Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Tuesday, February 26, 2008: Recently
I've felt like the classic Jewish telegram: "Start worrying. Details
There are apparently
many ways to solve the auction failures disaster, including making the closed-end
funds open. The pressure for a solution is building up -- even from Wall Street
itself. Brokers are reporting their "production has gone to zero",
as their clients are frozen with fear and anger. What else will they be sold
that will turn so quickly to drek?
To go from short-term
cash to long-term un-sellable securities in one week is a major accomplishment.
are poking around. And lawyers are salivating.
A reader sent
me this clip of his ARS holdings. You'll notice that his broker has classified
them as "Other Cash." This is pretty damning stuff. The lawyers could
have a field day with this:
There are many. And the good news is that we're "only" talking $60
billion. That's apparently how much auction rate preferreds are around.
today's calendar: At 4 PM Nuveen has a conference call specifically
to discuss Preferred Shares Auctions. Make sure you get on the call and ask
some hard questions. Yesterday's press release:
Vance's words comfort (??). Eaton Vance, another
large issuer of auction rate preferreds, recently posted this on their web site:
25, 2008 Nuveen Investments, a leading provider of investment services
to institutional and high net worth investors, announced it will host a conference
call to discuss topics related to Nuveen closed-end fund preferred shares.
call will take place Tuesday, February 26, at 4:00 p.m. ET/3:00 p.m. CT. The
conference call can be accessed by calling 1-866-259-1024. Following the call,
a telephone replay will be available beginning at 7:00 p.m. ET/6:00 p.m. CT.
To access the telephone replay, call 1-888-266-2081 and enter conference access
code 1207768 at the prompt. The call replay will be available through March
week, dislocations in the broader credit markets have caused the APS of many
closed-end funds, including our own, to experience an imbalance the sale orders
overbids in a regular auction with the result that the auctions have not cleared.
An unsuccessful auction is not a default. The underlying fund continues to
pay dividends to all our APS shareholders, but at a specified maximum rate
rather than a market clearing rate. The specified maximum rate differs by
fund and in most cases is not materially different than the market clearing
rate in recent successful auctions.
the earnings rate on the Eaton Vance funds' assets continues to exceed the
cost of the APS based on the maximum specified rate and leveraging the funds
with APS continues to be economically viable. Each of our closed-end funds
remains in compliance with all asset coverage tests and all our issued APS
continue to be highly rated either AAA or AA.
that liquidity needs to be restored to APS shareholders and we are working
with other market participants to develop possible solutions as quickly as
Rate Securities and Liquidity. Apparently us amateur
investors are not the only idiots to get sold this junk. Even professionals
got caught. Here's a quote from Aventine Renewable Energy's recent quarterly
31, 2007, we had invested $211.5 million in taxable auction rate securities
("ARS") which we classified as current assets. The ARS held by the
Company are private placement securities with long-term stated maturities
for which the interest rates are reset through a Dutch auction every 28 days.
The auctions have historically provided a liquid market for these securities
as investors historically could readily sell their investments at auction.
With the liquidity issues experienced in global credit and capital markets,
the ARS held by the Company have experienced multiple failed auctions, beginning
on February 8, 2008, as the amount of securities submitted for sale has exceeded
the amount of purchase orders.
December 31, 2007, we began to exit our position in these securities. As of
February 21, 2008, we had successfully liquidated $84.3 million of these securities,
thereby leaving us with $127.2 million invested in ARS as of February 21.
We incurred a pre-tax loss of approximately $1.5 million in connection with
these liquidations. All of these securities continue to carry AAA/Aaa ratings,
have not experienced any payment defaults and are backed by student loans
which carry guarantees as provided for under the Federal Family Education
Loan Program of the U.S. Department of Education. Nonetheless, if uncertainties
in the credit and capital markets continue, these markets deteriorate further
or there are any ratings downgrades on any ARS we hold, we may be required
to recognize impairments and/or reclassify these investments from short-term
to long-term investments.
these securities may not provide the liquidity to us as we need it, as it
could take until the final maturity of the underlying notes (up to 35 years)
to realize our investments' recorded value. Currently, there is a very limited
market for any of these securities and further liquidations at this time,
if possible, would likely be at a significant discount. Accordingly, we do
not currently intend to attempt to liquidate any more of these securities
until market conditions improve or our liquidity needs require us to do so.
Cash and cash equivalents as of December 31, 2007 was $17.2 million. Successful
ARS liquidations completed in 2008 generated $82.8 million. At December 31,
2007, we also had availability under our secured revolving credit facility
of $122.6 million. Our total estimated remaining expenditures needed to complete
our two new facilities at December 31, 2007 are estimated to be between $295
million and $305 million approximately evenly spent over the balance of the
construction period through Q1'09. After utilization of our current available
resources, should we not be able to liquidate a substantial portion of the
remaining portfolio of these ARS securities on a timely basis and on acceptable
terms, we will have to either attempt to raise additional funds or slow down
the construction of our new facilities, or both. In addition, delays in the
construction of our new facilities could expose us to material penalties.
The amount available
to us under our secured revolving credit facility is calculated using a borrowing
base. In addition to a component relating to inventory and receivables, there
is a fixed asset component included in this borrowing base. The amount of
fixed assets eligible to be included as collateral in our borrowing base at
December 31, 2007 was $48.2 million, and decreases by $1.8 million each quarter
thereafter. Our liquidity facility is a $200 million facility, subject to
collateral availability, and is expandable under certain conditions to $300
advice if you go on an African safari. Our
safari was the best. I remember you could drive a Toyota Land Cruiser to within
ten feet of a pride of lions and they'd ignore you. The vehicle wasn't threatening,
or lunch. However, if you extended an arm out of the vehicle, or worse, got
out, you were lunch.
Ralph returns from the doctor and tells his wife that the doctor
has told him he has only 24 hours to live.
Given this prognosis,
Ralph asks his wife for sex. Naturally, she agrees, and they make love.
About six hours
later, the husband goes to his wife and says, "Honey, you know I now have
only 18 hours to live. Could we please do it one more time?" Of course,
the wife agrees and they do it again.
Later, as the
man gets into bed, he looks at his watch and realizes he now has only 8 hours
left. He touches his wife's shoulder and asks, "Honey, please... just one
more time before I die ?" she says, "Of course, dear." And they
make love for the third time.
After this session,
the wife rolls over & falls asleep. Ralph, however, worried about his impending
death, tosses & turns until he's down to 4 more hours. He taps his wife,
who rouses. "Honey, I have only 4 more hours. Do you think we could...?"
At this point
the wife rolls over and says, "Listen Ralph, I have to get up in the morning...
Monastery of Silence
Sister Mary Katherine entered the Monastery of Silence. The Priest
said, "Sister, this is a silent monastery. You are welcome here as long
as you like, but you may not speak until directed to do so."
Sister Mary Katherine
lived in the monastery for
5 years before the Priest said to her, "Sister Mary Katherine, you have
been here for 5 years.
You may speak two words."
Sister Mary Katherine
said, "Hard bed."
to hear that," the Priest said, "We will get you a better bed."
5 years, Sister Mary Katherine was summoned by the Priest.
say another two words, Sister Mary Katherine."
said Sister Mary Katherine, and the Priest assured her that the food would be
better in the future.
On her 15th anniversary
at the monastery, the Priest again called Sister Mary Katherine in to his office.
"You may say two words today." "I quit," said Sister Mary
best," said the Priest, "You've done nothing but bitch since you got
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
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