Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Monday, October 17, 2005: We
have sun in New York. Finally. No more talk of gloom and
doom. Until my favorite realist emailed a piece from today's USA Today:
Lack of karma spells crash
NEW YORK As stocks' malaise lingers, Wall Street bears the doomsayers
who often warn of impending price drops are getting bolder predicting
the 3-year-old bull market is near an end.
The bears' outlook,
which more optimistic market players often shrug off, appears to be gaining
credence. The reason: The obstacles confronting stocks, ranging from rising
interest rates to the threat of higher inflation to soaring home-heating costs
and debt-choked consumers, keep mounting.
shift has occurred," notes Woody Dorsey, a behavioral finance expert
at Market Semiotics. "The preponderance of known negatives is finally
in the Dow Jones industrial average, down 4.6% in 2005. Even after
Friday's gains, the Dow has lost value in seven of 10 trading sessions
this month, is down 2.7% in the fourth quarter and last week notched
its lowest close since May 13. The current bull is also aging, now six months
older than the median bull market of 2½ years.
Angst is also
evident in the gloomy comments issued by bears:
author of A Modern Approach to Graham and Dodd Investing, pulls no punches:
"This is the beginning of the bear market that I have been predicting."
His worries include the poor start in October; the fact this is a post-election
year, which has historically been a bad time for stocks, including scary sell-offs
in 1929 and 1973; and the absence of the bull market for most of 2005.
of the market is no longer there," says Au, who predicts a serious downturn
lasting into 2007. "People are running scared."
Schiff, chief global strategist at Euro Pacific Capital, used the "C"
word, as in market "crash," in a recent missive to clients. Fueling
his anxiety: the belief that inflation is a bigger problem than feared, which
will force the Federal Reserve to keep boosting interest rates. Higher borrowing
costs, he argues, will burst the housing bubble and throw the economy into
"There is nothing the Fed can do to combat inflation unless they hike
chief strategist at CyberTrader, says another bad sign is the disinterest
in stocks. "It's all about supply and demand, and if you've got no demand
for stocks, prices are going lower."...
When in doubt stay out.
2. Sell weaker investments. Get more cash.
3. Get stronger selective investments. Be wary. Strong investments today
are weak ones tomorow.
4. Say NO more often. Stay away from startups.
5. Some commodities tend to be stronger, when markets are weaker.
panic. No one can predict, even me.
Best of all: we're still alive (despite my weekend tennis losses).
honesty or not? When you're checking out a
potential investment -- doing your due diligence -- you assume the players are
honest. This is fundamental. Most people are. But the world has changed. There
are huge monies chasing few opportunities. This provides great incentive (and
pressure) to create "hot" companies, like Refco, Krispy Creme and
my paint company. Remember the paint company? Great technology, lousy management.
Turns out management has not paid its employees their salaries or expenses in
some time and is encouraging its people to fib to potential investors. Not good.
Do they take your advice? A good measure
of whether you want to deal with / invest in a company is whether the management
listens to you. I remember hearing a presentation by a company selling software
to big banks, including Citigroup and Bank of America. I asked the pitching
president how he dressed when visited the banks? He said as he was then dressed
-- khakis and open shirt. I asked how his banking clients were dressed -- in
dark suits. I suggested he might dress accordingly. He got upset and threw me
out of his office. Two years later he went Chapter 11. That was an eggregious
example. But the willingness to listen is a key part of my due diligence process.
Sadly, most entrepreneurs don't listen. And sadly, most go broke.
Do they WANT to believe? Too
much money chasing too few opportunities means that when the "opportunities"
come along, the frenzy to grab them means due diligence and skepticism fly out
the window. That's how all those nice people got taken for such a gigantic ride
by Refco. The nice people include the firm's accountants at Grant Thornton,
the savvy dealmakers at Thomas H. Lee Partners who gobbled up the biggest stake
in the broker, the experts at lenders like Bank of America (BAC ) who extended
big-time credit, the whizzes at Wall Street houses like Goldman Sachs (GS )
that led the firm's IPO two months ago, and the money managers at institutions
like TIAA-CREF and Oppenheimer Funds that bought freshly-issued Refco stock.
amazing about the Refco fraud/disaster/idiocy is it was there in black and white
for all to see. All you had to do was read the Refco paperwork and ask yourself
simple questions, like why were two government agencies (not one -- but two)
government agencies investigating Refco? Read Sunday's New York Times
piece by their talented financial reporter, Gretchen Morgenson:
Refco Isn't Scary, What Is?
regulators and pundits say that there will be no financial market tremors
emanating from Refco Inc., the enormous commodities and financial services
firm that, after more than 30 years in business, hit the skids last week.
Maybe so, but it seems incomprehensible that a financial domino this big can
topple without making a sound. Refco, after all, was one of the largest players
in commodities, derivatives and United States Treasury markets, operating
in 14 countries and serving more than 200,000 clients.
tremors or not, there is plenty to be afraid of in the Refco mess. First,
of course, is the frightening spectacle of the company's chief executive,
Phillip R. Bennett, hiding a personal loan from Refco worth almost half a
billion dollars from his shareholders, as described by prosecutors in their
suit charging him with securities fraud. Then there is the inability of Refco's
auditors or investment banks to notice the repeated shuffling of this loan
on and off the company's balance sheet.
Watching a company
that went public just two months ago sink from sight is also disquieting,
of all may be the fact that supposedly savvy institutional investors who are
fiduciaries - TIAA-CREF and Oppenheimer Funds, for example - bought Refco's
shares in spite of the hair-raising risk factors detailed in the prospectus.
was the disclosure that Refco's internal auditors reported two significant
deficiencies in its internal financial controls. Refco, for example, lacked
"formalized procedures for closing our books." Sounds like a big
Refco also said
that it was found to be deficient in its ability to prepare financial statements
"that are fully compliant with all S.E.C. reporting guidelines on a timely
This is the
way investors live now: a financial services company's inability to prepare
its own financial statements does not preclude financial institutions from
buying its stock.
more. Refco told prospective investors that it was under investigation by
both the United States attorney in New York and the Securities and Exchange
Commission. The S.E.C.'s inquiry centered on Refco Securities, its brokerage
subsidiary, and its chief executive, Santo C. Maggio.
At the time
of the offering, the prospectus said, Mr. Maggio was near a resolution of
the matter and was ready to accept an order from the commission suspending
him from any supervisory duties at the firm for one year. Nevertheless, "while
complying with the restrictions of such supervisory suspension, Mr. Maggio
would continue to work for us and Refco Securities in his current capacities,"
the prospectus said.
Isn't Wall Street
wonderful? Where else would a chief executive about to be suspended for a
year by his regulators keep the top job?
risk factors as those enumerated by Refco might not have been a deal breaker
for potential investors if they liked what they saw on its financial statements.
But warnings signs showed up there that the sophisticated investors shrugged
as of February 2005, Refco Inc. had just $150 million in equity supporting
$49 billion worth of assets. That's one thin slice of equity: 0.3 percent
of assets. Equity at Bear Stearns by comparison was 3.5 percent of assets
Readers of Refco's
offering statement also found that the company had significant - and growing
- derivatives contracts, carried off its balance sheet. As of February 2004,
those arrangements totaled $69 billion and were made up of currency contracts,
swaps and options. In February 2005, the contracts totaled $127.5 billion,
and in May they stood at $150 billion. Given that Refco admitted to difficulties
in preparing its financial statements, how confident could a prospective investor
be in the company's ability to track the value of these contracts?
capital expenditures of $14 million last year also seem ludicrously low. This
is a company that has to manage information for hundreds of thousands of accounts,
and as a serial acquirer of companies, was integrating many new systems into
its own. All this would require sophisticated financial management systems.
capital expenditures with those of Lehman Brothers, for example. Lehman spent
$400 million on capital expenditures in 2004, or 3.4 percent of net revenues.
Refco's $14 million in capital expenditures last year represented 1 percent
of net revenues.
Refco's buyers seem to question why the company's chief financial officer,
Robert Trosten, left the firm last October, just a few months before his company
was to go public. Mr. Trosten was in line for a big payday on the underwriting,
as other Refco executives were. The fact that he was willing to leave "to
pursue other financial interests" might have made an alert investor wonder.
And what about Refco's inability to find a new chief financial officer for
two months? No problem.
us with details. We are, after all in the anything-goes era where shareholders
condone excessive executive compensation, accept massive dilution of their
holdings from stock option grants and cheerfully buy into the corporate spin
that masks operational realities. Why is it a surprise that investors chose
to ignore the warts hidden in plain sight in Refco's prospectus?
your appliances. Going away for a weekend? Unplug your largest appliances
-- especially those which work with remotes. Remember those appliances have
to be ON to respond to the remote.
millon for what? News Corporation has paid
$580 million to buy MySpace.com, "a social network" used allegedly
by 33 million teenagers. Go there and be amazed. It's total junk.
Why Join MySpace?
asks their site. Five reasons:
» Create a Custom Profile (your name, your hobbies, your photos, etc.)
» Upload Pictures
» Send Mail and IM's (instant messages)
» Write Blogs & Comments
» It's FREE!
"We have become an atomized, alienated culture, and what people are looking
for is a sense of community," said Jesse Kornbluth, former editorial director
of AOL and now the editor of HeadButler.com, a Web-based culture service. "Part
of the attraction of the online community is that it is the place where the
nerd can get the girl. In no other space does the witty, chess-playing nerd
trump the football captain."
Harry's Prediction: MySpace.com will be dead within five years. It's a total
fad. Congratulations to the owners for selling out at the right time.
The headline on the
story reads "U.S. urges China to reform economy."
Secretary John Snow and other top American economic officials on Monday urged
China to move faster in market-opening and currency reforms, laying out guidelines
they said would make the country wealthier and more stable, while also reducing
its huge trade surplus.
Maybe I'm missing something. But what conceivable right
does the U.S. have to lecture China?
We run a gigantic Federal government deficit and a huge trade deficit. Were it
not for China's buying our treasury bills, our interest rates would be much higher
and our inflation would be rampant. How would you like to be lectured by a big
brutish bully -- what many countries perceive us now as.
old Chinese proverbs
+ Virginity like bubble, one prick, all gone.
+ Man who run in front of car get tired.
+ Man who run behind car get exhausted.
+ Man with one chopstick go hungry.
+ Man who eat many prunes get good run for money.
+ Wife who put husband in doghouse soon find him in cat house.
+ Man who drive like hell, bound to get there.
+ Man who live in glass house should change clothes in basement.
+ How my private equity fund is doing. Click
+ Blackstone private equity funds. Click
+ Manhattan Pharmaceuticals: Click
+ NovaDel Biosciences appeals. Click
+ Hana Biosciences appeals. Click
+ All turned on by biotech. Click
+ Steve Jobs Commencement Address. The text is available:
Click here. The full audio is available. Click
+ The March of the Penguins, an exquisite movie. Click
+ When to sell stocks. Click
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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