Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Thursday, November 29, 2007: Two
days of extraordinary stockmarket gains do not mark the return of a bull market.
As I have nagged before:
Do not be fooled
by bear market bounces, which are often violent, and short-lived. Having cash
-- as I've advocated before -- is a good thing. It will allow us to pounce
on bargains. Just know: they're aren't yet here.
bounce is ascribed to (blamed on) the Feds vice chairman, Donald L. Kohn,
who seemed to hint that the Fed might lower interest rates when it meets next
on December 11. I read his remarks. I think the market was grasping at straws.
There are two
"facts." First, stockmarkets are irrational. Always have been. Today's
markets are even more irrational and the swings even more violent. Reasons:
they're easier to trade -- better computers, no uptick rule on selling short.
There's huge monies around. The hedge funds can sell
short and do. In the old days, mutual funds and pension funds had all the money
They didn't sell short and they didn't trade the market for ultra-short, minuscule
gains. In fact, you couldn't in the old days because commissions were too high.
These days there are countless daytraders who watch the opening and early trades
and dive in, hoping the trend will continue for a few hours, before they exit
at the end of the day. You think I'm kidding, call your favorite hedge fund
or even a broker and ask them if this isn't the hardest market ever to trade?
Second, to the
extent that stockmarkets are rational -- they tend to like growth in
corporate sales and earnings -- you have to expect that they will come back
as the economy comes back, viz.:
has arrived, according to latest Fed Beige Book
WASHINGTON (MarketWatch) -- The economic slowdown has begun, according to
the Federal Reserve's latest report on conditions across the country released
Wednesday. The economy continued to grow, but at a reduced pace, according
to the report, known informally as the Beige Book. The glut of available homes
for sale is keeping downward pressure on house prices and construction activity.
No turnaround is on the horizon until well into 2008, contacts said. Two of
the few bright spots were manufacturing and tourism which benefit from the
weaker dollar. The report found soft retail sales, pessimism about the holiday
season and concern that goods are piling up on shelves. The financial market
turmoil is impacting the market for credit. Business loans are down and standards
for consumer loans are up. Not wanting to dwell on the weak bank sector, the
report separated out "nonfinancial services" as an area of strength.
Demand for legal services increased.
Now I'm going
to bore you by reproducing today's New York Times piece on yesterday's
market. (Oil is up today.)
on Hints of a Cut in Interest Rates
Capping a series of wild swings, the Dow Jones industrial average soared to
its biggest one-day percentage gain in more than four years yesterday after
a top Federal Reserve official hinted at another interest rate cut and oil
fell below $91 a barrel.
Still, few analysts
were willing to call an end to the upheaval, and the rally came amid new indications
that problems in the credit market are taking a toll on businesses and consumers.
Analysts described the volatility as a symptom of the uncertainty that has
racked Wall Street for weeks.
But it was a
wave of relief that moved the markets yesterday. The comeback began on Tuesday,
after a $7.5 billion foreign investment in Citigroup helped restore investors
confidence in the ailing credit market.
vice chairman, Donald L. Kohn, further reassured investors yesterday by pledging
to follow flexible and pragmatic policy making as the bank decides
how to cope with the financial upheaval. The unusually candid remarks were
taken as a sign that the Fed policy panel was considering a rate cut at its
Dec. 11 meeting. A steep drop in oil prices and bargain-hunting added to the
The Dow has
gained 546 points over two days, a leap of nearly 4.3 percent. It gained 331
points yesterday to close at 13,289.45. The Standard & Poors 500-stock
index moved up 2.86 percent, or 40.79 points, to 1,469.02. The index, which
was down for the year Monday, has risen 4.4 percent in two days and is now
up 3.5 percent for the year.
Even as Mr.
Kohn suggested that market turbulence could tighten credit lines, there were
other signs that the economy was slowing. Orders for durable goods fell more
sharply than expected in October, and a Fed survey found business conditions
gradually deteriorating across the country. Housing inventories rose last
month as existing-home sales continued to decline.
On Monday, both
major stock indexes were down 10 percent from their record highs. The Dows
gain yesterday was the fifth consecutive day of triple-digit moves in the
a soap opera, said Howard Silverblatt, senior index analyst at Standard
& Poors, noting that the market has exhibited a touch of melodrama.
But he warned
that the markets erratic behavior, where triple-digit gains or losses
are caused by news from a single event, speech or company, reflected the knee-jerk
mentality of investors who simply do not know where the economy is headed.
a light at the end of the tunnel, he said, and it could be another
echoed the sense of uncertainty. Were flying blind, said
Brian Gendreau, an investment strategist at ING Investment Management. In
this environment, you can talk yourself into any kind of position.
bullishness yesterday, in large part because of Mr. Kohns remarks that
the Fed will act as needed to address the current volatility.
Anxiety in the credit markets has made banks and mortgage companies less eager
to lend, leading many investors to call for another cut in interest rates.
ticked up for a second day, a sign that investors were confident enough to
move away from the safe quarters of government bonds. The yield on the 10-year
note was 4.03 percent, up from 3.95 percent, on Tuesday.
Crude oil futures
settled at $90.62 a barrel in New York trading, down more than $7 from its
noninflation-adjusted record high set on Friday.
Mr. Kohn, in
his speech at the Council on Foreign Relations in New York, acknowledged that
uncertainties about the economic outlook are unusually high right now.
He noted that
the increased turbulence of recent weeks partly reversed some of the
improvement in market functioning over the late part of September and in October.
And pointing to heightened concerns about larger losses at financial
institutions now reflected in various markets, he said the results could
be a more defensive posture in granting credit, not only for house purchases,
but for other uses as well.
Mr. Kohn, who
will vote at the banks policy meeting on Dec. 11, acknowledged the moral
hazard debate that has hung over recent discussions of Fed policy, referring
to the reluctance to reinforce investors poor decisions by lowering
interest rates. But he said that when the decisions do go poorly, innocent
bystanders should not have to bear the cost.
not hold the economy hostage to teach a small segment of the population a
lesson, he said, suggesting that a rate cut would be justified.
were strongly worded, but Fed officials still seem deeply divided. The bank
issued a statement last month that suggested it would be reluctant to lower
rates again before next year. Less than two weeks ago, a Fed governor, Randall
S. Kroszner, said that the current stance of monetary policy should
help the economy get through the rough patch during the next year.
The Fed chairman,
Ben S. Bernanke, has also hinted that he is skeptical of an additional rate
cut, citing underlying strength in the economy. He is scheduled to speak tonight
in Charlotte, N.C.
economic data suggested that strength may be abating. Spending at retail outlets
is softening, and businesses are pessimistic about holiday sales, according
to the beige book, a regular survey of national economic conditions conducted
by the Fed.
appears to be keeping many domestic businesses in the black, as tourists and
export buyers are attracted to American goods by a record-low dollar, the
book reflected what we already know, that we are seeing the economy broadly
decelerating, said Joseph Brusuelas, chief United States economist at
appeared more cautious about spending as they anticipate a drop in demand.
New orders for durable goods major products like airplanes and appliances
declined in October by 0.4 percent, the Commerce Department said.
A major indicator
of spending orders for nonmilitary capital goods, excluding aircraft
fell 2.3 percent, suggesting that consumers are reluctant to make bigger
discretionary purchases. It was the first drop in the category since June;
orders were down 1.2 percent from last October.
at businesses in October ticked up 0.2 percent, after a September rise of
0.3 percent. The increase could suggest declining demand and a gloomier outlook
for business activity.
sales dropped for the eighth consecutive month. Sales fell 1.2 percent in
October to a 4.97 million annual pace, down from 5.03 million in September,
the National Association of Realtors said yesterday. Inventories of homes
also rose last month, by 1.9 percent.
And, for your
final piece of boredom, before you get to the good (useful) stuff on photography
and today's joke, here's an important (and ultra-depressing) piece from Tuesday's
Financial Times (the pink paper):
away: four problems that could beset debt markets for years
chief investment officer of Pimco, the worlds largest bond fund, has
in recent years become famous for issuing downbeat warnings about the credit
world. This month, however, his tone has turned positively apocalyptic.
faced a downturn like this since the Depression, he observed to reporters
when talking about the US housing sector and its impact. The debt markets
effect on consumption, its effect on future lending attitudes, could
bring [America] close to the zero line in terms of economic growth,
he said. It does keep me up at night.
By Wall Street
standards, such sentiments still sound extreme: in public, at least, most
financiers are still anxious to avoid any comparisons with the terrible 1930s.
Nevertheless, behind the scenes a mood of gloom is spreading across Wall Street
and other parts of the financial world.
recently, many bankers and policymakers hoped that this summers credit
squeeze would prove short-lived. But as winter draws in, bankers and regulators
are coming to recognise that the shock that arrived in August could be merely
the first chapter in a saga of pain that could last years.
As a result,
investor confidence is slipping and, with banks wary of lending to each other,
borrowing costs in the money markets are on the rise (see chart). While these
price swings may be exaggerated by the looming turn of the year a period
when banks typically hoard cash to flatter their annual accounts the
underlying trend is clearly alarming the authorities. In recent days the European
Central Bank, the Bank of Canada and the US Federal Reserve have all acted
to pump liquidity into the interbank market in an effort to keep that crucial
corner of the financial system from seizing up.
stresses in global money markets are palpable, says Donal OMahony,
analyst at Davy, the Irish stockbroker. Or as John Hurley, a member of the
ECBs governing council, observed on Tuesday: Recent developments
have not been favourable and increase the risk of a more significant spillover
from financial markets to broader economic activity. Markets may therefore
continue to remain fragile for some time.
of fear reflects four inter-related problems. First, projected losses from
this years credit turmoil are continuing to rise. When it first became
clear that US homeowners were defaulting on their mortgages, particularly
in the so-called subprime category of borrowers with a poor credit history,
Ben Bernanke, the Fed chairman, suggested this would create $50bn (£24.1bn,
€33.6bn) in losses. But this month he raised the projected loss to $150bn
and many investment banks fear it will be at least twice this size.
That is partly
because house prices are falling faster than economists expected but also
because lending standards had been far more lax than previously thought. Indeed,
standards were so loose that Goldman Sachs analysts now think that total losses
on US subprime mortgages issued in 2006 and early 2007 will be as high as
22 cents in the dollar.
If that projection
is bad, however, there is worse. As defaults rise on subprime mortgages, other
types of debt, such as on credit cards and in car loans, also begin to face
defaults. Investors are now starting to worry that the subprime crisis
will broaden out into other forms of consumer and real estate lending,
notes Goldman Sachs in a recent research report, which estimates that in a
worst-case scenario non-subprime losses could eventually rise as high as $445bn.
If so, this
would imply America could be heading for a total credit hit of $700bn or so
and that is without taking account of any losses that might occur if
risky corporate loans turn sour too. This is a dramatically bigger shock than
investors expected back in August and much larger than the losses in Americas
last banking shock, the savings and loans crisis of the 1980s. The Goldman
teams worst case is not far from the scale of losses produced by Japans
1990s banking crisis, where bad loans were estimated at $800bn-$1,000bn.
A blow of this scale could take years to absorb. But aside from its size,
there is a second feature of the credit crisis now spooking investors: uncertainty
about how the credit pain will affect the financial system as a whole. In
previous crises, credit losses were usually relatively well contained: in
the S&L debacle, for example, bad loans were held by a limited group of
US banks, which were well known to regulators.
But the feverish
financial innovation seen this decade has enabled banks to turn corporate
and consumer loans into securities that have then been sold all over the world.
Until recently it was presumed that this innovation had made banks stronger
than before, because they had passed credit risk on to others. Consequently,
regulators and investors tended to presume that the main threats to stability
in the modern financial world came not from banks but risk-loving players
such as hedge funds. Recent events have, however, turned these assumptions
on their head. Although some hedge funds have run into problems, their losses
have generally not posed any wider systemic threat. Instead, share prices
of the banking groups have slid as it became clear that banks had offloaded
less risk from their books as investors and regulators had presumed. Indeed,
the interbank market is gripped by fears that more banks could soon tumble
into crisis, as they run out of capital with which to write off loans.
had been widely ignored in recent years because they seemed utterly safe and
dull such as bond insurers, money market funds and structured investment
vehicles are also beset by a loss of confidence.
are making investors fearful about the potential for unexpected chain reactions
to develop as complex interlinkages break down in poorly understood corners
of the financial world. Grenades keep going off in the system and nobody
quite knows what to think or expect, says one policymaker. There
is a fear of the unknown [risks].
Aside from this
abstract fear, there is also a very tangible concern about which institutions
are suffering subprime pain. In recent weeks, large western banks and other
financial institutions have written off about $50bn of credit losses. But
analysts fear that the coming year-end statements from US banks and
future reports from European banks could reveal more bad news. Many
also suspect that non-bank institutions, such as insurance companies and asset
managers, are also holding large losses that have yet to appear. If
mortgage-related losses are $400bn-plus, then banks probably only have a portion,
says Geraud Charpin at UBS.
These financial interlinkages, in turn, are fuelling a third concern: the
knock-on impact of the credit turmoil on the real economy. When
the credit crisis first emerged this summer, many economists initially thought
it would have limited impact on US growth. Some cited parallels with the events
of 1998 surrounding Long Term Capital Management, a hedge fund that imploded:
that an event shocked Wall Street but barely affected the wider American economy,
let alone that of the world.
But it is now
clear that the 2007 credit shock has implications that extend well beyond
hedge funds or Wall Street. As the credit losses pile up, the banks
capital resources are being squeezed and that is forcing them to cut
lending, particularly to riskier companies and consumers.
If the process
intensifies and many analysts fear it will that would undermine
economic growth. In turn, this could unleash a second, more pernicious phase
of the credit shock: defaults in the corporate arena of the type that have
not been seen in the credit squeeze so far. That could, moreover, generate
a further round of losses on credit instruments and thus more pain for banks
and other investors.
months ago it was reasonable to expect that the subprime credit crisis would
be a financially significant event but not one that would threaten the overall
pattern of economic growth, Lawrence Summers, former US Treasury secretary,
wrote in the Financial Times this week. However, the odds now favour
a US recession that slows growth significantly on a global basis.
accepts this downbeat scenario. After all, one mitigating feature of the current
market turmoil is that it is occurring after a period of strong global growth
and, in particular, at a time when regions outside the US, such as
the emerging economies, continue to boom.
in the US and Europe remain strong and American consumers do not appear to
be panicking: though housing activity is weak, retail sales last Friday
the bellwether post-Thanksgiving shopping day were relatively strong.
For October they were up 5.2 per cent year-on-year.
also take comfort from a hope that the Fed will slash interest rates to offset
any risk of a serious economic downturn. The US bond market, for example,
is trading at levels that assume several more rate cuts totalling at
least a full percentage point before next autumn. We expect the
US and global economy to slow but avoid a serious downturn, say economists
at Lehman Brothers, who argue that a recession will be avoided by central
banks changing course.
the longer the credit squeeze lasts, the greater the risk that the pain will
spread from Wall Street to Main Street. If such contagion does occur, there
is a fourth problem increasingly alarming investors: a dawning realisation
that western authorities have few policy tools with which to resist this spreading
Indeed, in the
current environment the Fed appears distinctly reluctant to cut rates to the
degree that the bond market expects, because inflation pressures are rising.
Data on Wednesday are expected to show that inflationary pressures are rising
in Europe too, which could also stay the ECBs hand on rates. Even if
central banks do eventually throw caution to the winds and slash rates, this
may not be enough to ease the problems of the markets. Rate cuts are
part of the solution but probably only just a part of it, observes UBSs
That is because
this years shock has, in essence, shattered investor faith in the innovative
techniques that have enabled the global banking system to create a wave of
cheap credit in recent years.
is likely to return only once there is real transparency about existing problems
and when a rethink has taken place of the way that 21st-century finance
At the best
of times, these would appear to be difficult tasks; in the current, panicky
climate they seem doubly hard and the steps needed to rebuild investor
faith cannot be implemented quickly, however desperately the market might
be clamouring for comfort.
we are going to go through next year, certainly the first half of next year,
with considerable traumas, Peter Sutherland, chairman of both Goldman
Sachs International and BP, said this week. It is a dangerous period
for the world.
lessons on digital photography: No matter how good you were with
film, digital is a very different kettle of fish, with different skills. Digital
is not easy to learn. Differences:
1. Film cameras
take the photo the moment you hit the button. Digital has a "shutter lag."
That lag will cause you to miss the photo -- the smile, the pole vault, etc..
The more money you pay for a digital camera, the less likely you will have shutter
lag. But you need to test it.
2. Shutter lag
is exacerbated by how long it takes your digital camera to focus. In bright
light, there's no problem. IN low light you might never get focused and the
camera will not allow you to shoot, unless you switch to manual focus. Spectacular
lenses -- like this $700 -- 18-200 mm zoom are great outdoors, but totally suck
indoors. Their aperture (in this case f5.6) is so small that the lens allows
insufficient light to focus. This happened to me at Claire's wedding. There
are three solutions: You can focus manually if you can see through the lens
(or guess). You can switch to a fixed lens (like my 85 mm f.1.8). Or you can
switch to the baby camera I love, the Canon SD850, which does a spectacular
job of focusing in low light.
The Nikon 18-200 mm ultra-wide angle to ultra-zoom is a stunning engineering,
but its small aperture has drawbacks.
3. I'll take a
photo outdoors with a Nikon D100 plus this lens (cost $2000) and my baby $230
Canon SD 850. I show you both photos. You won't be able to tell the difference.
You may actually prefer the Canon one. But come inside, attach a big strobe
to the Nikon D100, bounce that strobe off the ceiling and bingo, no red eye,
no tell-tale black shadows around the subject. You won't even know I shot with
flash. But use the Canon, you'll get red eye nd black shadows. The external
bounce strobe (the Nikon SB-800) will cost you another $310, or $740 if you
buy it with a Quantum turbo battery.
4. Film will still
produce sharper pictures for big enlargements. Many professional photographers
will shoot in film, then digitize their shots.
5. Image stabilization
(as Canon calls it) or vibration reduction (VR as Nikon calls it) works well
and adds a little more sharpness -- but it is not a panacea. It will not produce
perfectly sharp pictures in low light at slow shutter speeds. Don't be fooled.
6. Digital photography
produces zillions of useless photos and consumes countless hours of "editing."
Good idea: pretend each photo costs money -- like in the old days.
7. There are only
three intelligent ways to display your photos: The great ones go on the wall.
The occasions go in photo books. All the online processors have them. And the
semi-great photos belong in a digital photo frame, which cycles randomly through
your skiing and beach vacations.
I'm going to shoot
today's ceremony (see below) with the Canon SD850. It's easier and lighter to
you just love radical religion? Two recent
Sudan charged a British teacher Wednesday with inciting religious hatred after
she allowed her students to name a teddy bear Muhammad, an offense that could
subject her to 40 lashes, the Justice Ministry said.
The government of Saudi Arabia has affirmed the sentence of 200 lashes for a
19-year-old Shiite girl who was sitting in a car with a male acquaintance last
year when they were attacked by seven men who gang-raped both of them. The
Saudi Justice Ministry said the young woman deserved 200 lashes and six months
in prison, even though she had been raped, because she was guilty of illegal
mingling sitting in a car with a man who was not related to her.
daughter becomes a real lawyer today: Claire
graduated from law school in May, sat for the bar exams in July, heard that
she'd passed them in November and now is officially being admitted to the Massachusetts
bar today. Her mother and I are rushing to Boston to attend the swearing-in
ceremony today. Happy parents, living their lives through their children. What's
new? In celebration of Claire's Day, I run this old, but wonderful joke. Claire
hasn't decided on a specialty yet (though she's really good at constitutional
law). I know it won't be this one. This joke's for you, Claire, our family's
new, real lawyer. We're proud of you.:
A father walks
into a bookstore with his young son. The boy is holding a nickel. Suddenly,
the boy starts choking, going blue in the face. The father realizes the boy
has swallowed the nickel and starts panicking, shouting for help.
A well dressed,
attractive and serious looking woman, in a blue business suit is sitting at
a coffee bar reading a newspaper and sipping a cup of coffee. At the sound of
the commotion, she looks up, puts her coffee cup down, neatly folds the newspaper
and places it on the counter, gets up from her seat and makes her way, unhurried,
across the book store.
Reaching the boy,
the woman carefully drops his pants; takes hold of the boy's testicles and starts
to squeeze and twist, gently at first and then ever so firmly. After a few seconds
the boy convulses violently and coughs up the nickel, which the woman deftly
catches in her free hand.
boy's testicles, the woman hands the nickel to the father and walks back to
her seat in the coffee bar without saying a word.
As soon as he
is sure that his son has suffered no ill effects, the father rushes over to
the woman and starts thanking her saying, "I've never seen anybody do anything
like that before. It was fantastic! Are you a doctor?"
the woman replies, "divorce attorney."
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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