Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Monday, October 27, 2008: As
we enter another tough week, some simple repeats:
Do not try and pick a stockmarket bottom. There is no bottom, for now.
It's seriously difficult to be "smart," to make money in this market.
I like UltraShorts. (See previous columns.) But being "smart" elsewhere
is hard and illogical. Think: The U.S. started this mess. It borrows too much,
lives beyond its means (huge budget deficit, huge trade deficit, no savings,
etc.). Hence, move money to Australia. I did. I moved my money when the Australian
dollar was 96 cents. It's now 60 cents. The U.S. dollar has skyrocketed. The
Australian dollar has plummeted. No matter how crummy America's finances are,
the dollar remains the safe haven. My mistake was twofold. First I got
the "logic" wrong. Second, I should have sold my Australian currency
when it fell 15%. Remember my inviolate 15% Stop Loss Rule? It applies to everything.
And I mean everything, including currencies. I was lucky. I got out of my my
commodities fund when it was only down 5% (at end September). Today it's down
Don't wait until tomorrow. Everything is changing ultra-fast. Do it NOW.
If you have anything remotely tied to the stockmarket, sell it now. Faith
and hope are not a strategy. Everything is going lower.
Cash is king. You'll need the cash to live on, to buy things and to finance
your business. You will not be able to borrow anything. Banks are not using
the money the government is dumping on them to lend money to you and me. They
are using those government monies to buy other banks. And if I were I a banker,
that's exactly what I'd do. Buying a cheap bank will make you more money going
forward than lending to Joe The Plumber. (Sorry about dragging him in.) See
the Joe Nocera story below.
We are in for seriously hard times. You need to prepare for them. Your business's
sales will fall. You need to reduce your personal and your business's expenses
-- even more than you already have. It's time to hunker down. Send a copy of
this column to your friends. Tell them I've been right. I'm not a bear because
The government is seriously mismanaging this crisis. But, seriously, what
did you expect? Remember that priceless line, "If the government were
put in charge of Sahara Desert, within five years there's be a shortage of sand."
We're seeing that. The biggest mistake our wonderful government made was letting
Lehman Brothers go belly up. The second biggest mistake was forcibly taking
over Washington Mutual. The third biggest mistake is presenting the banks and
AIG with huge amounts of monies and no conditions. "You mean we can't spend
$400,000 on a sales convention and have the Federal Government pay for it? You
mean we can't keep paying bonuses to our executives? Surely having fun is what
getting free money from Washington is what it's all about?"
Should I set myself up as consultant to banks on how to go broke in style and
get a big Washington bailout? I suspect that business is already crowded. I
know I'm cynical, but with real justification.
government now needs to address the real problems -- lost jobs. When people
lose their jobs, they can't pay their mortgages, their credit card debts, etc.
And things spiral further downward. So far in 2008, we've lost one million jobs.
And more job losses are coming by the day. Pumping money into banks will not
stop jobs from being lost.
8. Wealth worldwide
is being squeezed as asset prices plummet. This has huge implications for
every form of commerce. People spend more when they think they're rich -- the
value of their homes and stocks has risen. But when they think they're poor,
they clam up and save. They don't go to restaurants, to Best Buy, to Tiffany's,
etc. You need to make a spreadsheet of your diversified assets and figure realistically
what they're worth (or not worth) today. You'll be surprised.
The center of
this contagion is borrowing. Everyone and everything borrowed too much money.
When it became evident that a heck of lot of people (and companies) couldn't
pay the money back, the whole house of cards fell apart. I met with one of the
nation's most accomplished financial executives on the weekend -- a man who's
run several banks. Among his conclusions: When we finally tailor our lendings
to what the American public can actually afford to pay back, we will find that
Americans can only afford to buy half the cars and trucks they have bought
in recent years. That's a huge reduction for that embattled industry, and all
the industries that supply to the auto makers.
will the banks start lending again? Want to
be sick? Read this piece from Saturday's New York Times. This piece has nothing
to do with politics, so you can believe it.
So When Will Banks Give Loans?
By JOE NOCERA
recently received $25 billion in federal funding. What effect will that have
on the business side and will it change our strategic lending policy?
It was Oct.
17, just four days after JPMorgan Chases chief executive, Jamie Dimon,
agreed to take a $25 billion capital injection courtesy of the United States
government, when a JPMorgan employee asked that question. It came toward the
end of an employee-only conference call that had been largely devoted to meshing
certain divisions of JPMorgan with its new acquisition, Washington Mutual.
Which, of course,
it also got thanks to the federal government. Christmas came early at JPMorgan
executive who was moderating the employee conference call didnt hesitate
to answer a question that was pretty politically sensitive given the events
of the previous few weeks.
Given the way,
that is, that Treasury Secretary Henry M. Paulson Jr. had decided to use the
first installment of the $700 billion bailout money to recapitalize banks
instead of buying up their toxic securities, which he had then sold to Congress
and the American people as the best and fastest way to get the banks to start
making loans again, and help prevent this recession from getting much, much
In point of
fact, the dirty little secret of the banking industry is that it has no intention
of using the money to make new loans. But this executive was the first insider
whos been indiscreet enough to say it within earshot of a journalist.
mean to, of course, but I obtained the call-in number and listened to a recording.)
billion dollars is obviously going to help the folks who are struggling more
than Chase, he began. What we do think it will help us do is perhaps
be a little bit more active on the acquisition side or opportunistic side
for some banks who are still struggling. And I would not assume that we are
done on the acquisition side just because of the Washington Mutual and Bear
Stearns mergers. I think there are going to be some great opportunities for
us to grow in this environment, and I think we have an opportunity to use
that $25 billion in that way and obviously depending on whether recession
turns into depression or what happens in the future, you know, we have that
as a backstop.
Read that answer
as many times as you want you are not going to find a single word in
there about making loans to help the American economy. On the contrary: at
another point in the conference call, the same executive (who Im not
naming because he didnt know I would be listening in) explained that
loan dollars are down significantly. He added, We would
think that loan volume will continue to go down as we continue to tighten
credit to fully reflect the high cost of pricing on the loan side. In
other words JPMorgan has no intention of turning on the lending spigot.
It is starting
to appear as if one of Treasurys key rationales for the recapitalization
program namely, that it will cause banks to start lending again
is a fig leaf, Treasurys version of the weapons of mass destruction.
In fact, Treasury
wants banks to acquire each other and is using its power to inject capital
to force a new and wrenching round of bank consolidation. As Mark Landler
reported in The New York Times earlier this week, the government wants
not only to stabilize the industry, but also to reshape it. Now they
Landlers story noted that Treasury would even funnel some of the bailout
money to help banks buy other banks. And, in an almost unnoticed move, it
recently put in place a new tax break, worth billions to the banking industry,
that has only one purpose: to encourage bank mergers. As a tax expert, Robert
Willens, put it: It couldnt be clearer if they had taken out an
the first piece of evidence that this is, indeed, the plan. PNC announced
that it was purchasing National City, an acquisition that will be greatly
aided by the new tax break, which will allow it to immediately deduct any
losses on National Citys books.
As part of the
deal, it is also tapping the bailout fund for $7.7 billion, giving the government
preferred stock in return. At least some of that $7.7 billion would have gone
to NatCity if the government had deemed it worth saving. In other words, the
government is giving PNC money that might otherwise have gone to NatCity as
a reward for taking over NatCity.
know about you, but Im starting to feel as if weve been sold a
bill of goods.
had another brutal day Friday. The Asian markets got crushed. Germany and
England were down more than 5 percent. In the hours before the United States
markets opened, all the signals suggested it was going to be the worst day
yet in the crisis. The Dow dropped more than 400 points at the opening, but
thankfully it never got any worse.
There are lots
of reasons the markets remain unstable fears of a global recession,
companies offering poor profit projections for the rest of the year, and the
continuing uncertainties brought on by the credit crisis. But another reason,
I now believe, is that investors no longer trust Treasury. First it says it
has to have $700 billion to buy back toxic mortgage-backed securities. Then,
as Mr. Paulson divulged to The Times this week, it turns out that even before
the bill passed the House, he told his staff to start drawing up a plan for
capital injections. Fearing Congresss reaction, he didnt tell
the Hill about his change of heart.
shifted gears again, and is directing Treasury to use the money to force bank
acquisitions. Sneaking in the tax break isnt exactly confidence-inspiring,
either. (And lets not even get into the less-than-credible, after-the-fact
rationalizations for letting Lehman default, which stands as the single worst
mistake the government has made in the crisis.)
at a hearing of the Senate Banking Committee, the chairman, Christopher J.
Dodd, a Connecticut Democrat, pushed Neel Kashkari, the young Treasury official
who is Mr. Paulsons point man on the bailout plan, on the subject of
banks continuing reluctance to make loans. How, Senator Dodd asked,
was Treasury going to ensure that banks used their new government capital
to make loans besides rhetorically begging them?
your view, Mr. Kashkari replied. We want our banks to be lending
in our communities.
Are you insisting upon it?
We are insisting upon it in all our actions.
But they are
doing no such thing. Unlike the British government, which is mandating lending
requirements in return for capital injections, our government seems afraid
to do anything except plead. And those pleas, in this environment, are falling
on deaf ears.
Yes, there are
times when a troubled bank needs to be acquired by a stronger bank. Given
that the federal government insures deposits, it has an abiding interest in
seeing that such mergers take place as smoothly as possible. Nobody is saying
those kinds of deals shouldnt take place.
at this point, probably falls into the category of troubled bank, and nobody
seems to be arguing that it should be taken over. It is in the too big
to fail category, and the government will ensure that it gets back on
its feet, no matter how much money it takes. One reason Mr. Paulson forced
all of the nine biggest banks to take government money was to mask the fact
that some of them are much weaker than others.
We have long
been a country that has treasured its diversity of banks; up until the 1980s,
in fact, there were no national banks at all. If Treasury is using the bailout
bill to turn the banking system into the oligopoly of giant national institutions,
it is hard to see how that will help anybody. Except, of course, the giant
banks that are declared the winners by Treasury.
going to be one of the winners and deservedly so.
Mr. Dimon managed
the company so well during the housing bubble that it is saddled with very
few of the problems that have crippled competitors like Citi. The government
handed it Bear Stearns and Washington Mutual because it was strong enough
to swallow both institutions without so much as a burp.
Of all the banking
executives in that room with Mr. Paulson a few weeks ago, none needed the
governments money less than Mr. Dimon. A company spokesman told me,
We accepted the money for the good of the entire financial system.
He added that JP Morgan would use the money to do good for customers
and shareholders. We are disciplined to try to make loans that people can
Nobody is saying
it should make loans that people cant repay. What I am saying is that
Mr. Dimon took the $25 billion on the condition that his institution would
start making loans. There are plenty of small and medium-size businesses that
are choking because they have no access to capital and are perfectly
capable of repaying the money. How about a loan program for them, Mr. Dimon?
afternoon, I caught up with Senator Dodd, and asked him what he was going
to do if the loan situation didnt improve. All I can tell you
is that we are going to have the bankers up here, probably in another couple
of weeks and we are going to have a very blunt conversation, he replied.
If it turns out that they are hoarding, youll have a revolution
on your hands. People will be so livid and furious that their tax money is
going to line their pockets instead of doing the right thing. There will be
hell to pay.
CDS -- credit default swaps. Unregulated insurance against which no reserves
were taken. (See last week's columns.) When they come due, no one can afford
to pay them off -- except the U.S. Government.
-- bets against something else. Also unregulated. Most bets are not covered
by reserves. When they come due, no one can afford to pay them off -- except
the U.S. Government.
-- first payment default. Believe it or not, this is a real statistic and bankers
track it. Yes, you got it. There are a huge number of people who borrowed money
to buy a house and never made a single payment on their loan. Not one payment.
How stupid could you lending money to someone whose ability to pay is so bad,
they couldn't even make one payment.
No Income, No Job, No Assets. They still got a mortgage. See FPD.
I lied about my income, often increasing it ten times, or as much as was necessary
to get the mortgage.
I presented no W9 or any other documentation to back up my mortgage application.
I wrote what the mortgage broker told me to write. See Liar loan and FPD.
I don't make this
A young man who was sleeping in a farmers barn, comes running out
of the barn and pounds on the farmers door. When the farmer answers, the young
man starts yelling, the animals in your barn can talk.
Of course the
farmer does not believe him.
He goes on further,
when the animals thought I was asleep they started talking, The horses were
talking, the chickens and the cows and the sheep in the pen I was sleeping in...
The farmer interrupts
the young man, "That sheep is a lair."
you're here a second time this morning, please read from the top.
I added a bunch more stuff. Send me comments with your own experiences please.
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.