Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Thursday, October 16, 2008: I
return to the question I've asked again and again: Would you (or anyone you
know) want to buy stocks in this environment?
get calls, "Harry, the stocks are now cheap."
I laugh. "They are cheap," I agree, "and they will
get cheaper." And yesterday they got cheaper again. Exhibit One remains:
Don't try to catch a falling knife. It can be painful if you miss. And lots
of big smart investors are having trouble with knives. Warren Buffett's strike
price on GE is 16% higher than GE is at present.
As I've written,
shorting makes sense. The easiest shorting has been the Ultra-Short PowerShares.
Look what the key ones did yesterday. They all went up big-time.
The S&P 500
one (SDS) rose yesterday by $15.85 or 18.07% The reason it didn't show up in
this chart is because QCharts -- a service I actually pay more for -- is screwed
up. (There's a lesson here. Don't trust what you see on your screen. Always
double and triple check.) Look at these numbers again. You could have made
an entire year's handsome gains in one day -- yesterday. I hope some of you
did. I've mentioned these ultra short ETFs before.
Do I think the
markets will continue to fall? Yes. (Though there will be occasional dead cat
bounces.) And for the reasons I've mentioned twice this week already (but I've
added stuff today):
1. The end of the short selling ban.
2. Margin calls.
They must accelerate after yesterday's huge drop.
3. Hedge fund
redemptions. Everyone I know is thinking about dumping their hedge funds. Why?
Hedge funds are motivated differently to you and I. When I say, "Get
out of equities 100%" -- as I did last November, you and I can do it.
But hedge funds can't. Would we pay them 2% to be 100% in cash? No. We expect
them to be brilliant, to find bargains. Hedge funds are made up of normal people.
A"value" hedge fund can't suddenly because 100% short hedge fund --
which has clearly been the only strategy that's made sense this year.
4. Falling commodities
prices. Oil, nickel, iron ore, etc. Lower commodities prices are good for manufacturers.
But they're ultra-lousy for hedge funds, which have speculated in commodities,
lost money, and now face annoyed investors and higher redemptions, which means
selling stock. (Fortunately I dumped my commodities fund at the end of September,
when it was down around 4% for the year. Right now it's over 25% down for the
year, and falling. I'm a genius. I'm still waiting for the cash.)
5. Business retrenchments.
Government numbers show about 750,000 have now lost their jobs in 2008. The
number is actually closer to one million (if you include all the part-time and
self-employed construction workers.) That's a lot of purchasing power leaving
6. Municipal governments
in crisis. They are now firing workers. (More about that below.)
7. Falling profits.
The car makers' woes are out. But there are many other industries that haven't
reported their woes, yet. Third quarter earnings are just coming out. They aren't
pretty. Look at today's miserable results from Citigroup, UBS and Merrill Lynch.
8. Excess production
capacity. The late 1990s built a lot of factories we no longer need.
what about muni bonds? Municipal bonds have
fallen sharply in price. They are out of favor because investors believe towns,
states and counties are in big financial trouble, dragged down by recession-induced,
sharply lower tax revenues. This means that yields are good, and getting better.
For those of us fortunate enough to live in tax-friendly places like New York
or California, muni bonds represent a seriously interesting investment opportunity.
Yields of 5% triple tax-free (equivalent to 8.3% taxable) are available for
today on some of the longer bonds. Moreover a year or two from now, muni bonds
will be up in price.
does this make sense? First, municipals rarely default. Second, their rating
system and the agencies that rate them give disgusting a whole meaning. Third,
I heard Barney
Frank speak at a private meeting yesterday
for large donors. If the Democrats win (and there seems a good chance they will),
then the day after Obama is inaugurated, they will announce an Economic Recovery
Package, the elements of which include:
1. Financial aid
to states and cities.
2. Funding of infrastructure projects -- like fixing bridges, building new ones,
3. Aid to help states and cities pay their employee medical bills.
4. Greater unemployment benefits.
5. More food stamps.
The logic is very
simple: The present financial bailout has saved the financial system. What's
needed is to rebuild confidence. The way to do that is to put people to work.
Were it not for the municipalities and states, the unemployment numbers this
year would be much higher. The states/cities financial problems have caused
them to cut back on their hiring. Hence the need for help.
Frank's "bible." At yesterday's meeting,
Frank touted Mark Zandi's new book.
I rushed out yesterday, and read it last night. It's a brilliant summary of
what went on and wrong. It has some ideas how regulators can fix things. It
also shows the mess regulation is today. Too many regulatory agencies. Too much
confusion. Some of his suggestions are being implemented. Others never will
be. He does predict another asset bubble -- but doesn't say what it will be.
I believe it will be in alternative energy -- nuclear, wind, solar, batteries,
etc. Both candidates are hot on cutting the oil monies we ship each day to countries
who don't like us.
what you always wanted: Now you can exercise yourself (and your dog)
at night -- with a ball that glows in the dark.
Buy it now for
Law strikes again. Just when you really like something, they discountinue
it. My favorite Lenovo ThinkPad X61 is now obsolete. There are a handful still
available at the Lenovo
Outlet Store. A savy reader writes, "On laptops make sure you
remind people to stay away from any computer that has an Intel Graphics card.
They are way underpowered."
from Abu Dhabi
Just got back from Abu Dhabi in the United Arab Emirates. Here is my panoramic
that describes it best. We had to drive three hours to find a camel and desert!
privileged to spend an hour with the Director of Culture and Heritage for Abu
Dhabi: Hospitality, Tolerance and Culture is their formula for success. Business
was booming. My friend I went to visit works for a major bank there. They just
can't keep up and went to double shifts. If things keep going they might have
to be open 24 hours just to process everything. It's a world away from our issues."--
Steven J. Sleeper
best health insurance is not to get sick. (Yes,
I watched last night's debate.) This is the second best:
A man suffered
a serious heart attack and had open heart bypass surgery. He awakened from the
surgery to find himself in the care of nuns at a Catholic Hospital.
As he was recovering,
a nun asked him questions regarding how he was going to pay for his treatment.
She asked if he had health insurance.
He replied, in
a raspy voice, 'No health insurance.'
The nun asked
if he had money in the bank.
He replied. 'No
money in the bank.'
The nun asked,
'Do you have a relative who could help you?'
He said, 'I only
have a spinster sister, who is a nun.'
The nun became
agitated and announced loudly, 'Nuns are not spinsters! Nuns are married to
The patient replied,
'Then, send the bill to my brother-in-law.'
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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