Harry Newton's In Search of The Perfect Investment
Technology Investor.
Previous
Columns
9:00 AM EST, Friday, January 9, 2009:
Wow. The value of my muni bonds has recently skyrocketed. And should rise
further. Obama hinted very specifically yesterday he wasn't letting any responsible
municipalities fail. Nice tax-free yields are still available.
The muni bond
market is murky. Bonds are not traded on an exchange with prices public for
all to see. A friend recently called five brokers asking them for quotes on
selling a certain bond he owned. He got five enormously different bids. He
was shocked at the range. Meantime, today's New York Times talks of
"a long-simmering
investigation of possible bid-rigging, tax evasion and other wrongdoing
throughout the municipal bond business. Three federal agencies and a loose
consortium of state attorneys general have for several years been gathering
evidence of what appears to be collusion among the banks and other companies
that have helped state and local governments take approximately $400 billion
worth of municipal notes and bonds to market each year."
Which
shares to sell short? Those companies which
rely on bank borrowing and especially on short-term borrowing. Banks have
severely cut their lending. This is hurting companies which need the monies
to live. Look at this chart.
Now read this
story from BusinessWeek:
Why Banks
Still Won't Lend
Despite more than $1 trillion in federal largesse, they still may not have
the capital cushions to bear the risks of making fresh loans
By Mara Der
Hovanesian and Christopher Palmeri
American Apparel
(APP) executives should have been focused on the sales of their leggings
and T-shirts this holiday season. Instead, management spent most of the
critical shopping period worrying about $125 million of debt due on Dec.
19. After weeks of intense meetings with major banks, the trendy retailer
landed a last-minute extension on a loan. The onerous strings: a $2.3 million
fee and limits on capital spending. "The credit markets are still frozen,"
says Chief Financial Officer Adrian Kowalewski. "Even companies that
are performing well can't get loans at reasonable terms."
The financial
challenges facing Kowalewski and other corporate executives pose a major
quandary for the incoming Obama Administration and Washington policymakers,
who are trying to kick-start the economy. Despite all the government's best
efforts in recent months, big banks still aren't lending money freely. One
sign of the crunch: New loans to large companies slumped 37% in the three
months ending Nov. 30 from the preceding three months. "Banks are being
extremely cautious," says Edward Wedbush, chairman of the Los Angeles
brokerage Wedbush Morgan Securities.
The industry
is getting flak for hunkering down. After all, the Treasury has injected
$187.5 billion into the nation's largest banks, including Citigroup (C),
Bank of America (BAC), and JPMorgan Chase (JPM). The recipients of taxpayer
money, say critics, should be required to open up their coffers. "The
bad news [is] Treasury has no way to measure whether taxpayer funds are
being used to increase lending," Representative Barney Frank (D-Mass.),
chairman of the House Financial Services Committee, said in December. "The
much worse news [is that Treasury] does not even have the intention of doing
so."
Banking chiefs
defend their position. They argue that the government funds are designed
to shore up capital and support lending, but that they have no obligation
to make new loans. "It's not a one-to-one relationship," says
BofA CEO Kenneth D. Lewis. "We don't write $15 billion in loans because
we got $15 billion from the government."
Right now
there's little financial incentive to make fresh loans. In the current unease,
new corporate loans are immediately marked down to between 60¢ and
80¢ on the dollar, forcing banks to take a hit on the debt. It's more
lucrative, then, for them to buy old loans that are discounted already.
At the same
time, some banks no longer have the appetite to use leverage, borrowing
money to amplify returns. Others say they would like to use leverage but
can't easily find willing lenders who offer attractive terms. Leverage has
long been a critical factor in profitable lending.
Whether the
industry's stance is justifiable or not doesn't really matter. Either way,
companies are having a tough time getting credit. And without additional
intervention, the lending climate could remain cloudy for a while, threatening
companies' prospects and weighing on the economy.
Consider El
Paso Corp. (EP). As commodities prices have cratered, the nation's largest
natural gas pipeline operator has slashed capital spending by 16%, which
means its overall production will remain flat this year. El Paso's higher
debt costs will further crimp profits. Anxious to lock down financing amid
lenders' woes, the energy company sold $500 million of junk bonds in December
at an interest rate of 15%more than twice its overall borrowing costs.
"It was expensive," says Chief Financial Officer D. Mark Leland.
"We weren't confident [about] when things would get better."
Banks don't
seem to know, either. They also are hoarding capital out of fear. Under
federal rules, banks are required to maintain a certain level of capital
based on their assets. When they incur losses, they either have to raise
more capital or sell assets to keep those ratios in check. After raising
money from outside investors and receiving bailout money in recent months,
most big banks comfortably meet the federal capital standards.
But those
calculations don't necessarily take into account all the problematic assets
on banks' balance sheets. For example, they don't include securities whose
losses seem to be temporary. In this environment, those losses can quickly
become permanent, notes Stuart Plesser, an equity analyst with Standard
& Poor's (MHP).
Meanwhile,
big banks face another wave of losses, which may only further erode their
capital. Companies have already taken huge hits from subprime mortgages
and other risky debt. But other problems loom in credit cards, commercial
real estate, and traditional home mortgages. In an interview with Maria
Bartiromo, economics professor Nouriel Roubini of New York University's
Stern School of Business said that credit losses will top $2 trillion, up
from around $1 trillion today.
Even if the
government forks over the remaining $350 billion of its Troubled Asset Relief
Program to banks, the capital will still be a drop in the bucket compared
with the industry's total losses. Given that, Roubini and others figure
it's only a matter of time before the government creates another bailout
fund. "Banks don't have enough money to bear the risk," says Anil
Kashyap, a University of Chicago Booth School of Business professor. "We're
going to need Tarp II and Tarp III."
The
Madoff scandal. No phone conversation, no dinner, no chance encounter
in New York (where I live) goes by without hearing stories of the devastation
the Madoff fraud has wreaked on people's lives. I heard yesterday of a close
personal friend of Madoff who lost $200 million -- his entire investments.
The man knew Madoff for 40 years. Their families were close. He never suspected
anything.
One friend sent
his son to investigate Madoff for a potential family investment. "Go
find out how Madoff produces those consistent year-to-year returns, no matter
the economy. The son returned, "Dad, the only way Madoff is making his
money is by front running their customers. We don't want to be involved."
Front running
is illegal. It works like this. You're a broker. Your client calls up and
says buy me 100,000 Apple. You figure that order will drive the price of Apple
up. You buy some Apple first for yourself. Then you buy the 100,000 for your
client. Apple's price goes up. You sell your shares. Bingo, you've made a
few shekels. It's 100% illegal. But it still happens every day.
"I
couldn't be more scared." I heard this
yesterday from a very successful businessman. I hear comments like it all
the time. My friends, like me, are hoarding cash.
Bubbles
are forming, as we speak. I see four areas:
discount debt, infrastructure, alternative energy and precious metals
(gold, silver, platinum).
Bubbles are
fun to be on -- if you have the discipline and skills to get out in time.
Michael Lewis made his reputation with the brilliant Liar's Poker.
His latest is Panic.
The
book deals with four major episodes: the 1987 United States stock market crash,
the 1997-98 emerging-market bust-ups (called Foreigners Gone Wild),
the dot-com meltdown and the current housing/credit/stock market collapse.
The book is a compilation of essays, some you've already read. Daniel Gross
reviewed the book recently in the New York Times Book Review. He wrote:
Some of the
best entries are Lewiss own, including his January 1999 New York Times
Magazine article on the failed hedge fund Long-Term Capital Management.
The quantitative geniuses who designed this vehicle had a tough time grappling
with the fact that their model had failed. It is interesting to see
how people respond when the assumptions that get them out of bed in the
morning are declared ridiculous by the wider world, Lewis writes.
In each of the episodes, the bottom fell out because a bedrock belief held
by many participants smart professionals, not the perennially stupid
individual investor suddenly evaporated. Panic is to
a large degree a chronicle of the capacity of highly paid professionals
for self-delusion.
This volume
could just as easily have been titled Complacency. As Lewis
shows, theres something distinctly American in our propensity to blow
bubbles until they pop, spend a few months licking our wounds and then hit
replay. Yuppies Last Rites Readied, declared the headline
on a New York Times article of Oct. 21, 1987, which documented how the stock
market crash was causing materialist, money-soaked urban dwellers to reduce
conspicuous consumption and focus more on human relationships. Of course,
that moral awakening lasted only as long as the downturn. And the same business
publications that do such a great job of dissecting the bubbles once theyve
popped are the same ones that help promote and sustain the next one. What
drives this? Its not simply greed, or stupidity, but a kind of learned
naïveté. We convince ourselves, over and over again, that nothing
can go wrong, and that even if it does the smart ones among us will be insulated
from any ill effects. Despite Suze Ormans pleas, as financial beings
we lack self-awareness and irony. In October 2000, Jerry Useem of Fortune
called prominent players and asked what they had learned from the dot-com
bust. James Cramer, hedge fund manager, media personality and founder of
TheStreet.com, declared the Internet over and spoke of spending his time
coaching soccer. Im done with the material stuff. Riiight.
In these times,
$27.95 may seem a steep price to pay for a collection of articles, many
of which can be found online. But there are good reasons to splurge. The
books profits are going to charity. And as of mid-December, used copies
were trading hands on the secondary market (Amazon) for $13. In other words,
after a few weeks of ownership, this book still retains about half its value.
Which is more than can be said for Citigroup stock.
Latest
thoughts on backing up. Businesses have gone out of business because
they lost all their data. My entire life is on my computer. There are five
reasons to back up:
1. Your computer's
hard drive crashes. It's not "IF" they crash. They all crash.
It's just a matter of when. They spin thousands of time per minute. They're
mechanical. They will die.
2. A disgruntled
employee deliberately destroys your stuff. You fire the guy. His last
act is malicious. He erases your server, or, worse, your web site. It happened
to me once. Fortunately we quickly shut off his access to the server and he
only destroyed his machine.
3. Your computer
gets a virus or other horrors. Many new ones are not caught by your virus
checker. And many cannot be removed. I can show you long recent emails
with a University computer whiz. He tells me the only way to remove some of
the nasty nasty is to re-image your hard drive. That means starting from scratch.
That's a waste of time. Keep reading.
4. Your computer
is getting very s-l-o-w. All Windows PCs get slower as they get older.
5. You want
to test new software, but you're reluctant to mess up your main machine.
Harry's Backup
Strategy has two parts. First, backup all my working files. They're all in
one folder called "AllHarry." Easy to backup. I use a free program
called FileSync, version
2.18. It works like a charm. I have three external USB hard disks
that I use exclusively for backing up. Walt Mossberg of the Wall Street Journal
recently recommended something called Clickfree. He wrote Clickfree
Backs Up Your Files Easily, So You're Not Toast. Read his piece here.
I clone my hard
drive to three other hard drives. The first one is the image of the drive
as it came out of the factory. The second is the image of my drive as I added
my key software, like Microsoft Office, Dreamweaver, Photoshop, etc. The third
is a weekly copy of my working hard drive. I never load any new software without
first cloning my drive. This way if the software is a disaster, I can revert
back easily -- by popping the old drive out and popping the backup in. All
Windows laptops let you switch out hard drives easily. My cloning software
is from Apricorn.
Late
night humor on today's finances.
+ "Earlier
this week the Senate voted 97-to-0 for tougher regulations. For example, when
corporations buy a senator, they must now get a receipt." Jay
Leno
+ "The
economy is in big trouble. Yesterday in a big speech, President Bush said
the economy was still getting over the hangover from the 90's. And then, the
president admitted he was still getting over his hangover from the 80's."
Conan O'Brien
+ "This
might be getting serious. The Security and Exchanges Commission is going to
be investigating Vice President Dick Cheney. They'll begin that investigation
as soon as Congress finishes investigating the Security and Exchanges Commission."
David Letterman
+ "President
Bush was on Wall Street giving a speech on corporate responsibility. He called
for the doubling of punishment for corporate crime. That means they will slap
you on both wrists apparently." Jay Leno
+ "President
Bush said today that he is ready to send corporate CEOs to prison and to the
tough ones. You know, the ones that only have nine golf holes and not the
full eighteen." Jay Leno
+ "Playgirl
magazine is planning a pictorial spread for the men of Enron. You thought
they were hiding massive deficits before." Dennis Miller
Not
funny.
An armed hooded robber bursts into the Bank and forces the tellers
to load a sack full of cash.
On his way out
the door with the loot, one brave customer grabs the hood and pulls it off
revealing the robber's face. The robber shoots the guy without hesitation!
He then looks around the bank to see if anyone else has seen him.
One of the tellers
is looking straight at him and the robber walks over and calmly shoots him
also.
Everyone by
now is very scared and looking down at the floor.
"Did anyone
else see my face?" calls the robber.
There are a
few moments of silence...then Yoni, an elderly jeweler there to deposit his
daily profits, looking down, tentatively raises his hand and says: "I
think my wife may have caught a glimpse ...."
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.
|