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

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9:00 AM EST Tuesday, July 22, 2008: Hedge funds have made billions this year shorting the banks, Freddie and Fannie and other financial institutions (like AIG). There is more money to be made short-selling toxic financials, despite the new SEC rule limiting naked short selling. A little bank called BankAtlantic has sued analyst Richard Bove for defamation. CNBC discussed the suit and the definition of defamation. Click "Small Florida Bank Sues Dick Bove."

Dick Bove's crime was writing a report called "Who is Next?" His answer Not as many candidates as one would think. He has two ways of figuring who's next:

+ One method is to take the non-performing asset of an institution (non-performing loans, foreclosed assets, and 90-Day past due loans) and divide them by outstanding loans. A ratio above 5% suggests danger.

+ A second approach is to divide an institution's non-performing assets by its reserves plus common equity. A ratio about 40% is in the danger zone.

Here are the banks from the first method whose ratios are above 5%:

Downey Financial Corp (DSL), Corus Bankshares (CORS), Doral Financial Corp. (DRL), IndyMac Bancorp. (IMB), FirstFed Financial Corp. (FED), Oriential Financial Group (OFG), BankUnited Financial Corporation (BKUNA),. First BanCorp (FBP), Santander BanCorp. (SBP), Bank Atantic Bancorp. (BBX) and BFC Financial Corp. (BFF).

Here are the banks from the second method whose ratios are above 40%.

IndyMac Bancorp. (IMB), Downey Financial (DSL), Doral Financial Corp. (DRL), BFC Financial Corp. (BFF), Bank United Financial Corporation (BKUNA), Corus Bankshares (CORS), First BanCorp. (FBC), FirstFed Financial Corp. (FED), Flagstar Bancorp (FBC), and Santander BanCorp. (SBP).

Bove is clearly one of the most talented analysts whose work I've ever read. He's been covering this sector for eons. His report is actually far more optimistic on the banks than on the Federal Government which he clearly regards as clueless. (He's right.) Reading between Bove's lines, you get the feeling that the man is seriously worried about the health of the United States' financial system. Read his words:

It is clear that Fannie and Freddie are too big to fail. They are also too big for the United States government to support. Referring to the numbers above, if the debt and the known guarantees of the GSE’s (Fannie and Freddie) are added to the public debt of the United States, that debt would grow by 104% to an estimated $10.8 billion.

This might cause the value of dollar to decline. It might force interest rates throughout the economy higher, not just those of the mortgage sector. It might force Congress to raise taxes.

Add to the entities that are not big enough to protect Fannie and Freddie, the Federal Reserve. This agency is approximately the same size of each of the GSEs. The Fed has $940 billion in assets. Fannie has $883 billion and Freddie has $803 billion. In theory, the Fed has $6 billion in equity and the GSEs together have $60 billion.

It is for these reasons, the risks to the United States financial system, that the former Fed Chairman, Alan Greenspan, repeatedly went to Congress during his tenure to ask that these agencie be reduced in size. He was supported by Treasury Secretaries Paul O’Neill and John Snow. The current Treasusury Secretary Henry Paulson did not argue for a cutback.

Mr. Paulson has publicly stated that he does not want to see the structure of Fannie Mae and Freddie Mac changed. This view is wrong. It may be Mr. Paulson's way of recognizing that he has no ideas about how to run these organizations other than to argue that big financial companies should fail.

However, the metrics above clearly indicate why these companies must be restructured. They are now so large they dominate activities in the mortgage markets impacting not just financials institutions but also housing, and through housing, the United States economy. ...

It is also clearl that these institutions are so large that they are impacting the funding of the United States government and possibly the value of the U.S. currency. They may have reached a size that allows them to interfere with the normal functioning of the government itself, if the government actually does the unthinkable, and guarantees their debt.

Moreover, I have argued for decades now that these institutions raise interest rates in the overal economy by diverting funds away from commercial activities into housing.

Elsewhere in his report, he has a section on "What should be done with Fannie and Freddie?"

The elements of the dilemma are:

+ The GSEs (Fannie and Freddie) cannot be allowed to fail without putting the financial system of the United States at risk.

+ The Unites States government cann't nationalize these companies are guarantee their debt explicity, and, maybe now, even implicitly.

+ They cannot be allowed to continue in their present form because they have a long record of complete mismanagement and fraud, and they are simply too big.

+ They must support growth in the housing industry.

After reading all this (and yesterday's column), it is clear that the best place for my and your investible funds is in government securities in a safe foreign country in local (i.e. non-US) currency. Australia, with its huge mining and commodity resources, seriously appeals.

To read his entire report, "Who is Next?" by Dick Bove.

Selling stuff from your own website: From reader Michael Marcus,

It's tough to create a website that looks professional (even with the blogging platform). I operate four blogs and many web sites.

A blog is NOT the place to sell things. I highly recommend Yahoo Store for commercial websites, particularly for small business. It's very easy to use and provides professional results, unless you have terrible taste.

They have plans starting at just $20 a month, and can handle dozens or even thousands of products.

Yahoo offers about 20 basic design templates with a huge number of color variations, and the templates can be customized with HTML and graphics and various tweaks as you gain experience. Tech support is available around the clock. Yahoo can provide credit card processing, or you can use the merchant service provider of your choice.

Do not subscribe to QCharts. They claim to be "the definitive state of the art software for serious traders." In fact, their data center crashed this morning because of "a power outage." And they don't have an alternative center. That's why this column is late this morning. I had pretty charts prepared and everything and then these idiots crashed.... Idiots!!!!

The New York Times rejected John McCain's article. They said it was not up to their standard. Frankly, it wasn't. It gave boredom a whole new meaning. But it's ignited explosive charges of media bias in Republican circles. You can read the entire piece in its original form in The Drudge Report.

Questions for Dan Gillerman: Each week in its Sunday magazine, the New York Times asks someone a bunch of questions. This past weekend, the Times interviewed the Israeli ambassador to the U.N.

As the Israeli ambassador to the United Nations, you are about to leave your post after nearly six years and return to Tel Aviv at a time when Iran is releasing touched-up photographs of its latest missile tests and continuing to enrich uranium in defiance of U.N. sanctions. How seriously do you take their threats?

Listen to Ahmadinejad, who denies the Holocaust while planning the next one, who talks about wiping Israel off the face of the map — listen to him, and take him at face value.

But what if it’s all bluster? Maybe he’s just a short man who needs to pontificate.

For too long, much of the world, including Neville Chamberlain, believed that Hitler was just a crazy short man. I don’t think we can afford to do it again.

Considering the long and illustrious history of the Persians, isn’t it unlikely that the Iranians would ever do anything reckless with nuclear weapons?

The real fear is not that the Iranians will be crazy enough or stupid enough to launch a missile at Israel, but that they will have no compunction about providing rogue regimes and terror organizations like Hamas and Hezbollah with weapons of mass destruction.

You recently called Jimmy Carter a “bigot” after he met with Khaled Meshal, the head of Hamas.
Is it true you were reprimanded by the U.S. State Department?

There was no complaint or reprimand. The only reaction I received was very positive.

The Bush administration, it seems, has not done much to advance the Mideast peace process. Would you agree?

I think the key is in the Arab world. The Palestinians’ real tragedy is that they have not been able to produce a Nelson Mandela. Every single day, Muslims are killed by Muslims. You do not see a single Muslim leader get up and say, “Enough is enough.” It’s nearly as if we live in a world where if Christians kill Muslims, it’s a crusade. If Jews kill Muslims, it’s a massacre. And when Muslims kill Muslims, it’s the Weather Channel. Nobody cares.

What about Mahmoud Abbas, the impressively moderate head of the Palestinian Authority?

I am not saying Abbas is a Mandela. But at least he is willing to talk, and the Arab world should stand with him and legitimize him and stand against the extremists. They are not doing that.

Of the 192 ambassadors from as many countries at the U.N., do any of them refuse to speak to you?

I say hello to everyone. The ambassadors who do not say hello to me are the Iranian, the Syrian and the Libyan, whose mere presence on the Security Council is scandalous. No co-op board in this city would even consider letting Libya buy an apartment, yet the U.N. gives it a seat on the world body responsible for peace and security.

What is your security like?

It is very tight 24-7. When my wife and I go to the movies, our main worry is maybe we picked a movie our security men won’t like. Usually two or three bodyguards sit in the row behind us.

Who buys their tickets?

They do. They are having a great time.

You are about to be replaced at the U.N. by Gabriela Shalev, a law professor at Ono Academic College with no experience as a diplomat. Can any regular person be a diplomat?

I’m sure Gaby will do great. Diplomacy is not something you can learn at school or in the foreign service. A diplomat is a person who can tell you to go to hell and actually make you look forward to the journey.

Whom would you like to see win the presidential election in this country?

I don’t think it would be right for me to voice an opinion on American politics. I would be crucified. This is the worst gaffe you can make as a diplomat, to take sides.

You’re wearing a tie decorated with elephants. Is that a sign of your loyalty to the Republican candidate?

No, no, my loyalty is to pink elephants.

Your airconditioner is struggling: You haven't changed its dirty filter, or washed its cooling fins. Ditto for your refrigerator.

Memo to Harry: Do it today.

I'm from Andromeda.
A man is walking down the street in Boca Raton, Florida, when a beautiful woman appears out of nowhere, right in front of him. She is completely naked and has green skin. Stunned, the man starts to speak to her. 'Excuse me, but you just popped out of thin air. How did you do that?'

'Oh,' says the woman, 'I'm from Andromeda, in what you call 'outer space'.'

'Andromeda?' says the man, 'Wow! Do all the women on Andromeda have green skin like you?'

'Yes,' replies the woman, 'everyone is green on Andromeda.'

The man continues to stare and speak. 'Excuse me for asking, but I can't help noticing that you have 12 toes on each foot. Here on Earth we all have five toes on each foot. Do all Andromedans have 12 toes on each foot?'

'Yes, they do,' replies the woman.

'Please, may I ask you one more question?'

The woman nods.

'I also can't help noticing that on each of your hands you have seven fingers, and on each finger is a very large diamond. Here on Earth, diamonds are very rare and valuable. Do all Andromedan women have large diamonds on their fingers?'

'Well, no,' the woman answers, 'not the shiksas.'

How to make love
Last May, Boudreaux married an attractive woman, Lola, half his age.

After several months, Lola complained that she had never climaxed during sex; and according to her Grand Momma, all Cajun women are entitled to a climax once in a while.

So, to resolve the problem, they went to see the large-animal Vet since there was no trustworthy doctor anywhere in Pierre Part. The Vet didn't have a clue, but he did recall how, during the hot summer, his Momma and Daddy would fan a cow with a big towel that was having any difficulty breeding. This would cool her down and make her relax.

So, the Vet told them to hire a strong, virile, young man to wave a big towel over them while they were having sex. This, the Vet said, would cause the young wife to cool down, relax, then climax.

So the couple hired a strong young man from the big city of Houma to wave that big towel over them as the Vet suggested.

After many efforts, Lola still had not climaxed! They went back to the Vet. The Vet said for Lola to change partners and let the young man have sex with her while Boudreaux waved the big towel.

They tried it that night and Lola went into wild, screaming, ear-splitting climaxes, one right after the other for about two and a half hours.

When it was over, Boudreaux looked down at the exhausted young man and in a cocky manner said, 'Now dat, my good fren, is how you wave de towel!'

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.

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