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Harry Newton's In Search of The Perfect Investment Newton's In Search Of The Perfect Investment. Technology Investor. Previous Columns
8:30 AM Tuesday, July 5, 2005:
It's logical. High oil prices, high Arab stock exchanges. The UAE market -- a combination of the Dubai Financial Market and Abu Dhabi Stock Market -- is up 105% on the year. The Saudi stock exchange is up 65%. Figuring this sort of stuff is what great investing is all about.

Business Week's weekend cover story is "Too Much Money." It discovers what I've written endlessly about -- too much money chasing too few opportunities, with two results

1. Returns are down (and will stay down).
2. Hedge funds and other investment vehicles are taking on increasingly risky bets.

Results: You got to pay increasing attention to capital preservation -- my contant mantra.

Frankly I'd pay zero attention to Business Week's other conclusions. When reporters research a cover story they often talk to the wrong people -- Business Week talked to economists (Yuch!), who discovered -- surprise, surprise --

"that excess liquidity can disappear overnight if investors start getting skittish and lose confidence, causing severe disruptions to markets that have gotten used to cheap money. A unexpected rise in inflation or interest rates could tank the bond market and burst the global housing bubble, which now stretches from Barcelona to Shanghai to San Francisco. Doubt about the U.S. ability to finance its huge trade deficit could trigger a steep downturn in the dollar and a monetary crisis. And China's factory-building spree may leave it saddled with excess capacity for years to come. Prices for cold-rolled steel and ethylene have already dropped sharply, and auto prices have fallen as much as 20% in the past 12 months. "It's going to be very tough for those guys who own factories," says Morgan Stanley economist Andy Xie, "and a lot of them won't pay the banks."

I don't buy into the doom and gloom story. I do buy into the world is changing and we need to find investments for a changing world. But I don't have any brilliant insights after an incredible July 4 weekend of great family, great weather, great swimming, great tennis and some great insect bites. I itch.

I found some neat statistics in my weekend reading:

+ Hedge funds now manage assets worth $1 trillion and account for between a third and a half of all trading on the New York and London stockmarkets. -- The Economist.

+ Since 1998, annual concert tour revenue has more than doubled, while CD sales have remained essentially flat. In 2004, thirteen different artists grossed more than $40 million each at the box office. Price made $87 million. -- The New Yorker.

Renaissance Technologies Corp's $5 billion flagship Medallion hedge fund has earned an average of 34% annually since it began in 1988, making it the most successful fund during the period. These returns, which are audited, come even after fees that now are -- get this -- 5% of assets and 44% of all investment gains. That is more than double what other hedge funds typically charge. -- The Wall Street Journal.

I found one neat forecast. It's from a New York Times interview with Bill Gross, who manages the $85 billion Pimco Total Return bond fund -- the largest in the world.

Q. Your forecast is for yields on 10-year Treasury notes to be in the range of 3 percent to 4.5 percent.

A. Believe it or not, that's a three-to-five-year forecast. We are expecting inflation at 1 to 2 percent, down from 2.8 percent. That ultimately is positive for bonds. There are two dominant reasons. Asian labor has been arbitraged by U.S. corporations hoping to contain wages here at home. The next big piece is the expectation that Asians will continue to buy into our markets. The Chinese and Japanese have been huge buyers of Treasuries and the demand from them is partly responsible for the artificially depressed yields we see today.

Q. If your forecast is right, what would burst the housing bubble?

A. If interest rates stay low, there's no reason there has to be a disaster in housing. But if housing prices stop going up, which would be my forecast, that makes a substantial difference. Individuals have banked on that appreciation every year. You should come to a point where owners of houses realize we're in never-never land and stop buying on a speculative basis. Markets many times fall of their own weight. That's what happened with the Nasdaq in 2000.

Q. What does your forecast mean for investors?

A. In this new world in which inflation is 1 to 2 percent, returns on all assets, from stocks to bonds to hedge funds and private equity, will be low. A lot of investors will throw up their hands and say, why are we pursuing this seemingly endless struggle to produce double-digit returns when it can't be done? We might as well buy Treasuries and sleep well. If yields are going lower, today's 4 percent rate on Treasuries will look attractive 12 months from now.

Q: What is the outlook for corporate bonds?

A: If inflation comes down it means that profits will come down, too, and corporate cash flow may not be as plentiful. That is not an ideal environment to own a corporate bond. That doesn't mean there can't be an attractive situation. In May we were buyers of three to four billion dollars of auto finance bonds.

Q. You run the largest bond mutual fund. Is it a problem for you to invest that much money?

A. It's not. The bond market is $24 trillion, so our $500 billion in total assets is about 2 percent of the whole pie. There have been innovations in derivatives. The mortgage market is so large, and then there's international markets. The European bond market is probably 4 to 5 times deeper than the U.S. Treasury market. I will say this. One reason why rates are doing what they are doing has to be in part self-reinforcing behavior on the part of Pimco. When Pimco at $500 billion turns from bearish to bullish, even if we move in a measured way, we probably move that market 10 basis points. You look in the mirror and say, Can that be true?

Wiring money out of your brokergage account? Watch that they don't charge you interest, pending the sale of securities to cover the wire.

The end of the housing bubble down under: Some experts think the end of the Australian housing boom could signal the end of a housing bubble, not just in Australia, but also in the U.S., writes today's New York Times. I don't believe a word of it. American housing has not boomed percentagewise what Australian housing has done. Australia also lacks the population growth the U.S. has. Reading the fine print, you find "But so far, despite predictions that housing prices in Australia would plummet by as much as 20 to 30 percent, there are no signs of a crash. Prices have leveled off noticeably or dropped slightly, at least in Sydney, Melbourne and Canberra. They continue to rise at a modest rate in Perth, Darwin and Brisbane, the major cities in resource-rich states, where the local economies are being buoyed by China's insatiable demands for raw materials." If you want to read the entire piece, click here.

Everyone hates the Bank of America: I wrote I hated them. I got flooded with emails from readers:

+ As for BAC, I couldn't agree more strongly. I banked with them when I moved out to CA in 2000 and needed a new "local" bank. They had the largest ATM network and were one of the few banks at the time with online billpay (believe it or not, just 5 years ago this was uncommon). Anyway, they nickled and dimed us to death and we finally switched banks about two years ago. We now bank at First Republic Bank (FRC). I would HIGHLY recommend them. They have very few branches (so keeping your BAC account open wouldn't be the worst thing) but the SERVICE they give is second to none.

+ Bank Of America is the worst bank out there. I opened an account a year ago, then decided I didn’t want it anymore. So I withdrew my funds. Most banks, when they see the account has been emptied they will close the account, but not BAC. They began charging monthly fees of 15 dollars, after three months they threatened to go to collection and ruin my credit rating. They said those fees were considered to be loans. They are not professional or friendly to there customers like Chase and Citibank.

If it weren't for the high 4.45% dividend yield, I'd bet my last dollar that BAC is going much lower:

There's no way this incompetent bank can successfully absorb MBNA. That will be a $35 billion disaster. On second thoughts, BAC is going lower.

LCD monitors plunge in price: This is incredible. Costco is selling a 19" digital, 1280 x 1024 LCD computer monitor for $299.99. I paid over $600 a year or so ago for an equivalent machine. Click here.

An incredible bargain. Whatever happened to inflation?

My son, Michael, graduated from Dartmouth. He is way smarter than I am.
A young New York boy goes off to Dartmouth, but about 1/3 way through the semester, he has foolishly squandered what money his parents gave him. Then he gets an idea. He calls his father.

"Dad," he says, "you won't believe the wonders that modern education are coming up with! Why, they actually have a program here that will teach Fido how to talk!"

"That's absolutely amazing!" his father says. "How do I get him in that program?"

"Just send him down here with $1,000," the boy says, "I'll get him into the course."

So, his father sends the dog and the $1,000. About 2/3 way through the semester, the money runs out. The boy calls his father again.

"So how's Fido doing, son?" his father asks.

"Awesome, dad, he's talking up a storm," he says, "but you just won't believe this - they've had such good results with this program, that they've implemented a new one to teach the animals how to READ!"

"READ!?" says his father, "No kidding! What do I have to do to get him in that program?"

"Just send $2,500, I'll get him in the class."His father sends the money.

The boy has a problem. At the end of the year, his father will find out that the dog can neither talk nor read. So he shoots the dog.

When he gets home, his father is all excited. "Where's Fido? I just can't wait to see him talk and read something!"

"Dad," the boy says, "I have some grim news. This morning, when I got out of the shower, Fido was in the living room kicking back in the recliner, reading The Wall Street Journal, like he usually does. Then he turned to me and asked, "So, is your daddy still messin' around with that little redhead who lives on 63rd Street?'

The father says, "I hope you SHOT that lyin' son of a bitch!"

"I sure did, Dad!"

"That's my boy!"

Harry Newton

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. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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