Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST Monday, January 14, 2008: Forecast
of the year, made by Ben Bernanke, Fed Chairman, before the Joint Economic Committee
of the U.S. Congress on March 28, 2007. Note the date.
this juncture, however, the impact on the broader economy and financial markets
of the problems in the subprime market seems likely to be contained."
And pigs will
fly. I've been aching to run this wonderful image. It's a perfect illustration
for the Bernanke quote.
My second illustration
is the Tech Wreck of 2000-2002. It shows big drops in stockmarket prices,
especially among tech stocks (the bottom blue line in the chart).
Cisco, despite its higher profits, has still not reached the lofty heights
of 2000, nor even the $36 price I sold my Cisco holdings at on its way down.
Item four: Some
excerpts from a piece by Gretchen Morgenson in yesterday's New York Times:
Game, Cruel Jokes, and No One Is Laughing
WHAT do banks
call it when a troubled borrower abandons her home, sending them the keys?
And what do
they call it when an irate borrower abandons his home, yanking electrical
outlets from walls, leaving faucets running and otherwise trashing it on the
the inside of the house with you.
nothing like black humor to define however sadly and starkly
the blows that keep on coming in this mortgage debacle. But make no mistake,
lenders are only beginning to learn how to manage the onslaught of jingle
mail and houses turned inside out.
and regulators have greeted the new year hoping that the worst of this financial
nightmare is over. Some investors may even view Bank of Americas planned
bailout of Countrywide Financial last week as a sign that it is safe to wade
back into financial services stocks.
But while other
economic crises over the last decade were resolved relatively quickly and
cleanly the Mexican peso mess, the Russian debt debacle and the dotcom
implosion the unraveling of the great home mortgage boom is significantly
more complex. There are infinitely more moving parts to this problem, and
it will take far longer to right.
while it is widely known that a wave of subprime adjustable-rate mortgages,
or A.R.M.s, will reset this summer raising the specter of further
foreclosures an even more troublesome mess involving pay-option adjustable-rate
loans lies well beyond that. These are the kooky loans that allowed borrowers
to make payments that were a fraction of the interest owed, without paying
back any principal.
Only when the
loan balloons to 15 percent larger than its original size a nifty development
that results from a multisyllabic quagmire known as negative amortization
do lenders demand that borrowers pay down principal. In many cases,
this will cause borrowers monthly payments to double, according to analysts.
When do analysts
say borrowers will have to start coughing up this extra cash? In 2009, or
as the rescue prospects are for subprime borrowers, they are even worse for
most pay-option A.R.M. borrowers, said Michael D. Calhoun, president
of the Center for Responsible Lending, a consumer advocacy group. Three-quarters
of pay-option borrowers are making the minimum payment based on 2 to 3 percent
interest typically. The payment shock is so huge that a refinance is virtually
as more evidence that we are moving into financial waters that we havent
had to navigate in quite some time if ever. Because other housing downturns
were not national in scope and did not involve mortgages that had been pooled,
sliced up and sold to investors around the globe, it is almost impossible
to predict how long the turmoil will last or how financiers, regulators, municipalities
and homeowners will manage its fallout.
BUT it is possible
to get a feel for what is happening on the ground from a new survey of 2,400
real estate agents sponsored by Inside Mortgage Finance Publications. The
survey taps into the outlook of people who see troubled borrowers firsthand,
when they try to sell their homes before foreclosure occurs.
agents participating in the survey confirmed what many borrowers say: that
loan servicers are downright unresponsive. This is especially true when distressed
owners try to sell their homes before being put through the trials of foreclosure.
When they sell at a price that is lower than the outstanding mortgage debt,
that is known as a short sale.
Asked how servicers
could streamline such sales, one said: Allow you to go directly to the
loss mitigation department without having to speak or argue with eight people
before they finally give in and transfer you. Another said: Respond
to offers within five business days they are killing the market by
taking upwards of three months to respond to an offer.
A third participant
said: Answer their phone, make it easier to talk with the appropriate
people, instead of playing Mickey Mouse games. I have never understood why
these companies who are owners of a defaulted loan do not make it easier to
communicate with agents who are trying to sell these homes.
principal at Geosegment Systems, the designer of the survey and a supplier
of data to financial services firms, said its findings show that loan servicers
are averse to short sales, even though they may be the best solution for many
borrowers, lenders and the overall real estate market....
For the full Morgenson
Item five: An
excerpt from the weekend's Economist:
economy; A long slog
The severity of America's downturn may matter less than its length
employment numbers are perhaps the most glamorous economic statistics. Though
fickle and much revised, they have an outsized effect on the financial markets
and policymakers. On January 4th dismal jobs figures seemed to confirm what
many feared: a downturn is at hand
shuddered on news that the jobless rate had jumped to 5% in December, and
that the private sector had shed workers for the first time since 2003. Talk
of recession has soared (see Warning
Lights). Even George Bush has admitted the economy faces challenges.
If not actually shrinking, America's economy is weak. The real question is
not the technical issue of whether the downturn will qualify as a recession,
but how long it will last.
Many Wall Street
seers expect any downturn to be mild and short-lived, thanks to the adrenaline
shot of lower interest rates (financial markets expect the federal-funds rate
to fall by more than a percentage point this year, to below 3%) and the cushion
of export growth. The housing malaise, they think, will linger, but less maliciously.
And the panic in credit markets will ease, as losses are tallied and banks
Even the Fed's
most hawkish governors are now hinting at more cuts in interest rates. The
weak dollar and strength in emerging economies will indeed boost exports,
although if a recent slowing of foreign manufacturing orders is a guide
by less than in 2007. Buoyed by central-bank liquidity and sovereign-wealth
funds' readiness to pour capital into American banks, some tensions are easing.
The spreads between interbank rates and safe government bonds have fallen,
though they remain above historical norms.
That is all
good news. Even so, powerful signals point to a long period of sub-par
growth. The huge backlog of unsold homes suggests house prices have further
to fall by around 20% going by housing futures. Lower house
prices will force Americans to spend less and save more a process that
has hardly started. They will also spread the mortgage mess well beyond
subprime borrowers, which would lead to greater financial losses. Hank
Paulson, Mr. Bush's treasury secretary, this week suggested his scheme for
assisting troubled homeowners should extend beyond subprime borrowers.
the weak economy will raise credit concerns well beyond residential mortgages
beyond subprime). Commercial property looks ever more vulnerable.
Corporate default rates, stunningly low in recent years, are sure to rise.
One recent estimate expects default rates on high-yield debt to quintuple
from 0.9% in 2007 to 4.8% this year. If the downturn endures, even that could
prove optimistic. Rapidly rising defaults and losses could yet trigger
another financial-market panic.
Even if the
economy is spared that fate, many effects of the credit mess have yet to materialise.
Lending standards have tightened, but surely have further to go. America's
banks are in worse shape than anyone predicted in August. The business of
extracting fat fees from creating complex debt structures is in tatters. Banks'
balance sheets are at once weakened by large losses on subprime-related products
and swollen with unwanted assets from defunct structured-investment vehicles.
For all the ease with which banks have tapped new capital in the past few
weeks, they will be more cautious lenders now.
falling asset prices, rising defaults and tighter credit and it is hard
to see how the economy will bounce back quickly. History, too, suggests
the hangover will last. A new study finds that, on measures from capital inflows
to asset-price rises, the buildup to America's mortgage crisis looks eerily
like earlier financial crises in rich countries. In the average rich-country
banking crisis, it took two years for growth to return to trend; at worst
it took more than three (see Same
as it ever was).
are not perfect, but their message is that whether or not the economy falls
into an official recession, it will probably stay weak for longer than many
now expect. Prudently looser monetary policy will help, but cannot reverse
the credit cycle or the bursting of the housing bubble. Nor will modest
fiscal stimulus of the sort Congress is talking about. As Mr. Paulson admitted
this week there is not a single or simple solution that will undo the
excesses of the last few years. America faces a long, hard slog.
All this is my
unsubtle way of saying "I know you can't time stockmarkets. But it's
a mess out there. I'm in doubt and I'm largely staying out. Except for some
obvious shorts, which I'll talk about (I hope) in the next few days."
You do not have to pass an IQ test to be in the banking, broking
or financial services industry.
You do not have to pass an IQ test to buy a suit or rent a corner office.
With these profound thoughts in mind.....
+ A new neighbor
called the local township administrative office to request the removal of the
DEER CROSSING sign on our road. The reason: 'Too many deer are being hit by
cars. I don't think this is a good place for them to be crossing anymore.' --
from Kingman, KS
+ I was at the
airport, checking in at the gate when an airport employee asked, 'Has anyone
put anything in your baggage without your knowledge?' To which I replied, 'If
it was without my knowledge, how would I know?' He smiled knowingly and nodded,
'That's why we ask.' -- Birmingham , AL
+ The stoplight
on the corner buzzes when it's safe to cross the street. I was crossing with
a coworker. She asked if I knew what the buzzer was for. I explained that it
signals blind people when the light is red. Appalled, she responded, 'What on
earth are blind people doing driving?' -- She was a probation officer in Wichita
+ I work with
an individual who plugged her power strip back into itself and couldn't understand
why her system would not turn on. And a deputy with the Dallas County Sheriff's
+ When my husband
and I arrived at an automobile dealership to pick up our car, we were told the
keys had been locked in it. We went to the service department and found a mechanic
working feverishly to unlock the driver's side door. As I watched from the passenger
side, I tried the door handle and found it was unlocked. 'It's open," I
said to the technician. His reply, 'I know. I already got that side.' -- Ford
dealership in Canton , Mississippi
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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