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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 Thursday, March 27, 2008:
My dear friend and reader, Steve Schone, emailed me and said, in effect, he was sick of reading about idiots like me who had been dumped (and duped) into auction rate preferreds. After all, he'd been intelligent enough to avoid them. He had a broker who actually did research (miracle of miracles!), had fingered the risks on ARPs, and had mercifully stayed clear. Why hadn't I? Point well taken.

So at vast expense (an extra $9.95 a month) I set up a new web site -- You can go there and read the latest (and not so greatest) on our ARPs.

This now gives me two web sites to do each day -- my unpaid night jobs (except for the Google AdSense pittance).

My day job is to to figure out how to eek out a few sheckels on my investments. Or, increasingly, how to protect what little I haven't pissed away in the last little while. That job is more depressing even than contemplating locked ARPs. At least they're earning something; They're locked up and I am recused from figuring some imaginative way to lose yet more capital.

My call last November about getting out of he stockmarket remains right. That saved megabucks. My call on getting into commodities and precious metals was right. Though I jumped out of IAU, GLD and SLV when they dropped a week or so ago, I think I should be back in them. If everyone is as depressed about the stockmarket as I am, then there will be continued flight to precious metals and commodities. You might look at Vanguard's Precious Metals and Mining fund.

As to the other things, I am increasingly depressed by what I now dubb as Newton's Rule of Unintended Gotchas. I listen to great pitches with great logic on the great future of some great stock or great industry. Then I watch and wait. And pretty soon, something out of left field emerges and screws things up and the stock plummets.

As the economy tightens, there are more and more "Gotchas." I have to admit that I still have money with "professional" money managers. I figured they were smarter than I was. Some are. Yet the stockmarket is confounding them also. One just sent me an email. You could smell his acute frustration in this one telling sentence:

Unfortunately, some of our biggest losses were in stocks that we felt our field checks were extensive and our conviction was high.

He's making a bundle in shorting stocks -- who isn't. But few people have the gumption to go net short. Trust me: everything from retail to technology to leading Dow stocks are shorts. This market is not going up. Trust me further, finding a few stocks that do go up -- there will be some -- is too difficult. I prefer to ride rising tides. Wait two years.

This is a typical email:

I enjoy reading your website.

A quick question. What do you think is the safest play right now?

I’d like to put most in cash, but do not know what the best/safest vehicle is.

Some say CDs because they’re backed by the Government, vs. Money Market Mutual funds which are not.

What do you think?


Right now the safest is multiple $100,000 deposits in banks -- CDs or savings accounts. I'll work more on this today.

Great reading: The latest March 31, 2008 issue of The New Yorker is fantastic.

It's got three wonderful articles. One by James Surowiecki on Too Dumb To Fail, one called Out of Print, which talks about the death of the newspaper business and one by John Cassidy on Suprime Suspect -- the man Merrill Lynch loved to hate.

Here's the Surowiecki piece. (He's truly excellent.)

In 1984, Continental Illinois, then one of the country’s largest banks, found itself on the verge of collapse, after billions of dollars’ worth of its loans went bad. To avert a crisis, the government stepped in, purchasing $3.5 billion of the soured loans and effectively taking over the bank. Later that year, at a congressional subcommittee hearing, Representative Stewart McKinney summed up the lesson of the rescue effort: “Let us not bandy words. We have a new kind of bank. It is called too big to fail. T.B.T.F., and it is a wonderful bank.”

Since then, T.B.T.F. has become a generally accepted, if unwritten, rule in the financial world. Two weeks ago, though, it was given a new twist when the Federal Reserve acted to save the investment bank Bear Stearns, orchestrating the company’s sale to J. P. Morgan Chase by providing Morgan with up to thirty billion dollars in financing to cover Bear Stearns’s portfolio of risky assets. Previously, the government had intervened to protect only commercial banks—which take deposits and issue traditional loans, and which are heavily regulated. (Another first: the Fed is now allowing investment banks to borrow from it directly.) The Bear Stearns deal means that the T.B.T.F. rule now applies to investment banks as well. Suddenly, the federal government is committed to saving a whole lot more companies than it was a couple of weeks ago.

Rescuing failing companies obviously runs the risk of creating moral hazard—if we insulate people from the consequences of their irresponsibility, they’re more likely to be irresponsible in the future. But the Fed did a good job of lessening that risk, making sure that Bear suffered a heavy toll. The sale punished Bear shareholders severely, valuing Bear at just two dollars a share, down from sixty dollars a few days before, while thousands of Bear employees are likely to lose their jobs. That’s about as harsh as a bailout gets.

More to the point, the threat of moral hazard in this case was simply less dire than the threat of financial contagion. The Fed could have done what it did in February, 1933, when it stood quietly by while Detroit Bankers Corp. and the Guardian Detroit Union Group, Detroit’s two largest banks, foundered after a series of bad loans. But the failure of those two banks quickly led to bank runs in neighboring states—Cleveland’s two biggest banks failed soon after—and eventually to a national banking panic. Bear Stearns’s collapse, similarly, could easily have provoked market chaos. Bear wasn’t among the largest Wall Street banks, but it was a major clearinghouse for stock trades and played a central role in hundreds of billions of dollars of credit deals. If not too big, it was too important to fail.

The Bear deal does mark a major policy shift, since the Fed has now implicitly admitted that it will catch investment banks when they fall. But that shift really just ratifies the inevitable, given the nature of credit in today’s world. Most money that’s borrowed these days no longer comes from commercial banks, which are responsible for less than thirty per cent of all lending. Instead, in one form or another, the loans are packaged and sold as securities. And since investment banks do much of the selling and buying of those securities, they play an ever bigger role in financial markets. Two decades ago, the Fed could afford to let a firm like Drexel Burnham Lambert (which, admittedly, was dealing with criminal charges in addition to its economic woes) go under without worrying too much about the ripple effects. It would demand very steady nerves to do the same thing today.

You might, then, see the Fed’s willingness to help investment banks as evidence of their indispensability. But what it really underscores is how badly Wall Street has managed its business in recent years. Because investment banks’ trades and investments are typically very highly leveraged—Bear Stearns, for instance, had borrowed thirty dollars for every dollar of its own—the banks need to be exceptionally good at managing risk, and they need to insure that people trust them enough to lend them huge sums of money against very little collateral. You’d expect, then, that Wall Street firms would be especially rigorous about balancing risk against reward, and about earning and keeping the trust of customers, clients, and lenders. Instead, most of these firms have taken on spectacular amounts of risk without acknowledging the scale of their bets to the outside world, or even, it now seems, to themselves. That’s why, since the bursting of the housing bubble, we have seen tens of billions of dollars in surprise write-downs and complete paralysis in the credit markets. When you consider that the banks at the center of the subprime debacle were also at the center of the tech-stock bubble, the surprising thing about the Bear Stearns crisis isn’t that a major investment bank was abandoned by its customers and lenders but, rather, that it didn’t happen sooner.

Now that the Fed has stepped in, it’s possible that things will go back to normal. But let’s hope they don’t get too normal: one of the biggest problems in the market in the past decade has been that lenders, clients, and even ordinary small investors have put far too much faith in the magical abilities of Wall Street firms, and have failed to give their promises and performance proper scrutiny. Markets require trust to work well, but when trust is blind they are almost guaranteed to go haywire. We don’t want the paralytic level of skepticism that has reigned in the marketplace in recent months to continue, but we don’t want a return to the way things were, either. It’s a good thing that Bear Stearns was saved. But it’s also a good thing that it nearly died.

Here's an excerpt from Eric Alterman's piece on the death and life of the American newspaper:

Three centuries after the appearance of Franklin’s Courant, it no longer requires a dystopic imagination to wonder who will have the dubious distinction of publishing America’s last genuine newspaper. Few believe that newspapers in their current printed form will survive. Newspaper companies are losing advertisers, readers, market value, and, in some cases, their sense of mission at a pace that would have been barely imaginable just four years ago. Bill Keller, the executive editor of the Times, said recently in a speech in London, “At places where editors and publishers gather, the mood these days is funereal. Editors ask one another, ‘How are you?,’ in that sober tone one employs with friends who have just emerged from rehab or a messy divorce.” Keller’s speech appeared on the Web site of its sponsor, the Guardian, under the headline “NOT DEAD YET.”

Perhaps not, but trends in circulation and advertising––the rise of the Internet, which has made the daily newspaper look slow and unresponsive; the advent of Craigslist, which is wiping out classified advertising––have created a palpable sense of doom. Independent, publicly traded American newspapers have lost forty-two per cent of their market value in the past three years, according to the media entrepreneur Alan Mutter. Few corporations have been punished on Wall Street the way those who dare to invest in the newspaper business have. The McClatchy Company, which was the only company to bid on the Knight Ridder chain when, in 2005, it was put on the auction block, has surrendered more than eighty per cent of its stock value since making the $6.5-billion purchase. Lee Enterprises’ stock is down by three-quarters since it bought out the Pulitzer chain, the same year. America’s most prized journalistic possessions are suddenly looking like corporate millstones. Rather than compete in an era of merciless transformation, the families that owned the Los Angeles Times and the Wall Street Journal sold off the majority of their holdings. The New York Times Company has seen its stock decline by fifty-four per cent since the end of 2004, with much of the loss coming in the past year; in late February, an analyst at Deutsche Bank recommended that clients sell off their Times stock. The Washington Post Company has avoided a similar fate only by rebranding itself an “education and media company”; its testing and prep company, Kaplan, now brings in at least half the company’s revenue.

Until recently, newspapers were accustomed to operating as high-margin monopolies. To own the dominant, or only, newspaper in a mid-sized American city was, for many decades, a kind of license to print money. In the Internet age, however, no one has figured out how to rescue the newspaper in the United States or abroad. Newspapers have created Web sites that benefit from the growth of online advertising, but the sums are not nearly enough to replace the loss in revenue from circulation and print ads.

The latest pitch in panhandling

Tax-time approaches.
Time for creativity in deductions. Apparently this one is true.

The one they always talk about at CPA classes concerns the topless dancer who got breast implants and wrote them off as a business deduction under Section 179 and treated them as a capital asset, as an ordinary necessary business expense, and deducted them.

The IRS challenged her. It went to tax court. She won.

I mercifully refrained from illustrating this story.

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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