Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
AM EST, Thursday, May 7, 2009. It's easy
to get out of stockmarkets. There are two ways. First, our 15% Stop Loss
Rule. Second, when the economic clouds start darkening, as they
did in the fall of 2007. It's not easy to get back in. There are no
easy ways to pick when to get back in. I didn't pick early March. I was caught
up in contagion fear. So I missed most of the 30% rise since. But then, so
did my three remaining brilliant, hand-picked money managers. They're basically
flat since March! Heck, even index ETFs did better. (And that's saying something.)
I go further, I want you, reader, to understand several things.
My self-imposed 9:00 AM deadline each morning for this column doesn't always
allow for heavy, long-term thinking. I tend to get caught up in the moment
of what I read between 6:00 AM and 9:00 AM.
I'm fickle, just like the rest of the financial press. We tend to think and
write together -- the same sentiment. You, as intelligent thinker, should
be aware that most financial reporters don't have significant "skin"
in the game. So, to them, financial markets are, somewhat of an academic way
to fill space and earn a living by filling that space. Editors prefer you
to fill space with conventional wisdom -- what everyone else is writing about.
I'm different twofold. I don't earn a living from this column. Trust me. This
is a labor of love. But I do have skin in the game. When I lose capital,
I feel it.
I feared massive inflation. Today I'm feeling better. Here's a chart. Obama's
national debt will be high. But it has been higher and the country survived
without massive inflation. Eventually the national debt came down.
Last night my
Australian friend Rob Douglass sent me the latest Pain Report. It starts:
last Pain report Global Equity markets have performed very impressively
and we have similarly seen a significant improvement in risk appetite
across all asset classes. The process of healing continues throughout the
capital markets and the Armageddon we faced in October
2008 appears to be fading like a very bad dream.
chart below shows the dramatic improvement in the LIBOROIS spread, which
we have mentioned previously is a good barometer of the degree of stress
On the economic
front we have seen much "chatter" about the second derivative
( the rate of change of the rate of change) of economic growth and similarly
many recorded sightings of the "green shoots" of economic recovery.
From a statistical point of view the "stabilisation" argument
is evident in manufacturing surveys across the world. Similarly we can see
from the U.S first quarter GDP report that inventories are likely to contribute
to growth in the second and third quarters since they fell at a record,
and arguably unsustainable, pace in the first quarter.
world companies engaged in a "frenzy" of production cuts, the
likes of which we have not seen since the Great Depression, and in some
cases such as Japan, South Korea, Germany and Singapore one could say even
more so than the depression. So what began on Wall Street in 2007 moved
like a "wrecking ball", in a rolling contagion, through the Main
Street of countries all across the globe and even finally touched Sesame
Street, with the news that they too had to announce cutbacks.
2008 we continued to warn that both economic growth and corporate earnings
expectations were way too high and this was painfully illuminated by the
"astonishing" bottom up equity forecast, as at September 2008,
of a 40 % plus forecast for S&P 500 earnings for the fourth quarter
of 2008. The record now shows that the outcome was a decline of over 30%.
Then as we approached the "lows" in March 2009, some 20 months
after the financial crisis had erupted, a number of analysts and economists
told us all that the crisis was serious and bottom up equity analysts were
"decimating" their earnings forecasts.
If we can
now fast forward to May 2009 my big picture observation is that I am less
fearful today than I have been in a long time. We appear to have avoided
financial and economic Armageddon and markets have moved from pricing a
deep depression to pricing a nasty recession.
For the last
five months the title of my speeches has been the Mother of all Stimulations
and we have written extensively, as have many others, about the unprecedented
"quantum" of both monetary and fiscal stimulation and how we await
for these measures to gain some "traction". Similarly the world's
financial system has in effect been underwritten by the governments of the
world and in many ways this has been Lehman Brothers parting gift to the
world. Having seen the whites of the eyes of the "financial apocalypse"
unleashed by the failure of Lehman, Governments in turn, unleashed the mother
of all rescues. I stayed up throughout the night of October 10th 2008 as
every worst fear, became reality on my Bloomberg screen and CNBC.
So yes I feel
a whole lot better in May 2009.
said all of this we have not changed the laws of economics and after an
era of unprecedented credit expansion we now face a lengthy period of credit
contraction (please see earlier Pain Reports for the world's scariest chart,
namely debt/ GDP in America). This process of balance sheet contraction,
or healing, will be driven by further massive deleveraging in the financial
sector. The International Monetary Fund's latest Global Financial Stability
Report provides a revised estimate of total write-down's in the global financial
system to more than U.S$ 4 trillion. This clearly means that banks will
have to continue to raise significant amounts of equity, and similarly engage
in a painful and prolonged period of deleveraging. ...
In the last
several weeks I have become much more balanced in my views and hopefully
this came through in my last Pain Report as I did suggest that equity markets
were grossly oversold and that the rally had further to run, and that it
has. The "perma bears", of which believe it or not I am not, dismiss
the rally which I think is simply silly. They could at least acknowledge
that the risk of systemic failure has largely been removed. The "perma
bulls", well what can one say, for them every day is a new low, as
they live in a set and forget world, which can be so very damaging to your
financial health. So I am sorry to disappoint you, I belong at present to
neither camp and neither should you. Everyone keeps asking was 666 the low?
I don't know and I don't care.
What I do
know is that there is an undeniable improvement in "risk appetite"
and there is a mountain of cash sitting on the sidelines and that investors
have changed their approach from one of selling on strength to one of buying
on weakness. Similarly having been hopelessly in denial in 2007 and 2008
many economists and equity analysts have significantly reduced their expectations
of both growth and earnings. Now, if the market is priced for "Armageddon"
and it doesn't happen, then one can be forgiven for feeling a sense of relief.
That is exactly what has happened, but none of this really helps either
you or I. So time for some head on the block views of the future.
As we head
for the northern summer many investors are likely to fear being left behind
by the current rally in equity markets and this could see the S&P 500
reach for the 1,000 level. As we then move towards the northern winter I
feel the markets will experience what best could be described as a reality
check as unemployment continues to rise and the consumer continues to reduce
spending and increase their savings.
You can read
the entire Pain Report here.
Is it time, Harry, to get back into the markets in a major way -- not just
the handful of stocks I already recommended -- ERF, PWE, LINE and Apple. Yes,
it is time to get back in. But, obviously, you need to pick carefully. I like
EWA, the index for Australian stocks. Sadly, it's already bounced a lot off
its bottom. But it's got a long way to go before it gets back to the point
I sold it. Good move Harry.
you buy a Kindle 2? My son loves his. I hate
it. He (and every other Kindle owner) loves that you can cram hundreds of
5lb thousand-page books into an electronic device that weighs a pound. I hate
it because it's slow and cumbersome, and it's not a book. There are
other better electronic ways of reading things and surfing the Internet, including
the iPhone (cheaper and smaller), my BlackBerry and small powerful laptops,
like my Lenovo X61. Laptops have advantages:
1. They have a color screen. The Kindle's is shades of gray. Laptops's screens
are backlit, so you can read them where light is scarce. The Kindle needs
Kindle screen. Readable, but not exciting.
2. Laptops are much, much faster than the Kindle, which is SLOOOW. The Kindle
doesn't do WiFi or wired broadband Internet. It does Amazon Whispernet, which
is really slow Sprint EVDO wireless broadband. Good enough for desperate connecting
(in cars, trains, buses) but for serious connecting (at your desk or in your
3. Laptops much more storage space. My X61 has a 250 gigabyte hard drive.
The new Kindle 2 has 2 gigabytes -- and no way to expand it.
The Kindle's tiny keyboard sucks. It's useless for typing. It's meant for
annotating. Frankly, I prefer BlackBerry "keyboards."
It's easier and cheaper to get documents like PDFs and Word DOC files into
a laptop than onto a Kindle. Losing all the color is a huge
yesterday doesn't understand why Daddy thinks the Kindle sucks. He must be
right. He now a certified genius. He graduates from business school in less
than a month. Daddy won't be paying any more college fees or living expenses,
Michael loves his Kindle, which Anne gave him as a birthday present. Nice
Anne. Michael wonders which screw is loose in Daddy's tiny brain that he can't
appreciate the full brilliance of the Amazon Kindle, and is the only piece
of technology Daddy hasn't bought. (Notice gray hairs on Michael. This 27-year
old kid is driven. Seriously driven.)
your BlackBerry. It's genuine magic. I walked into a Verizon store
and said, "Wipe it." They asked, "You sure you have everything
backed up?" "Yes. Everything is on my laptop." They wiped it
clean. Suddenly, it works well and fast. The buttons do what they're meant
to. The calendar is clean. What a pleasure.
toilets don't clog. My friend has nine children. He says the only
toilets in his massively-stressed house which have never clogged are Toto.
What better recommendation.
you're a teacher or a student, the Wall Street Journal costs $99
a year -- not the $349 they want for a renewal from normal people,
like you or I. You can find plenty of academic subscription web sites on the
Internet. Use Google.
I don't have
a single joke this morning. I'll do better tomorrow.
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,
here and here.