Technology Investor 

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

Previous Columns
9:00 AM EST, Tuesday, January 13, 2009: Uncertain But Not Uncharted. That's the headline on Goldman Sachs "Forecast 2009." Normally I dismiss this stuff as fantasy, as blowing smoke up its clients' tushy. But this piece by Sharmin Mossavar-Rahmini is great because t says things are awful, but they've been awful before. And it has examples:

+ Esoteric mortgages, in fact, date back to the mid-1880s when various railroad companies enticed settlers to Kansas, Nebraska, and the Dakota Territory by offering a menu of mortgages including, for example, an 11-year mortgage with interest only for the first three years and only 10% down. Sound familiar? Such easy credit led to a peak in land prices in 1887; in real dollars, those prices are still 5.5 times higher than the price of farmland in the region today after 110 years.

+ Another trend purported to be unprecedented today is the high debt-to-equity leverage ratios and size of private equity deals. But it might surprise you to know that the amount of leverage in the late 1980s was significantly greater than the peak leverage ratios of private equity deals in 2006 and early 2007. In 1988, equity as a percentage of total capital in leveraged buyout deals averaged a mere 10%. The lowest level of equity contribution in the most recent credit cycle was 32%, reached in 2005. Similarly, the size of deals in the late 1980s certainly rivals the size of deals done in the last couple of years. Kohlberg Kravis Roberts & Co.'s leveraged buyout of RJR Nabisco Inc. for $25 billion in February 1989 was achieved with $2 billion of equity (i.e., only 8% equity); in today's equivalent dollars, the RJR deal is still the second largest leveraged buyout deal in US history.

+ What about the unprecedented collapse of several Wall Street firms and the merger or acquisition of financial institutions such as Lehman Brothers, Bear Stearns, Merrill Lynch, Wachovia, and Washington Mutual? This is not the first time that mortgage derivatives, hedge fund debacles, or the bursting of a credit bubble have taken down major financial institutions. Where are the likes of Kidder Peabody, Manufacturers Hanover, Bank of New England, First Executive Corp, MCorp, Financial Corp of America, and Drexel Burnham Lambert Financial Corp of America ran the largest savings and loan operation in the US. At its height, Drexel was the fifth largest investment bank in the US and had a 75% share of the high yield market. At the time of its demise, high yield securities were not only referred to as junk bonds but as "toxic waste."

+ What about the seizing up or freezing of credit markets? Is this unprecedented? During the 1973-74 period, the credit markets fared much worse. While we are amazed by the recent high levels of the TED spread, (the incremental yield between 3-month Libor and 3-month Treasury bills, which peaked at 4.64% on October 10, 2008), these spreads pale in comparison to 1974 levels. After the Arab Oil Embargo of October 1973, the TED spread reached 6.22% and stayed above 5% for four months in 1974. Longer-dated corporate securities also exhibited worse performance in 1974 than in 2008. Our best estimate of the price drop in BBB-rated long corporate utilities and industrial bonds from peak to trough in 1974 is about 23%, while BBB-rated long corporate bonds have dropped about 16% in price so far in this cycle.

In the 1973-74 period, the US economy had a cumulative decline in GDP of 2.7 percentage points, equities dropped 48%, and unemployment increased from a low of 4.6% to 9%. Interestingly enough, unemployment troughed at 4.4% in this cycle, and is expected to peak around 8.5-9.5%. But to really compare the current crisis to the early 1970s, you may want to envision cars lined up at gasoline stations, big "no gas" signs plastered over hundreds of gasoline stations, and depending on the state you lived in, having to check your license plate because motorists with even-numbered license plates were allowed to buy gas only on even-numbered dates and those with odd-numbered plates were allowed to buy gas only on odd-numbered dates. Now that was unprecedented!

You can read the entire document here.

Opportunities in finance. A young 27-year old friend asks "I'd like to work in finance. Am I crazy?" My answer, "No." But you'd better seek out the new companies -- the ones formed in the last 12 months. The ones with fresh capital, fresh ideas and untainted loans. New banks are popping up. New finance companies are being formed. Their sales mantra: "We're not like our older brethren. We have no weird, no toxic investments. We're clean and new."

Imploding economy continues imploding. Items:

+ Once I published magazines. The rule of thumb was 50% ads, 50% editorial. That was how you figured the size of that week's or month's magazine. The size was determined by how many ads you had. No more. Magazines are struggling. The January issue of BusinessWeek has 68 pages plus a four page cover, for a total of 72 pages. It has 15 pages of advertising. That's a 21% ad-edit ratio. BusinessWeek is losing money. When I worked at BusinessWeek, it was McGraw-Hill's crown jewel.

+ Maria Bartiromo talks with Columbia's Amar Bhidé and NYU's Nouriel Roubini in the latest skimpy issue of BusinessWeek. There are the usual doom and gloom forecasts for 2009, including Roubini's "I expect job losses of at least 2.5 million." What I found most interesting was the following:

Maria: You don't agree with the current stimulus ideas?

Bhidé: I am deeply skeptical. I certainly thought [the Troubled Asset Relief Program] was a terrible mistake. I have enormous confidence in the institutions of America, and I hope they will override the mistakes individuals make. But this whole business of TARP reminded me a lot of the WMD business in Iraq: "Oh my God, just trust us. There are these WMDs, and unless you give us the authority now and right now to bomb them, disaster will befall us all." Giving Wall Street or Detroit or the banks money with virtually no personal accountability erodes the legitimacy of the system. Ultimately, the great strength of this economy is the belief that the game is not rigged, that we can all get ahead if only we try harder. The destruction of that belief could be an awful consequence of this desperate shoveling of money.

Madoff lessons. All the lessons are obvious. But a remarkable number of otherwise intelligent people ignored them.

1. Base your due diligence on "the investment is a disaster." Then try to convince yourself otherwise.

2. Don't give more than 3% of your money to anyone or any one thing.

3. Magic doesn't exist. If you don't understand how it's done, how it works or what it is, you don't want it. Ordinary mortals should udnerstand it.

4. If it's too good to be true, it isn't true.

5. Investing is a risky business. Anywhere you put your money is risky.

6. You can't rely on government regulators or industry watchdogs to protect you. Talking of his agency's failure on Madoff, SEC Chairman Chris Cox said the agency inappropriately discounted allegations, the staff did not relay concerns to the agency's leadership and that examiners relied on documents volunteered by Madoff rather than seeking subpoenas to obtain critical information. Cox said the agency's inspector general would investigate whether personal relationships between Madoff's family and SEC staff played a role in the failed oversight.

"Our initial findings have been deeply troubling," Cox said. "I am gravely concerned by the apparent failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them."

Sign of the times:

No Pants Day
On Saturday, January 10, between 1,200 and 1,500 New Yorkers dropped their drawers for the 8th Annual No Pants! Subway Ride, from Foley Square to Union Square. When spectators would ask why there were so many people without pants, the response was usually, "It's hot" or "I forgot."

Pantsless passengers make their way to the downtown NQRW line at the Times Square Station on Saturday.

The global meltdown has hit Japan. Recently,
+ The famous Origami Bank has folded!
+ The Sumo Bank has gone belly up!
+ The Bonsai Bank plans to cut some of its branches!
+ Just yesterday, the Karaoke Bank is up for sale and likely to go for a song.
+ Even shares in the Kamikaze Bank have been suspended after they nose dived and
+ 500 staff at the Karate Bank have got the chop.
+ Finally, many analysts report there is something fishy going on at the Sushi Bank and it is feared that customers may get a raw deal.

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.