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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, 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%.

These 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.

Today, 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.

The economy is now in recession, according to the Wall Street Journal -- Most Economists in Survey
Say Recession Is Here
and in a total mess by the New York Times -- Economy Hammered by Toxic Blend of Ailments. There is also an interesting video from 8/28/2006. Click here.

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?" Questions include:

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?

The 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 an ounce.

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 reverse.

Oddly enough, 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 1986.

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.

Analysts were 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.

The hoarding 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.

David Bowers 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.

Auction 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 here.

3. It's End of Beginning for Closed-End Fund Holders, from Bloomberg today. Click here.

Our 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).

Spitzer Probably 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.

"Politics 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.''

Spitzer, 48, 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 allegations.

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 said.

"These 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.'' ...

The happiest 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).

Sensation-seekers 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.

Sensation-seeking 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.

"Sensation-seeking 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.

Tennis TV Schedule - 2008 Pacific Life Open at Indian Wells: Federer, Nadal, Djokovic, Roddick and Blake are playing. Also Sharapova, Hantuchova, Kuznetsova and Safina.

Smart 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 your stub."

Smart 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."

Smart 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 said.

The kid replied, "Well I got here as fast as I could."

Smart 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."

Smart 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."

Still 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 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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