Harry Newton's In Search of The Perfect Investment
9:00 AM EST, Friday, September 19, 2008: Acting
irresponsibly doesn't work. But acting irresponsibly big-time
works. I get rich by taking outrageous risks. And the government bails me out.
The Government bailed out Fannie, Freddie and AIG. Now it's bailing out lousy
loans made by financial institutions. And, the latest, it's establishing a "temporary"
guaranty program for U.S. money market funds. This morning, the U.S Treasury
announced that for the next year, it will insure holdings of any publicly offered
money market mutual fund, retail and institutional. Treasury has set aside a
mere up to $50 billion to bail these short-term money market funds, many of
whom juiced up their funds with paper they knew was risky. But, what the heck,
their higher yield would attract higher deposits. Hence, pay themselves higher
management fees. As Mae West said, "I've been rich and poor. Rich is better."
there is euphoria. A big "up" day yesterday. Another one coming today.
But long-term (and who thinks of that any longer), who's
going to bail out the Federal Government? There are two choices. And I don't
like either one.
1. You and I with higher taxes. The next administration will deal with
this minor problem.
2. The government's
printing press. Think Zimbabwe.
gorge today. And let's gorge big-time. None of this makes any sense. Only Warren
Buffett is emerging out of this smelling like a rose. (See below.) Typical of
the new "thinking" is a report that Morgan Stanley analysts issued
We are going
from bearish to bullish equities. Our upside for the S&P 500 is 1300 (it
closed last night at 1206) by end 08 at a minimum, with scope to trade higher
depending on the strength of policy action to stabilize the financial system.
This is not a call that the bear market is over, or even that we have seen
the lows in the current cycle, but for the rest of the year we believe the
improvement in risk tolerance will outweigh the downgrade cycle in earnings.
We believe the
risk/reward profile of the market has changed due to the following factors:
+ Global policy
makers have woken up to the severity of the financial crisis and are expected
to continue to respond aggressively as growth and systemic risks dominate
last strands of complacency have disappeared with severe declines in emerging
and non-US equities, representing a capitulation on the unrealistic decoupling
theme. This has also been reflected in the change in loss leadership within
the US market, with global cyclicals underperforming.
+ Risk tolerance
is at extremely low levels as reflected in collapsed Treasury yields, elevated
VIX, and considerable widening in corporate and LIBOR spreads. Aggressive
and concerted global policy action, especially specific to financials, could
provoke a sizeable improvement in risk tolerance.
+ On our fair
P/E for the S&P 500 of 15.2, the implied earnings for 2009 is $79. We
see this as realistic, with moderate rather than substantial downside risk.
+ The speed
of global consolidation (i.e., BAC/MER) within the financial sector, together
with regulatory intervention, will help put a floor under solvency risk even
though asset quality deterioration and deleveraging will take time to work
We are moving
overweight Financials from neutral while reducing our Healthcare overweight.
We are buying NOK, COH, GS and HIG and selling SGP, DIS, MSFT and AIG.
don't like this "new" thinking. I don't think it will last. The reality
of declining economies worldwide will soon rear their ugly head. And Wall Street
will be back to gloom and doom.
The funny thing
is that we're making money on our Washington Mutual (WaMu) shares. Remember
all those columns last week telling you of my ultra-capable friend who just
took over WaMu as CEO? My first WaMu buys were at $1.99. Today it looks like
it will be trade over $4.80.
on Wall Street is that the next step for the U.S. Treasury is that it will shortly
ban all selling.
Constellation Energy: A super energy company
which ran into financial problems by getting into a business -- energy trading
-- it did not understand. (Think AIG. Read yesterday's
Read today's Wall
might be disappearing into a black hole, but the stars are aligning for Warren
The veteran value investor has swooped in on Constellation Energy Group, the
natural-gas and power company that lost more than half its value this week.
MidAmerican Energy Holdings, part of Berkshire Hathaway, has thrown Constellation
a lifeline in the form of a tentative $26.50-a-share takeover offer.
which started the year with its stock price over $100, is the sort of victim
Mr. Buffett loves.
rang last month when Constellation admitted it had miscalculated its collateral
requirements in the event its credit ratings were cut to "junk"
levels. Constellation was still trying to address the knock to confidence
about its internal controls and liquidity when the credit storm reached hurricane
force this week.
It had $2 billion
of liquidity on hand. But Standard & Poor's was threatening a potential
downgrade that would have left Constellation needing to post another $3.3
billion of collateral for its energy-trading operations. Time to bring
in a well-capitalized buyer.
MidAmerican is paying $4.7 billion for the common equity, taking a
$1 billion preferred interest and assuming $4.8 billion of net debt. For that,
it gets nearly 9,000 megawatts of electricity plants, 1.7 million customers,
natural-gas reserves and the energy-trading book.
The cost to
unwind that book is anyone's guess. Dan Eggers, an analyst at Credit Suisse,
posits a preliminary figure of $2 billion. Even then, Mr. Buffett is getting
Constellation at a phenomenally good price.
and equipment were valued at a net $10.4 billion at the end of June.
Replacement cost would be much higher and almost half the generation fleet
consists of very desirable, low-emissions nuclear and hydroelectric plants.
forecasts the two biggest "hard" assets, the generation and utility
businesses, to generate combined earnings before interest, tax, depreciation
and amortization of $2 billion in 2009. Put a conservative multiple of six
times on that and they are valued at $12 billion.
one potential drawback of such a sweet deal is that it tempts in rival bidders.
investors hope this move from Mr. Buffett, with a war chest put at $35 billion
back in May, signals a market bottom.
on it. Constellation, long on hard assets but short on liquidity, represents
a perfect opportunity. Bombed-out bank valuations, on the other hand, look
less tempting, given the root cause of their problems: opaque, potentially
toxic balance sheets.
With the ripples
emanating from Wall Street potentially set to claim more victims in the weeks
and months ahead, further industrial opportunities may well present themselves.
But not every sector can bank on a "Buffett put."
you can buy Constellation for under $26.50, it seems like the perfect buy. Buffett
will buy you out, or someone else will come along and offer a few shekels more.
What happens if your brokerage firm goes bust? Finra
issued a statement yesterday. Here's the Finra
gets a margin call and gets wiped out: For
this funny YouTube video, click
bruiser of a browser: Chrome is Google's new
browser. The world doesn't need a new browser. Firefox is just perfect. But...
Chrome has allegedly one big plus: It's called task management. According to
Google has taken
a different tack. It didn't expend much effort on what traditionally has been
the heart of a browser, the rendering engine, which creates viewable pages
from the text, images, and instructions supplied by Web servers. Google just
adapted the open-source WebKit browser engine used by Safari.
So where did
Google engineers really hunker down? The browser's Task Manager, which
is hidden inside the Developer menu, reveals Google's priorities. Click on
Task Manager, and you get a window that lists each page you have opened and
how much memory and processor time it's using. There's even a button, End
Process, that forces a misbehaving page to closesomething you often
cannot do with Internet Explorer or Firefox without closing the browser and
all your other Web applications. (There goes that hour of work you just put
into your blog.)
If this kill
function sounds familiar, that's because the concept of task management is
a core component of operating systems, such as Windows or Mac OS X. And that's
my point: Chrome offers many of the features of an operating system. It loads
Web-based applications, manages their memory and processor use, and keeps
them from interfering with one another. This is the kind of secure operation
you want, if you use a computer mainly to run Web-based programs. Clearly,
Chrome aims to make traditional operating systems less relevant.
is in beta, which means it's locked up on me already. (Nothing's perfect.) But
I do like some of its features. You can pick up a free copy at Google's
The city was accepting oral bids for a new project in the city. The deputy supervisor
in charge of bids has three contractors that want to bid, Stanislaus, Guido
He calls up Stanislaus
for his bid. Stanislaus says he needs $30,000 -- $10,000 Labor, $10,000 Material,
He then calls
up Guido for his bid. Guido says he needs $60,000 -- $20,000 Labor, $20,000
Material, $20,000 Profit.
Finally, he calls
up Ivan. Ivan tells the deputy supervisor "I bid $90,000 -- $30,000 for
me, $30,000 for you and we get the Stanislaus to do it!!"
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.