Harry Newton's In Search of The Perfect Investment
9:00 AM EST,
Monday, November 24, 2008: The economy is spiraling downwards.
It is impossible to escape the onrush of bad news. I won't bother you with
most of it. It's too depressing. But first, some good news from my economist
friend Dan Good:
to Wikipedia, Americans used 138 billion gallons of gasoline in 2006. Now
that gas is down about $2 a gallon, that puts $256 billion extra in the
hands of consumers relative to what was expected earlier this year. Combine
that with reductions in the price of home heating oil, plus reductions in
the price of other imported commodities, and the benefit to consumers dwarfs
the $150 billion stimulus package enacted earlier this year. Meanwhile,
10 year Treasury bonds are yielding under 3.4%, a potential boon for people
looking to take out mortgages or refinance. The S&P 500 is now yielding
more than the 10 year T-bill for the first time in many, many years; probably
a great buy signal for stocks for those with courage and a long-term perspective.
mean that all the doom and gloom is wrong. But the declines noted above
are a bright spot, at least for the U.S. economy.
assets and upcoming bankruptcies. They're the two prophecies you
can, with confidence, make. For us investors, the rules remain:
whatever you can, because tomorrow it will be worth less.
3. Watch out
for your "permanent" borrowings. They may no longer be.
4. Don't buy
anything today unless it's the bargain of all time. Few things are, as yet.
Real estate owners have not adjusted to the new reality of lower prices.
Friday's huge bounce, I don't believe we've reached "bottom."
There's still huge amounts of hedge redemption selling to come. There's
talk that the hedge fund industry will, by this time next year, be half
the size it is now.
The evil at
the root of this recession has been easy money. Remember Hamlet? In Act 1,
Lord Polonius gives his son Laertes some wise advice:
borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.
sadly, needs borrowing. Wisely used, it greases commerce's gears. Today it's
indispensable. But ... please read this piece from Sunday's New York Times.
Isnt Leaving the Vault
By GRETCHEN MORGENSON
SO goes the
old saw about bankers: they loan you an umbrella when the sun is shining,
only to ask for it back when it rains.
But with our
economy and markets in a world of hurt, the nations banks were supposed
to stow their self-interest and help start lending again.
When the Troubled
Asset Relief Program (TARP) of the Treasury Department handed over $125
billion in taxpayer money to nine banks a month ago, they were supposed
to lend to small businesses, home buyers and other worthy borrowers to keep
the economys gears in motion.
At the time,
the Federal Reserve Board and three bank regulatory agencies said: The
agencies expect all banking organizations to fulfill their fundamental role
in the economy as intermediaries of credit to businesses, consumers, and
other creditworthy borrowers.
admonition wasnt accompanied by any real requirements to lend.
When the Treasury gave taxpayer billions to the banks, it attached no strings.
So is it any surprise that lending is tight?
institutional and individual borrowers across the country indicate this.
Nervous lenders are demanding that even healthy loans be paid back. Banks
and other financial institutions, meanwhile, are reducing exposures to borrowers
and doing whatever they can to discourage the assumption of further debt.
I have heard from dont want to get into trouble with their lenders
by speaking publicly about their experiences. As a result, they will remain
nameless. But their stories are all the same.
is, unless the government puts serious pressure on the nations banks
to start lending, the value of assets used as collateral will fall as
individuals and institutions everywhere are forced to sell.
bit of leverage is being pulled, said Robert G. Smith, chairman of
Smith Affiliated Capital, an investment management firm. The brokerage
firms are pulling in their lines and so are the banks. At the same time,
there is nobody putting one cent of capital into positions. The name of
the game, the stated goal of TARP, was to make loans. Regulators are inside
these firms. Why is this not happening?
real estate borrower in Texas who owns properties financed by GE Capital
said his lender was tightening the screws despite the fact that all
of his loans were current and his properties robust.
He said GE
Capital had told him that when his loan comes due, there will be no negotiation;
either it must be paid off in full or foreclosure proceedings will begin.
GE Capital is among the banks playing hardball with some borrowers, it is
tapping funds through the Federal Reserve Bank of New York, which makes
it easier for the company to finance its operations at low cost.
Electric spokesman said that because of the current downturn the company
needs to give extra scrutiny to certain loans, but that it is on track to
lend $50 billion this quarter, down from $80 billion in the same quarter
being extra careful to avoid any potential future losses, said Russell
Wilkerson, the G.E. spokesman. But fundamentally we have continued
to do a lot of lending. And, he added, the company has not received
any money from TARP.
Bank of America announced that it would spend $7 billion to increase its
stake in China Construction Bank. This, just weeks after receiving $15 billion
the nation needs access to loans in the worst way, did Bank of America choose
to deploy $7 billion overseas?
a Bank of America spokesman, said that no TARP money was used to increase
its Chinese bank stake and that the bank had planned the investment and
set aside money for it months earlier.
of banks have cut back their lending, but at Bank of America we are making
every good loan we can make, he said. There is a recession out
there and that does reduce the opportunity to make good loans.
so many swooning assets on their books, it is easy to see why banks are
inclined to hoard capital.
Treasurys decision not to buy toxic mortgage assets with TARP money
after it said it would do so has produced paper losses for the banks that
hold these securities. The value of those securities rose when TARP
was announced but fell significantly when the mortgage purchase program
a waste of money to put $25 billion into Citibank when within days the value
of its underlying mortgages fell because TARP decided against buying distressed
mortgages, said Jonathon M. Trugman, founder of Pendulum Capital Management,
a hedge fund. The uncertainty that Treasury has introduced with
TARP has cost investors far more in declining stock and bond prices than
the $700 billion that the program received from Congress.
are also encountering headwinds when they tap into overdraft lines of credit
tied to checking accounts, for example. On Nov. 7, Citibank joined a host
of banks charging a $10 overdraft protection transfer fee on
such lines of credit each time the bank has to transfer money into a customers
a Citigroup spokeswoman, said the bank changed its policy to be consistent
across our overdraft protection services and align with industry practice.
It in no way changes how customers can use their lines of credit.
an ugly precedent for banks refusing to renew loans during a time of crisis,
said Frederick E. Rowe, a money manager at Greenbrier Partners in Dallas.
That is what Texas institutions did during the savings and loan crisis in
the late 1980s. The consequences were disastrous.
As the overheated
real estate market cooled back then, Texas banks hurried to shore up their
capital by forcing repayment on good loans, because their (good) borrowers
were the only ones who could do so. This put additional pressure on
the very assets that backed the loans and a deflationary spiral began. So
many banks in Texas failed because everybody tried to foreclose at the same
banks that have taken the taxpayers money ought to be part of the
solution, but they are acting like war profiteers, Mr. Rowe said.
If I were in charge, I would haul them all down to Gitmo, put them
in a room and say, You have used the taxpayers money to pervert
our objectives. It is morally wrong and we are not going to stand for it.
revisited. I've been inundated with smartphone
emails. To repeat: I like the iPhone. I like the new BlackBerry Storm. I like
the Google G1. I 'm not going to recommend one for you because it's all a
matter of personal taste. Your major buying criteria are:
The keyboard. How easy is it for you to type on. There are three keyboards:
real ones with buttons and glass ones with click feel (the Storm) and ones
with just glass (e.g. the iPhone). The more you type, the more you need real
2. The screen's
size. Movies, photos and games look better on a bigger screen. iPhone has
the biggest screen.
3. Will it work
on my next overseas trip? The Storm works everywhere. Others less so.
4. How well
does it work with your email server? BlackBerries work best.
5. Does it have
WiFi? The Internet works much faster on WiFi than on 3G.
6. The battery's
life. The iPhone's life is very short, often less than a day. And you can't
swap batteries. You can with BlackBerries.
you really need a smartphone if all you make are phone calls? A cell phone
is much cheaper than a smartphone. You don't have to buy the monthly data
age humor. The fact that I think this is funny says something about
my age or my brain, or both.
Why did the police arrest the turkey?
They suspected it of fowl play.
to the Pilgrim who was shot at by an Indian?
He had an arrow escape.
Asked to write
a composition entitled, "What I'm thankful for on Thanksgiving,"
a student wrote, "I am thankful that I'm not a turkey."
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
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