Harry Newton's In Search of The Perfect Investment
8:00 AM EST, Tuesday, October 7, 2008: September
was hedge funds' worst month ever. Losses have been staggering. Many hedge fund
investors are panicking and bailing. As a result, hedge funds are dumping more
and more stocks -- irrespective. Hence stock prices are likely to stay under
pressure until at least the end of the year. Which means resist trying to catch
a falling knife -- a "cheap" great company.
The Theory of Unintended Consequences? Well, you couldn't ask for a better
example of it than what our wonderful Federal Government did to the stockmarket
in September. The following came from a monthly hedge fund report:
This was the
BCM Discovery Funds worst month since inception. In times of severe
crisis and exogenous events, correlations across virtually all asset classes
converges, and in extreme cases, it is possible to reach perfect correlation
(perfect correlation = 1). September was as close to pure correlation as any
of us have seen. No matter what the strategy or what market our funds focuses
on, no matter how diversified or concentrated a fund strategy may be, the
negative returns among managers were staggering. The hit list is wide and
deep - lists have hit email inboxes within the investment community
asking can these numbers be true? The following factors are playing
the most significant role in what we see as atrocious performance across the
+ The SECs
ill conceived short ban which has been proven to be useless and has distorted
+ The daily volatility and mood swings based upon the governments Economic
+ A complete and utter freeze in the credit markets.
+ Fear in every market regardless of geography.
+ A rapid increase in the frequency of deleveraging related events. The time
span between major market shocks (such as bank failures) have compressed to
a matter of days, not weeks or months.
muni bond market has appeal. Municipal bonds have appeal for people
in high-tax states because muni bonds are triple-tax free. No local, no state
and no federal tax. Presently muni bonds are out of favor. Their prices are
low and their yields are high. Chasing yield is a mug's game (see below). But
for investors who are prepared to hold the bonds until maturity, they represent
solid income. You have to be prepared to intone Todd's Mantra: "I
don't care if my muni bonds go up or down in price, so long as they pays me
There are two muni bond rumors floating around:
1. The rating
agencies will cut muni bond ratings because of a lousy economy. That will drop
their prices and increase their yields dramatically
2. The rating
agencies will selectively change muni bond ratings, upgrading well-managed issuers
and downgrading lousy ones. Moodys and S&P are talking about "Global
Rating," which will upgrade munis versus corporate bonds. Previously the
rating agencies thought they corporates and munis were the same and rated them
according to the same criteria. Go figure that idiocy.
Fact is that muni
bonds fail much much less than corporate bonds.
As the year ends,
some investors, faced with substantial profits elsewhere, are doing what's called
muni bond swaps. They sell their present muni bonds for a a loss, and buy back
virtually the same collection. It has to be "virtually" -- not the
same -- otherwise Uncle Sam smells a rat.
The spread between
treasuries and munis has widened dramatically. A five year muni bond is paying
136% more than a five year Treasury. You can earn 5% on 20-year maturity muni
bonds. But you'd better plan on holding them for that long.
The major problem
with muni bonds at present is it's hard to sell them. Like most financial markets,
there's a "Buyers' Strike." No one is buying anything.
ban on short selling got you down? Try these
* Up 15.4% in
the past week alone.
cuts its interest rates.
Says today's Wall
Street Journal, "Undoubtedly, the Aussies were moved only by domestic pressures
to shore up their faltering but still relatively healthy economy and banking
Super. So Australia
is doing brilliantly and we're doing awfully. So? When I sent money there a
few months ago, the Aussie dollar was 96 U.S. cents. It's now 72 cents. Go figure.
on the iPhone and IPod Touch. The
iPhone or the cheaper iTouch are genuinely useful because of all the wonderful
things they can do when connected to the Internet, especially on a fast WiFi
I'll talk more
about these things in another column. For now, the iPhone/ iTouch can be hugely
irritating. It will connect to a WiFi network (you'll see the blue antenna connect
signal), but Safari (the browser) will come back with an error message, "Safari
cannot open the page because it cannot find the server." The
solution is to:
* Go to Settings.
* Select WiFi.
* Chose a network.
* Select the blue arrow next to the network you are connected to.
* Select DNS.
* Change the address to 18.104.22.168
Don't say you
never learned anything useful from this column.
Due to the credit crunch and the failure of the Federal Government to bail out
the candle manufacturers, the light at the end of the tunnel has been blown
out. As expected, commentators on CNBC on this new disaster will wax eloquently.
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
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here and here.