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Harry Newton's In Search of The Perfect Investment Newton's In Search Of The Perfect Investment. Technology Investor.

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8:30 AM EST Tuesday, March 4, 2008: Eaton Vance has a conference call today on ARPS. It's 3:00 PM EST. Call 1-866-562-3356. Use the access code 37152796.

As the dollar plummets, gold and silver continue to be seen as "safe havens."

The pain in Auction Rate Preferreds (ARPS). Recent emails:

Hello Mr. Newton,
I read your article on the auction rate mess, I am sitting on $225,000 of these Nuveen preferreds. I was told these things were like cash, triple rated, collateralized 3 to 1, very safe! This is a big portion of my life's savings, What actions can I take ?
Do you think the principal on these is gone ? Have you heard from many others?
Steve in NYC

Dear Steve,
I hold $4.5 million of Nuveen preferreds. Like you I got sold a story by my broker that these things were like cash, triple-rated, collaterized 3 to 1, very safe.

So far, there is absolutely no progress on getting us our money. We are stuck in cement. You can listen to Nuveen management's inane conference call: Replay # 1-888-266-2081 (toll free). Replay Access Code 1207768. You must listen to it today, because, in its infinite wisdom, Nuveen's management is removing the call at the end of today. Why? Who knows?

You won't learn anything from the conference call, however. Nuveen management continues to give both irresponsibility and inaction whole new meanings. I don't understand why Nuveen management (and the management of Madison Dearborn which now owns Nuveen) doesn't understand the gravity of this situation: namely that nobody will ever want to deal with Nuveen -- a firm that deals so cavalierly with its customers.

Hi Harry:
I just discovered your website today and I've read all of your columns about the recent failed auctions. I've also done A LOT of research on this topic and I would like you to check out this website that I found to be very informative. These guys knew this was a perfect storm waiting to happen......years ago. They've got several excellent writings that I think you will find very interesting. The name of the company is Capital Advisors Group and here is the link:

They also had a conference call and you can listen to the replay if you want to. These guys have never invested in these securities. You'll understand why after you've read what's on their website. Good luck. I'll be checking your column daily. I was lucky enough to get out at the start of this mess but I am concerned for all who didn't get out. I'll send you any other good info that I come across.
A fan.

Dear Fan,
You're 100% right. Capital Advisors did see the tsunami coming. The problem is that none of our brokers read the Capital Advisors' website and their warnings. The second problem is that Capital Advisors, for all their financial intelligence, doesn't have a real solution to our present predicament. Their forecast for us getting all our money back any time soon is decidedly gloomy.

Hello Harry,
My wife and I are stuck in $1,000,000+ (I've kept the number confidential--Harry) in ARPS sold to us by our ETRADE broker. We did not get a prospectus and obviously were told they were liquid and safe. Only $200,000 is a State of Wisconsin issue resetting to 15%. They will redeem these soon. I guess we're stuck with 50-year bonds for the other monies. I called Cohen & Steers today and they told me they were "watching the situation waiting for the auctions to succeed". I told them they were never going to succeed again and wanted my money.

They said I should blame the banks to which I replied they hired the banks and they had our money. Either the closed-end funds will have to find cheaper money than AA composite corporate * 1.50 or they should convert the shares to common with a redemption date limitation. I understand they can't have us all selling 50 million shares of a closed-end fund the same week.
George and Diane, New York

Dear George and Diane,
What you heard from Cohen & Steers is at the heart of our problem: The issuers (like Nuveen, BlackRock, van Kampen and Cohen & Steers) issued the long-term auction rate paper for the brokers to sell short-term and for the banks to make a market in. Everyone made a profit on this. And like everything on Wall Street, everything is designed for selling today. No one retains a moral responsibility for the product. Which means that today we're in major finger-pointing mode. The issuers blame the brokers. The brokers blame the issuers. And everyone blames the banks and the investment banks, like Citibank and Goldman Sachs who stopped supporting the ARPS auctions three fateful weeks ago.

Since no one feels any moral responsibility for this mess, the only solution -- at this point -- is maximum pressure on all parties. What I call Newton's Maximum Research, Maximum Noise, Maximum Pressure Strategy. To wit:

1. Get evidence. Get your hands on all the brochures that talk about these things being cash or cash equivalents. Good words include "Purchase or sale through weekly auctions" and "A place to park cash before choosing your next longer-term investment." Both these quotes came from a Nuveen brochure. You need to find words from your issuer and your broker. Copies of "evidence" were also on my February 28 column. When you find something, email me a copy, please.

2. Tell your broker you hold him responsible. And you expect him to apply pressure up and across the chain. Brokers are offering to lend their best clients money against their now locked-up ARPS. But the loans are largely unacceptable. They're usually for finite periods -- typically a year. And they make no provision for renewal. You could be up the creek without a paddle in 12 months -- owing your broker money and no way to pay it. Since he's only lending you 50%, but taking your entire ARPS security as collateral, he could grab your security and sell in a firesale for 50% of its alleged worth. And you'd have no recourse since that was the deal.

3. Tell your issuer you ultimately hold him responsible. I gave you a great Nuveen name in my February 28 column -- Tim Hurd. Email him your concerns if you own Nuveen stuff. Do your own research and find the big exec responsible at BlackRock, Eaton Vance, Van Kampen, etc. etc. Eaton Vance has a conference call today. It's 3:00 PM EST. Call 1-866-562-3356. Use the access code 37152796.

When you call / contact / email your issuer, refer to their own marketing brochures and their own words that talk about the preferreds being like cash, being a "good place to park short-term cash" and all their other words. See my February 28 column for examples.

4. Write letters to your local attorney-general and governor. Some are already investigating. Some need to be prodded. But these people need to know that our April 15 tax monies are tied up in these ARPS. If you personally know people in power, contact them directly. Explain to them that this does not need a government bailout. It needs government pressure and some bending of government rules. After all, according to the same Nuveen brochure, "every dollar (of my investment) is backed by at least twice that amount of fund assets." The assets are there. They just need to be loosened up. There are a zillion solutions, including the issuers offering to buy back our shares, just as mutual funds do every day.

5. Call your financial editors. I'm in touch with Jim Stewart who wrote that recent piece on ARPS in the Wall Street Journal. He wrote the piece called,"Risks of a 'Safe' Investment Are Found Out the Hard Way." And he explained, "They were sold as a liquid, safe, slightly higher-yielding, tax-exempt alternative to money-market funds. I should know, since I bought some. For several years I've been parking a good part of my cash in auction-rate preferred shares."

Every owner of ARPS I've spoken with (and there are many) is staggered that our plight has attracted so little attention in the financial press. This morning I emailed Mr. Stewart,

We need to keep writing about these things. Without pressure, Wall Street will never solve this. There are enormous consequences right through the economy - from homes that won't be bought, from businesses that suddenly have no working capital for seasonal needs, from businesses that won't be bought, from taxes that won't be paid, from personal bankruptcies that will be filed, to job losses (my Goldman salesperson got canned two days ago). But frankly, the worst part is the loss of confidence in "the system." There is a myth that these things were only for rich people - not for working stiffs (like you and I). We need to keep writing and encourage others to also.

6. Send me an email explaining your plight. . Include your phone number. Every conversation I have produces more evidence, more strategies, more ideas. Obviously, I'll keep your name strictly confidential. Believe me, we're in this together. And together we're going to have to solve it. I have $4.5 million of Nuveen ARPS. I'm motivated. I didn't work over 40 years to have my money lost because of Wall Street arrogance, laziness, incompetence and irresponsibility.

P.S. A good place to read investor comments is on SmartMoney's web site. Stewart's piece also appeared there. And a bunch of investors dropped notes.

Be wary of broker loans on ARPS: Brokers and banks are offering loans to the unfortunate holders of auction rate preferreds they sold and are now stuck with them. These loans are not for the faint of hearted. In fact they could be downright dangerous. Here's a scenario: Broker lends 70% of the value of a $1,000,000 ARPS at a rate that is actually less than the amount the ARPS is presently paying. Loan is six months, renewable (theoretically).

At the end of six months, brokers calls, "We're calling the loan."

Client says "it's a six month renewable loan."

Broker says, "Yes, it is, but it's renewable at our discretion. We are calling the loan."

Client says, "I can't pay it."

Broker says "then we'll have to sell the ARPS."

Client: "But there's no market for my auction rate preferred security (ARPS)."

Broker: "Yes, there is. We can sell it easily for 70% of its face value."

Client: "That means I will lose $30% -- or $300,000 -- on this."

Broker: "Don't you have any other money to repay the loan?"

Australian interest rates rise: The Reserve Bank of Australia has lifted interest rates by 0.25 percentage points to 7.25 per cent, increasing the official cash rate to the highest in almost 12 years, while Australia's banks are expected to pass on an even higher increase in interest rates.

Nice sense of humor:

Friendly neighbor: Talented hedge fun.

Clever definitions. Wish I made them up.

+ Typographical errors
Slips that pass in the wire.

+ Underrate
Seven or less.

+ Valet parking
Skid row.

+ Vampire
A pain in the neck.

Never having to say you're sorry.

+ Vegetarian
A good salad citizen.

+ Wedding ring
A tourniquet worn on the left hand to stop circulation.

+ X-ray

+ X-ray technician
One with inside information.

+ Zebra
The largest size a woman can buy.

+ Zookeeper
A critter sitter.

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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