Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Monday, February 11, 2008: Increasingly
I don't like what I'm seeing or reading. My friend, a California real estate
magnate, reports to me he has taken back more property in the past four
months than in the past 12 years. He also tells me that that shopping
space "is increasingly difficult to lease," as retailers from Rite-Aid
to Starbucks are shuttering stores and curbing expansion, as consumers cut spending.
estate friends talk about a "tsunami" of upcoming bad debts and further
writeoffs. I believe we're even looking at defaults by banks. This 1933 for
some banks. Don't have more than $100,000 in cash in each bank, unless you're
married when the limit is $200,000.
are plummeting. Mike O"Rourke, chief market strategist for BMT, reports,
"As of Fridays close, 73% of the S&P 500 reported their Q4 earnings.
According to data compiled by Bloomberg, Q4 earnings for the S&P 500 are
on pace to be $18.10, down 18.7% from Q4 2006s earnings of $22.67.
As everyone would expect, the real damage was incurred in the Financial and
Consumer Discretionary Sector."
Fred Hickey, author
of the newsletter The High-Tech Strategist, is his usual gloomy self,
except he's ecstatic at tjhe profits he's making on gold and silver ETFs (GLD
and SLV) and the puts on tech stocks. His present put options include Texas
Instruments (TXN), Research in Motion (RIMM), Amazon (AMZN), Palm, Juniper Networks
(JNPR), Garmin (GRMN) and Cisco (CSCO). He writes, "many of the puts that
I have are longer-term put options, mostly LEAPS, with some expirations out
as far as January 2009. This is the strategy I employed to capture the 2000-2002
tech stock break and so far, it's working again."
Of all the pieces
I read over the weekend, none was as fascinating as a piece in the Atlantic
magazine called "The Next Slum?" The article begins "the
subprime crisis is just the tip of the iceberg. Fundamental changes in American
may turn today's McMansions into tomorrow's tenements." Basically, the
piece argues a structural change is under way in the housing market -- a major
shift in the way many Americans want to live and work. The piece quotes Arthur
C. Nelson, director of the Metropolitan Institute at Virginia Tech. He's looked
carefully at trends in American demographics, construction, house prices and
consumer preferences. In 2006, using recent consumer research, housing supply
data and population growth rates, he modeld future demands for various types
of housing. The results were bracing. Nelson forecast a likely surplus of 22
million large-lot homes (houses built on a sixth of an acre or more) by
2025 -- that's roughly 40% of the large-lot homes in existing today.
reading. From Bloomberg:
took out a $184,000 mortgage in 2006 and makes his payments every month. Now
he owes $192,000.
Minneapolis house painter has a payment- option adjustable-rate mortgage.
It allows him to write a check for $565 a month even though he owes $1,300.
The difference is added to the mortgage, and when his total debt reaches $212,000,
or after five years have passed, he said his monthly minimum could jump to
about $2,800, which he can't afford.
barely making it right now,'' Ripplinger said.
1 million homeowners with $500 billion of option ARMs are beyond the
help of interest-rate cuts by Federal Reserve Chairman Ben S. Bernanke. While
subprime borrowers face an average increase of 8 percent or less when
their adjustable- rate mortgages reset, option ARM homeowners may see their
monthly payments double after their adjustments kick in.
them neutron loans because they're like a neutron bomb,'' said Brock Davis,
a broker with U.S. Express Mortgage Corp. in Las Vegas. "Three years
later the house is still there and the people are gone.''
ARM borrowers' loan balances reach a predetermined limit, called a negative
amortization cap, usually 110 percent to 120 percent of the mortgage amount,
their payment rates immediately increase. They also automatically shoot up
after five years. Otherwise, increases typically are capped at 7.5 percent
of a borrower's initial payment per year.
could be called long-fuse, exploding ARMs,'' said Kathleen Keest, former assistant
Iowa attorney general and now senior policy counsel at the Center for Responsible
Lending in Durham, North Carolina. ``I've heard people say they are the most
complicated product ever offered to consumers. They are the real liar loans.''
The loans accounted
for 8.9 percent of the almost $3 trillion in U.S. home loans
made in 2006, up from 8.3 percent in 2005, according to an estimate by industry
newsletter Inside Mortgage Finance. ...
One in five
option ARMs packaged into bonds last year required less than 10 percent
down payment and no proof of a borrower's income, according to
a Jan. 22 report by New York- based analysts at UBS AG, Europe's largest bank
by assets. Two percent required no down payment at all from the borrower,
the analysts said.
rates on option ARMs tend to be low in the early years, misleading some investors
to think they will remain safe, said Sean Kirk, a debt trader at Seaport Group
LLC, a New York- based securities firm focused on bonds of distressed or restructured
Four types of
home buyers typically get option ARMs.
who plan to sell the property quickly, made up 12 percent of all option ARMs
packaged into bonds last year, according to UBS. That included only borrowers
who identified themselves as investors and not residents, who get lower mortgage
rates. Wealthy people have used the loan for its flexibility, according to
Thornburg Mortgage Inc. in Santa Fe, New Mexico.
The rest either
took out the loans as an "affordability'' product to buy more expensive
homes, according to Standard & Poor's, or borrowers may have been misled
about the terms, according to federal bank regulators.
heard of a payment-option ARM before,'' said Ripplinger, the Minnesota borrower.
``We thought they were putting us on a 30-year fixed. They didn't put us on
a 30-year fixed. I believe that's why a lot of people are losing their homes
tapped home equity in refinancing represented more than 44 percent
of the option ARMs underlying securities created in each of the past four
years, according to UBS.
legislation in August requiring mortgage brokers to act in borrowers' best
interest, a law that may have made Ripplinger's mortgage illegal, said Brandon
Nessen, executive director of Minnesota ACORN, a housing activist group in
make a loan that puts someone in a worse position than they were in before,''
borrowers can take out option ARMs and avoid problems, said Ira Rheingold,
executive director of the National Association of Consumer Advocates in Washington.
It's just that mortgage sellers marketed them to people who didn't understand
the terms and couldn't afford them, he said.
used to cheat people,'' Rheingold said. "It helped artificially keep
housing prices higher than they should have been.''
of more than 90 days on option ARMs increased to 5.7 percent in the fourth
quarter from 0.6 percent in the same period of 2006 on loans held by Countrywide
Financial Corp., the Calabasas, California-based company said in a regulatory
filing last week.
loans in their portfolios when they don't bundle them into securities for
sale to investors.
had $28.3 billion in option ARMs in portfolio at the end of October, according
to Inside Mortgage Finance. The only banks with more were Charlotte, North
Carolina-based Wachovia Corp., with $117.8 billion, and Seattle-based
Washington Mutual Inc., with $57.9 billion, according to the Bethesda,
Maryland-based newsletter. ...
wrote down the value of $35 million of the loans in the fourth quarter, up
from $1 million a year earlier, according to a regulatory filing. The company
agreed to be acquired by Charlotte, North Carolina-based Bank of America Corp.
after losing as much as 89 percent of its market value.
option ARMs were higher quality than other companies' option ARMs, Chief Executive
Officer G. Kennedy Thompson said in a Jan. 30 conference call. That's because
the bank made sure borrowers could stay current on monthly payments at the
reset amount, not just the teaser interest rate, which can be as low as 1
percent, he said.
That was a standard
that regulators, including the Fed, recommended in 2006 after the total U.S.
foreclosure rate climbed to a five-year high. It has since surged to the loftiest
level since at least World War II, according to data compiled by the Washington-based
Mortgage Bankers Association.
guidelines have made it more difficult to refinance into new option ARMs.
ARM volume that was done was part of the excess,'' IndyMac Bancorp Inc. CEO
Michael Perry said in a telephone interview from his office in Pasadena, California.
IndyMac, the second-largest independent U.S. home lender, made $43 billion
of the loans from 2005 through the third quarter of 2007.
we've been through what we've all been through, there's many things we regret,''
Perry said. IndyMac no longer makes the loans because mortgage-bond buyers
aren't interested, he said.
also is no longer offering option ARMs to borrowers who put down little or
no money or home equity as a deposit, CEO Kerry Killinger said on a conference
call last week. ... The company's unpaid principal balance of option ARMs
exceeded their original principal amount by $1.73 billion at the end of 2007,
almost double the $888 million of a year earlier, Washington Mutual reported
on Jan. 17.
are feeling the effects of option ARM delinquencies, said Andrew Laperriere,
managing director of New York-based research firm International Strategy &
Financial Corp., the Santa Monica, California-based savings and loan whose
net income slumped 75 percent last quarter, blamed option ARMs hitting their
negative-amortization caps for higher delinquencies. More than 1,800 of its
borrowers hit the limits, and 2,400 more may this year, the company said Jan.
that 85 percent of option ARM borrowers owe more than their original loan
is, you can refinance an option ARM to a 30- year conventional loan at a 5.5
percent interest rate, and you're still looking at your payment going up 150
percent,'' Laperriere said. ``That's pretty ugly.''
billion of adjustable-rate mortgages are scheduled to reset this year,
with the next spike in resets coming in 2011, when $420 billion in
mortgages will adjust to new interest rates for the first time, according
to New York-based analysts at Citigroup Inc.
That's the year
that Joe Ripplinger's payment will jump, provided he doesn't reach his negative
amortization cap before then. "It's the worst thing we could have done,''
From The New
Japans Slump in 1990s, Lessons for U.S.
In broad strokes, the parallels are alarming. After a long boom, the Japanese
economy in the 1990s, as Americas today, was jolted by a sharp plunge
in the real estate market.
In Tokyo, the
government bankers and policy makers were slow to recognize the scope of the
problem. Bad loans piled up. The financial troubles rippled through the economy
as consumer spending and job growth fell.
slump proved extraordinarily long-lived, ending only a few years ago, a stretch
of stagnation known as Japans lost decade. It was a humbling and lasting
setback for a nation once feared and admired as a model of economic dynamism.
The shadow of
Japan hangs over the American economy these days. The United States is sliding
into a housing-driven downturn, economists say, just as it also appears to
be losing some of its global edge from the productivity-enhancing gains driven
by the technology investments of recent decades. For Japan, experts point
out, the housing bubble burst just as the rise of China as an export power
hurt Japanese manufacturers.
A lengthy slowdown,
they say, could alter the economic psychology of America, echoing the Japanese
pattern, as the nation enters a period of diminished confidence that restrains
consumer spending and business investment.
there are a lot more similarities than people are willing to admit,
said Clyde V. Prestowitz, president of the Economic Strategy Institute, a
Washington-based policy research organization that has long promoted American
economy is very fragile now, said Mr. Prestowitz, who was a trade negotiator
with Japan in the Reagan administration.
But the extreme
Japanese experience, most analysts agree, stands less as a prediction of Americas
fate than as a cautionary example. A Japan-style quagmire, they say, is an
outcome that can be avoided in the United States with sound economic policy.
central bank and finance ministry, economists say, waited far too long
years before taking steps to revive Japans economy in the 1990s.
Reserve, while slow to see the credit crisis spilling into the broader economy
last year, has acted much more decisively in recent weeks. The Fed has twice
cut short-term interest rates sharply, lowering its benchmark rate to 3 percent,
reflecting both the central banks anxiety and its determination to try
to lift the economy despite serious concerns about the risk of higher inflation.
Ben S. Bernanke,
the Fed chairman, is a former professor at Princeton University and a student
of Japans policy missteps. And while a number of experts fault Mr. Bernanke
for what they see as the Feds poor communications with both Main Street
and Wall Street, the central banks recent moves suggest that he has
taken those lessons to heart.
His past comments,
however, indicate that Mr. Bernanke thinks that low interest rates alone are
not enough to revive an ailing economy. In a 2003 speech in Tokyo, for example,
he offered a prescription for Japans malaise: a more aggressive monetary
policy and explicit, though temporary, cooperation between the monetary
and fiscal authorities to stimulate the economy.
that message. Congress Americas fiscal authority moved
unexpectedly rapidly to approve a $168 billion stimulus plan that includes
household tax rebates, temporary tax cuts and incentives for business investment.
States is moving faster than the Japanese did, said Charles Yuji Horioka,
a professor of economics at Osaka University. So far, so good. But American
policy makers have to be ready to take further steps as needed.
economy, many economists predict, will deteriorate further before things turn
around. The governments report last week that employment fell in January,
the first decline in more than four years, was the latest sign of trouble.
The depth and duration of the downturn, economists say, will largely depend
on how much more bad news is coming from banks and other financial institutions.
an economics professor at the Stern School of Business at New York University,
warned that the roughly $100 billion in bad loans reported by banks to
date could increase nearly tenfold, as the defaults spread beyond the subprime
mortgage loans to consumer loans, credit cards and corporate lending.
In his view,
the American economy is already in recession and faces a lengthy downturn
of a year or more, before growth recovers.
Mr. Roubini sees scant chance of the United States following Japans
path. Im very pessimistic, but I dont think it will be anything
like Japan, he said.
the boom-bust cycle in Japan, the American housing market looks positively
sedate. In the major metropolitan regions of the United States, house prices
rose 82 percent from the end of the last recession in November 2001
to their peak in June 2006, according to the Standard & Poors Case-Shiller
home price index. Since the peak, house prices have declined about 10 percent,
and most economists expect a further decline of 10 to 15 percent.
In Japan, housing
prices in the major metropolitan regions nearly tripled from 1985 to
1991, then proceeded to lose two-thirds of their value over the next
14 years. Today, prices have risen slightly, according to Japanese government
statistics. Still, Japanese house prices last year were only slightly higher
than the level before the boom, more than two decades ago.
In Japan, government
officials not only tolerated the housing price bubble, economists say, they
actively encouraged it. Fearful that a strengthening yen was hurting Japanese
exporters, the Ministry of Finance urged banks to lend to real estate developers
so that a building boom and increased consumer spending would lift the economy.
post-bubble recession should have lasted from 1992 to 1994, according to Adam
S. Posen, a senior fellow at the Peterson Institute for International Economics
in Washington. But Japanese officials were too conservative and too protective
of failing banks, he said, and thus prone to policy steps that were counterproductive,
like the decision in 1997 to raise Japans sales tax to 5 percent, from
Japan down was repeated macroeconomic policy mistakes, Mr. Posen observed.
close-knit business and government culture, economists say, slowed its response
to the crisis and prolonged the slump. The industrial groups, or keiretsu,
had tight links with banks, so when a bank got in trouble it was often quietly
bailed out temporarily with loans or investments from other members of the
corporate group. Japanese bank regulators, economists note, tended to be friendly
Japan experts say, banking regulation and disclosure rules were tightened
we force the bad news out faster than the Japanese did, and we deal with it
faster, said Edward J. Lincoln, an economist and director of the Japan-U.S.
Center for Business and Economic Studies at New York University. That
should limit the damage from the economic shock instead of drag it out, as
they did in Japan. ...
to buy a new laptop: In coming weeks, Intel
will release will faster laptop processors and the makers will release a whole
new batch of new faster machines. The "problem" is that laptop makers
have suddenly become obsessed with "widescreen" machines -- laptops
that are much wider than they are tall. This has appeal if you spend your entire
life messing with big Excel spreadsheets. But it's a disaster if you spend your
time doing other things -- like writing emails, checking out the Internet, doing
PowerPoints, etc. What happens with widescreen laptops is that your favorite
web site (e.g. the Wall Street Journal) clings to the left side of your laptop's
screen, while the right hand side is completely blank. I have a widescreen laptop
sitting on my desk (it's on loan). A gigantic 30% of the screen is blank (i.e.
waster) as I check the Wall Street Journal, Bloombergs and the New York Times.
What's worse is that it shows less of their websites than other older machines.
I pulled out a bunch of laptops and checked their screens, based not on the
physical size of the laptop, but on the number of pixels they show. Then I divided
the horizontal pixels by the vertical pixels to get an aspect ratio. If you
spend your entire life surfing the Internet and writing emails and letters,
the "ideal" aspect ratio would be 0.63, not 1.60. You'd want 900 x
1440 or 1050 x 1680. You're, of course, not going to get that. The closer you
get to 1.00, the better. Be wary of upcoming widescreen hype.
teach Mr. McCain about sunk costs. On his web
site, John McCain writes, that "there
are simply not enough American forces in Iraq." He has stated that he would
be willing to keep troops in Iraq for 100 years if that is what it would take
Sunk costs are
the monies, people and resources you've already thrown at a problem. Your decision
is now: what about the next monies, people and resources? You need to figure
your return on the next investment, not the past one. Will the next one
have any chance of success? If not, don't make it. The previous resources have
gone. You shouldn't be "saving" them with new resources.
The BIG mistake
is throwing good monies, people and resources after bad ....
Chavez of Venezuela is certifiably nuts:
+ After the recent
outbreak of dengue fever, which reached into his cabinet to infect Culture Minister
Francisco Sesto, Chavez did not shake up the public health system. Instead,
he called for an investigation of claims that the disease may have been altered
into a more virulent strain as part of an attack on Venezuela by unidentified
bank robber and the hostage
A man robs a bank and takes hostages.
He asks the first
hostage, "Did you see me rob the bank?"
The hostage answers,
The crook promptly
Then he asks the
second hostage if he saw him rob the bank.
The hostage answers,
"No, but my wife did."
wish I had thought of this.
At a high School
in Wisconsin a group of students played a prank on the school. They took three
goats, painted numbers on their sides: 1, 2, 4. They then let the three goats
loose in the school.
Local school administrators
spent most of The day looking for #3.
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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