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Harry Newton's In Search of The Perfect Investment Technology Investor. Harry Newton

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9:00 AM EST, Monday, April 27, 2009. The gurus say the key to a successful portfolio is diversification. But diversification didn't work in this mess. Everything went down together -- stocks, real estate, private equity, mining, commodities and even biotech. We have to think of something new. And that's something we choose to call unlinked diversification. Investments that are not chained together.

Clearly, the number solid portfolio is 100% in bonds -- especially in muni bonds if you live in a high-tax state like New York or California. Don't email me that muni bonds are unsafe in today's world. Some are. Most aren't. Pick wisely.

But you're chasing a little more performance, I'm guessing. There's the rub. I'm searching, mulling, stumped.

Elements of unlinked diversification seem to include gold, silver and platinum, stocks and selling short a long ways out (i.e. assuming that disaster will strike -- the Black Swan scenario). The BIG gains, however, come from BIG concentrated bets. Last year the BIG gains were made by selling financials short. This year the BIG gains have come from buying financials long.

This is not an easy game. When in doubt, stay out.

The worst thing for the world economy would be to assume the worst is over, says the Economist in its latest issue.


Begin with those glimmers. It is easy to read too much into the gain in share prices. Stockmarkets usually rally before economies improve, because investors spy the promise of fatter profits before the statisticians document a turnaround. But plenty of rallies fizzle into nothing. Between 1929 and 1932, the Dow Jones Industrial Average soared by more than 20% four times, only to fall back below its previous lows. Today’s crisis has seen five separate rallies in which share prices rose more than 10% only to subside again.

The economic statistics are hard to interpret, too. The past six months have seen several slumps, each with a different trajectory. The plunge in manufacturing is in part the result of a huge global inventory adjustment. With unsold goods piling up and finance hard to come by, firms around the world have slashed production even faster than demand has fallen. Once firms have run down their stocks they will start making things again and the manufacturing recession will be past its worst. ...

Take the country many are pinning their hopes on: America. The adjustment in the housing market began earlier there than anywhere else. Prices peaked almost three years ago, and are now down by 30%. Manufacturing production has been falling at an annualised rate of more than 20% for the past three months. And the government’s offsetting policy offensive has been the rich world’s boldest.

As the inventory adjustment ends and the stimuli kick in, America’s slump is sure to ease. Cushioned by the government, the economy may even begin to grow again before too long. But it is hard to see the ingredients for a recovery that is robust enough to stop unemployment rising. Weakness abroad will crimp exports. America’s banks are propped up with public capital, but their balance-sheets are clogged with toxic assets. Consumer spending and firms’ investment will be dragged lower by the need to pay back debt and restore savings. This will be a long slog. Private-sector leverage, which rose by 70% of GDP between 2000 and 2008, has barely begun to unwind. At 4%, the household savings rate has jumped sharply from its low of near zero, but it is still far below its post-war average of 7%. Higher unemployment and rising bankruptcies could easily cause a vicious new downward lurch.

The brighter picture. “Global business sentiment remains very poor, but it has taken on a slightly better hue in recent weeks. Broad assessments of current and prospective conditions have also moved up measurably since the beginning of the year,” said the latest Survey of Business Confidence of the World conducted by Moody’s “It is premature to conclude that businesses are turning measurably more upbeat, but recent survey results are somewhat encouraging.”

Talking about banks' toxic assets. The problem with the Fed is it never tells you precisely why it closes a bank. Clearly it wakes up one morning, decides the loans a bank has are shit and closes it down, Gestapo-like The president of a local bank has no recourse and no appeal. The Fed does what its tiny little bureaucrats decide. The banks respond by accumulating cash and cutting loans -- just what this economy doesn't need. The latest:

SAN FRANCISCO (MarketWatch) -- Ketchum, Idaho-based First Bank of Idaho became the fourth bank closed by regulators Friday, as the credit crisis continued claiming victims. The Federal Deposit Insurance Corp. said Minneapolis-based U.S. Bank US Bancorp has assumed the failed bank's deposits. First Bank of Idaho had $374 million in deposits as of Dec. 31, the FDIC said. The bank's closure follows that of other banks in Georgia, Michigan and California on Friday.

I believe the Fed has closed 29 banks this year. The First Bank of Beverly Hills was the 28th, closed also on Friday. Of Beverly Hills???

CHECK. CHECK. CHECK. Are you sure all your bank accounts are all insured?

SAN FRANCISCO (MarketWatch) -- Calabasas, Ca.-based First Bank of Beverly Hills became the third bank closed by regulators Friday and the 28th U.S. bank failure of the year. The Federal Deposit Insurance Corp. said it will mail checks to insured depositors at the failed bank on Monday. First Bank of Beverly Hills had $1.5 billion in assets as of Dec. 31, the FDIC said, and $1 billion in deposits. The FDIC estimated the bank had $179,000 in uninsured deposits. The FDIC said, "an assuming institution could not be located" for the failed bank's deposits and assets.

Worst Slide Story: A Recession Sing-A-Long! Turn up your speakers. Click on the picture, or here. Then cry.

You have a friend in the Feds. And if you believe that, you'll believe anything. This comes from the Star-Telegram in Texas.

Sun, Apr. 26, 2009:
Texas securities regulators hampered as they investigate investment fraud

Melissa Ramon had an easy way of making friends, of finding that hook to a person’s personality. The blonde, who boasted a 3:23 marathon time, had guests over to her $1 million Bellaire home for dinner. She cruised the wealthy Houston suburb in a Mercedes and a Lexus. She bought a second home in Wyoming. She hobnobbed with a congressman, U.S. Rep. Charles Gonzalez, D-San Antonio.

She hosted Super Bowl bashes and charity fundraisers, and, according to a sworn statement, attended a bar mitzvah hosted by one man who said he invested with her. She visited another in intensive care. At funerals, she was among mourners dressed in black. In sworn statements, former friends say it was part of the game, part of building trust in her company, JaxTrece.

Commissioner Denise Voigt Crawford, head of the Texas State Securities Board, guns for fraudsters with abandon — and she aims to send them away.

Last fiscal year, her staff of 93 helped U.S. and district attorneys win 283 convictions, all felonies. The board’s old-fashioned detective work has helped it clamp on to scammers, as well as others who violate securities laws.

But Crawford, like her counterparts at the federal Securities and Exchange Commission, is handicapped by some rules and a lack of cooperation from other regulators.

The board has also had to fill the vacuum left by the SEC’s lack of enforcement, she said. "For the last few years, it’s been very apparent there just hasn’t been a will to regulate," Crawford said.

Meanwhile, the board has worked to fend off federal attempts to squeeze the state out of securities regulation — a move Crawford argues could leave people more vulnerable.

One thing that hamstrings the state, she said, is a 1996 federal law that makes some investment offerings exempt from filing detailed information. Companies using "Rule 506" can raise unlimited money, do not have to register their securities and usually do not have to file reports with the SEC. The brief notice they do file includes little beyond the names of owners and promoters, contact information and the type of securities offered.

Unless there’s evidence of fraud, the state cannot act, according to the securities board. "We cannot put any condition on the availability of this exemption," Crawford said.

Another hindrance: Crawford said the board hasn’t been getting information it needs from the Financial Industry Regulatory Authority, or FINRA, a self-regulating industry organization. The board shares information with FINRA, as it does with other regulators, she said. But since 2006, she said, the flow of information has been one-way, with the state ponying up information and the organization failing to reciprocate.

"It used to be very, very good, and now it’s terrible," Crawford said.

FINRA’s reticence was due in part to legal decisions that officials believed hampered their ability to share crucial information with government regulators. Crawford believes that FINRA overreacted.

Said FINRA spokeswoman Nancy Condon: "We appreciate her concerns, but really beyond that I don’t have further comment."

Despite such problems, the state securities board still elbows its way in.

It issued a cease-and-desist order to a Rule 506 company, TierOne Converged Networks of Dallas, which failed to disclose that CEO Kevin Weaver had filed for bankruptcy and had been found by FINRA to have "fraudulently misrepresented and omitted material facts in connection with the sale of securities." The board did not accuse Weaver or the company of any crime but said that a violation of the order would be a criminal offense and could result in fines.

"You know what, that thing is 8 months old, man," Weaver said of the state’s order. "The bottom line it was just a technical oversight." He declined to comment further.

At times, the board also investigates a suspect business by sending investigators in undercover, something the SEC cannot do.

That’s how the state stopped National Life Settlements in its tracks.

In December, board investigator Rani Sabban took note of an investment offer on Craigslist out of Austin. With most investment earnings in the cellar, this one was guaranteeing a 10 percent fixed rate of return.

Sabban played the part of an interested investor, e-mailing for details. He learned that the investments — targeted at retired teachers and government workers — weren’t registered, the state says. Rather than being guaranteed, they relied on what the state says were highly speculative "life settlements" — interests in the insurance death benefits of older people.

And investors, some of whom cashed out guaranteed pension plans to invest, weren’t told the whole story, the state says. For instance, they didn’t know that one of the men running the company, 79-year-old Howard G. Judah Jr. from the Houston area, was a three-time felon.

In February, Texas Attorney General Greg Abbott charged the two with "orchestrating a fraudulent scheme," and a judge issued an order seizing more than $19 million in bank accounts under the men’s control.

Judah and his partner, Gregory F. Jablonski, 62, of Colorado, used investors’ money to pay for limousine rides, a house, a Mercedes, a Cadillac Escalade, tanning-salon sessions and meals at dozens of restaurants — right down to a $4.44 tab at Jack in the Box, said Janet Mortenson, appointed by a court to take control of the company after the state’s investigation.

"It’s sad because the victims in [this] case worked whole lives, saved retirement nest eggs and then were convinced . . . to put that money into this risky scheme," she said.

John LaGrappe, an attorney representing Judah and Jablonski, said that his clients weren’t intending to enrich themselves and that the state is focusing on the $1.5 million it alleges was misappropriated. He said his clients purchased life-insurance policies as promised.

"I don’t think investors give a damn that my guys bought a house or a car," he said. "They wanted their 10 percent interest."

It was a rare case because not a single investor had complained.

Shannon McAdams, who formerly worked for Ramon as a consultant, says her big score came from kidney specialist Dr. Lazaro Cherem. In a sworn statement that was part of a lawsuit, Cherem alleges that he liquidated his life savings and handed over $1.3 million to her.

Ramon says it never happened.

"You need to look at Cherem’s checks," Ramon said. "They’re all made to cash. Are they made to me? No, they’re not. There are some that are made to me. Not the $1 million that he’s claiming.

"He also claimed he gave it to me in cash. I mean that’s going to be a little hard to prove. You know, everybody in the world knows that you would never hand over a million dollars in cash."

A statement on JaxTrece letterhead shows a $210,000 balance in Cherem’s name.

As the SEC has taken a back seat on some cases, Crawford said the Texas board has taken on "huge cases that are enormously complex."

Last year, for example, states led the charge on multibillion-dollar investigations involving auction-rate securities. The collapse of the securities, which were marketed as cash equivalents, left thousands of investors without access to their money.

It was a huge undertaking for the small agency, but Texas achieved huge settlements from banks.

"For us to take on a case of that magnitude was just awesome in terms of the amount of time and effort we had to devote to it," Crawford said.

Yet, she said, state regulators have had to fight attempts by federal agencies over the past 15 years to suck power away.

Federal officials have argued in favor of pre-empting state authority on regulating securities — an option still lurking with securities rules likely to be rewritten after the Wall Street meltdown and the Bernard Madoff and R. Allen Stanford scandals.

Crawford said it makes no sense to sideline states.

"This scenario of excluding some regulators is a very real possibility," she said at a December roundtable of state regulators. "Considering recent proposals that . . . would essentially put the federal government in near total control of the entire scope of financial regulation, there is a cause for concern among Main Street investors and for Main Street investors." ..

For the full story with photo of Ramon, click here.

The world's best laptop backpack. This is a Briggs & Riley black nylon backpack, called Glide.

I own 4,000 computer backpacks and bags. This is the best one because:

1. It's beautifully designed, with pockets and spaces for everything you need.
2. It's not big. It's only 17" x 12.5" x 7". Yet it will hold any size laptop.
3. It's very comfortable.
4. It doesn't make me look too much like a geek.

Briggs & Riley sells it for $177 on their web site. I got mine for less at a local travel store by paying cash and preparing to walk out the front door.

More bad financial jokes.
+ I went to an ATM today, and it asked to borrow a twenty till next week.

+ In America, banks rob people because that is where the money is!

+ Did you hear the one about the Polish homeowner? He paid his mortgage!

+ This shipping market is so bad that the only guys investing in ships are Somalians.

How to get well, fast.
Hung Chow calls into work and says, 'I no come work today, I really sick. Got headache, stomach ache and legs hurt, I no come work.'

The boss says, 'You know something, Hung Chow, I really need you today. When I feel sick like you do, I go to my wife and tell her to give me Sex. That makes everything better and I go to work.. You try that.'

Two hours later Hung Chow calls again. 'I do what You say and I feel great. I be at work soon. .. You got nice house'

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.