Technology Investor 

Harry Newton's In Search of The Perfect Investment Technology Investor. Auction Rate Securities. Auction Rate Preferreds.

Previous Columns
9:00 AM EST Monday, July 14, 2008: We are in our worst financial crisis since the Great Depression. As an investor your strategy is sixfold:

1. You should not have more than $100,000 on deposit or invested in any bank. That's all the FDIC insures. That's all you'll get back if and when your bank fails. That's all the depositors in IndyMac are getting. As you know, there was a run on that bank last week and it failed -- the first major bank to shut its door since the mortgage crisis erupted a year or so ago. You should also check your IRA. It's insured only to $250,000.

2. You should not have your money in a short-term money market fund -- without checking what it invests in. Don't be surprised at the junk you find.

3. You should not be invested in any hedge fund that uses leverage.

4. You should not be invested in any overtly financial stock like a bank or an investment bank, or a stealth financial stock, like GE which last year got more than half its profits from finance.

5. Cash is King. I've intoned that boring mantra since mid-November, when I said "Go 100% to cash." But I reiterate it today again. I see too many cockroaches around affecting too many stocks (not just financials). Cockroaches include high oil, inability to raise money for capital projects or new important acquisitions, etc. Not to be inconsistent, I'm willing to allow you to go long with 5% of your investable monies. I mentioned some interesting stocks on Friday. You should take another 5% and go short. It's not too late. Be wary and keep a close eye. If your shorting go 7% against you, cover.

6. The only "safe" investment is to short financials. You have several choices. You can short

Or you can buy SKF, which is an ETF that shorts financials with a vengeance.

Then again you can choose to short individual financials. My favorite is Lehman.

Or you can choose my second favorite, Citigroup.

Or you can choose a bank of your own choosing that has been heavily involved in home mortgage lending and enjoy the rewards of watching it go to effectively zero -- as happened on Friday with the bankruptcy of IndyMac Bank, the third largest bank failure in U.S. history.

Cockroaches remain the biggest problem. Everyone has them. Read from today's Bloomberg. Here's an excerpt:

July 14 (Bloomberg) -- At an investor presentation in May, Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank's $2.2 trillion balance sheet, the biggest in the U.S., was a cornerstone of his turnaround plan.

Nowhere mentioned in the accompanying 66-page handout were the additional $1.1 trillion of assets that New York-based Citigroup keeps off its books: trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds.

Now, as Citigroup prepares to announce second-quarter results July 18, those off-balance-sheet assets, used by U.S. banks to expand lending without tying up capital, are casting a shadow over earnings. Since last September, at least $100 billion of assets have flooded back onto Citigroup's balance sheet, accompanied by more than $7 billion of losses.

"If you start adding up all the potential exposures, it's a huge number,'' said Sam Golden, a former ombudsman for the U.S. Office of the Comptroller of the Currency who now heads the financial-industry practice for restructuring adviser Alvarez & Marsal in Houston. ``The banks will say that it was disclosed. Investors are saying, `Yeah, but it was cryptic. We really didn't know what you were telling us.'''

U.S. banks already are reeling from more than $165 billion of writedowns and credit losses, so shareholders are wary of unknown obligations that might force them to take responsibility for additional troubled assets. The risks have become so obvious that accounting officials are proposing new rules -- some of which Citigroup opposes -- that would force many assets back onto balance sheets.

Seven of the biggest U.S. banks, including Citigroup, are on the hook for at least $300 billion of credit and liquidity guarantees for off-balance-sheet loans and bonds, according to a June 30 report from consulting firm RiskMetrics Group Inc. in Rockville, Maryland. Such guarantees seemed remote when pledged as an inducement to bond buyers. Now, the first year-over-year decline in housing prices since the Great Depression and rising home-loan, commercial-mortgage and credit-card delinquencies have begun to trigger them.

"You will rapidly realize what a farce these off-balance- sheet things are,'' said Ladenburg Thalmann & Co. analyst Richard X. Bove. "You could pick up a lot of loan losses with the stuff you're putting back on.''

It's impossible to predict what the losses might be from off-the-books assets or liabilities because disclosures are thin relative to what is required for balance-sheet assets, said Neri Bukspan, chief accountant for Standard & Poor's in New York.

"A lot of information tends to disappear or becomes second or third class,'' Bukspan said.

Citigroup has had to bail out at least nine investment funds in the past year, including seven structured investment vehicles, or SIVs, whose funding withered. The bank had to assume $45 billion of securities from those SIVs, which are now included in the $400 billion of on-balance-sheet assets Pandit says he's trying to unload in the next three years.

The bank probably will report a second-quarter net loss of $3.7 billion later this week, according to the average estimate of seven analysts surveyed by Bloomberg. A loss would be the company's third straight and add to $15 billion of losses recorded during the previous two quarters. ...

The article mentions upcoming earnings problems at JPMorgan, Merrill Lynch, Freddie Mac and Fannie Mae. The article says "Mortgage-finance agencies Freddie Mac and Fannie Mae plunged to their lowest in 17 years in New York trading last week, partly on concern that off-the-books assets might swamp their capital."

These wo are probably going to zero, despite government assistance. There's a really interesting piece titled "Long Protected, Fannie and Freddie Ballooned" that talks about how both Fannie and Freddie spent millions to lobby Washington to not regulate them aggressively.

Did he really say this?

"Finance is the art of passing money from hand to hand until it finally disappears," said Robert W. Sarnoff.

The Deer Camp.
Four guys were at deer camp. They had to bunk two to a room. No one wanted to room with Daryl because he snored so badly. They decided it wasn't fair to make one of them stay with him the whole time, so they voted to take turns.

The first guy slept with Daryl and comes to breakfast the next morning with his hair a mess and his eyes all bloodshot. The other two said, 'Man, what happened to you?' He said, 'Daryl snored so loudly, I just sat up and watched him all night.'

The next night it was the second guy's turn. In the morning, same thing--hair all standing up, eyes all bloodshot. The other two said, 'Man, what happened to you? You look awful!' He said, 'Man, that Daryl shakes the roof. I sat up and watched him all night.'

The third night was Frank's turn. Frank was a big burly ex-football player; a man's man. The next morning he came to breakfast bright eyed and bushy tailed. 'Good morning,' he said. The other two couldn't believe it! He looked rested and wide awake. They asked, 'Man, what happened?'

He said, 'Well, we got ready for bed. I went and tucked Daryl into bed, patted his butt and kissed him good night. ...Daryl sat up and watched me all night'.

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.

Go back.