Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Tuesday, October 9, 2007: It's
October. A squirrely month in the markets. The month of many meltdowns. I can't
predict. No one can. But I can prepare for badness. I can reduce my exposure
to the upside (sell a little), buy a few puts, sell a little short, take a little
money home. If I wanted to write a doomsday scenario, I would include three
The dollar in free-fall. Overseas investors in America -- like the Chinese,
the Japanese, the Saudis, the Kuwaitis, will one day wake up and ask themselves,
"Do I really want my money in America's declining money?" A
result: The Australian dollar
is now over 90 cents U.S. for the first time in 23 years. With Australia's economy
bouncing along on the back of booming Asia, Australian economists are tipping
their dollar to sail higher and possibly to reach parity with the US dollar.
In Australia there is speculation the Reserve Bank could lift interest rates
as soon as next month and attract more investment monies. (We recently reduced
rates here.) As I have bought more Australian securities, so others will, too.
2. Oil escalation.
There's lot of talk that rising oil prices won't affect the economy. But
if it hits $100? My oil guru, Jim Kingsdale has posted his latest
excellent newsletter. In it, he says,
The Future May
Be Closer Than We Think
That said, the
next few months may be an extremely interesting period for oil-world. As we
come to the normal heating oil inventory build time, experts have projected
that global consumption requirements will sprint forward toward 88 million
b/d. That is several million more than the world is used to providing. It
is not clear to some observers that the requisite production will be forthcoming.
If it is not, be prepared for much higher oil prices before year end.
The most interesting
part of this story to me is not whether oil breaks $100 before year end. It
is that the next few months could give us an indication of whether the spare
production capacity claimed by Saudi Arabia actually exists. Or, on the other
hand, whether the Peak Oil fundamentalists are right in saying that Ghawar,
the Saudis huge reservoir of light sweet crude, is declining, thus giving
them only limited spare production capacity of heavy sour crude, which is
tougher to refine into useful products. In other words, the next few month
may provide some important insights into how far along the road to Peak Oil
the world actually is.
3. The housing
free-fall. From the latest issue of the Economist:
Stock markets are breaking records again as if the credit crisis were ancient
history. If only it were.
seems to go from bad to worse. In late September figures showed that the American
housing market was in free fall, with both sales and prices plunging. On October
1st Citigroup and UBS, two of the world's biggest banks, said they were writing
down $9.3 billion of debt between them because of the credit crunch.
markets have reacted not with dismay but with euphoria. Wall Street marked
the Citigroup write-downs by driving the Dow Jones Industrial Average to a
record high. The MSCI emerging-markets index has soared to new highs. This
summer's turmoil seems to have been completely forgotten.
this apparent insouciance? It seems that investors reckon they cannot lose.
"Take your pick," says Gerard Minack, a strategist at Morgan Stanley:
"Equity markets are either behaving as if the worst is over for credit
and housing problems or they remain convinced that the [Federal Reserve] can
offset whatever bad news may unfold." In other words, bad economic news
means the Fed will cut interest rates and good news means recession will be
There are some
signs to support the idea that the worst might be over in the credit markets.
After strenuous effort, banks have managed to find buyers for $9.4 billion
of the $24 billion needed to finance the takeover of First Data, a payments
processor, by Kohlberg Kravis Roberts, a private-equity firm. According to
JPMorgan, even the structured products that caused so much disquiet during
the summer are moving again$6.2 billion of collateralised-debt obligations
were issued in the last week of September.
is resurfacing in currency markets, too. The "carry trade," the
borrowing of low-yielding currencies to buy higher-yielders, is back in full
swing; the Australian and New Zealand dollars have been surging. Having reached
a 27-year high on October 1st, gold (often seen as a safe haven for nervous
investors) suddenly lost 2.5 percent of its value in a day.
case seems fairly simple. The American economy may be slowing but the rest
of the world, particularly emerging markets, can make up for it. As a result,
corporate profits can continue to be strong. Profits forecasts are being revised
down, but not dramatically so. Ian Scott, a strategist at Lehman Brothers,
says that in America there have been just 71 profit warnings after the third
quarter, compared with 114 warnings at the same stage in 2005 and 173 in 2004.
The dollar's decline has added impetus to the earnings of American exporters
and multinationals with overseas subsidiaries.
In this light,
the credit crunch seems like old news. Even bank write-downs can be spun in
a good light. Much of the panic in August was caused by fear of what banks
had on their books; now the bad news is out, investors can relax.
many investors are looking back to 1998 when the Fed cut rates in response
to a previous crisis in the finance industrythe collapse of Long-Term
Capital Management, a hedge fund. The markets recovered quickly and the dotcom
bubble reached its apogee. This time round, emerging markets (or even alternative
energy stocks) might be the big winners. And in the short term at least, money
that was pouring into the credit markets is now being invested in shares.
But not everyone
buys the bulls' arguments. Experienced observers of the debt market, such
as Tom Jasper of Primus Guaranty, a credit insurer, think the crunch is far
from over. According to Moody's, a rating agency, the spread (excess interest
rate) of high-yield debt over Treasury bonds has fallen from the crisis peak
but is far higher than it was in June.
In the quick-to-rollover
money markets, there is still a much wider spread than normal between the
rate governments must pay to borrow money and the rate which big banks have
to pay. That indicates investors remain nervous about the extent to which
banks are exposed to losses from subprime mortgages, or large private-equity
the housing markets are far from over, too. The latest gloomy statistic to
emerge was a 21.5% annual fall in pending American home sales, a figure that
is a leading indicator for actual sales. House prices will surely fall further
and defaults increase, as homeowners struggle to cope with higher mortgage
rates from "teaser" loans taken out in 2006.
That may well
have a depressing effect on consumer sentiment, something which the Fed's
rate cut last month may do little to help. Normally, interest-rate moves take
12-18 months to work their way through the economy. In any case, mortgage
rates are barely lower than they were a month ago. The American economy could
yet slip into recession, an event on which Goldman Sachs now places a 40%
Even the argument
that corporate profits are still strong does not look completely convincing.
American profits are close to a 40-year high relative to national output,
according to Longview Economics, a financial consultancy. That suggests they
should return to the mean, especially as the profit numbers taken from national-accounts
data look a lot weaker than those reported by quoted companies. The last time
such a gap appeared was in the late 1990s, an era of much creative accounting.
And while the
weak dollar may be good news for American exporters, it is bad for European
companies. Having been strong in the early part of this year, the latest data
on European economies have weakened sharply; Nicolas Sarkozy, the French president,
is not the only one concerned by the euro's strength. There is the potential
for turmoil in the currency markets, either because Europe takes a stand against
the rising euro at the Group of Seven finance ministers' meeting on October
19th, or because international investors, who have to finance the American
trade deficit, become alarmed by the weakness of the dollar. Stockmarkets
might be able to rise above the problems of the credit markets. But whether
they could gain ground in the face of foreign-exchange market turmoil as well
seems a lot more doubtful.
Nigerians scam eBay auctions: They join an
auction for a high-priced item, like a laptop. They bid up the item -- way up.
EBay cancels the auction because the price looks totally out of whack. The Nigerians
(the same bunch that offer you a commission on locked-up funds) bid yesterday's
laptop up from $1,850 to $7,700. Once the auction is closed, the Nigerians then
send a "second chance" email to the bidders. Send them the money and
they'll send you the laptop. If you believe that, I can give you a "second
chance" on a local bridge. How about this one?
It's yours. Send me money. I'm told it's as good as cash.
escalating, out of control corporate phone bill:
My friend Jane Laino runs a consulting firm, DIgby
4 Group, devoted to corporate telecom expenses -- getting refunds for
overbilling (it's rampant) and fixing expenses and networks to what makes sense.
I asked her for the top four mismanaged areas. She started by telling me, "Most
organizations do not know how much they are spending on communications expenses
and do not accurately track it." She says the amount companies spend is
amazing. She has one company spending over $30 million a year on telecom. Here
are her top four problems:
1. Now you
have Less Time to Check Vendor Bill Accuracy
service providers now contractually limit the amount of time you have to find
billing errors (typically 120 days). Try to have this restriction eliminated
or at least give yourself more time to find the errors (you can often get
it extended to one year.)
The Fastest Growing Communications Expense is the Hardest to Manage
expenses (Blackberries, cellphones, etc.) are exploding. Even if you have
a corporate master contract, each wireless device has its own separate contract,
each with a different expiration date, which most organizations do not track.
If a device contract expires, the rates may go up or you may remain on an
old billing plan that costs more than a newer plan would.
a lot of Money on a New System, then Poorly Implementing It
now regularly spend hundreds of thousands of dollars on new telephone systems
that do not work nearly as well as the old ones did. This is due, in
part, to not documenting how your staff has built their work processes around
your existing system, before you replace it. The end result is frustration
for employees and reduced service to callers. A couple of examples:
A group of attorneys share an administrative assistant who answers each of
their telephones live with the name of the attorney. The new telephone system
does not let the assistant know who the call is for. A road-warrior is used
to calling into the office, speaking to a number of people, then being sent
to retrieve his own voice mail messages, then wants to leave a message for
a few other people. This was easy to do with the old telephone system, but
cannot be done with the new system. He has to keep hanging up and calling
back. On our old system we pressed a single button when running out of the
office to put the system in "night mode" meaning that the Automated
Answering will come on right away when someone calls. With our new "improved"
phone system we have to dial * + 18 + 190 to do the same thing.
4. Not Recovering
Money due you from the IRS
The IRS has
agreed to give back the 3% Federal Excise Tax billed on certain telecommunications
charges (long distance calls, wireless voice plans, conferencing calling)
for a 41-month period between March 2003 and July 2006. Any organization can
recover this for the next 3 years by filing an amendment to their 2006 tax
return. Despite the fact that many organizations are owed tens or hundreds
of thousands of dollars, many have not taken advantage of this.
companies innovate. This spoof came from the
October issue of Condé Nast's Portfolio magazine. We've
all watched in awe as the shaving companies -- Gilette and Schick -- have upped
the number of razor blades per razor from one, to two, to three, to four and
To: All Departments
From: Alan J. Pendleton
Re: Launch of New Razor
Date: October 1, 2007
It has been
one week since our company aggressively launched its newest product in the
category of Personal & Beauty Products Shaving. While it is too
soon to make a full assessment, I feel as though there are some early indicators
as to how well things are going. And in that regard, I regret to say, they
are not going well at all.
Our goal, from
the beginning, was to make a splash, with boldness and innovation
as our rallying cry. On the plus side, the Boldness and Innovation Retreat
was a huge success. ...
On the minus
side, we probably didnt adequately examine our decision to hit the market
with a 17-blade razor. With hindsight being 20/20,
I believe these to be some of our missteps:
was, simply put, too many blades. If any of you have ever held one of our
razors to your face, I think youll agree its a terrifying experience.
2. The razor did not need to offer access to the Internet. Being the first
Web friendly razor on the market sounded great but had no practical
purpose and cost us millions in R&D.
3. Five pounds is too heavy for a razor. When you couple the weight with the
danger of 17 blades and the fact that razors are used under wet, slippery
conditions, its no wonder our sales came in well below projections.
4. Our projections were unreasonably high. Who came up with the number 200
million? Recent estimates put the U.S. population at 300 million. Its
beyond comprehension that no one flagged a projection that assumed two-thirds
of the American public would buy this razor, especially when one takes into
account that we didnt market it to women.
5. Our effort to guerrilla-market by letting loose the Razor Boys in Times
Square was not only irresponsible but also costly, both in legal fees and
in damage to our image as a thoughtful, family-minded company.
Did it not occur to anyone to run background checks on the youths to whom
we gave 17-blade razors? ...
I think we can all agree that a memo is not an appropriate place to fire anyone,
but we can also agree that this is an extreme circumstance. Therefore, if
your name is Dale Phelps, Sheila Mulgren, or Robert McCutcheon, dont
come to work anymore.
Alan J. Pendleton
President, American Bathroom
quips from the old Hollywood Squares
Q. If you're
going to make a parachute jump, at least how high should you be?
A. Charley Weaver: Three days of steady drinking should do it.
Q. You've been
having trouble going to sleep. Are you probably a man or a woman?
A. Don Knotts: That's what's been keeping me awake.
Q. According to
Cosmopolitain, if you meet a stranger at a party and you think that he is attractive,
is it okay to come out and ask him if he's married?
A. Rose Marie: No; wait until morning.
Q. Which of your
five senses tends to diminish as you get older?
A. Charley Weaver: My sense of decency.
Q. In Hawaiian,
does it take more than three words to say 'I Love You'?
A. Vincent Price: No, you can say it with a pineapple and a twenty.
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 .
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