Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
4:00 PM EST Friday, March 7, 2008: Good
news from Bloomberg.com:
Fund to Redeem Auction-Rate Securities (Update3) By
March 7 (Bloomberg)
-- Aberdeen Global Income Fund Inc. plans to buy back all its auction-rate
debt, the first closed- end fund to take the step since the market seized
up in mid- January.
The fund will
redeem $30 million of auction-rate securities known as preferred shares, replacing
them with loans from a major financial institution, the fund said today in
About half of
all closed-end funds used the auction-rate market to finance additional investments
in government and corporate bonds, a strategy aimed at boosting returns. Auctions
began failing as investors fled all but the safest government debt, leaving
preferred shareholders with about $60 billion in securities they couldn't
may put pressure on other fund managers to buy back auction-rate debt.
Many brokers marketed the securities as a short-term investment similar to
a money-market fund.
that Aberdeen has done the right thing,'' said John Dwyer of Duxbury, Massachusetts,
who has $650,000 stuck in auction-rate preferred shares. "It's a great
model for how all the issuers should behave.'' Dwyer
doesn't hold shares in the Aberdeen fund.
The fund, which
is managed by Aberdeen Asset Management Inc. of Aberdeen, Scotland, trades
at a 12 percent discount to its $127 million in net assets. The stock has
returned 9.1 percent annually in the past five years, compared with 12 percent
by the Standard & Poor's 500 Index.
Chicago-based Nuveen Investments Inc. and Boston-based Eaton Vance Corp.,
have resisted buying back their preferred shares, saying it would hurt their
common shareholders. The companies, the largest closed-end fund managers,
have said they are in talks with major banks aimed at bringing new liquidity
to the market. The companies didn't immediately return phone calls seeking
is the first fund to announce a redemption, it won't be followed by many others,
said Cecilia Gondor of Thomas J. Herzfeld Advisors Inc. in Miami, which specializes
in closed-end fund research.
to being a small fund, she said Aberdeen Global had a maximum interest rate,
which takes effect when an auction fails, considerably higher than most closed-end
funds, giving Aberdeen more incentive to refinance. Other fund managers have
said their funds still a higher return from their investments than they pay
in interest to preferred shareholders. Aberdeen
declined to comment.
has said it would like to replace its preferred shares with a new form of
debt that money-market funds could buy. Money funds are barred from buying
securities with maturities longer than 13 months, unless they hold the right
to sell back to the issuer at any time.
head of U.S. cash management at Deutsche Bank AG, said he didn't see that
plan moving forward.
funds would require a liquidity facility to be eligible and liquidity does
not come cheaply right now,'' he said.
8:30 AM EST Friday, March 7, 2008: This
is serious Hunker Down Time. Excluding commodities, everything you
can name is down -- from consumer confidence (lowest in five years) to stockmarkets
(lowest in two years). Here's Yahoo's gloomy picture of yesterday's stockmarket.
Look at the dismal numbers.
Banks are also in serious Hunker Down Time. Major banks are lending to major
customers. Business for the most part is proceeding. Marginal credits and shakey
new deals are affected but not sound credits. The definition of "marginal"
has tightened substantially.
As always, there
are serious opportunities around for those of us with cash. (Remember my mantra
of the past several months? Cash is King.) One dear friend is buying
almost new houses for under $100 a square foot (way under replacement cost)
and renting them for $900+ a month to families who have been foreclosed on their
houses and need a place to live. This opportunity will expand in coming months
as the forecast is for additional drops in the prices of homes. From a recent
issue of The New York Times:
lead analyst at RGE Monitor, said the firm predicted more homeowners would
walk away from their homes if prices continued to drop, regardless of their
financial circumstances. If home prices drop an additional 10 percent, Mr.
Menegatti said, 20 million households will owe more than the value of their
walk out? he said. No. But theres been a cultural shift.
Buying a house used to be like entering a marriage, a commitment for life.
Now, if you see something better, you go back into the dating market.
see houses identical to their own selling for much less than they owe, Mr.
Menegatti said, I wouldnt be surprised to see five or six million
homeowners walk away.
That same article
had one statistic that I can't get out of my head:
In the boom
market, homeowners took their winnings, withdrawing $800 billion in
equity from their homes in 2005 alone, according to RGE Monitor, an online
financial research firm.
This $800 billion
went into a huge spending spree. No more. That one number is why consumer spending,
75%+ of the U.S. economy, presently sucks.
My friend is very selective about the houses she buys. The house must be in
good condition. The area must be good. And she must be able to pay herself a
decent rate of return on the net income (rent less expenses). She is not
figuring any appreciation on the house or the land into her calculations. .
is bullish for Apple; bearish for RIMM:
Apple is making its iPhone work with Microsoft's Exchange Server. That means
that we will no longer need BlackBerries to get to our emails, contacts and
calendar. This is a major bummer for Research In Motion, the maker of the BlackBerry.
RIM has, in my unhumble opinion, neglected its phones and their software. Apple's
iPhone is a much better mobile gadget. RIMM will slide further:
Rate Preferreds (Update): Some tidbits to reports, nothing of substance:
+ From Bloomberg
Traps Closed-End-Fund Shareholders by Joe Mysak
March 7 (Bloomberg)
-- If you own the preferred shares sold by some closed-end bond funds, you
had better prepare to hold them for a while.
The shares have
been caught in the freeze-up of the auction-rate securities market.
Since late last
year, buyers haven't been showing up to bid on auction-rate paper. The underwriters
who used to bid on it in order to keep the market functioning smoothly no
longer have the heart, or cash, to do so. That means holders of the paper
are stuck with it.
issuers have a real incentive to convert their auction securities to fixed
or variable-rate paper because failed auctions usually trigger a penalty rate,
sometimes in the double digits. No municipal issuer wants to pay 15 percent
or 20 percent to borrow money.
the companies that sold auction-rate preferred securities, such as Nuveen
Investments Inc., BlackRock Inc. and Eaton Vance Corp., usually don't have
such penalties attached. They just pay the rate, based upon a formula, outlined
in the original offering prospectus, and even if there is a penalty, it is
You're stuck. The companies that originally sold this stuff have no obligation
to redeem it. And the dealers who made the sale -- often in the guise that
what you were buying was every bit as safe and easily liquidated as a money-
market fund -- aren't required to bid on it.
market relied on convention. It was a convention for underwriters to backstop
the auctions -- not, as we know now, a requirement. The dealers did their
job well, and for more than two decades. Auctions hardly ever failed, and
so the market grew and grew, with Bank of America Corp. estimating earlier
this year that it totaled $330 billion. States and municipalities sold about
half; something like $60 billion was sold by closed-end funds.
who bought those closed-end funds' preferred shares aren't happy about not
being able to access their money, if my e-mail inbox is any indication. They
want out, a desire bound to increase as the April 15 tax deadline approaches.
companies, such as Nuveen, have uttered conciliatory words, but so far have
taken no real action. At this point, it is hard to see a scenario under which
investors would be bailed out of their positions in these kinds of securities.
Some dealers have offered to lend investors money.
Over the last
couple of weeks, a number of firms have set up secondary-market trading platforms
for those who want to sell. That's got to be welcome news for the desperately
cash-hungry, but getting less than 100 percent on the dollar can hardly be
satisfying to those investors who thought they were holding a cash equivalent.
How much is the market going to discount their holdings? Is it 15 percent?
Maybe 20 percent?
investors are holding securities that pay them money-market rates with none
of the benefits of money-market funds. It's even worse than that. They are
holding securities that pay a relatively low rate of interest and that seem
to have no maturity, at least within most people's lifetimes. Their money
is safe, and inaccessible.
How much did
investors know about these things? Did they know the interest rate paid on
the shares was set at periodic auctions? Did they appreciate what might happen
if the auctions failed? Did they even look at the offering prospectuses where
such details are usually disclosed? Or did they simply rely on what their
brokers told them?
I suspect the
answer is that most investors relied on their brokers. And that those brokers
relied on convention: Auctions never fail.
We know how
the auction-rate problem ends for states and municipalities. They convert
their auction-rate securities and stop using a method of finance that depends
on a certain level of active manipulation by dealers.
How is the matter
resolved for those investors who bought closed-end-fund preferred shares?
Right now, there doesn't seem to be much incentive for any of the parties
to fix it. The lawyers who sniff out trouble are circling and ready to sue
the Wall Street firms that sold this stuff.
If I had to
bet, though, I think the solution is going to come from the fund companies
themselves rather than from the securities firms. And who knows? Perhaps the
auction market isn't dead, and will somehow revive. That's difficult to imagine,
but not impossible.
In the meantime,
if you own auction-rate securities sold by closed-end funds, you had better
be prepared to hold.
+ An owner of
$60 million+ of ARPs emails me that his "strategy" is:
1. VERY FIRMLY,
call your brokers and notify them that you NEVER authorized them to purchase
Auction Rate Preferred Shares
2. You want
100% of your principal returned immediately.
3. In the event
they don't agree, notify them you will legally hold them accountable for all
principal, interest, and damages.
4. A loan makes
no sense, since we are acknowledging collateral on an asset we NEVER authorized
them to purchase.
This is a formal
complaint to the broker, which we have made, and we are awaiting a response
which could take 2-3 weeks. After that, we band together and attack.
+ A California
law firm has issued a press release:
March 6 /PRNewswire/ -- Los Angeles based attorney Byron T. Ball of The Ball
Law Firm LLP announced today that the firm is offering advice to Corporations,
High Net Worth Individuals, Funds, and Businesses that are facing liquidity
problems in the auction rate preferred market. Ball said, "We view this
as a tremendous opportunity to help position our clients to recover or minimize
any damages they may have sustained."Contact Byron T. Ball, Eric Gowey,
or Jennifer Woodward at The Ball Law Firm LLP, 10866 Wilshire Blvd. Suite
1400 Los Angeles, Ca, 90024. Call 1-866-240-6177.
been so inundated with phone calls, they take your name and say they'll call
you back "within 24 hours." I'm still waiting.
James Stewart continues to publicize the ailments facing ARPs. He told me he
was on CNBC yesterday. I couldn't find a video clip. For an earlier interview
with him click
I have added some more executives below.
I repeat: If you
own failed auction rate preferred securities (ARPS), please send me an email.
We need to talk. There are serious benefits in combining our thinking. .
I am not a law firm. I am not a financial advisory firm. I am not seeking fees,
I am stuck in these things, just like you. I am seeking collective wisdom.
+ Auction Bond Failures Near 70%; No Sign of
Abating (Update2). From Bloomberg.com. By Michael McDonald. Click
+ Allianz Global
Investors Fund Management Provides an Update on Auction Rate Preferred Shares
issued by its Closed-End Funds. Click
+ Nuveen eyes
auction-rate options, offers no timeline. Dow Jones Newswires. By Daisy Maxey.
+ No Answers Yet
To a Trillion-Dollar Question, Wall Street Journal March 5, 2008, page D3 by
James B. Stewart. Click
+ Risks of a 'Safe'
Investment Are Found Out the Hard Way. Wall Street Journal. February 27, 2008;
page D4 by James B. Stewart. Click
+ The reality
of the Failed Auction Market. Capital Advisors Group. Click
+ Calamos releases
comment on auction rate securities market. Click
+ Frozen Liquid:
More Auction-rate Securities Put on Ice. SBA Communications becomes the latest
company stung by auction-rate securities when its inability to liquidate them
forces it to take a $15.6 million impairment charge. From CFO.com. By Tim Reason.
+ Another Kick in the ARS. As troubles continue in the auction rate securities
market, Massachusetts's securities regulator begins probing financial firms
for information. From CFO.com by Tim Reason. Click
+ Nuveen Squeezed
as Auction Failures Rise; OppenheimerFunds Buys. From Bloomberg.com. By Jeremy
R. Cooke and Adam L. Cataldo. Click
+ No Mark of ARS?
Bristol-Myers Replaces Its CFO. Drugmaker says the change doesn't reflect its
recent $275M charge. It selects Royal Numico finance chief Huet to succeed Bonfield.
From CFO.com. By Stephen Taub and Roy Harris. Click
+ Replay of Eaton
Vance conference call. 1-800-642-1687. Access code 37152796.
to write to and to express your anger: We are
adding more names each day. Send your favorite villains.
+ Nuveen is owned by Madison Dearborn. Tim Hurd is Madison Dearborn's
partner in charge of their Nuveen investment. (They paid $5.75 billion for Nuveen.)
His email address is Thurd@mdcp.com.
His phone number is (312) 895-1170.
+ Eaton Vance
chairman and CEO, Thomas E. Faust, Jr. His email is firstname.lastname@example.org.
His phone number is 800-225-6265 ext 8201. His executive assistant is Kelly
Creedon. His address is Eaton Vance, 255 State Street, Boston, MA 02109.
+ The closed end
fund top dog at BlackRock is Brian D'anna. He's on Linkedin.
Also CEO - Laurence Fink - Laurence.email@example.com
and CFO - Paul Audet - firstname.lastname@example.org
+ Van Kampen CEO
- Michael Kiley. COO - Ed Wood - email@example.com.
Jack Reynoldson - Executive Director, Fixed Income Investments - 630-684-6325;
All these other employees can be found by asking the Operator to be connected
to their office - Operator # is 630-684-6325 Steven Massoni - Managing Director
Unit Investment Trusts; Andrew Scherer - Managing Director Investment Platforms;
David Linton - Managing Director National Sales and Howard Tiffen - Managing
Director Senior Loan.
+ BlackRock. Robert
Kapito, President - firstname.lastname@example.org;
Scott Amero - CIO Fixed Income - email@example.com;
Robert Doll - CIO Equity - firstname.lastname@example.org
; Bennett Golub - Managing Director and Head of Risk and Quantitative Analysis
If you have more names, send them. These people need to understand the misery
they have inflicted on countless thousands of innocent people. They need to
understand that their businesses depend on our trust. Right now they
have lost our trust. The longer they delay finding a solution, the less we will
ever trust them. That includes the brokers and the issuers.
Wall Street works: The SEC has fined Fidelity
Investments $8 million and brought civil charges against former star money manager
Peter Lynch and 12 others for receiving improper gifts from outside brokers
vying to win Fidelity's lucrative trading business. Fidelity, which is the U.S.'s
largest mutual fund manager was found to have accepted more than $1.6
million in perks from 2002 to 2004. In the judgment dated March 5, 2008, you'll
read what Fidelity did, which included (I don't make this stuff up):
During the period
from at least January 2002 through October 2004, two Fidelity senior executives
(DeSano and Grenier) and ten Fidelity equity traders (Beran, Bruderman, Burnieika,
Burns, Donovan, Driscoll, Harris, Horan, Pascucci and Smith) in aggregate
accepted approximately $1.6 million worth of travel, entertainment and gifts
from brokerage firms that sought and obtained orders to buy or sell securities
on behalf of Fidelity's advisory clients.5 In addition, Lynch requested and
received tickets to events from two equity traders, who obtained those tickets
from brokers. Those brokerage firms each received millions of dollars in commission
revenue for handling orders from Fidelity's advisory clients' accounts. DeSano
and the traders in aggregate accepted from brokers dozens of expensive trips,
frequently by private jet, including excursions to the Super Bowl, family
vacations to Bermuda, Nantucket and the Caribbean, golf outings at exclusive
clubs in Florida and South Carolina, weekends in Las Vegas, lodging at fine
hotels, and even an extravagant, three-day bachelor party for Bruderman in
Miami. Brokers also provided the Fidelity executives and traders with gifts
including premium tickets to the World Series, the U.S. Open, Wimbledon, Rolling
Stones concerts, and dozens of other sporting events and concerts. In addition,
certain traders accepted illegal drugs from brokers and one trader's illegal
gambling was facilitated by a broker.
17. The ten
traders allowed the receipt of travel, entertainment and gifts to influence
their selection of brokers to handle transactions for Fidelity's clients.
As one trader commented to another, "Word is out that order flow is for
sale." In addition, certain traders routinely sent transactions to brokers
who were members of their families or brokers with whom they had a romantic
who supervised Fidelity's equity trading operations, personally accepted travel,
entertainment and gifts from brokers who sought and obtained securities transactions
for Fidelity's clients. He solicited tickets from brokers for himself and
to satisfy requests from his supervisor, Grenier. He accompanied certain traders
on several trips by private jet paid for by brokers, including attending part
of Bruderman's bachelor party in Miami, and traders told him about some of
the other private jet trips and tickets they received from brokers. He also
knew that certain traders directed transactions to brokers who were members
of their family or with whom they had a romantic relationship.
You can read the
entire delicious document. Click
wonderful pirate joke.
A pirate walked into a bar and the bartender
said, "Hey, I haven't seen you in a while. What happened? You look terrible."
you mean?" said the pirate. "I feel fine." Bartender: "What
about the wooden leg? You didn't have that before."
we were in a battle and I got hit with a cannon ball, but I'm fine now."
okay, but what about that hook? What happened to your hand?"
were in another battle. I boarded a ship and got into a sword fight. My hand
was cut off. I got fitted with a hook. I'm fine, really."
about that eye patch?"
one day we were at sea and a flock of birds flew over. I looked up and one of
them shit in my eye."
said the bartender. "You lost an eye just from birdshit?"
was my first day with the hook."
weekend: Hug the spouse, the kids and the grandkids. Get some rest
and some exercise. All this will blow over.
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.
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here and here.