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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, June 20, 2008: I'm not trying to wreck your weekend. Promise. But this continues not to be the time to be in the stockmarket. The best call I ever made was back in November when I said, "Get out now." Since then, I've written about the possibility of a big one-day crash. Now I'm increasingly worried. There are too many bad things piling on top of each other -- from severe inflation to the credit crunch to job losses to huge deficits to the declining dollar. The whole litany. Two pieces are worth reading:

RBS issues global stock and credit crash alert. From the British Telegraph:

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

Such a slide on world bourses would amount to one of the worst bear markets over the last century.

# RBS alert: Quotes from the report
# Fund managers react to RBS alert
# Support for the euro is in doubt

RBS said the iTraxx index of high-grade corporate bonds could soar to 130/150 while the "Crossover" index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.

"I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names.

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr. Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

RBS expects Wall Street to rally a little further into early July before short-lived momentum from America's fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.

"Globalization was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.

US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit.

The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said.

# Morgan Stanley warns of catastrophe
# More comment and analysis from the Telegraph

"The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said.

Kit Jukes, RBS's head of debt markets, said Europe would not be immune. "Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates.

"The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB. Wider spreads between the German Bunds and peripheral markets seem assured," he said.

Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.

How much is your investment worth? From today's New York Times:

That might seem like a simple question on Wall Street, where the price of everything from Apple to zinc flickers across computer screens every day. But inside Bear Stearns, the answer was anything but clear last spring for investors who put their money into two giant, but ultimately doomed, hedge funds.

Two executives who oversaw the funds, Ralph R. Cioffi and Matthew M. Tannin, did not disclose that the funds were plunging in value until it was too late, the authorities say. On Thursday morning, the pair surrendered to federal agents and were charged with nine counts of securities, mail and wire fraud.

Whatever the outcome, the case spotlights one of the most vexing problems confronting Wall Street as the credit crisis plays out: How to value tricky investments linked to subprime mortgages and other risky debt.

As the mortgage market slumped last spring, authorities say, Mr. Cioffi valued one of his funds as having lost 6.5 percent in April. But colleagues at Bear placed far lower values on investments in that fund. They said the fund had lost 18.97 percent.

All across Wall Street, similar battles are playing out inside banks, albeit without the legal drama. Many banks are struggling to value the assets they hold, raising doubt among many investors about those companies’ financial health.

“It’s a humongous problem for Wall Street,” said Michael Young, a lawyer with Willkie Farr & Gallagher. “These days these valuation obstacles are at the core of the write-downs.

Mr. Cioffi and Mr. Tannin are the first Wall Street executives to face criminal charges linked to the credit mess. But many other bank executives are grappling with far bigger financial worries. Worldwide, banks have written down the value of assets by $380 billion, as high-flying markets have crashed back to earth. Some banks suggest that the write-downs have been conservative and that some assets may be written back up in the future. Others say the bill will keep mounting.

Bankers like to say that valuing complex investments is part art and part science, but four large firms have said recently that some employees have not been honest.

In February, Credit Suisse found a group of employees who had bumped up the value of mortgage assets by $2.65 billion during the fourth quarter last year and through the start of this year. The employees were fired.

In March, Lehman suspended two traders on its equity derivatives desk for overpricing bets in the market by tens of millions of dollars. In May, Merrill Lynch disclosed a similar incident that cost it about $18 million.

Morgan Stanley was the latest to find misconduct. On Wednesday, the investment bank said it had lost $120 million this year because of a rogue trader. The trader, Matt Piper, is British and has worked for Morgan Stanley in London for four years. He was suspended while Morgan Stanley continued investigating his trades in credit-index options.

“In this sort of environment of stressed markets, one would expect to see people trying to behave improperly,” said Colm Kelleher, Morgan Stanley’s chief financial officer, on a conference call. “We’re very angry about it.”

The level of losses industrywide is sure to raise questions about how values were assigned in the first place. Banks generally look at prices in the market first. But when no market price is available, they turn to internal computer models. The practice is similar at hedge funds, though in some instances, banks give pricing out to hedge funds, allowing price levels to trickle through in nebulous asset classes like mortgage bonds.

Now, bank executives are increasingly scrutinizing their employees and trying to catch them if they are too optimistic — or downright dishonest — about valuations.

But it is not simply a question of catching rogue traders. Marking the book, as the industry calls the pricing process, has become one of the more controversial topics among finance executives, even in instances where no fraud has been alleged. On Thursday, the chief financial officer of Citigroup said the company would use internal models to price mortgage bundles known as collateralized debt obligations rather than use the dismally low market prices as the only factor. On the other end of the spectrum, firms like Goldman Sachs say that market prices should be the driving factor in pricing.

Different computers models often use different data and produce different valuations. Investors have complained recently that Wachovia and Washington Mutual are modeling values with a housing price index that is more optimistic than the index used by their competitors.

“There’s almost a definitional issue of what you mean by value,” said Rick Antle, an accounting professor at the Yale School of Management. “You’re really kind of behind the eight ball.”

Away from Wall Street, plaintiffs’ lawyers are circling. Suits over losses in funds like Charles Schwab’s YieldPlus Select assert that managers were irresponsible in not knowing how risky the mortgage assets would turn out.

A spokesman for Charles Schwab said the company does not comment on pending legal cases.

“I don’t know if I could tie it to some kind of widespread conspiracy. Certainly the fact that the write-downs have been so massive would mean that somebody was optimistic,” said Ryan Bakhtiari, a lawyer who has filed an arbitration on behalf of investors against Schwab. “It was true from the beginning to the end of the food chain: everybody made inflated money.”

Banks are sometimes forced into write-downs because of selling in the market. Lehman Brothers, for instance, said that the collapse of the hedge fund Peleton Partners in February forced Lehman to write down the mortgage assets it owned similar to ones held by Peleton. Some banks say the write-downs caused by fire sales may be overkill.

“There is a bit of this atmosphere that says, ‘Let’s just mark it down, no one is going to question it if we mark it down,’ ” said Christopher Hayward, the finance director at Merrill Lynch, at a recent industry conference.

Not all banks are eager to take their hits. In the fall, for example, a large city in the Southeast asked Bank of America to write down the C.D.O.’s the city held, said Mr. Bakhtiari, who represents the city but was not authorized to identify it.

Bank of America refused to mark down the C.D.O.’s, Mr. Bakhtiari said, because it did not want to create a mark-down domino effect in its other holdings. A spokesman for Bank of America declined to comment Thursday.

Investors are increasingly complaining that banks have become too opaque about the assets they own and the trades that make — or lose — them money. Financial companies flocked en masse in recent years to trading assets that are far harder to value than, say, shares of Microsoft.

And the problem may be exacerbated by the way traders are compensated. Bank employees from lowly associates to chief executives are paid bonuses each year based on performance. But there is little recourse if their bets lose money the following year, so long as the employee is deemed to have made an innocent mistake.

Some banks are considering expanding the period in which traders are evaluated to longer than a year, said Chip MacDonald, a partner in the capital markets group at the law firm Jones Day.

Switching to a Mac. The best news for Apple is that Bill Gates is leaving Microsoft's future in Steve Ballmer's klutzy hands. Under Ballmer's watch we've had the Yahoo idiocy (think huge lawyer and investment banking costs) and the Vista disaster (think huge customer goodwill loss). From reader, John Buckheit this morning::

Actually all Macs for the past several years come with a two button mouse with scroll wheel. The buttons are not obvious as they are not outdented, but it can respond to separate presses on the left and right. You tell it how you want to respond in mouse preferences. I switched to a Mac last month (haven't used them for ten years) after Vista gave me a hard time. I love my Mac. I have a program called VMWare Fusion that allows me to run Windows applications as windows on my Mac (on it I installed XP). Right now, I just use that for Quicken as the Mac has a terrible version of Quicken. I think all the other Mac software is better.

And so do an increasing number of my other friends.

A smuggler's dream. This was just a blur on the radar of the British Coastguard as it crossed the English channel three times a week. They were so astonished by the speed of the unknown craft, they brought in a special high speed helicopter to chase it. They found drugs, of course. Imagine the thrill of putting the pedal to the metal.

Useful psychology. Writing in the June issue of the Journal of Applied Social Psychology, Colorado State University researchers suggest that people with bumper stickers are more likely to be aggressive and angry people, or at least aggressive and angry drivers.

Angry driver?

Don't forget to download Firefox 3.0. It really is a better browser. Download for free here. And don't forget to get the Showcase add-on, also free and also very useful. Don't be deterred by the slowness of Firefox servers. There's huge demand.

Business trouble
Aaron and Jonathan, two businessmen both in their 80s, meet one day in Brent Cross shopping center Aaron asks, "So nu, Jonathan, what's new?"

"Vat's new, you ask me? Trouble, that's vat's new," replies Jonathan. "Mine secretary is suing me for breach of promise."

"But I don't understand," says Aaron. "At your age, what could you possibly promise her?"

Who's got talent?
Moshe is lucky enough to meet Arthur Rubinstein, the famous concert pianist, and within minutes of meeting him, Moshe persuades him to drop by his house to listen to his wonderful daughter Emma play the piano.

As soon as Emma finishes her favourite piano piece, she looks at Rubinstein and asks, "So what do you think I should do now, Mr Rubinstein?"

Rubinstein immediately replies, "I think you should get married."

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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