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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 Wednesday, March 12, 2008: Dumb me. I forgot to change the date on yesterday's column. As a result, you may have missed it. It contained all the good news from Eaton Vance. Click here.

The Eaton Vance news caused Wall Street phone lines to to buzz with rumors of possible early redemptions by others, including Nuveen. And sure enough, at 7:30 AM this morning, the following came over Business Wire (a way corporations release news). Note today's conference call. Call in 15 minutes early. The call will be`packed.

Nuveen Investments Seeks to Refinance Auction-Rate Preferred Stock Issued by Nuveen’s Closed-End Funds

Goals Are to Reduce the Funds’ Cost of Leverage and Restore Liquidity for Preferred Shareholders

CHICAGO--(BUSINESS WIRE)--Nuveen Investments, Inc., a leading provider of diversified investment services to institutional and high-net-worth investors, today announced that it is seeking to restructure the leverage of the 100 Nuveen closed-end funds that have issued auction-rate preferred stock (ARPS).

Nuveen has arranged new debt financing to refinance a substantial portion of its taxable funds’ ARPS and is in discussions with market participants regarding additional financing. By the end of March, Nuveen intends to begin announcing ARPS refinancings for specific taxable funds, subject to necessary approvals.

“We understand the uncertainty that our closed-end fund shareholders have faced as a result of the unprecedented auction-rate market failures of the past several weeks,” said John Amboian, CEO of Nuveen Investments. “We are seeking to do two things: first, reduce the relative cost of leverage — which has increased due to this historic turmoil in the auction-rate market — by replacing ARPS with various forms of debt and other leverage, including potentially a new form of preferred stock; and second, restore liquidity at par for auction-rate preferred shareholders.”

Nuveen is reviewing alternative methods for refinancing the ARPS with the Nuveen funds’ board on a continuing basis, and the board is fully supportive of Nuveen’s efforts on behalf of common and preferred shareholders.

“Any approach will be subject to significant implementation risk, as its success will depend on market and economic factors beyond our control,” said Amboian. “However, we believe it is important for common and preferred shareholders to understand our thought process, as well as the nature of the actions we are seeking to take and the potential time frames involved.”

Refinancing the ARPS is Necessary to Reduce Relative Cost of Leverage

Nuveen believes that the funds’ ARPS, as presently structured, will likely continue experiencing failed auctions, as market participants have lost confidence in the auction process to provide short-term liquidity. Nuveen believes, however, that at current short-term interest rates, leverage continues to offer the potential to enhance returns for common shareholders.

“We believe that it is in the best interest of our common and preferred shareholders to begin as quickly and prudently as possible to refinance the funds’ ARPS,” said Bill Adams, Executive Vice President, Nuveen Investments. “Our primary goal is to reduce the funds’ current relative costs of leverage, bringing those costs more in line with historical norms and providing liquidity for preferred shareholders.”

Nuveen sponsors 120 closed-end funds of which 100 are leveraged and have a total of $15.4 billion in ARPS outstanding. Of these 100 leveraged funds, 13 are taxable funds that invest in equities, government and corporate debt, or combinations and have $4.3 billion of ARPS outstanding, and 87 are municipal bond funds that invest in municipal bonds and have $11.1 billion in ARPS outstanding.

Potential New Form of Preferred Stock

Nuveen has been working with its banking partners to develop a new form of preferred stock that includes a put feature (Variable Rate Demand Preferred or VRDP), making it eligible for purchase by taxable and tax-exempt money market funds. While Nuveen believes that it will be able to address the principal legal and regulatory issues regarding VRDP issuance, the feasibility of refinancing the funds’ ARPS with VRDP is still contingent on finding third parties willing to provide put commitments at a reasonable cost, on the willingness of money market funds and other investors to purchase VRDP, and on other factors.

“VRDP is a new financial instrument,” said Adams. “Until one or more of our funds successfully issues VRDP, we cannot be certain that VRDP will be a viable form of financing for our funds.”

Refinancing the Taxable Funds’ ARPS

Nuveen plans to refinance the taxable fund ARPS with more conventional forms of debt leverage, and has arranged new debt financing to refinance a substantial portion of its taxable fund ARPS.

“Some of Nuveen’s taxable funds already employ debt leverage such as commercial paper and bank borrowings to complement ARPS,” said Adams. “There are no regulatory impediments to replacing a substantial portion of the ARPS issued by Nuveen’s taxable funds with some form of debt leverage.”

Should VRDP become a viable source of financing, VRDP may be used in the future to replace some or all the taxable funds’ debt leverage depending on each fund’s portfolio composition and investment objectives.

Nuveen anticipates that it will announce refinancing of some ARPS issued by its taxable funds by the end of March, and will seek to complete the refinancing of all the taxable funds’ ARPS within four to six months depending on market conditions. Nuveen cannot assure investors that it will obtain the financing necessary to redeem all outstanding taxable fund ARPS or that, if the financing is obtained, it will be able to complete the refinancings in a timely manner.

Refinancing the Municipal Bond Funds’ ARPS

Nuveen believes that the best solution for the municipal bond funds would be to refinance the ARPS with VRDP. Nuveen is in active discussions with market participants that could provide put commitments for the VRDP. If Nuveen is successful in obtaining put commitments, its goal would be to begin refinancing some of the municipal bond fund ARPS within two to three months. However, Nuveen expects that it will take considerably longer to refinance all of the Nuveen municipal bond funds’ ARPS given the large number of funds involved and the significant amount of ARPS they have outstanding.

Until one or more municipal bond funds are successful in issuing VRDP, it will not be possible to determine whether VRDP can be used to refinance all or a significant portion of the ARPS or in what time frame the refinancings could be completed.

The municipal bond funds may consider using debt leverage temporarily to refinance a portion of their ARPS if the cost of debt leverage can enhance common shareholders’ returns. This could occur if the Federal Reserve continues to reduce the Federal Funds Rate and the cost of short-term debt leverage continues to decline. Debt leverage is generally a less advantageous form of leverage for the municipal bond funds than leverage achieved through issuing preferred stock. This is because dividends on preferred stock are tax-exempt to the holder while interest on debt leverage is taxable.

Nuveen also may refinance a portion of the ARPS by creating tender option bonds (TOBs) from certain municipal bond funds’ portfolios. TOBs are derivative securities created from fixed-rate bonds through a trust arrangement that effectively creates financial leverage within a bond portfolio. TOBs have a put-like feature that makes them eligible for money market funds to purchase. The municipal bond funds’ ability to create TOBs to refinance ARPS will be limited due to the availability of eligible municipal bonds from which to create TOBs as well as other factors.

Nuveen will implement the refinancing of the ARPS on a fund-by-fund basis and will provide periodic updates to shareholders and market participants via press releases and on its Web site at The timing of any fund’s refinancing will depend on a variety of factors, including final fund-by-fund board approval, the nature of each fund’s portfolio, its current leverage structure, the cost of financing arrangements, the feasibility of the VRDP structure, and the ability to obtain sufficient credit capacity, among other factors. No assurance can be given that any of the funds will be able to successfully refinance the ARPS in the stated time frame. A change in market conditions could delay or impair the funds’ ability to refinance some or all of their ARPS.

“Aside from market factors, the ability to achieve our goals will depend on the support of the major broker-dealer firms and other financial institutions that participate in the ARPS market,” said Adams. “We have been working closely with them. Our efforts remain focused on finding the best solution for our common and preferred shareholders.”

Nuveen Investments will host a conference call at 10:00 a.m. Central time on March 12, 2008, to discuss the refinancing of the funds’ ARPS. Nuveen anticipates high call volume and encourages attendees to access the call via the live streaming audio link to facilitate the registration process. Online participants will be able to submit questions. Attendees can access the teleconference on Nuveen’s Web site,, or at (Due to its length, this URL may need to be copied/pasted into your Internet browser's address field. Remove the extra space if one exists.) Attendees who prefer to participate by phone can access the call by dialing (888) 603-6873 or (212) 729-5019 and referencing conference ID number 38446231.

A replay of the call will be available beginning shortly following the call through March 26, 2008. To access the replay, please dial (800) 642-1687 or (706) 645-9291, conference ID number 38446231, or visit the closed-end fund section of the company’s website at Call information and updates will be posted on Nuveen’s new auction-rate preferred resource center at

Nuveen Investments provides high-quality investment services designed to help secure the long-term goals of institutions and high-net-worth investors as well as the consultants and financial advisors who serve them. Nuveen Investments markets its growing range of specialized investment solutions under the high-quality brands of NWQ, Nuveen, Santa Barbara, Tradewinds, Rittenhouse and Symphony. In total, the Company manages $164 billion in assets as of December 31, 2007.

Yesterday's big bounce in stockmarkets: The Fed's announcement of a $200 billion capital injection into the banking system caused a huge 3.6% jump in the Dow, which was (I think) more a reaction to an oversold market and short-covering than any real feeling the Fed's money would do much long-term good. Fact is many commercial and investment banks are still riddled with lousy, worthless assets. They need to be worked through before some degree of long-term stability can be achieved. I do see some hope that some of these monies may eventually work themselves through to redeeming auction rate preferreds. But ARPs redemption was not the Fed's objective.

And while yesterday's bounce in stockmarkets was nice, I am convinced, it is not the beginning of a bull market. There are simply too many dreary economic happenings (including recession and lower corporate earnings -- no need to list them all) that will continue to depress stockmarkets. What should an investor do? My strategy is cash, commodities, mining stocks and strong currencies (like the Canadian and Australian dollar and the Euro. Below is an interesting analysis by Donald Coxe.

You think you have it bad Auction Rate Preferreds? Read this mess, as reported recently in The Star Ledger, a New Jersey newspaper:

Port Elizabeth shipping tycoons caught in a financial storm
Mortgage crisis turns sale of shipping terminal into $286 million disaster

During nearly four decades running one of the nation's busiest shipping terminals, Brian Maher made plenty of investments.

But his biggest gamble may turn out to be the one made on his behalf by Lehman Brothers, the venerable Wall Street investment firm.

In July, Maher and his brother hired Lehman to oversee $600 million, a portion of what they made on the sale of their family's business at Port Elizabeth. Now, seven months later, $286 million of the money is tied up in securities that have plunged in value. The Mahers cannot get to their money and, worse, it may be lost forever.

The Mahers claim in an arbitration filing that Lehman ignored their instructions and put a large portion of the money in risky debt securities just as the market was beginning to crumble.

"It was my experience that when reputable organizations reach an understanding they honor it," Brian Maher wrote in an e-mailed response to questions last week. "Lehman not only violated that understanding, but they did so with two-thirds of the money they were to invest. They betrayed the trust we put in them and their reputation as a responsible Wall Street bank."

Lehman denied the Mahers' allegations, and the two sides are likely to spend the coming year battling it out before a panel of arbitrators.

"These clients had a professional investment adviser with whom we dealt," Lehman's spokesman Randall Whitestone said in a statement. "We believe we have meritorious defenses to this claim."

What happened to the Maher brothers is a story about the times.

As the credit market began to collapse last summer, investors, big and small, got caught in a costly vortex created by a panic not seen on Wall Street since the bursting of the Internet bubble in 2000. Many investors, including some major institutions, had little knowledge of the incredible risk they faced with sophisticated debt securities. Ultimately, the Mahers story puts a human face on a credit crunch that continues to ripple through the economy.

"It's a horrible situation," said Ric Marshall, chief analyst at the Corporate Library, a research firm specializing in corporate governance. "It exemplifies the kinds of complex relationships and credit instruments that these banks have gotten into and why the economy is in trouble.

"It's all part of the same big mess."

Brian Maher, 61, began working at his father's shipping terminal the same year President Richard Nixon started his first term in the White House. Over time, he and his younger brother Basil, 56, built Maher Terminal into one of the most important seaport hubs in the nation.

Last year, 1.4 million containers filled with everything from German beer to blue jeans made in China moved through Maher Terminal. The goods were transferred from ships, loaded onto thousands of trucks and then transported to distribution centers and retailers across the Northeast.

In the close-knit port community, the Mahers were leaders. Brian Maher, tall and reserved, played a prominent role in labor negotiations. The Short Hills resident also introduced pioneering technology to move cargo through the port more efficiently and helped to mediate heated dredging controversies.

Basil Maher, a resident of Chatham who shares his brother's modest style and penchant for privacy, provided a voice for the shipping industry on the national association of waterfront employers. After the 9/11 terrorist attacks, he testified before Congress and was named to a Department of Homeland Security advisory committee to improve protection of the ports.

By 2007, the Mahers operated the last family-owned port terminal in the U.S. Its biggest rivals were international conglomerates with deeper pockets of money to spend on technology and facilities. And with trade levels soaring, port terminals were now hot real estate investments.

Against that backdrop, the brothers announced in July an agreement to sell the 445-acre family business to a subsidiary of Deutsche Bank, a titan of Germany's financial services industry. The sale price was never publicly disclosed.

One provision of the deal provided a glimpse into the character of the men who sold the business: The Mahers distributed a portion of the proceeds, "sharing bonuses" to each of their 246 employees.

The story of what happened next is based on filings with the Financial Industry Regulatory Authority, the largest non-government regulator of Wall Street brokerage firms, and conversations with individuals familiar with the situation.

Like a lawsuit, the claim represents only one side of the story. Lehman is expected to file its response to the claim next month.

When the sale of their business appeared imminent, the Mahers turned to John Liu, an investment banker who helped with the transaction, for some guidance. Liu, co-head of U.S. mergers and acquisitions and chief financial officer at Greenhill & Co., helped them to choose two investment firms and a basic investment strategy.

Liu said yesterday he was trying to help the Mahers by referring them to Lehman and it turned out to be "disappointing." He declined further comment.

The Mahers emphasized to Lehman they wanted their investments to be in short term, tax-exempt municipal bonds or similar securities. Eventually, they put $600 million into a Lehman account, while a separate undisclosed amount of proceeds from the sale went into a similar account with UBS.

The Mahers said in their complaint that UBS followed their instructions.

In some ways, the Mahers were like lottery winners who suddenly receive a windfall. The money could not simply be deposited in the bank; it had to be invested and managed. Yet, the Mahers had not really mapped their plans for the future, except to create a corporation known as Essex Equity.

"Essex Equity was set up to provide Basil and me with a platform to organize our affairs and from which we could explore opportunities," Brian Maher said in an e-mail. "We had no specific investment plan at the time of the sale."

The Mahers claim Lehman's money managers were negligent and violated federal securities regulations when they placed more than half of the $600 million in so-called auction rate securities allegedly tied to two now-troubled bond insurance companies, MBIA and Ambac Financial.

The outcome of the dispute, experts said, may hinge on whether the Mahers can prove the choice of investments was a deliberate attempt by Lehman Brothers to dump securities on an unwitting client as the sub-prime mortgage crisis boiled over last summer.

For years, auction-rate securities were considered good investments for institutions and wealthy individuals who wanted to park their money for a short time and still earn an attractive interest rate. They were seen as alternatives to money market funds and short-term commercial paper.

They were also considered safe.

Auction-rate securities are debt instruments -- issued by entities such as municipalities, hospitals and housing finance agencies, as a way of generating money. While they are rated as long-term bonds, they are sold as short-term securities at periodic auctions, hence their name.

The auctions occur as frequently as every seven days when the interest rate is reset. Every time an auction is held, investors are able to pull out their original investment plus interest as other buyers replace them.

While the high yield and ability to access the money are benefits, the single biggest risk is that an auction will fail -- that there won't be buyers to replace the original ones. When that happens, the value of the security can plunge. But it's so rare as to be almost inconceivable.

That's why no one was prepared for what happened last summer when subprime mortgage market collapse.

The lion's share of the Mahers money, according to the claim, was invested in auction-rate securities tied to the bond insurers MBIA and Ambac Financial.

Bond insurers write policies ensuring lenders will be reimbursed if the borrower can't pay back the money, and they play a critical role in the debt market. State governments, for instance, cannot raise money by selling bonds without insurance.

But over the last few years, the insurers entered into riskier investments such as subprime mortgage securities. Now, they're under fire from debt rating agencies, who fear they don't have the cash to cover claims.

In early August, the Mahers claim Lehman used nearly $168 million of their money to buy auction-rate securities despite an earlier failed auction, which prevented a set of similar corporate securities from being sold, according to the Mahers claim.

Around Aug. 14, Lehman tried to sell a security held by the Mahers. That auction also failed. Four days later, the Mahers allege Lehman reinvested more than $57 million despite three more failed auctions.

Lehman declined to comment on specific allegations.

By late August, roughly a month after the account was opened, John Liu, the Mahers advisor-friend, received a monthly portfolio statement from Lehman detailing some of the investments. In two e-mails to Will Gourd, one of Lehman's money managers, Liu complained about the firm's choices.

In the claim, the Mahers said Lehman liquidated a small portion of securities in their portfolio, but "either did not or could not liquidate a majority of them, as the auctions associated with them failed and continue to fail."

At least one of the securities that could not be sold, dubbed Double Oak Trust Series 2007-1, was insured by MBIA.

What that means for the Mahers is this: $286 million remains tied up in securities that cannot be sold because no one wants to buy them. But what's worse, no one is certain what the securities will be worth once the credit crisis passes.

Typically, brokerage firms require investors to sign an agreement saying they will arbitrate any problems. So, it will be left to the arbitrators to decide whether Lehman did something wrong or whether the Mahers were swept up in a set of circumstances that turned what would be an ordinarily safe bet into a bad one.

"It's likely Lehman is going to tell a different story," said Thel, the Fordham professor, before adding, "If the facts are as they allege, they (the Mahers) have a substantial chance of prevailing."

Charles Jones, a finance professor at Columbia's Graduate School of Business, said arbitrators will take into account what was promised by Lehman and the sophistication of the Mahers.

"They could be sophisticated businessmen, but that does not always translate to sophistication about investments," he said. "It will depend on a whole set of factors that are impossible for us to see as outsiders."

Right on the Big Picture Outlook: Donald Coxe, Global Portfolio Strategist of BMO Financial Group, is one of a select group of analysts that have been remarkably right on the “big picture” outlook for some years. These points come from a web site called (of all things) Investment Postcards from Cape Town -- that's South Africa. I like what Coxe writes:

1. Long-term investors should remain heavily overweight commodity stocks, including the base-metal stocks. As the bear market grinds on, use days of stock market weakness to add to commodity stock exposure. They not only remain the asset class with the best earnings outlook, but also the asset class that is least understood by conventional asset allocators, who still see them as cyclicals dependent on OECD growth.

2. In the near term, the golds will continue to outperform stock markets and to act as a form of hedge against two kinds of shocks – financial panics and inflation shocks.

3. Remain heavily underweight bank stocks, and financials tied to “Jurassic Park Avenue” excesses. Within the financial group, overweight high-quality fire and casualty companies, life insurers, and asset management organizations.

4 Retain above-average cash positions, preferably in strong currencies.

5. Where possible, borrow in dollars and invest in assets denominated in strong currencies.

6. The Canadian dollar remains the Western currency with the best fundamentals. Canada’s problems arise because the Great Lakes are an insufficient barrier to the flow of bad economic and financial trends from the South.

7. Within the commodity groups, continue to emphasize investment in companies with long-duration unhedged reserves in the ground in politically secure regions.

8. The growth of sovereign control of energy assets means that the supply-side response to record-high oil prices will probably be inadequate to meet relentlessly growing global demand. Too many Third World governments with rich oil reserves have too many other demands for cash to reinvest heavily for the long term in new production. Retain exposure to the shares of producing Alberta Oil Sands companies with reserves that could outlast this century.

9. Long-term-oriented investors should use any temporary pullback in base metal producers to build their portfolios for the Final Movement of the Sonata – which will be the longest and loveliest performance of metal music in history.

10. The Treasury yield curve is now in recession mode – low yielding and upward sloping. It is of investment merit only for those who expect a long, deep recession. The Ten-Year note, with a negative real yield of 50 basis points, should appeal only to those who believe the recession will be accompanied by deep deflation. Oddly enough, credit spreads, though they have widened from their record-low levels, do not discount any recession at all.

We think bond investors should go for short- and medium-term high-quality non-Treasury paper – preferably in currencies other than greenbacks.

11. Defence stocks remain attractive, even if Democrats win it all in November. The next president may well choose to speak more softly than the incumbent, but if he or she doesn’t carry a big stick, the jihadists won’t listen.

Click here for Coxe's most recent webcast, dealing with the case for commodities and resources stocks.

Time to retire to Alaska?
Tom had been in the liquor business for 25 years.

Finally sick of the stress, he quits his job and buys 50 acres of land in Alaska as far from humanity as possible.

He sees the postman once a week and gets groceries once a month. Otherwise it's total peace and quiet.

After six months or so of almost total isolation, there's a knock on on his door.

He opens it and a huge, bearded, unwashed man is standing there.

Name's Lars, your neighbor from forty miles up the road. Having a Christmas party Friday night. Thought you might like to come. About 5:00.'

'Great', says Tom, 'After six months out here I'm ready to meet some local folks. Thank you.'

As Lars is leaving, he stops. 'Gotta warn you, gonna be some drinkin.'

Not a problem,' says Tom. 'After 25 years in the business, I can drink with the best of 'em.'

Again, the big man starts to leave and stops. 'More 'n likely gonna be some fightin' too.'

'Well, I get along with people, I'll be all right. I'll be there. Thanks again.'

'More 'n likely gonna be some wild sex, too.'

'Now that's really not a problem,' says Tom, warming to the idea. 'I've been all alone for six months! I'll definitely be there. What should I wear?'

'Don't much matter. Just gonna be the two of us.'

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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