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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 Monday, June 16, 2008: Lehman Brothers rose $3.11 on Friday. On Wall Street they call that "a dead cat bounce." I'm still short. LEH remains the classic cockroach stock. See below.

Except for special situations, cash remains king. I'm fearful of two things:

1. Funds going increasingly to cash and dumping what they own. We've seen this in biotech where big owners have sold big.

2. What might happen if margin calls start to accelerate, and broad stock dumping really happens.

Am I forecasting a 20% drop in one day? No. Am I fearful one might happen? Yes.

Wall Street is a product machine. It creates products which it sells to us -- from little you and me to big institutions. All of us increasingly don't understand what the products really are, how they work are or what they're backed by. Still, we buy them because we're lazy, trusting and greedy. (I speak from personal, painful experience.) The new products, and the new "creative" ways of using them (like securitization and high leverage), inevitably blow up. Hence, we roll from one financial crisis to another. A great summary of what's happened and what will happen is in this new book:

Remember Long-Term Capital Management? A big hedge fund blows up. The Fed steps in and organizes a rescue. Why? Writes Morris:

Although the world largely accepted the party line that a disorderly failure would be violently disruptive, many remain skeptical. An equally plausible reason, perhaps, was to avoid a full airing of the real scandal: that at the very epicenter of American finance, a tiny group of people were able to borrow hundreds of billions of dollars from banks, and that neither the banks, nor the banks' regulators, had any idea how much they had borrowed or what they were doing with it.

Morris is not optimistic. He writes:

The current crisis is often compared to Long-Term Capital Management debacle, which rattled global finance in 1998. But that involved about $100 billion in positions, with no more than $10 billion or at risk in a worst case. It was settled when New York bankers met in the New York Fed's boardroom and agreed to cough up $3.6 billion. Today, the at-risk values are at least 100 times higher. There is no room big enough for a meeting, and no list of who should be at the table.

Morris believes that Wall Street has not admitted the scale of its problem and has not purged "absurd valuations, phony triple-A ratings, inflated balance sheets and the hidden liabilities that are marbled though financial balance sheets."

He figures we're facing a trillion dollar writedown. (Right now we're less than halfway there.) Personally, I think it will be more. As to the lessons which I see after reading his book:

1. Stay away from financials. Don't even think they're cheap. Read below about catching falling knives.

2. Stay away from companies masquerading as industrial, when they're really financial. The prime example is GE.

3. Stay away from things that rely on huge dobs of borrowed money. I hope no one who reads this column is invested in a hedge fund that uses borrowing. I'm just checking. I hate leverage. I hate borrowing. It puts you at someone else's mercy.

4. Stay away from Wall Street's new products. My mantra is simple: If I don't understand it, I say "No." Take private equity funds. Writes Morris:

The private equity kings insist that they are management wizards, not financial engineers. But at least in its most recent phase, the numbers show that the private game, like subprime CDOs (collaterialized debt obligations), is just another arbitrage on cheap money and rising asset markets. Researchers at the University of Pennsylvania's Wharton School have built a large database of private equity returns from reports furnished to clients. Fund partners (i.e. Wall Street) earned twice as much money from transaction fees and fixed fund management fees as they did from deal outcomes. The rewards, in other words, flowed to people who excelled at raising funds and executing deals..." And not to you and I.

You should read Morris' book. It's good, short history. The events since he wrote (late last year) -- the increasing cockroach-like writedowns -- confirm his predictions.

Falling knives are dangerous. Catch a falling knife: I haven't done a big study but it seems to me that all the people and institutions who stuck their money into financials to save them in recent months are now facing substantial capital losses as the market has continued to slide. Take Washington Mutual, the nation’s largest savings and loan.

The company received a $7 billion capital infusion in April. The investors paid $8.75 for each WaMu share — 26 percent below the stock’s price the day of the deal. You'd think that was a deal? Wrong. On Friday the stock closed at $6.65. They've lost 24% already.

Talk about the Lehman Brothers reverse Midas touch -- In which everything turns to dodo. There are two things you'll learn from this story: First, the rating agencies generally change their mind after the event -- good or bad. Second, the much of what Wall Street creates sucks. From Australia comes another delicious LEH story:

June 13
EQT Lehman Brothers fund to wind down slowly
(from InvestorDaily)
Fund to get new manager

Investors may have to wait a while to recoup their investments due to current credit market conditions.

Equity Trustees (EQT) has indicated there is no set timeframe in which investors will be able to recover their investments from the terminated EQT Lehman Brothers Wholesale High Income Fund.

The EQT Lehman Brothers Wholesale High Income Fund was terminated in May. A month later United States securities firm Lehman Brothers closed its Australian funds management arm, Lehman Brothers Asset Management (LBAM).

EQT will continue to manage the fund for the next 45 days, after which time another as yet unknown manager will take over, EQT business development manager Boyd Peters told an adviser briefing on Friday.

The fund will remain open for as long as it takes to sell the assets at a reasonable price, Peters said.

Despite the tough past 12 months in credit markets the fund will take a longer-term view with winding down assets; LBAM chief executive Paul O'Halloran still believes " the credit in these portfolios is strong".

Credit markets have seen some improvement over the last two months and the markets should recover enough in the next 6 months to warrant selling off assets, O'Halloran said.

The fund's assets are expected to continue to generate income and investors can expect to receive distributions, according to EQT and Lehman Brothers.

Following the closure of the EQT Lehman Brothers High Income, research house Standard and Poor's has withdrawn the fund's three-star rating, while Morningstar dropped its rating from recommended to avoid.

May 21
Planners may face loss on Lehman fund, Follows asset management closure (from InvestorDaily)
Financial planners may be forced to take losses as Lehman Brothers begins selling assets in its income fund.

Financial planners may be forced to take losses as Lehman Brothers begins liquidating its local flagship product, the EQT Lehman Brothers High Income Fund.

The potential losses may arise after the New York-based investment bank closed its Australian asset management division earlier this week, effectively leaving no-one to manage the fund.

Lehman Brothers' local operations were based in Melbourne and known as Lehman Brothers Asset Management (LBAM).

LBAM chief executive Paul O'Halloran and company portfolio manager Damon Shinnick were made redundant by the group's United States parent.

EQT [listed-firm Equity Trustees] distributed the strategy, which had $150 million under management, through its platform and most of the inflows came from advisers.

"Our main interest is managing things in a fair and equitable way for the unitholders," EQT managing director Peter Williams told InvestorDaily.

Financial planners who made an investment at the start of the six months to April 30 might get around 7 per cent less back, Morningstar data showed.

An investment made one year ago might be worth 5 per cent less, but an investment made five years ago might be worth around 37 per cent more, it showed.

Lehman Brothers, the parent of LBAM, ordered the closure as part of its plan to cut more than 5000 jobs - 15 of them in Australia - in response to the "challenging market environment".

"It is a shame because we thought O'Halloran and Shinnick had a pretty good process and were good investors," Morningstar head of adviser and research Anthony Serhan said.

"It is a loss for the industry and it will be a disappointment for many planners."

Morningstar will change the rating of the fund to avoid from recommended, while Standard and Poor's withdrew its former three-star rating.

Lehman Brothers is facing a lawsuit from Wingecarribee Shire Council for allegedly putting money into failed sub-prime products.

Our family loves artist Tom Otterness. This is a piece he did for someone's backyard as a private commission. It's not small. Check out the kid in the center.

This is one of the legs. Tom does these wonderful little figures.

This is an installation in the New York City subway. It's in the 14th Street station. Every New Yorker has heard stories about the neighbor who went to Florida, brought back a baby alligator, grew it in his apartment until it became too big, then flushed it down the toilet into New York's sewage system.

These are also in the 14th Street subway station. A fellow avoiding paying the toll to ride the subway is caught by a policeman.

Breast exam -- part 1
A woman, in her fifties, is at home happily jumping unclothed on her bed and squealing with delight.

Her husband watches her for a while and asks, "Do you have any idea how ridiculous you look? What's the matter with you?"

The woman continues to bounce on the bed and says, 'I don't care what you think. I just came from having a mammogram and the doctor says that not only am I healthy but I have the breasts of an 18 year old.'

The husband replies, 'What did he say about your 55 year old ass?'

'Your name never came up,' she replied

Breast exam -- part 2
A woman and a baby were in the doctor's examining room, waiting for the doctor to come in for the baby's first exam. The doctor arrived, and examined the baby, checked his weight, and being a little concerned, asked if the baby was breast-fed or bottle-fed.

'Breast-fed,' she replied.

'Well, strip down to your waist,' the doctor ordered.

She did. He pinched her nipples, pressed, kneaded, and rubbed both breasts for a while in a very professional and detailed examination. Motioning to her to get dressed, the doctor said, 'No wonder this baby is underweight. You don't have any milk.'

I know,' she said, 'I'm his Grandma, but I'm glad I came.'

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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