Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST Friday, March 14, 2008: They're
coming out of the woodwork: Investors who find our ARPs attractive. They like
the much higher net after tax returns -- higher than 10-year treasurys (3.53%)
and higher than 30-year Treasurys (4.45%). For example, my Nuveen triple tax-free
ARPs are presently yielding 4.3%. They're tax-free of city, state and Federal.
Treasurys are only tax-free of local taxes. You have to pay federal tax, which
in my case is around 28%.
investors also like the "maturity." They see a 9-to-12 month window
by which time all ARPs will be redeemed, or converted into something liquid,
i.e. something that can be sold.
I could sell my ARPs. But now I can, I won't. For one, I like the yield. For
me, my 4.3% is equivalent to 7.2% pre-tax, which I believe will
be larger than what I could earn safely in the presently awful stockmarket,
which is being propelled downwards by the presently awful economy.
economy is now in recession, according to the Wall Street Journal --
Economists in Survey
Say Recession Is Here and in a total mess by the New York Times
Hammered by Toxic Blend of Ailments. There is also an interesting video
from 8/28/2006. Click
When things look
the bleakest, the stockmarket starts to pick up. The stockmarket is a "forward-looking
animal" according to the gurus on Wall Street. It's looking 9-to-12 months
out. That's the theory. But this is not a normal economic mess. This
one is seriously hurting the consumer, who accounts for a gargantuan 70%+
of the economy. The consumer faces major problems -- from the declining value
of his house, (which he can no longer borrow against), from the lack of jobs,
to the escalating inflation -- it costs a lot more to just live these days.
$4 a gallon for regular gas looms.
I don't want to
depress you as we go into a glorious weekend. But you need to spend some time
this week asking yourself "How am I prepared to ride out this recession?"
1. Do I have sufficient
cash, if I get canned?
2. Are the few stocks I still own recession-proof?
3. What have I
done to reduce the expenses in my business or my personal spending?
4. What can I
do to make my clients/customers' lives easier? The key is not to lose them.
5. Am I doing
sufficient exercise to reduce the stress I'm likely to face in coming months?
problem with today's economy: It's not just
one thing. Maybe we'll call it The First Cockroach Recession. As one problem
gets solved, another emerges. When I kill one cockroach, days later another
appears. Not getting the message? Read this piece from today's Economist:
If at first
you don't succeed
The Fed tries to flush out the credit markets once again—but the stink lingers
Illustration by Satoshi Kambayashi
THIRD time lucky?
The credit markets almost seized up in August, December and again this month
and on each occasion the Federal Reserve has led a rescue attempt (see article).
Its latest effort led to a bout of euphoria on Wall Street, with the S&P
500 index managing its biggest one-day increase in over five years on March
11th. But every time the Fed has unblocked the drains somewhere in the credit
markets, they have bunged up elsewhere. Sure enough, on March 13th panicky
investors sent the dollar tumbling below ¥100 and pushed gold above $1,000
The fear is
that the financial markets have entered a negative spiral, the obverse of
the kind of euphoria that drove dotcom stocks to absurd valuations in 1999
and early 2000. Back then, investors scrambled to buy shares regardless of
their price. This time round, they are being forced to sell bonds and loans,
whether or not they believe the borrowers will eventually repay. The problems
are exacerbated by the demise of the securitisation market, and fears about
counterparty risk. Both those factors are making banks less willing to lend—even
to worthy borrowers. They will become ever more cautious the deeper America's
economy tips into recession.
Debt, such an
exalted financing tool a little more than a year ago, is now a four-letter
word. In the boom, banks were able to lend money via bonds and loans and then
unload the debts in the form of structured products. Even when yield spreads
narrowed, investors simply spiced up their portfolios with more debt to produce
higher returns. But once the problems in the subprime market became clear,
the appetite for structured products collapsed, and the process went into
the problem is particularly intense in an area of the market that, in theory,
should have been the safest; paper given AAA-like ratings by the agencies.
There are no longer end buyers for this paper. The yields on such assets are
too low to make them of interest except to geared investors. And there is
scant lending available, even if investors wanted to gear up their portfolios
in these volatile times.
Also, the investment
banks that deal with hedge funds are tightening lending standards. This may
involve higher margin payments or a bigger “haircut” shaved off the value
of assets pledged as collateral. According to one banker, even government
bonds pledged as collateral are facing haircuts for the first time in 15 years.
That may make
sense for each individual bank, but at the systemic level it makes matters
worse for everyone. Hedge funds are being forced to sell their best assets
to meet their debts, adding to the air of crisis. A dramatic case is Carlyle
Capital, a bond fund run by the Carlyle Group, a private-equity firm (see
article). On March 12th it said it had defaulted on $16.6 billion of debt
and expected to default on the rest, after failing to reach an agreement with
its creditors. The fund used gearing of 32 times to buy AAA-rated paper and
has had to sell assets to meet margin calls. Some of that debt was issued
by Fannie Mae and Freddie Mac, the two quasi-governmental agencies that guarantee
mortgage debt. As Carlyle sold, the prices of their debt fell, increasing
concern about their finances (see chart 1). In early March the spread between
yields on Fannie Mae debt and Treasury bonds was higher than at any time since
This helps explain
why the new Fed facility allows primary dealers to pledge AAA-rated mortgage
securities as collateral for borrowings. If confidence can be restored in
that part of the market, perhaps the negative spiral can be broken.
by no means convinced, however. Rob Carnell of ING described the measures
as a “palliative to market fragility, rather than a cure.” Nor was the initial
reaction in parts of the credit markets particularly encouraging. The cost
of insuring against corporate-bond defaults did not fall sharply (see chart
2). Meanwhile, the interbank rate needed to borrow euros for three months
hit 4.6%, the highest level since January and more than half a percentage
point above official euro-zone rates. That indicated banks still preferred
to hold cash rather than lend it.
is a natural consequence of the breakdown of the securitisation market. Banks
know that it will be more difficult to offload any new loans. They are also
saddled with old loans, either because they have been unable to sell them,
or because they have taken structured investment vehicles onto their balance
sheets to protect their reputations.
When banks get
more nervous about lending, that tends to have wider consequences. Companies
will find it more difficult to borrow; weaker ones will accordingly get into
trouble. According to Matt King, a credit strategist at Citigroup, the single
biggest factor influencing corporate default rates is banks' willingness to
extend credit—as measured by the lending surveys of the Fed and the European
Central Bank. Nor is it likely that the full impact of tighter lending standards
on consumer demand has been felt.
of Absolute Strategy Research, a consultancy, reckons that the credit crisis
has also undermined the willingness of foreigners to finance America's current-account
deficit. Data show that overseas investors own some $1.5 trillion of asset-backed
debt, investments that have gone badly wrong. They will not be willing to
lend in the same way again.
And the effects
of the crisis are showing up in some unexpected places. One of the latest
casualties is the sewer system of Jefferson county, Alabama. The county, which
includes the city of Birmingham, had agreed to interest-rate swaps worth a
remarkable $5.4 billion in an attempt to limit its financing costs. But the
rationale for the deal was undermined by the credit problems of the “monolines”,
which insured the sewer system's bonds. The result was a sharp rise in financing
costs. A group of banks led by JPMorgan Chase is asking it to put up a further
$184m in collateral; the county is refusing.
As the dispute
rumbles on, the sewer system's debt has been downgraded all the way to CCC
by Standard & Poor's, a rating agency. One thing is certain. If the credit
crunch continues, the residents of Jefferson County won't be the only ones
holding their noses at the stink.
Rate Preferreds Update:
Nothing of significance to report today, mercifully.
1. You can hear a replay of Nuveen conference call. Dial (800) 642-1687
or (706) 645-9291, conference ID number 38446231,
2. There's a big
blog called When the collapsed Auction Rate Securities (ARS) market gets
personal, which is a subsection of something called BloggingStocks. Hundreds
of people stuck in auction rate securities have contributed comments and advice
-- some useful, some not. Click
3. It's End
of Beginning for Closed-End Fund Holders, from Bloomberg today.
ex-Governor Spitzer provides endless amusement: Not
one magazine, blog or newspaper has resisted this charming story. Why should
I? To me, the BIG question is how could anyone be SO stupid? Bloomberg
investigated that. Here's their take (an excerpt).
Lusted More for Thrills Than Flesh (Update1)
March 13 (Bloomberg)
-- Eliot Spitzer's fall was driven by the same personality trait that propelled
his rise, psychologists say: thrill-seeking behavior.
is one of the most exciting careers imaginable,'' said Frank Farley, a professor
of educational psychology at Temple University in Philadelphia, and former
president of the American Psychological Association. "There are few occupations
where you can give speeches to large groups of people who stomp their feet
and clap their hands for you. Most people don't want it.''
said yesterday he will resign as Democratic governor of New York after he
was identified as the client of a prostitution ring. The married father of
three daughters, who previously served as state attorney general, didn't address
The need to
lead an exciting, challenging life provides the fuel to become a crusading
attorney general, a jet fighter pilot, trader on Wall Street, or an emergency-room
doctor. This kind of personality isn't the norm, Farley said. For most people,
excitement and uncertainty doesn't drive them into careers. The same characteristic
also can be manifested in extramarital affairs and dangerous behaviors, Farley
folks aren't pathological,'' said Keith Johnsgard, a professor emeritus of
psychology at San Jose State University who has studied motivations of race-car
drivers and other risk- takers. "They're really bright and probably less
neurotic than most people. They're not crazy, they're not stupid, you just
don't want to be married to one.'' ...
marriages tend to be between people with great tolerances for boredom because
these people aren't looking for new partners, said Marvin Zuckerman, a
professor emeritus of psychology at the University of Delaware. Zuckerman
devised a scale researchers use to assess an individual's level of sensation-seeking
and wrote the book, "Sensation Seeking and Risky Behavior'' (American
Psychological Association, 309 pages, $43.76).
may crave new, exciting experiences because activities most people find pleasurable
appear muted to them, Johnsgard said. He conducted a 10-year study of those
drawn to adventure. The research showed that they find mundane joys less satisfying
than other people because of a variation in receptors for dopamine, a brain
chemical involved in giving people a sense of reward.
behavior also tends to be higher in men than in women, Zuckerman said. Several
studies link high levels of the male hormone testosterone to the personality
trait, he said.
is related to assertiveness and masculine traits,'' Zuckerman said. "Aggression,
assertiveness, and dominance and competitiveness. They love the challenge.
They like the fight.''
This type of
personality also is naturally attracted to sex with new partners as an extension
of the drive to experience different things, Farley said.
TV Schedule - 2008 Pacific Life Open at Indian Wells: Federer,
Nadal, Djokovic, Roddick and Blake are playing. Also Sharapova, Hantuchova,
Kuznetsova and Safina.
ass answer -- #5
A flight attendant was stationed at the departure gate to check tickets.
As a man approached, she extended her hand for the ticket and he opened his
trench coat and flashed her.
Without missing a beat, she said, "Sir, I need to see your ticket, not
ass answer -- #4
A lady was picking through the frozen turkeys at the grocery store
but she couldn't find one big enough for her family. She asked a stock boy,
" Do these turkeys get any bigger?"
The stock boy
replied, "No ma'am, they're dead."
ass answer -- #3
The cop got out of his car and the kid who was stopped for speeding
rolled down his window. "I've been waiting for you all day," the cop
The kid replied,
"Well I got here as fast as I could."
ass answer -- #2
A truck driver was driving along on the freeway. A sign comes up
that reads, "Low Bridge Ahead." Before he knows it, the bridge is
right ahead of him and he gets stuck under the bridge. Cars are backed up for
miles. Finally a police car comes up. The cop gets out of his car and walks
to the truck driver, puts his hands on his hips and says, "Got stuck, huh?"
The truck driver
says, "No, I was delivering this bridge and ran out of gas."
ass answer -- #1
A college teacher reminds her class of tomorrow's final exam. "Now class,
I won't tolerate any excuses for you not being here tomorrow. I might consider
a nuclear attack or a serious personal injury, illness, or a death in your immediate
family, but that's it, no other excuses whatsoever!"
A smart-ass guy
in the back of the room raised his hand and asked, "What would you say
if tomorrow I said I was suffering from complete and utter sexual exhaustion?"
The entire class
is reduced to laughter and snickering. When silence is restored, the teacher
smiles knowingly at the student, shakes her head and sweetly says, "Well,
I guess you'd have to write the exam with your other hand."
in La Quinta, California on "vacation."
I'm coming back on Sunday to ultra-dreary East coast weather, replete with rain,
snow and cold. I've only seen three clouds out here the entire two weeks. The
Coachella Valley is Heaven, except in summer.
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
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