Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Thursday, March 27, 2008: My
dear friend and reader, Steve Schone, emailed me and said, in effect, he was
sick of reading about idiots like me who had been dumped (and duped) into auction
rate preferreds. After all, he'd been intelligent enough to avoid them. He had
a broker who actually did research (miracle of miracles!), had fingered the
risks on ARPs, and had mercifully stayed clear. Why hadn't I? Point well taken.
So at vast expense
(an extra $9.95 a month) I set up a new web site -- www.AuctionRatePreferreds.org.
You can go there and read the latest (and not so greatest) on our ARPs.
This now gives
me two web sites to do each day -- my unpaid night jobs (except for the Google
My day job is
to to figure out how to eek out a few sheckels on my investments. Or, increasingly,
how to protect what little I haven't pissed away in the last little while. That
job is more depressing even than contemplating locked ARPs. At least they're
earning something; They're locked up and I am recused from figuring some imaginative
way to lose yet more capital.
My call last November
about getting out of he stockmarket remains right. That saved megabucks. My
call on getting into commodities and precious metals was right. Though I jumped
out of IAU, GLD and SLV when they dropped a week or so ago, I think I should
be back in them. If everyone is as depressed about the stockmarket as I am,
then there will be continued flight to precious metals and commodities. You
might look at Vanguard's Precious Metals and Mining fund.
As to the other
things, I am increasingly depressed by what I now dubb as Newton's Rule of
Unintended Gotchas. I listen to great pitches with great logic on the great
future of some great stock or great industry. Then I watch and wait. And pretty
soon, something out of left field emerges and screws things up and the stock
As the economy
tightens, there are more and more "Gotchas." I have to admit that
I still have money with "professional" money managers. I figured they
were smarter than I was. Some are. Yet the stockmarket is confounding them also.
One just sent me an email. You could smell his acute frustration in this one
some of our biggest losses were in stocks that we felt our field checks were
extensive and our conviction was high.
He's making a
bundle in shorting stocks -- who isn't. But few people have the gumption to
go net short. Trust me: everything from retail to technology to leading Dow
stocks are shorts. This market is not going up. Trust me further, finding
a few stocks that do go up -- there will be some -- is too difficult. I prefer
to ride rising tides. Wait two years.
This is a typical
I enjoy reading your website.
A quick question.
What do you think is the safest play right now?
to put most in cash, but do not know what the best/safest vehicle is.
Some say CDs
because theyre backed by the Government, vs. Money Market Mutual funds
which are not.
What do you
now the safest is multiple $100,000 deposits in banks -- CDs or savings accounts.
I'll work more on this today.
reading: The latest March 31, 2008 issue of
The New Yorker is fantastic.
It's got three
wonderful articles. One by James Surowiecki on Too Dumb To Fail, one
called Out of Print, which talks about the death of the newspaper
business and one by John Cassidy on Suprime Suspect -- the man Merrill Lynch
loved to hate.
Here's the Surowiecki
piece. (He's truly excellent.)
In 1984, Continental
Illinois, then one of the countrys largest banks, found itself on the
verge of collapse, after billions of dollars worth of its loans went
bad. To avert a crisis, the government stepped in, purchasing $3.5 billion
of the soured loans and effectively taking over the bank. Later that year,
at a congressional subcommittee hearing, Representative Stewart McKinney summed
up the lesson of the rescue effort: Let us not bandy words. We have
a new kind of bank. It is called too big to fail. T.B.T.F., and it is a wonderful
T.B.T.F. has become a generally accepted, if unwritten, rule in the financial
world. Two weeks ago, though, it was given a new twist when the Federal Reserve
acted to save the investment bank Bear Stearns, orchestrating the companys
sale to J. P. Morgan Chase by providing Morgan with up to thirty billion dollars
in financing to cover Bear Stearnss portfolio of risky assets. Previously,
the government had intervened to protect only commercial bankswhich
take deposits and issue traditional loans, and which are heavily regulated.
(Another first: the Fed is now allowing investment banks to borrow from it
directly.) The Bear Stearns deal means that the T.B.T.F. rule now applies
to investment banks as well. Suddenly, the federal government is committed
to saving a whole lot more companies than it was a couple of weeks ago.
companies obviously runs the risk of creating moral hazardif we insulate
people from the consequences of their irresponsibility, theyre more
likely to be irresponsible in the future. But the Fed did a good job of lessening
that risk, making sure that Bear suffered a heavy toll. The sale punished
Bear shareholders severely, valuing Bear at just two dollars a share, down
from sixty dollars a few days before, while thousands of Bear employees are
likely to lose their jobs. Thats about as harsh as a bailout gets.
More to the
point, the threat of moral hazard in this case was simply less dire than the
threat of financial contagion. The Fed could have done what it did in February,
1933, when it stood quietly by while Detroit Bankers Corp. and the Guardian
Detroit Union Group, Detroits two largest banks, foundered after a series
of bad loans. But the failure of those two banks quickly led to bank runs
in neighboring statesClevelands two biggest banks failed soon
afterand eventually to a national banking panic. Bear Stearnss
collapse, similarly, could easily have provoked market chaos. Bear wasnt
among the largest Wall Street banks, but it was a major clearinghouse for
stock trades and played a central role in hundreds of billions of dollars
of credit deals. If not too big, it was too important to fail.
The Bear deal
does mark a major policy shift, since the Fed has now implicitly admitted
that it will catch investment banks when they fall. But that shift really
just ratifies the inevitable, given the nature of credit in todays world.
Most money thats borrowed these days no longer comes from commercial
banks, which are responsible for less than thirty per cent of all lending.
Instead, in one form or another, the loans are packaged and sold as securities.
And since investment banks do much of the selling and buying of those securities,
they play an ever bigger role in financial markets. Two decades ago, the Fed
could afford to let a firm like Drexel Burnham Lambert (which, admittedly,
was dealing with criminal charges in addition to its economic woes) go under
without worrying too much about the ripple effects. It would demand very steady
nerves to do the same thing today.
You might, then,
see the Feds willingness to help investment banks as evidence of their
indispensability. But what it really underscores is how badly Wall Street
has managed its business in recent years. Because investment banks trades
and investments are typically very highly leveragedBear Stearns, for
instance, had borrowed thirty dollars for every dollar of its ownthe
banks need to be exceptionally good at managing risk, and they need to insure
that people trust them enough to lend them huge sums of money against very
little collateral. Youd expect, then, that Wall Street firms would be
especially rigorous about balancing risk against reward, and about earning
and keeping the trust of customers, clients, and lenders. Instead, most of
these firms have taken on spectacular amounts of risk without acknowledging
the scale of their bets to the outside world, or even, it now seems, to themselves.
Thats why, since the bursting of the housing bubble, we have seen tens
of billions of dollars in surprise write-downs and complete paralysis in the
credit markets. When you consider that the banks at the center of the subprime
debacle were also at the center of the tech-stock bubble, the surprising thing
about the Bear Stearns crisis isnt that a major investment bank was
abandoned by its customers and lenders but, rather, that it didnt happen
Now that the
Fed has stepped in, its possible that things will go back to normal.
But lets hope they dont get too normal: one of the biggest problems
in the market in the past decade has been that lenders, clients, and even
ordinary small investors have put far too much faith in the magical abilities
of Wall Street firms, and have failed to give their promises and performance
proper scrutiny. Markets require trust to work well, but when trust is blind
they are almost guaranteed to go haywire. We dont want the paralytic
level of skepticism that has reigned in the marketplace in recent months to
continue, but we dont want a return to the way things were, either.
Its a good thing that Bear Stearns was saved. But its also a good
thing that it nearly died.
an excerpt from Eric Alterman's piece on the death and life of the American
The latest pitch in panhandling
centuries after the appearance of Franklins Courant, it no longer requires
a dystopic imagination to wonder who will have the dubious distinction of
publishing Americas last genuine newspaper. Few believe that newspapers
in their current printed form will survive. Newspaper companies are losing
advertisers, readers, market value, and, in some cases, their sense of mission
at a pace that would have been barely imaginable just four years ago. Bill
Keller, the executive editor of the Times, said recently in a speech in London,
At places where editors and publishers gather, the mood these days is
funereal. Editors ask one another, How are you?, in that sober
tone one employs with friends who have just emerged from rehab or a messy
divorce. Kellers speech appeared on the Web site of its sponsor,
the Guardian, under the headline NOT DEAD YET.
but trends in circulation and advertisingthe rise of the Internet,
which has made the daily newspaper look slow and unresponsive; the advent
of Craigslist, which is wiping out classified advertisinghave
created a palpable sense of doom. Independent, publicly traded American newspapers
have lost forty-two per cent of their market value in the past three years,
according to the media entrepreneur Alan Mutter. Few corporations have been
punished on Wall Street the way those who dare to invest in the newspaper
business have. The McClatchy Company, which was the only company to bid on
the Knight Ridder chain when, in 2005, it was put on the auction block, has
surrendered more than eighty per cent of its stock value since making the
$6.5-billion purchase. Lee Enterprises stock is down by three-quarters
since it bought out the Pulitzer chain, the same year. Americas most
prized journalistic possessions are suddenly looking like corporate millstones.
Rather than compete in an era of merciless transformation, the families that
owned the Los Angeles Times and the Wall Street Journal sold off the majority
of their holdings. The New York Times Company has seen its stock decline by
fifty-four per cent since the end of 2004, with much of the loss coming in
the past year; in late February, an analyst at Deutsche Bank recommended that
clients sell off their Times stock. The Washington Post Company has avoided
a similar fate only by rebranding itself an education and media company;
its testing and prep company, Kaplan, now brings in at least half the companys
newspapers were accustomed to operating as high-margin monopolies. To own
the dominant, or only, newspaper in a mid-sized American city was, for many
decades, a kind of license to print money. In the Internet age, however, no
one has figured out how to rescue the newspaper in the United States or abroad.
Newspapers have created Web sites that benefit from the growth of online advertising,
but the sums are not nearly enough to replace the loss in revenue from circulation
and print ads.
Tax-time approaches. Time for creativity in deductions.
Apparently this one is true.
The one they always
talk about at CPA classes concerns the topless dancer who got breast implants
and wrote them off as a business deduction under Section 179 and treated them
as a capital asset, as an ordinary necessary business expense, and deducted
The IRS challenged
her. It went to tax court. She won.
I mercifully refrained
from illustrating this story.
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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