friend Lucky Marr emails me, "Those of you
who have visited Russia will no doubt agree there are no surprises in these
photos. The only surprise to me was why in the hell we ever worried about
them in the cold war!"
weekend radio broadcast.
Interviewer: Tell us some good news in the world of finance.
Where do you put your money?
I work for the New York Times, I have to put my money in a blind trust. Hence,
the good news it that I don't know how much I've lost.
bad financial jokes.
+ Did you hear
about the Polish homeowner? He paid his mortgage!
+ This shipping
market is so bad, the only guys taking ships are the Somalians.
Oh I am sorry you wanted a funny joke.
to surprise her husband, an investment banker's wife pops by his office. She
finds him with his secretary sitting in his lap. Without hesitation, he starts
dictating, "...and in conclusion, gentlemen, credit crunch or no credit
crunch, I cannot continue to operate this office with just one chair!"
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
click on my email address. You have to re-type it . This protects me from
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note I'm not suggesting you do. That money, if there is any, may help pay
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here and here.