Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
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:
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.
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.
You should not be invested in any hedge fund that uses leverage.
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.
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.
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.
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.
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
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.
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.''
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
of information tends to disappear or becomes second or third class,'' Bukspan
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
Protected, Fannie and Freddie Ballooned" that talks about how both
Fannie and Freddie spent millions to lobby Washington to not regulate them aggressively.
he really say this?
is the art of passing money from hand to hand until it finally disappears,"
said Robert W. Sarnoff.
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
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
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