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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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8:30 AM EST Friday, July 25, 2008: It was hard tennis. I lost. I'm drowning my sorrows with a Coke and a slice of pizza. The pizza shop owner has the TV set tuned to CNBC. It used to be his favorite channel until he lost all his money owning George Gilder's tech stocks in the Tech Wreck of 2000-2002. Now he watches CNBC out of perversity. I'm watching. It's 4:40 PM or so. I hear these words:

Moodys today gave the Federal Government a triple AAA rating.

My brain is reeling? Wasn't Moodys the rating agency that gave all the financials, including Freddie and Fannie, the great ratings before they all collapsed in a sea of red ink?

I go to the Wall Street Journal's MarketWatch and I find this. (Remember I don't make this stuff up.)

SAN FRANCISCO (MarketWatch) -- Although extending aid to Fannie Mae (FNM) and Freddie Mac (FRE) could test the resiliency of the U.S. government balance sheet, it would not endanger the U.S. government's strong Aaa rating, Moody's Investors Service said Thursday. The prospective issuance of bonds by the Treasury to cover Fannie and Freddie's losses would result in a only small percentage increase in gross bond issuance, and a relatively small increase in federal government debt, said Steven Hess, Moody's vice president, in the report. At the same time, Moody's noted that there are other risks to the government's balance sheet although they aren't likely to be realized. Nonetheless, the ratings agency believes the government has sufficient financial flexibility to deal with these risks and maintain its Aaa rating.

We're getting into some really serious territory when we starting betting with the finances of the U.S. Government to save two corrupt and grossly mismanaged private companies -- Fannie and Freddie As I write this I'm starting to shudder. Are we really doing this?

Yesterday the New York Times ran a long piece titled House Approves Sweeping Effort to Help Housing. In the piece were the following words:

Perhaps most significantly, the legislation hardens the government’s long-implicit assurance that it would step in to rescue the two mortgage giants who together own or guarantee about $5.2 trillion of the nation’s $12 trillion in mortgages. Currently, Fannie Mae and Freddie Mac guarantee financing for about 80 percent of new mortgages.

To accommodate a potential rescue for Fannie Mae and Freddie Mac, the bill raises the national debt limit to $10.6 trillion, an increase of $800 billion. (That's 8.2%.)

The Treasury Department has said it hopes never to use the authority to spend unlimited taxpayer funds — perhaps hundreds of billions of dollars — to maintain the solvency of the mortgage giants because they are in sound financial condition. Still, shares in the two companies rose sharply on Wednesday in a sign of the market’s positive view of having a federal rescue plan in place. (The following day -- Thursday -- they plummeted.)

The independent Congressional Budget Office said on Tuesday that the rescue plan for the mortgage finance companies should appear on the federal budget as a $25 billion charge in fiscal years 2009 and 2010, but officials conceded that this was only an estimate based on complicated probability calculations.

What is Washington smoking? Washington believes Fannie and Freddie "are in sound financial condition." How can anyone honestly know? The one and only thing we know about this financial crisis is that it's riddled with cockroaches. The losses and the writedowns just keep on coming. Many of the mortgages Fannie and Freddie own are still low-monthly payments (e.g. interest only). These are about to ramp out and then become unaffordable, at which point hundreds of thousands more will abandon their homes. Mr. Market is saying they're not in sound financial condition. Yesterday, Fannie's stock fell 19.9% and Freddie's 18.4%.

Let's go back to my column on Tuesday. I talked about an important report on bank finances called, "Who is next?" by Richard (Dick) Bove. As I wrote on Tuesday:

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 (Government Sponsored Entities, i.e. Fannie and Freddie) are added to the public debt of the United States, that debt would grow by 104% to an estimated $10.8 trillion.

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 (Fannie and Freddie). 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 agencies be reduced in size. He was supported by Treasury Secretaries Paul O’Neill and John Snow. The current Treasury 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 financial institutions but also housing, and through housing, the United States economy. ...

It is also clear 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 overall 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 cannot nationalize these companies nor guarantee their debt explicitly, 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.

Market at bottom. Don't believe it. That's the title of Jon Markman's interesting piece on MSN Money. He wrote the piece on Wednesday, before yesterday's selloff. It begins:

The recent updraft is probably an illusion. There's no indication the bear market has ended and plenty of evidence it has a long way to fall yet.

Investors praying that the most inept federal government since the Hoover administration has engineered an end to the credit crisis with a plan to rescue Fannie Mae and Freddie Mac may be on track to see their delusions shattered.

You can read his entire piece on MSN Money. It's seriously depressing, but I suspect he's right. He concludes:

To give you an idea of how persistent a bear market can be, consider that Cisco Systems, Intel and Sony, three of the finest, strongest companies in the world, have never actually left their 2000 bear markets. We'll probably look back at the financial stocks in five years and say the same thing.

How to get 8% on your money in Australia: This morning I am moving $1 million to Australia. I will move more on Monday as I free up more monies. Obviously I am seriously worried about two happenings: First, a 10% to 20% one-day drop in U.S. stockmarkets and second, a 20%+ overnight decline in the value of the dollar.

In yesterday's column, I wrote that big, stable Australian banks are paying 8% for on-demand money. There are two benefits to doing this: First, the interest rate is far better than here. Second, owning Australian dollars is a good hedge against the U.S. dollar and what further idiocies Washington might do to our dollar, and worse, the day sentiment turns against the U.S. dollar, just as it turned against Bear Stearns and IndyMac Bank (and others). Washington believes printing money is the panacea to our every problem. It gives insanity a whole new meaning.

I spent yesterday checking the Australia story. It gets better. Australia only taxes non-residents (that's you and me) at the rate of 10% on our interest income. That brings our rate of return down to a still-hgh (by U.S. standards) 7.2%. Even better, the taxes you pay in Australia are a deduction on what you owe here in taxes.

You need to find a banker in Australia. That's not difficult if you have a friend there. If you know me (and send me an email) I can introduce you. Just remember, I'm not a banker. I'm not a financial adviser. I'm not making a nickel on this. There is a form to fill out. It's called "Reference by An Acceptable Referee." It's a Commonwealth Government Requirement. That's what the form says.

For information on Australian taxes, go the Australian Taxation Office. That's where you'll see the 10%.

Exotic foreign cars have their odd idiosyncrasies. It all started when we left my wife Susan's E500 2004 Mercedes wagon in the garage for six weeks. When came back, the parking attendants said the battery was flat. This was common, they said, among expensive exotic cars like Mercedes, BMW and Audi. They had electronics which drained the battery continuously -- whether the car was moving or not.

Now it turns out we're going through tires like there was no tomorrow. I query our local mechanic. Expensive exotic car makers typically put "performance" tires on their cars. The original tires on the car had a treadwear rating of 280. They're optimized for driving on autobahns at 130 MPH. We replaced them with tires with a treadwear rating of 440, which will last much longer and will not affect handling one iota, since we're not driving at 130 mph. You can read about treadwear on Wikipedia

It turns out that our Mercedes also came with "low profile tires." These run well on German autobahns, but are lousy on New York City streets, where the potholes make huge dents in the metal rims, causing the tires to lose their air and the need to regularly replace the rims.

I drive a 2002 Subaru Legacy Outback wagon, which can sit for three months in the depth of the winter without losing its charge. It has normal tires and normal rims.

I get a lot of junk mail. I delete them instantly. But yesterday's was the first "keeper." The headline read "Angelina Jolie Set to Destroy Own Vagina." Inside was a photograph of an attractive topless lady with the words "Watch The Video." Had I clicked, I would have loaded an awful virus.

Once again, don't open email attachments.

The joy of filters: Central airconditioners have two parts that need cleaning -- their air filter and their condenser. It's easy to replace the air filter. To clean the condenser requires a man with a power hose and soap. I dropped by Home Depot to buy a washable air filter. They didn't have a filter called "washable." But the nice man suggested an alternative: buy Home Depot's one-time use filter and "wash it."

Oh yes, the moral of this story. Air conditioners work much better (and much cheaper) when you change (or wash) their filters and clean their condensers.

P.S. You can get washable filters at Air Filters, Inc.

The joy of being 96
Just before the funeral services, the undertaker came up to the very elderly widow and asked, 'How old was your husband?'

'98,' she replied. 'Two years older than me.'

'So you're 96,' the undertaker commented.

She responded, 'Hardly worth going home, is it?'

The joy of being 104
Reporters interviewing a 104-year-old woman: 'And what do you think is the best thing about being 104?' the reporter asked.

She replied, 'No peer pressure.'

Times have changed. This one used to be Bloomingdales.
An elderly woman decided to prepare her will and told her preacher she had two final requests. First, she wanted to be cremated, and second, she wanted her ashes scattered over Wal-Mart.

'Wal-Mart?' the preacher exclaimed.

'Then I'll be sure my daughters will visit me.'

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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