Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
9:00 AM EST Friday, May 30, 2008: You
buy or sell what grabs you. There isn't much that "grabs" me at present,
Lehman Brothers cooks its own books. I've been
mulling on a Wall Street Journal piece for the past few days.. The story
is headlined "A
Shorter Slams Lehman." In it are these sentences:
Lehman, David Einhorn took issue with large, unrealized gains the firm
booked in the first quarter from marking up equity positions that don't trade
in public markets. Like other brokers, Lehman has large amounts of illiquid
assets that it values using management-driven financial models.
In the quarter,
Lehman said it had a pretax gain of $695 million related to hard-to-value
equities. In the previous four quarters, the average, unrealized gain from
such holdings was $69 million.
The $695 million
is a net number made up of roughly $1 billion of gross gains and offsetting
losses, according to Lehman. The $1 billion included an unrealized gain from
writing up the value of an equity investment in an Asian power company, which
the firm declined to name.
In his speech,
Mr. Einhorn said the company was India-based KSK Energy Ventures and that
Lehman told him it booked a $400 million to $600 million gain on KSK in the
first quarter. The manager said Ms. Erin Callan (Lehman's CFO) told him Lehman
marked up its holding because a new investor had taken a stake in KSK at a
valuation above Lehman's.
Ms. Callan said
this other investment was part of a financing round in anticipation of an
initial public offering, according to Mr. Einhorn. After Mr. Einhorn further
questioned the valuation process, he says Lehman changed its story.
him, he said, saying the firm had revalued its KSK stake based on an "expected"
pre-IPO financing as well as other factors.
I actually have
a degree in accounting and a certificate to prove it. My thesis was how little
you could believe published financials. I delved into things like depreciation,
amortization, etc. But never in my wildest imagination, could I have imagined
that a respectable public company would totally fake up its earnings
by giving itself profits it never earned.
$695 million, it didn't sell anything. It simply picked a number out
of the air. Well, not exactly. Had it not given itself the $695 million
in faked-up "profits,its net income for the last quarter would have been
a loss. According to the Wall Street Journal's online
site, Lehman reported only $663 million in net income before
taxes. Had it not faked up the $695 million, it would have lost $32 million.
And its stock would be thoroughly in the toilet -- where I suspect it's going.
It gets better.
According to the Journal, Mr. Einhorn also questioned the values Lehman
put on many other financial assets. In particular, he said Lehman hadn't sufficiently
written down $6.5 billion of complex debt securities called collateralized
debt obligations, or CDOs. He added that these holdings were only recently disclosed,
even though other banks and Wall Street firms disclosed similar holdings months
ago and took massive write-downs on them. Mr. Einhorn noted that write-downs
taken by Lehman in the first quarter on the $6.5 billion of CDOs were only about
$200 million. Yet, in an April filing about the first quarter, Lehman
disclosed that about 25% of the CDOs were rated BB+ or lower, which is
a junk rating.
them how they could justify only a $200 million write-down on any $6.5 billion
pool of CDOs that included $1.6 billion of below-investment-grade pieces,"
he said. He added that Ms. Callan declined to explain the size of the write-down,
but she added that "Lehman 'would expect to recognize further losses' in
its second quarter."
thoughts on Lehman are in a speech he gave to the Ira
W. Sohn Investment Conference.
My previous "no-brainer"
short was First Solar (FSLR) and it has worked out nicely. Lehman Brothers (LEH)
sure looks like a solid short.
on ARPS: From a reader:
That's another reason
to stay away from financials. There's probably $250+ billion of auction rate securities
still locked, not redeemed. Brokerage firms are praying these securities will
be redeemed at par. Most brokerage firms are actually refusing to let their customers
sell the securities on the secondary market (through Restricted Securities Trading,
Fieldstone or Southern Trust). The brokerages fear their customers will go to
arbitration and be successful getting back their losses. Figure 10-15% on $250
billion and you're looking at as much as $37.5 billion. That's not a loss
the financials can afford today.
righthand man (at Fieldstone Securities) confirms for me that most closed-end
muni bond funds are selling for 90-91 cents on the dollar. That's up from
82 cents on the dollar about 6 weeks ago. Three weeks ago it was 85-86 cents.
You could sell your $3.5 million of Nuveen funds possibly for 91 cents on
the dollar. Then you can go to arbitration for the 9 cents on the dollar you're
software improves dramatically: I've made two
great investments -- a lifetime membership in American Airlines' Admirals Club
and a lifetime subscription to TiVo. I'm fond of both, especially the new improvements
TiVo has made. I like TiVo and its service much better than than the boxes your
local cable provides.
oil will rise further. There are two basic reasons oil will rise
-- rising consumption by the new rich and falling production by old oil. There
is one other reason -- our own dumbness. And that includes the latest "dumbness"
-- moves by Congress' tighten up oil "market manipulation" (whatever
Big Picture, billing itself as "the macro perspective on the
capital markets, economy, geopolitics, technology and digital media."
This week he discussed how absurd US energy policy is.
The United States
is heavily dependent on fossil fuels (>80%), most of which come from places
we would rather not send our money to. We consume 26% of the world's energy,
with only 3% of the worlds known oil reserves.
It turns out
that for the past three decades, we've had a George Costanza Energy policy
-- every decision we have made as a country has worked to drive energy prices
higher. Had we made the opposite decisions, Crude Oil prices would be much
lower than they are today ($130.17 as I type this). What follows is a list
of energy-related policies of the United States. On many of these, I have
no opinion -- but I wanted to list as many as I could to demonstrate why Oil
is where it is.
with an impact on Energy:
areas available for offshore drilling;
the rise of CAFE standards for automobiles;
nuclear power generation of electrical;
Reserve policies since 2001 led to a very weak US dollar (raising Oil prices);
5. Energy conservation
6. Iraq and
Afghanistan wars contributing to Middle East tensions.
7. No major
United States funding for R&D on energy;
8. Kept CAFE
standards for light trucks/SUVs much lower than autos;
9. Failed to
raise efficiency standards for appliances for decades.;
no tax incentives for consumer purchases of hybrid automobiles;
Sprawl: Americans, on average, live further from where they work than Europeans
12. Mass transit
system not a high priority;
tax credits for residential solar power to expire;
14. No special
capital gains treatment for VC alternative energy investment
corn ethanol policy helped drive food prices higher also;
the lowest gasoline taxes in the developed world;
17. No special
capital gains tax treatment for clean energy technology development;
a tax incentive (ADCS) that encouraged purchases of large inefficient vehicles;
19. Game changing
breakthroughs over the past decades in solar, battery, or energy generation
light trucks, SUVs, and pickups from gas-guzzler tax;
clean coal, including gas liquefaction from coal;
(or non-existent) state tax incentives for building energy efficient homes;
to aggressively promote compact fluorescent light bulb;
hydroelectric power generation;
tax incentives for battery technology development? None
to aggressively promote efficiency improvements for residential energy use,
transmission of power, or consumption;
27. No new
oil refineries built in the USA over the past 25 years.
And that's just
off the top of my head. Some of the above is being responded to by the private
sector. With Oil at $130+, there are significant price incentives for these
develop solutions only AFTER the economics of it are feasible. This means
we are starting R&D with Oil at previously unthinkable levels. Imagine
if we had had some form of energy leadership 10 or 20 years ago when oil was
As I mentioned
on the show last night, whoever is elected President in November should put
together a blue ribbon panel, and develop a real energy policy. Otherwise,
we will revisit this post in a few years with Oil at $200 . . .
a Food Crisis: Wondering why there are food
riots worldwide? Here's the beginning of an important piece from The Nation
When tens of
thousands of people staged demonstrations in Mexico last year to protest a
60 percent increase in the price of tortillas, many analysts pointed to biofuel
as the culprit. Because of US government subsidies, American farmers were
devoting more and more acreage to corn for ethanol than for food, which sparked
a steep rise in corn prices. The diversion of corn from tortillas to biofuel
was certainly one cause of skyrocketing prices, though speculation on biofuel
demand by transnational middlemen may have played a bigger role. However,
an intriguing question escaped many observers: how on earth did Mexicans,
who live in the land where corn was domesticated, become dependent on US imports
in the first place?
food crisis cannot be fully understood without taking into account the fact
that in the years preceding the tortilla crisis, the homeland of corn had
been converted to a corn-importing economy by "free market" policies
promoted by the International Monetary Fund (IMF), the World Bank and Washington.
The process began with the early 1980s debt crisis. One of the two largest
developing-country debtors, Mexico was forced to beg for money from the Bank
and IMF to service its debt to international commercial banks. The quid pro
quo for a multibillion-dollar bailout was what a member of the World Bank
executive board described as "unprecedented thoroughgoing interventionism"
designed to eliminate high tariffs, state regulations and government support
institutions, which neoliberal doctrine identified as barriers to economic
rose from 19 percent of total government expenditures in 1982 to 57 percent
in 1988, while capital expenditures dropped from an already low 19.3 percent
to 4.4 percent. The contraction of government spending translated into the
dismantling of state credit, government-subsidized agricultural inputs, price
supports, state marketing boards and extension services. Unilateral liberalization
of agricultural trade pushed by the IMF and World Bank also contributed to
the destabilization of peasant producers.
This blow to
peasant agriculture was followed by an even larger one in 1994, when the North
American Free Trade Agreement went into effect. Although NAFTA had a fifteen-year
phaseout of tariff protection for agricultural products, including corn, highly
subsidized US corn quickly flooded in, reducing prices by half and plunging
the corn sector into chronic crisis. Largely as a result of this agreement,
Mexico's status as a net food importer has now been firmly established.
With the shutting
down of the state marketing agency for corn, distribution of US corn imports
and Mexican grain has come to be monopolized by a few transnational traders,
like US-owned Cargill and partly US-owned Maseca, operating on both sides
of the border. This has given them tremendous power to speculate on trade
trends, so that movements in biofuel demand can be manipulated and magnified
many times over. At the same time, monopoly control of domestic trade has
ensured that a rise in international corn prices does not translate into significantly
higher prices paid to small producers.
It has become
increasingly difficult for Mexican corn farmers to avoid the fate of many
of their fellow corn cultivators and other smallholders in sectors such as
rice, beef, poultry and pork, who have gone under because of the advantages
conferred by NAFTA on subsidized US producers. According to a 2003 Carnegie
Endowment report, imports of US agricultural products threw at least 1.3 million
farmers out of work -- many of whom have since found their way to the United
not good, since the Mexican government continues to be controlled by neoliberals
who are systematically dismantling the peasant support system, a key legacy
of the Mexican Revolution. As Food First executive director Eric Holt-Giménez
sees it, "It will take time and effort to recover smallholder capacity,
and there does not appear to be any political will for this -- to say nothing
of the fact that NAFTA would have to be renegotiated."
That the global
food crisis stems mainly from free-market restructuring of agriculture is
clearer in the case of rice. Unlike corn, less than 10 percent of world rice
production is traded. Moreover, there has been no diversion of rice from food
consumption to biofuels. Yet this year alone, prices nearly tripled, from
$380 a ton in January to more than $1,000 in April. Undoubtedly the inflation
stems partly from speculation by wholesaler cartels at a time of tightening
supplies. However, as with Mexico and corn, the big puzzle is why a number
of formerly self-sufficient rice-consuming countries have become severely
dependent on imports.
provides a grim example of how neoliberal economic restructuring transforms
a country from a net food exporter to a net food importer. The Philippines
is the world's largest importer of rice. Manila's desperate effort to secure
supplies at any price has become front-page news, and pictures of soldiers
providing security for rice distribution in poor communities have become emblematic
of the global crisis. ...
of Mexico and the Philippines was paralleled in one country after another
subjected to the ministrations of the IMF and the WTO. A study of fourteen
countries by the UN's Food and Agricultural Organization found that the levels
of food imports in 1995-98 exceeded those in 1990-94. This was not surprising,
since one of the main goals of the WTO's Agreement on Agriculture was to open
up markets in developing countries so they could absorb surplus production
in the North. As then-US Agriculture Secretary John Block put it in 1986,
"The idea that developing countries should feed themselves is an anachronism
from a bygone era. They could better ensure their food security by relying
on US agricultural products, which are available in most cases at lower cost."
What Block did
not say was that the lower cost of US products stemmed from subsidies, which
became more massive with each passing year despite the fact that the WTO was
supposed to phase them out. From $367 billion in 1995, the total amount of
agricultural subsidies provided by developed-country governments rose to $388
billion in 2004. Since the late 1990s subsidies have accounted for 40 percent
of the value of agricultural production in the European Union and 25 percent
in the United States.
of the free market and the defenders of dumping may seem to be at different
ends of the spectrum, but the policies they advocate are bringing about the
same result: a globalized capitalist industrial agriculture. Developing countries
are being integrated into a system where export-oriented production of meat
and grain is dominated by large industrial farms like those run by the Thai
multinational CP and where technology is continually upgraded by advances
in genetic engineering from firms like Monsanto. And the elimination of tariff
and nontariff barriers is facilitating a global agricultural supermarket of
elite and middle-class consumers serviced by grain-trading corporations like
Cargill and Archer Daniels Midland and transnational food retailers like the
British-owned Tesco and the French-owned Carrefour. ...
At the time
of decolonization, in the 1960s, Africa was actually a net food exporter.
Today the continent imports 25 percent of its food; almost every country is
a net importer. Hunger and famine have become recurrent phenomena, with the
past three years alone seeing food emergencies break out in the Horn of Africa,
the Sahel, and Southern and Central Africa.
in Africa is in deep crisis, and the causes range from wars to bad governance,
lack of agricultural technology and the spread of HIV/AIDS. However, as in
Mexico and the Philippines, an important part of the explanation is the phasing
out of government controls and support mechanisms under the IMF and World
Bank structural adjustment programs imposed as the price for assistance in
servicing external debt.
can read entire depressing piece in the June
2 of The Nation.
Windows problems: Windows Sysinternals are
tools that help you manage, troubleshoot and diagnose your Windows systems and
applications. There are two web sites: Microsoft's
and the software itself.
Use Internet Explorer, not Firefox.
for xobni. I mentioned this Outlook plug-in yesterday.
As I use it more, I like it more. The
new, free plug-in is called xobni.
The software has two big pluses -- lightning fast searching, and threaded conversations.
reminder to have your children and grandchildren watch this video.
Shimon Peres, current President of Israel, gives advice to kids about their
future. Peres served twice as Prime Minister of Israel and has written 11 books.
This is a seriously super talk.
French Tennis Open continues. Watch it in high definition (HD).
The quality is mind-blowing. HD is the only way to watch sports. The
Tennis Channel is 455 on Time Warner Manhattan and 217 on DirecTV. ESPN is 209
on DirecTV and 29 and 729 (HD) on Time Warner. Your channels will be different.