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Harry Newton's In Search of The Perfect Investment Technology Investor. Auction Rate Securities. Auction Rate Preferreds.

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9:00 AM EST Wednesday, August 6, 2008: Oil is falling. (It always falls before an election. Surprise. Surprise.) The stockmarket shot up yesterday. And Nuveen has gotten a bunch of institutions to buy its new securities called Variable Rate Demand Preferreds (VRDP). It will use the money to redeem its locked Auction Rate Preferred Securities -- some of which I own and have been stuck in since mid-February when the auctions failed. I'm happy this morning. For more,

There are stories this morning that Citigroup may cut a deal with regulators in which it may be forced to buy back the auction-rate securities (ARS) it sold clients, presumably at face value. That deal may cost Citigroup $5 billion, plus a possible fine of $100 million. Coming up with these monies will strain its balance sheet. I can see more of these auction rate securities "deals" with regulators for other companies -- including Merill Lynch, UBS, Allianz, PIMCO, and Wachovia.

The market seems to think that the crisis is over for the financials. It's dead wrong. It's barely begun. Items:

NEW YORK, Aug 3 (Reuters) - The United States is in the second inning of a recession that will last for at least 18 months and help kill off hundreds of banks, influential economist and New York University Professor Nouriel Roubini told Barron's in Sunday's edition.

Taxpayers will pay a big price for helping bail out the rest of the financial services industry as well, Roubini said -- at least $1 trillion and more likely $2 trillion.

The banks will become insolvent because of mounting losses as a result of the housing bust and because they have only written down their subprime loans so far, he said. Still in front of them are their consumer-credit losses, for which they lack the reserves, Barron's reported.

He also said there are hundreds of millions of dollars outstanding in home-equity loans that could be worth zero, too.

Roubini forgot other real estate loans, which have not been written down -- like commercial and large tract land developments out west. For the full Barron's piece, Hundreds of Banks will fail, Roubini tells Barron's.

Become thoroughly depressed: Read Economic Free Fall? from the latest issue of The Nation. Excerpts:

The gravest danger is that the national economy will weaken further and spiral downward into a negative cycle that feeds on itself: as conditions darken, people hunker down and wait for the storm to pass--consumers stop buying, banks stop lending, producing companies cut their workforces. That feeds more defaulted loan losses back into the banking system's balance sheets. This vicious cycle is essentially what led to the Great Depression after the stock market crash of 1929. I offer not a prediction but a warning. The comparison may sound farfetched now, but US policy-makers and politicians are putting us at risk of historic deflationary forces that, once they take hold, are very difficult to reverse.

A more aggressive response from Washington would address the real economy's troubles as seriously as it does Wall Street's. Financial firms have lost capital on a huge scale -- more of them will fail or be bought by foreign investors. But Wall Street cannot get well this time if the economy remains stuck in the ditch. Washington needs to revive the "animal spirits" of the nation at large. The $152 billion stimulus package enacted so far is piddling and ought to be three or four times larger. Instead of sending the money to Iraq, we should be spending it here on getting people back to work, building and repairing our tattered infrastructure, investing in worthwhile projects that can help stimulate the economy in rough weather.

Yahoo directors are "pathetic." I shorted Yahoo. It's up a little. I feel confident. These guys are like the gang who couldn't shoot straight. From today's New York Times.

Five Yahoo directors, including Jerry Yang, the chief executive, were re-elected to the board with much higher protest votes than previously reported, indicating strong shareholder dissatisfaction with the company’s performance and its failed merger negotiations with Microsoft.

On Tuesday, Yahoo issued a new tally of its directors’ election, showing that investors representing 33.7 percent of votes cast at the annual meeting on Friday withheld votes from Mr. Yang. Yahoo’s chairman, Roy J. Bostock, received a 39.6 percent “no” vote. Ronald W. Burkle received a 37.9 percent “no” vote; Arthur H. Kern, 31.7 percent; and Gary L. Wilson, 27.7 percent.

“Clearly, it indicates a high degree of shareholder dissatisfaction,” said Michael Klausner, a Stanford Law School professor who specializes in corporate law and governance. He said the percentage of votes withheld was particularly high given that Institutional Shareholder Services, the influential proxy advisory firm, recommended to shareholders that they re-elect all Yahoo board members. The percentage of votes withheld from these directors is higher than last year.

On Friday, Yahoo reported Mr. Yang had 14.6 percent of votes withheld, while Mr. Bostock had 20.5 percent; Mr. Burkle, 18.8 percent; Mr. Kern, 22.1 percent; and Mr. Wilson, 18.2 percent.

The new tally does not change the outcome of the election. It was issued after an independent firm conceded an error in transmitting votes on behalf of clients.

Mr. Bostock, Mr. Kern and Mr. Burkle are on Yahoo’s compensation committee, which approved a controversial plan to retain employees. Critics said the retention plan made any acquisition of Yahoo more costly. Mr. Bostock and Mr. Burkle, as well as Mr. Yang, were heavily involved in the negotiations with Microsoft.

Yahoo conducted the new tally after Broadridge Financial Solutions, a brokerage services firm that transmitted votes on behalf of some Yahoo shareholders, said it had made a “truncation error” that resulted in the underreporting of votes withheld from several directors. As a result, 200 million shares that had been cast against some Yahoo directors were voted for them.

Broadridge re-examined the vote after a request on Monday from Capital Research Global Investors, one of Yahoo’s largest shareholders and a unit of the Capital Group Companies. Gordon Crawford, an influential portfolio manager for Capital Research, which owns about 6.2 percent of Yahoo’s shares, has been sharply critical of Yahoo’s board and management, and advised funds under his control to withhold votes from several directors.

Capital World Investors, a separate unit of the Capital Group Companies and Yahoo’s largest shareholder, with a nearly 10 percent stake, also withheld votes from some directors. Capital Research asked for a re-examination after the initial vote tally suggested the number of votes withheld from some directors was too low.

By insisting that the votes be properly counted, Capital Research “sent a message to Yahoo management that it is still walking on eggshells,” said Ross Sandler, an analyst with RBC Capital Markets. “They are under an extreme amount of pressure to unlock value and do it in the near term.”

Retiring to Mexico sounds blissful. From reader Barry Merchant:

I’m 64 Harry and, like you, still playing as much tennis as I can – singles and doubles, 4 times a week. I just retired last week from my chiropractic practice and at the end of this month my wife and I are packing up the two cats and moving to San Miguel de Allende, Mexico where we are building a modest house for about $300k. The taxes will be $150 a year. We’ll be joining Doc Severenson, the Tonight Show band leader and entertainer John Davidson in enjoying beautiful weather that averages 75 to 85 degrees all year round with low humidity. And there are plenty of red clay tennis courts that are great to play on. They’re slow enough to give you time to get to the ball and they’re easy on the legs. You would love it! If you’re ever so inclined, you should come down and visit. Our house will be ready by next Spring and you’re always welcome.

All best wishes Harry. I hope you live to 125 and on your 125th birthday I can challenge you to a tennis match!

San Miguel de Allende, Mexico

Mother-in-Law Revisited
The day after his mother-in-law disappeared in a kayaking accident, a Canadian man answered his door to find two grim-faced Mounties. "We're sorry sir, But we have some information about your mother-in-law," said one Mountie. "Tell me! Did you find her?" the anguished husband sobbed.

The Mounties looked at each other. One said, "We have some bad news, some good news, and some really great news. Which do you want to hear first?"

Fearing the worst, the ashen husband said, "Give me the bad news first."

The Mountie said, "I'm sorry to tell you, Sir, but this morning we found your mother-in-law's body in the bay."

"Oh my God!" exclaimed the husband. Swallowing hard, he asked, "What's the good news?"

The Mountie continued, "When we pulled her up, she had twelve 25-pound snow crabs and six good-size lobsters clinging to her."

Stunned, the husband demanded, "If that's the good news, what's the GREAT news?"

The Mountie said, "We're gonna pull her up again tomorrow!"

Snooty receptionist
An older gentleman had an appointment to see the urologist who shared offices with several other doctors. The waiting room was filled with patients.

As he approached the receptionist's desk, he noticed that the receptionist was a large unfriendly woman who looked like a Sumo wrestler. He gave her his name.

In a very loud voice, the receptionist said, 'YOU WANT TO SEE THE DOCTOR ABOUT IMPOTENCE, RIGHT?'

All the patients in the waiting room snapped their heads around to look at the very embarrassed man.

He recovered quickly, and in an equally loud voice replied, 'NO, I'VE COME TO INQUIRE ABOUT A SEX CHANGE OPERATION, BUT I DON'T WANT THE SAME DOCTOR THAT DID YOURS.'

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.

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