Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Thursday, October 23, 2008: The
good news: Overseas just got cheap. Thanks to the skyrocketing dollar -- as
a result of the present flight to safety and quality -- you can now vacation
cheaply in nice places like Australia, Hungary, Iceland, and Lake Como, Italy:
As I was researching my trip to Lake Como (if I can convince my wife), I found
words like "Price reduction. Cancellation." I've never been to Lake
Como, but it sure looks like a nice peaceful place.
You won't get
peace from playing with ultra-shorts, But you should continue to reap handsome
profits, as the markets continue to fall. Yesterday's action:
That's huge one-day gains. Check them out.
I don't know when
this bear market will end. I'm not trying to pick a bottom. That's
far too dangerous. Everyone who's done it has been wrong. Nor am I trying to
invest in high-dividend yielding stocks -- as Cramer has been touting. I believe
dividends will be cut -- many already have. The high dividend yields you see
in the stock tables are based on past dividends.
to credit default swaps. This recession is
not just only about sub-prime mortgage problems. The financial community is
infected with cockroaches. Every week or so, another one emerges. Today's lesson
-- I'm writing this to explain it to me -- is about CDSs, credit default swaps.
Remember this chart from yesterday:
Here's an email
conversation I had with my favorite financial guru, Dan Good:
Lets say Im a sound, public company and I raise $100 million in
a bond offering. I pay interest when its due. And I pay off the bonds
when theyre due. In the old days that was it. Correct?
In the old days, there was no need for credit default swaps. Correct?
except if you wanted to enhance your credit rating, say, from a Baa to an A.
It strikes me that if I, as an investor, didnt trust the company to pay
interest and pay off the bonds I would never have lent them the money in the
old days. Correct?
The bond yield would have been set depending upon the credit rating (Baa, higher,
Credit default swaps were sold initially on products like muni bonds that had
little chance of default. Correct?
but they were used to enhance the credit rating to enjoy a lower interest rate.
They became manna from heaven to Wall Street because the issuer of the credit
default swap collected premiums, but there were no catastrophic events, so the
issuer never paid off. It was the perfect business. All income. No expenses.
99.9% of the time.
After a while Wall Street started selling Credit Default Swaps (i.e. insurance)
on everything and anything. Good stuff and bad stuff. Correct?
Buyers saw it as a way to remove the risk of their investment? Correct?
Hence Credit Default Swaps reduced the need for due diligence. Correct?
If no one was doing any due diligence, then everyone and their uncle saw this
as an opportunity to sell everything and anything, including bits and pieces
of sub-prime loans. Correct?
diligence was slipshod, because buyers of the bonds were relying on the credit
Basically there is no reason for bond insurance if you do your due diligence.
bank or writer of the insurance has a difficult time doing due diligence compared
to what was typically done in the old days with credit rating agencies. In the
latter instance, the issuer made an exhaustive presentation to the agencies
and substantial due diligence was conducted. It was never a slam dunk. Today,
very little information is (was) provided to the writer of the insurance and
bad decisions were made.
Paying extra for credit default swap insurance seems to me like a total waste
not only does it cost me extra money but it also means that I have to
check the validity of the insurer, the issuer of the credit default swap
And then, maybe, I should insure against his default? This would never end.
But it did. And now many of the credit default swaps (i.e. insurance) on toxic
debt (like sub-prime) will never be paid. This is like having a house fire and
your insurance provider not being able to pay your claim because it also had
Dumb. Dumb. It's not my money. It's not taxpayer
money. So, I don't care. But I do remember how offended I was that Democratic
presidential candidate John Kerry had spent $4,000 on a ski outfit and then
was photographed skiing in it. Sarah Palin's new wardrobe doesn't seem like
the smartest expenditure of $150,000. From today's New York Times:
wardrobe joined the ranks of symbolic political excess on Wednesday, alongside
John McCains multiple houses and John Edwardss $400 haircut, as
Republicans expressed fear that weeks of tailoring Ms. Palin as an average
hockey mom would fray amid revelations that the Republican Party
outfitted her with expensive clothing from high-end stores.
talk radio and even shows like Access Hollywood seemed gripped
with sartorial fever after campaign finance reports confirmed that the Republican
National Committee spent $75,062 at Neiman Marcus and $49,425 at Saks Fifth
Avenue in September for Ms. Palin and her family.
Ms. Palin said on Wednesday that the purchases which totaled about
$150,000 and were classified as campaign accessories were
made on the fly after Ms. Palin, the governor of Alaska, was chosen as the
Republican vice-presidential candidate on Aug. 29 and needed new clothes to
match climates across the 50 states. They emphasized, too, that Ms. Palin
did not spend time on the shopping, and that other people made the decision
to buy such an array of clothes.
expressed consternation publicly and privately that the shopping sprees on
her behalf, which were first reported by Politico, would compromise Ms. Palins
standing as Senator McCains chief emissary to working-class voters whose
salvos at the so-called cultural elite often delight audiences at Republican
was brought to life, for instance, on The View on ABC, as Joy
Behar, a co-host, noted the McCain campaigns outreach to blue-collar
workers like an Ohio plumber who recently chided Senator Barack Obama
over taxes after another co-host, Elisabeth Hasselbeck, defended the
think Joe the Plumber wears Manolo Blahniks, Ms. Behar said.
Mr. Obama as well as those of his rival in the Democratic primaries,
Senator Hillary Rodham Clinton said that campaign money was never spent
on personal clothing but that potentially embarrassing purchases could be
blended into advertising budgets.
the former North Carolina senator, however, listed two $400 haircuts as a
campaign expense, and after they were detected he struggled to shake an elitist
image in his failed Democratic presidential bid.
Such an image
is unhelpful at this late stage of the general election, Republicans said,
especially when many families are experiencing economic pain, and when the
image applies to a candidate, like Ms. Palin, who has run for office in part
on her appeal as an outdoors enthusiast and former small-town mayor who scorns
like nobody with a political antenna was working on this, said Ed Rollins,
a Republican political consultant who ran President Ronald Reagans re-election
campaign in 1984. It just undercuts Palins whole image as a hockey
mom, a one-of-us kind of candidate.
to Australia? I was born there. Here is some useful tourist information:
+ Australia is
the land where the men are men and the sheep are very scared.
+ What do you
call an Australian with 100 girlfriends? A shepherd.
+ What is the
most useless thing on a woman's body? An Australian.
+ What do they
call an Australian in a suit? The defendant.
+ What is the
difference between an Australian and a canoe? The canoe tips.
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
click on my email address. You have to re-type it . This protects me from software
scanning the Internet for email addresses to spam. I have no role in choosing
the Google ads on this site. Thus I cannot endorse, though some look interesting.
If you click on a link, Google may send me money. Please note I'm not suggesting
you do. That money, if there is any, may help pay Michael's business school
tuition. Read more about Google AdSense, click
here and here.