Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM EST, Monday, July 30, 2007: Wall
Street is a product machine. It makes financial packages to sell them. Some
of the packages are good. Some are lousy. Wall Street cares less about the quality
and far more about the answer to the question: "Can it sold today?"
If it can be sold, Wall Street will earn a commission and someone else will
enjoy the "benefits." As an investor (individual or institution) you
had to be totally stupid to buy bundles of housing loans made to deadbeats.
These deadbeats were buying homes with interest-only loans -- the interest being
less than rent on a grungy apartment. (Wouldn't you take the loan also if you
were poor?) Predictably most of the sub-prime loans blew up. Sub-prime was Wall
Street's euphemism for drek.
sub-prime loans problems have freaked Wall Street out, calling into question
all the other loans it makes, bundles, peddles and sells. Wall Street relies
on cheap money. It uses the cheap money to help buy public companies outright.
Hedge funds use the money to buy more shares than they otherwise could afford.
When the money suddenly gets uncertain or expensive, Wall Street is spooked.
Which goes to explain much of what happened last week. At least what started
it. What continued it were all those computers programmed to trade the market
the direction the market is momentarily going. This exacerbates things. This
makes markets even more volatile.
last week was gruesome. This week may be different. Asian markets went up today.
Nikkei (up 0.03%)
Kong Hang Seng
credit crunch or a credit squeeze? The Economist's Buttonwood did
a piece this weekend called "Spreading caution." It's worth
credit market suffers from a spot of apprehension and indigestion.
CALLING it a
credit crunch might be an overstatement. But it does look like a credit squeeze.
In recent years, investors' enthusiasm for high-yield products has allowed
borrowers free rein in the debt markets. Blessed by strong profits and buoyant
economic conditions, companies seemed more than capable of paying back their
debts; default rates have been remarkably low.
was the power of borrowers, private-equity groups chief among them, that they
were able to dispense with the market's traditional safeguards. They dropped
some of the covenants that gave lenders the right to act if the borrower's
investors are turning their noses up at some deals. Banks that had lent large
sums to finance the buy-out of Chrysler, the car giant, and AllianceBoots,
the drugs retailer, had hoped to sell these loans to an eager market. This
week both debt sales were postponed in the face of sniffy investors. A similar
sale to fund the buy-out of US Foodservice, a food distributor, was scrapped
last month. Even before the latest news Baring Asset Management counted 28
corporate-bond or loan deals, worth around $17 billion, that had been pulled
since June 22nd.
What has prompted
this change of heart? Many point to the problems in the American subprime-mortgage
market, where defaults have risen and several hedge funds have been wiped
out in the process. Countrywide, a mortgage bank, has triggered further concerns
by admitting that bad-debt problems are now spreading to conventional loans.
suffer losses in one part of their portfolio they get nervous about potential
problems elsewhere. On July 20th the European crossover index, which covers
riskier corporate debt, suffered the worst day in its short history. The spread
(excess interest rate) over government bonds widened by two-fifths of a percentage
also be suffering from indigestion. According to Moody's, a rating agency,
nearly $1 trillion was raised in European credit markets in the first half
of the year. Greg Peters, a Morgan Stanley strategist, says that $57 billion
of bonds and more than $200 billion of loans are already in the pipeline:
a plentiful supply of debt to absorb the potential demand.
It is hardly
surprising, therefore, that investors have decided that higher yields are
needed. This has caused a temporary hiatus as issuers get used to the new
regime. But it looks more like a return to normality than a buyers' strike.
Credit-default swaps (which insure investors against a failure to repay) reflect
this shift in sentiment. Jim Reid, the credit strategist at Deutsche Bank,
says swap spreads in the European high-yield market are now wide enough to
compensate for the average historic default rate. In America spreads are well
above that level.
further might require some actual defaults. That, in turn, would probably
require the global economy to weaken significantly. At the moment, however,
economists seem pretty sanguine, forecasting output growth of 2.7% for America
in 2008 and 2.3% for both the euro area and Japan.
A benign view
of the economic outlook may be why the Dow Jones industrial Average recently
passed the 14,000 level for the first time. But stockmarkets have shown signs
of concern at developments in the credit markets; their latest wobble was
on July 24th.
Some of the
fundamental supports for equities are being eroded. In America, corporate
profits are on course to grow by 5.5% in the year to the second quarter, a
long way below the double-digit rises to which investors have grown accustomed.
The proportion of firms beating expectations in the second quarter was at
its lowest since late 2002. By the measure derived from America's national
accounts, profits fell in the fourth quarter of 2006.
And the takeover
boom may be near its peak. The tide appears to be going out for leveraged
equity financiers, says Bill Gross of the bond giant Pimco. Bids have
become more expensive to finance while share prices have been rising. Citigroup
says that, in mid-2005, the corporate-bond yield was 4.4% and the trailing
earnings yield on European equities was 6.8%. That made it highly attractive
to issue debt to buy shares. But by mid-July the bond yield was 6.1% and the
earnings yield 6.3%, a much less attractive trade.
be inventive in finding sources of finance for their deals, as Barclays has
shown. At the margin, however, bids are becoming harder to pull off. The banks
are now stuck with the risk of the AllianceBoots and Chrysler deals. They
won't want to make that mistake again.
Chief Strategist speaks:
My Citigroup broker kindly sent me a copy of a paper the bank issued
over the weekend. It was called, "Monday Morning Musings: A Finer Focus
on Financials--Chief Strategist Comments." I read it and emailed back,
"You know what all this means?" I was happy to receive an email reply
this morning, "Not a clue." My sentiments precisely.
careful of attached PDFs files. Bad people are sending you emails
with a PDF attachment. It looks like an Adobe Acrobat file containing a document
or photos. Beware, it's not. It's a virus. Don't open PDFs from people you don't
know. Here's what one looks like:
You'll notice: No subject, no content, the wrong email address and from someone
I don't know. Worse, my spam filter thinks it's a genuine message (because of
pdf attachment) and let it through.
A New York judge is presiding over the divorce proceedings of a Jewish
couple. When the final papers have been signed and the divorce is complete the
woman thanks the judge and says, "Now I have to arrange for a Ghet."
The judge inquires
what is a Ghet. The woman explains that a Ghet is a religious ceremony required
under the Jewish religion in order to receive a divorce recognized by the Jewish
The judge says, "You mean a religious ceremony like a Bris?"
Yes, very similar. Only in this case you get rid of the entire prick."
The Talking Clock
A drunk was proudly showing off his new apartment to a couple of
his friends late one night. He led the way to his bedroom where there was a
big brass gong and a mallet.
big brass gong?" one of the guests asked.
a gong. It's a talking clock," the drunk replied.
clock? Seriously?" asked his astonished friend.
replied the drunk.
work?" the friend asked, squinting at it.
the drunk replied. He picked up the mallet, gave the gong an ear-shattering
pound, and stepped back.
The three stood
looking at one another for a moment.......
on the other side of the wall screamed, "You asshole..it's three-fifteen
in the morning!"
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 .
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