Harry Newton's In Search of The Perfect Investment
9:00 AM EST,
Monday, November 17, 2008: My friend had $10+ million in muni bonds.
It was his "safe" money. It was ultra-safe. It was managed by the
best muni bond managers in the universe. Yet my friend has recently sold some
of his bonds. He's afraid. Afraid of what? A meltdown? He's not certain.
I have muni bonds also. They've been the "safest" part of my portfolio.
I have recently bought more. The long ones are yielding 5.5+%. That's
a lot. Am I chasing yield and abandoning safety? (Yieldhog is my middle name.)
Muni bonds have the lowest default rate of all fixed income securities. Historically.
But history is bunk in today's world. The man making the most money (or at least
he's right up there) is Nicholas Taleb, author of "The Black Swan".
This book says the worst happens. And the "worst" is far more than
you ever imagined. Look what's happened in recent months. It's the "worst."
that I know the worst can and does happen, what bothers me is answering the
question, "Is anything safe?" And where do I find it? I now have major
doubts about muni bonds.
Times doesn't make me, as a muni bond holder, happy.
States Get Out Sharper Knives
Two short months ago lawmakers in California struggled to close a $15
billion hole in the state budget. It was among the biggest deficits in
state history. Now the state faces an additional $11 billion shortfall
and may be unable to pay its bills this spring.
decline in revenues is without modern precedent here, but California is hardly
alone. A majority of states many with budgets already full of deep
cuts and dependent on raiding rainy-day funds or tax increases are
scrambling to find ways to get through the rest of the year without hacking
apart vital services or raising taxes. ...
revenues the result of an unusual assemblage of personal, sales, capital
gains and corporate taxes falling significantly have poked holes in
budgets that are just weeks and months old and that came about only after
difficult legislative sessions.
landscape, said H. D. Palmer, a spokesman for the California Department
of Finance, is fundamentally altered from where it was six weeks ago.
to reduce overtime costs, fewer streets will be salted this winter. In Ohio,
where the unemployment rate is above 7 percent, the state may need a federal
loan for the first time in 26 years to cover unemployment costs. In Nevada,
which is almost totally dependent on sales taxes and gambling revenues, a
health administrator said the state may be unable to pay claims in a few months.
Mr. Schwarzenegger, a Republican, and state legislators are preparing to do
battle over a proposed 1.5-cent sales tax increase, while in New York, Mr.
Paterson, a Democrat, has proposed $5.2 billion worth of savings, principally
cuts to Medicaid and education.
where until recent months natural resource production has provided a buffer
and fat surpluses are experiencing a sudden reversal of fortunes
as oil prices have declined.
I thought 2001 was really awful, said Scott D. Pattison, the executive
director of the National Association of State Budget Officers, referring to
the last big economic downturn. It is even worse now.
He added, This
fiscal year will be really bad, and what is unfortunate is that I cant
see how 2010 wont be bad too.
In keeping with
recent economic trends, the states with the worst problems are those where
housing booms morphed into a large-scale mortgage crisis over the last two
budget gap in Rhode Island represents over 11 percent of the states
entire general fund, in large part because of the high number of subprime
loans. The story is similar in Arizona, California, Florida and Nevada.
the crisis in the financial markets had immediate and widespread impact on
state budgets. States have lost revenues from capital gains taxes and bonuses
that have evaporated, and growing job losses have reduced state income taxes
while draining unemployment funds.
are seeing is when fewer people are working there is less income tax and less
spending, said Keith Dailey, a spokesman for Gov. Ted Strickland of
Ohio, a Democrat.
also stopped shopping, which has hurt states that are heavily reliant on sales
taxes, like Florida and Arizona. States that rely on tourism, like Nevada
and Hawaii, have also been hurt by less consumer spending.
national credit crunch makes it harder for businesses to get loans, which
trickles back into losses to states. When California was temporarily unable
to gain access to the credit markets in the days leading up to the federal
bailout package, state budget directors across the country noted the moment
brief inability to pay bills because it could not get credit California,
like many states, regularly borrows money when it is short of cash in anticipation
of revenue flowing in later has since been largely interpreted as an
outgrowth of the much larger national and international credit crisis. Still,
some budget experts said the problem could be a harbinger: cities and counties
with poor credit ratings could be cut off in the coming year, and there could
be higher costs for issuing bonds.
fact that this was an issue at all is a big concern for every state,
Mr. Pattison said. Long-term bonds may be at risk. And I think states
are going to have to accept that cost of debt is going to be higher.
Fewer than a
dozen states have remained in the black this fiscal year, according to the
Center on Budget and Policy Priorities, a liberal-leaning economic research
group in Washington that tracks state budgets, and they are largely those
in the West with oil and mineral resources at the ready.
states were doing very well with oil at $120 a barrel, said Iris Lav,
the deputy director of the center. They may not do as well now.
Ms. Lav said, state budgets are moving from the damaged to the devastated.
about life insurance companies. I worry about them too. Can anyone
guarantee they'll be around in 17 years when I plan to die?
blue chips cheap? The Wall Street Journal writes
news for investors remains uniformly grim, but among individual stocks, a
growing number of long-term opportunities may be beckoning. The selloff of
the past two months has sent prices of some big-name stocks far lower than
they were a decade ago."
Journal has a huge chart. It shows prices 10 years ago versus today. The biggest
losers? Ford Motor (down 97%), General Motors (down 96%), Sprint (down 94%),
JDS Uniphase (down 94%), Tenet Healthcare (down 90%), Eastman Kodak (down 90%).
biggest gainers? Celgene (up 8089%), Southwestern Energy (up 3239%), Gilead
Sciences (up 2500%), Cognizant Technology (up 2017%), Laboratory Corp. of America
(up 1554%), XTO Energy (up 1418%), Quest Diagnostics (up 1013%) and Apple (up
My takeaways from
Street Journal chart?
aren't "cheap." Some go up. Some go down. Stocks are worth what Mr.
Market says. The world of business is constantly changing. Management makes
the difference. Compare the miserable management at Ford and GM with the brilliance
of Apple's Steve Jobs. Personally I can't get enough of Steve's products and
I can't distance myself far enough from what Ford and GM, sadly, offer for sale
latest Fortune magazine quotes Richard Branson, a brilliant entrepreneur:
How does the state of the economy change your overall business strategy?
B: There are
enormous opportunities in recessions. Some of our companies will tighten their
belts and not do a lot right now. Others will expand in this recession.
F: What are
some of the opportunities?
B: The price
of planes will come down dramatically. So we're looking at setting up airlines
in Brazil and Russia. ... If you can afford it, expanding in a recession is
a very good use of your resources.
companies save on IT.
+ Free or very cheap software delivered over
the Internet, such as Google
This lets many applications run on a single server computer.
software, especially Linux.
+ Staying with
older operating systems, especially Windows XP.
vulnerable to these trends are Microsoft and SAP. Gainers include Google, Salesforce.com
and VMware, maker of virtualization software.
the feeling that next to financial services, automotive execs are the dumbest
people in the world,'' said Thomas Stallkamp, a former Chrysler president
best tennis balls. They're Gamma ProTour. They're available from
of our present mess: From a semi-depressing
essay in December's Harper's
end of Wall Street. In case you missed last week's columns, the era
that defined Wall Street is finally, officially over. Michael Lewis, who chronicled
its excess in the book Liars Poker, returned to his old haunt to
figure out what went wrong. And boy, did he find some juicy stuff.
A massive expansion
of government is the only means whereby an economic catastrophe can be averted.
As a consequence, America will be even more dependent on the world's new rising
powers. The federal government is racking up ever larger borrowings, which
its creditors may rightly fear will never be repaid. It may well be tempted
to inflate these debts away, leaving foreign investors with hefty losses.
In these circumstances, will the governments of countries that buy large quantities
of American bonds-China, Japan, the Gulf States, and Russia, for example-
continue supporting the dollar's role as the world's reserve currency? Or
will these countries see an opportunity to tilt the balance of power further
in their favor? Either way, the control of events is no longer in American
The fate of
empires is often sealed by the interaction of war and debt. That was true
of the British Empire, whose finances deteriorated from the First World War
onward, and of the Soviet Union. Defeat in Afghanistan and the economic burden
of trying to respond to Reagan's technically flawed but politically effective
Star Wars program were vital factors in triggering the Soviet collapse. Despite
its insistent exceptionalism, America is no different. The Iraq War and the
credit bubble have fatally undermined America's economic primacy. The United
States will continue to be the world's largest economy for a while longer,
but it will be other countries that, once the crisis is over, buy up what
remains intact in the wreckage of America's financial system.
He has a written
a long brilliant piece in CondéNast's increasingly excellent Portfolio
magazine. Frankly, I recommend you drop everything and read this piece immediately.
"Due to the economy, the light at the end of the tunnel has been switched
+ At the dinner
table: "Due to the economy, your mother and I have decided that we need
to let one of you go.'
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
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