Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
For today's column
on Auction Rate Preferreds.
8:30 AM EST Friday, April 4, 2008: This
She is my son
Michael's yellow lab. When he went away to graduate school last Fall, we got
her. Yesterday she threw up, bigtime.
I must have had
Winnie on my mind when I got to my computer at 2:00 AM this morning and wrote
what I thought of Nuveen's conference call yesterday on ARPS. Here's Nuveen
management telling me basically nothing I want to know -- like what they're
doing and when I'll get my money back (if ever) -- and a bunch of Wall Street
creeps are calling in and complimenting Nuveen for -- wait for this -- holding
a conference call.
Fawning is what I do over my wife (she's cute). It's not what I do over Nuveen.
You can catch my middle-of-the-night thoughts on Nuveen at Auction
I've been floating
around Wall Street looking for genuinely interesting ideas. So far I've dredged
up two -- a distress real estate fund and a distress private equity fund. They
buy stuff from investors desperate for cash. They buy the stuff at "bargain"
prices. There's more and more of distress stuff around. It seems that to be
successful there are three rules:
1. Don't buy distress
with money you'll need to pay upcoming living expenses, like food and rent.
2. Expect to hold
distress for a long time. If you get out faster, you're lucky, not smart.
3. Think long
and hard before you commit cash. Your bargain will undoubtedly be cheaper tomorrow.
There's an expression on Wall Street -- don't try to catch a falling knife.
All those Middle Eastern investors who "saved" Citibank, Bear Stearns
and others with huge capital "infusions" know what I mean. The knife
was very sharp.
I was thinking
of lessons learned when I saw a story on the cover of today's New York Times:
Stalk the Wounded of Wall Street
Almost two centuries
ago, as Napoleon marched on Waterloo, a scion of the Rothschilds banking dynasty
is said to have declared: The time to buy is when blood is running in the
Now, as red
ink runs on Wall Street, the figurative heirs of the Rothschilds bankers,
traders, hedge fund gurus and takeover artists are plotting to profit
from todays financial upheaval.
opportunists vulture investors is the Wall Street term have
begun to swoop. They are buying up mortgages of hard-pressed homeowners, the
bank loans of cash-short businesses, and companies that seem to be hurtling
toward bankruptcy. And they are trying to buy them all on the cheap.
One Wall Street
specialist in so-called distressed debt recently spent at least $450 million
for assets of Thornburg Mortgage, the battered mortgage servicing company.
Others are buying beaten-down corporate bonds and looking at car and credit
A former executive
of the Countrywide Financial Corporation, one of the mortgage giants that
fostered subprime lending, recently helped start a company to buy mortgages.
And executives of the Blackstone Group, those lords of the now faded buyout
boom, just raised $10.9 billion from investors to scoop up real estate.
are betting, and betting big, that some people have thrown the good out with
the bad, and that the prices of some investments have simply fallen too far.
But even many
of the vultures warn that the worst is not over for the markets or the broader
economy. The investors say that they are spotting deals that are good values
and that their footsteps do not always track the broader economy.
investing, as the trade is politely known, takes nerve: the best time to buy
is when others panic or are forced to sell something they wish they could
And the moment
to buy is often clear only in hindsight. Even supposedly savvy traders, as
well as cash-rich investors from the Middle East and Asia, have lost big in
recent months by jumping into the markets too early. Among the most prominent
is the billionaire investor Joseph Lewis, who lost a reported $1.19 billion
when Bear Stearns collapsed last month. The only time you really know
youve reached the bottom is when youre back on the other side
and things are going back up, said Wilbur L. Ross Jr., a dean of vulture
investing, who made a fortune buying steel companies when no one else seemed
to want them.
aside, his firm, W. L. Ross & Company, recently spent $2.6 billion for
two mortgage servicers and a bond insurance company. He said he planned to
buy more as hedge funds and other investors sell at bargain prices.
investors are following his lead. Wealthy individuals, endowments and pension
funds are giving the vultures billions of dollars to invest.
Last year, as
the mortgage crisis erupted and then ripped through the credit markets, about
$21 billion flowed into hedge funds that specialize in distressed investments
just over $1 out of every $10 flowed into those loosely regulated investment
vehicles, according to Hedge Fund Research.
are a lot of dead carcasses on the road, and the vultures are out sniffing,
said Andy Kessler, a former hedge fund manager. This is the cycle of
Wall Street. When bubbles crash, you get the value guys who come in and say,
This thing is cheap.
To some, Wall
Street looks like a big bargain basement. All kinds of financial assets are
selling for a fraction of what they were only months ago. The average corporate
loan, for example, fetches less than 90 cents on the dollar in the secondary,
or resale, market. Some mortgage bonds sell for pennies on the dollar.
It is no surprise
more hedge funds and private equity firms are getting into distressed investing
given the outlook for the economy, said Abraham Gulkowitz, a portfolio manager
at FrontPoint, the hedge fund business within Morgan Stanley.
of companies are under stress, Mr. Gulkowitz said. When you have
more and more companies under stress, suddenly by force everyone becomes a
Mr. Ross is
already planning a reshaping of the mortgage industry. He said he would use
his mortgage servicing companies Option One and a unit of American
Home Mortgage to expand into mortgage origination and eventually to
purchase loans. He predicts huge consolidation in the troubled bond reinsurance
business, where he will play a role through Assured Guaranty. He paid $1 billion
for a stake in Assured a few weeks ago.
vulture investors, however, said they were waiting for prices to get even
cheaper. There arent many great bargains around, said David
A. Tepper, founder of Appaloosa Management, a hedge fund in New Jersey that
is a major investor in the auto parts company Delphi.
When asked about
mortgage assets, he said, The fact that things are distressed or down
doesnt mean that theyre cheap or good buys.
of several big investments last fall is still up in the air. For example,
the Citadel Investment Group, a hedge fund known for buying distressed assets,
purchased $3 billion of E*Trades asset-backed securities for $800 million,
or 27 cents on the dollar, last November. Only time will tell if that trade,
and Citadels 18 percent stake in E*Trade, pays off.
For now, many
investors have a buried optimism about distressed assets, said
Mark Patterson, chairman of MatlinPatterson Global Advisers, which bought
substantial assets from Thornburg Mortgage. His firm made hundreds of millions
of dollars purchasing distressed bonds from WorldCom during the last economic
fled some kinds of assets indiscriminately in recent months. Standard &
Poors data shows that corporate bonds are selling for less than 90 cents
on the dollars across the board. In the 2002 downturn, particular bonds
like those in telecommunications fell far more than the average bond. The
broad flight this time leaves an opening for firms that can pick out the valuable
ones, said Leon Wagner, chairman of GoldenTree Asset Management, an investment
fund in New York.
know there will be money made out of this, Mr. Wagner said, adding that
distressed has become a buzzword on Wall Street.
Already in the
private equity world, more distressed companies are under review. Stephen
Presser, a partner at Monomoy Capital Partners, said a year ago he was seeing
15 to 20 midsize companies a month that were in trouble. Now, that figure
is an actual consumer spending slowdown that we can see almost throughout
the companies, Mr. Presser said. The same companies have typically
borrowed their way out of trouble in the past.
Banks are also
trying to sell the mortgage loans that they did not bundle into bonds and
resell, said Stanford L. Kurland, the former president of Countrywide.
now runs a joint venture that will buy mortgages on the cheap and rework their
terms. The venture is backed by the investment funds BlackRock Inc. and Highfields
Mr. Ross predicted
that the debt troubles of ordinary Americans will spread far beyond mortgages.
And on Wall Street, some hedge funds are selling good assets on the cheap.
Just last month,
Mr. Ross spent $1 billion buying municipal bonds at a discount from a hedge
fund that faced margin calls. The fund, which Mr. Ross declined to identify,
had bet that municipal bonds would increase in price and Treasury bond prices
would fall. The bet went wrong, and the fund had to sell fast.
In swooped Mr.
alternative energy (AE) bubble inflates: Yesterday
I published Goldman Sachs' AE bullishness. Last night Cramer pounded the table
at length (and ad nauseum) for First Solar.
First Solar is
the only alternative energy company he likes and he's threatening to pump it
up in many upcoming shows. His reasons:
not need government subsidies to survive.
2. Its technology
is good and is coming down in cost. It can mass produce its panels. Moreover
it doesn't rely on scarce silicon.
3. Its products
are meant for industrial use -- not the fickle consumer/residential market.
Its products are meant for utilities.
4. All the presidential
candidates endorse solar.
5. It doesn't
leave a stinky footprint -- like gas or coal.
6. It's in the
early stages of becoming "the next Intel."
and their menus: Looking for a restaurant in
Boston, Chicago, LA, New York, Philadelphia, South Florida or Washington? Wondering
what its menu looks like (and costs)? Go to MenuPages.
My recent favorite New York restaurant is Scalinatella
Ristorante 212-207-8280, 201 East 61 Street on the corner 3rd Avenue., Ask for
the pasta in white truffle sauce.
you trust anything you read? The
answer is NO. Check. Check. Check. Remember I told you about my friend Michael
Marcus who enjoys spoofing the media. On April he issued a fake press release
about Panasonic using plasma screens in its cell phones. The press picked up
Michael's garbage. This morning Michael emails me:
In Google, type
Panasonic plasma, and then click on news, and you should see links for websites
around the world who fell for my fake news.
Many of the
writers were professional enough to embellish the story with opinions and
added information that demonstrated their expertise, but I got only ONE call
for verification, and I told him it was a spoof.
There's an unfortunate
trend in contemporary journalism, particularly in online journalism, to reporting
by repetition and even reporting by robots.
are "read" by robots, that in turn re-publish them for human beings
and other robots to read.
beings do read the press releases, but they do little or none of the traditional
fact checking that was once an important part of journalism. In many media
outlets, there is an automatic assumption of accuracy and honesty that allows
almost anything to get published and widely permeated.
arrives in the proper format, with authentic language, it is almost always
believed and is not likely to be challenged by journalists who are in a hurry
to publish faster than their peers.
Sony Ericsson Open Tennis. I've been so busy
I've not had the time to watch the tennis out of Miami. The semis and the finals
are on this weekend. They'll get my mind out of sewer pit of auction rate preferreds.
The Fox Sports Net can usually be found co-mingling with the MSG (Madison Square
Garden) network. L means live.
recent favorite New Yorker cartoons: These
were yesterday's cartoons that never appeared because I was an idiot and forgot
to follow my checklist. Item 2: Upload the images for today's column. They're
They're willing to throw in their kidneys.
You have to shake it if you want to see it snow again.
(A Kanin cartoon.)
BULL MARKET -- A random market movement causing an investor to mistake
himself for a financial genius.
BEAR MARKET --
A 6 to 18-month period when the kids get no allowance, the wife gets no jewelry,
and the husband gets no sex.
-- The fine art of buying high and selling low.
-- The art of buying low and selling lower.
P/E RATIO -- The
percentage of investors wetting their pants as the market keeps crashing.
BROKER -- What
my broker has made me.
POOR -- Your life in a nutshell.
-- Idiot who just downgraded your stock.
STOCK SPLIT --
When your ex-wife and her lawyer split your assets equally between themselves.
-- A guy who actually remembers his wallet when he runs to the 7-11 for toilet
paper and cigarettes.
-- The day after you buy stocks.
CASH FLOW -- The
movement your money makes as it disappears down the toilet.
YAHOO -- What
you yell after selling it to some poor sucker for $240 per share.
WINDOWS 2000 --
What you jump out of when you're the sucker that bought Yahoo at $240 per share.
INVESTOR -- Past year investor who's now locked up in a nuthouse.
PROFIT -- Religious
guy who talks to God.
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.