Harry Newton's In Search of The Perfect Investment
EST, Thursday, November 13, 2008: This is not pretty.
But the chart
shows some sort of floor. If it breaks my little red line (which I think it
will), we're in trouble.
We have made money
on our Google shorts of the last few days. I'm tempted to say, "Take your
profits." No one went broke taking a profit. I am convinced Google is on
its way to $200. But the path will be volatile. Hence my advice. Take some money
home. Money is as good as cash. And you can spend it -- but not at Best Buy.
short Best Buy. They are the absolute worst for customer service. I spent an
hour last night trying to buy a generic power cable. They had, I'm guessing,
at least 250 in the store, some connected to devices and some in the Geek Squad's
drawers, but none in plastic for sale. Despite my begging, they could not see
selling me one out of the drawer.
Their argument? It was not for sale. They could not guarantee it would work.
Moreover it might burn down my apartment building. (I don't make this stuff
up.) I floated across the road to Circuit City. They were equally unhelpful.
But they're in Chapter 11. So I expected less. Best Buy is heading towards bankruptcy.
Neither Circuit City nor Best Buy had any customers of note. Best Buy actually
had fewer customers than Circuit, if that's possible. I hate to think what the
lights and the rent cost. Both stores were within 500 yards of Lincoln Center,
New York City. That's the ultra-high rent.
bonds revisited. I've been pushing muni bonds because rates are high
and local taxes are going up. I've been inundated with emails: "Be ultra
careful." Some jurisdictions had done dumb things, like mess with C.D.O.s,
derivatives and other bad investments. Some planned on spending into the ionosphere,
way beyond their ability to ever repay. Some will default. Pick only those bonds
that have a predictable revenue stream and a good chance of making their interest
payments. BusinessWeek has a scare piece:
Bonds Freeze Up
Interest payments soar for cities and counties, some of which loaded up on
complex derivative deals similar to ones that swamped many banks
Like other credit markets, municipal bonds are nearly frozen. During the week
of Sept. 22, three significant bond deals were done. Normally the tally would
be about 100. Those that are getting donelike New York City's Sept.
29 dealare high-priced.
untold dangers may lurk just beneath the forbidding surface of the muni market.
Some locales set up complicated derivatives deals with the now-defunct Lehman
Brothers and other troubled New York banks. Shedding those investments can
be costly and complicated.
the tumultuous past few weeks, many municipalities were facing fundamental
problems: quickly rising pension costs, aging roads, and large drop-offs in
income and real estate tax revenue. A lot of governments had moved away from
safer, fixed-rate bond issues, leaving them vulnerable to a sharp rise in
those rates over the past two weeks. These factors could add up to serious
trouble for scores of communities.
An ominous potential
harbinger is the case of Jefferson County, Ala. (BusinessWeek.com, 9/28/08),
which includes the city of Birmingham. Jefferson borrowed more to build a
sewer system than it could repay and entered into damaging derivatives contracts
with JPMorgan Chase (JPM). The derivatives, known as swaps, were private
contracts designed to allow the municipality to tap into then-lower variable
rates, but give them a predictable payment more like a fixed-rate bond.
has seen its interest payments soar and now seems poised to declare bankruptcy
before the end of this week unless it can come to some resolution with creditors.
It would be the largest U.S. municipal bankruptcy evera development
that's likely to make investors even more skittish.
is how Lasana Mack, treasurer of the District of Columbia, describes the muni-bond
landscape. Like many places, Washington borrows to pay its long-term bills,
and sometimes its short-term ones. A climb in short-term rates, from 2% two
weeks ago to over 7% this week, has already cost the capital hundreds of thousands
of dollars (though Mack estimates that prior to the current problems, the
district was saving about $15 million a year using the strategy).
worry: close to $1 billion in new borrowings scheduled for sale in November
and December. He has no idea how much interest he will have to pay, or whether
he'll find any buyers. "Nothing," he say, "is really functioning
who took outsize mortgages on risky terms, local governments have greatly
increased both the amount they borrow and their exposure to rate increases.
According to ThomsonReuters, total municipal borrowing has more than doubled
this decade, from $195 billion in 2000 to $425 billion last year. (Next year,
Thomas Doe, CEO of Municipal Market Advisors, a research firm in Concord,
Mass., says that could fall to $300 billion to $350 billion.) So far this
year, one in three borrowed dollars came with a fluctuating rate, compared
with one in five in 2000.
was fine when short-term rates were low. But in the past few weeks rates have
soared as investors backed away.
At the same
time, problems have emerged in the swaps used to minimize municipal vulnerability
to just this sort of volatility. The counterparties to the local governments
in many of these contracts are the investment banks so quickly going down,
leaving some municipalities to hunt for new partners to take over the deals.
So far, most
have been able to do so without extreme difficulty, but the pool of eligible
replacements may be shrinking. When Lehman went bankrupt on Sept. 15, Gary
Breaux, finance director of the East Bay Municipal Utility District in Oakland,
Calif., found several bidders interested in two swaps he had with that bank.
He chose Bank of New York for a $44 million contract. The bigger one, $69
million, he placed with Belgian-French lender Dexia. Just two weeks later
several European governments had to put $9 billion into Dexia after its shares
fell 30% and its CEO stepped down. If Dexia falters again, the fear is that
Breaux might have to find yet another replacement with fewer options to choose
In the municipal
market, warns Richard Ciccarone, chief research officer at McDonnell Investment
Management in Oak Brook, Ill., "major risks are usually the convergence
of multiple smaller risks."
end of Wall Street. The era that defined Wall Street is finally,
officially over. Michael Lewis, who chronicled its excess in the book Liars
Poker, returned to his old haunt to figure out what went wrong. And boy,
did he find some juicy stuff.
He has a written
a long brilliant piece in CondéNast's increasingly excellent Portfolio
magazine. Frankly, I recommend you drop everything and read this piece immediately.
here. I'm not going to destroy your pleasure at reading Michael Lewis'
piece, but here are some choice excerpts:
+ Now, obviously,
Meredith Whitney didnt sink Wall Street. She just expressed most clearly
and loudly a view that was, in retrospect, far more seditious to the financial
order than, say, Eliot Spitzers campaign against Wall Street corruption.
If mere scandal could have destroyed the big Wall Street investment banks,
theyd have vanished long ago. This woman wasnt saying that Wall
Street bankers were corrupt. She was saying they were stupid. These people
whose job it was to allocate capital apparently didnt even know how
to manage their own.
+ (Steve) Eisman
stuck to his sell rating on Lomas Financial, even after the company announced
that investors neednt worry about its financial condition, as it had
hedged its market risk. The single greatest line I ever wrote as an
analyst, says Eisman, was after Lomas said they were hedged.
He recited the line from memory: The Lomas Financial Corp. is
a perfectly hedged financial institution: It loses money in every conceivable
interest-rate environment. I enjoyed writing that sentence more than
any sentence I ever wrote. A few months after hed delivered that
line in his report, Lomas Financial returned to bankruptcy.
+ Eisman says
in his defense, I did subprime first. I lived with the worst first.
These guys lied to infinity. What I learned from that experience was that
Wall Street didnt give a shit what it sold.
+ ...He couldnt
figure out exactly how the rating agencies justified turning BBB loans into
AAA-rated bonds. I didnt understand how they were turning all
this garbage into gold, he says. He brought some of the bond people
from Goldman Sachs, Lehman Brothers, and UBS over for a visit. We always
asked the same question, says Eisman. Where are the rating agencies
in all of this? And Id always get the same reaction. It was a smirk.
He called Standard & Poors and asked what would happen to default
rates if real estate prices fell. The man at S&P couldnt say; its
model for home prices had no ability to accept a negative number. They
were just assuming home prices would keep going up, Eisman says.
+ The models
dont have any idea of what this world has become
. For the first
time in their lives, people in the asset-backed-securitization world are actually
having to think. He explained that the rating agencies were morally
bankrupt and living in fear of becoming actually bankrupt. The rating
agencies are scared to death, he said. Theyre scared to
death about doing nothing because theyll look like fools if they do
+ Now I asked
(John) Gutfreund (Salomon Brothers' ex-CEO) about his biggest decision. Yes,
he said. Theythe heads of the other Wall Street firmsall
said what an awful thing it was to go public and how could you do such a thing.
But when the temptation arose, they all gave in to it. He agreed that
the main effect of turning a partnership into a corporation was to transfer
the financial risk to the shareholders. When things go wrong, its
their problem, he saidand obviously not theirs alone. When a Wall
Street investment bank screwed up badly enough, its risks became the problem
of the U.S. government. Its laissez-faire until you get in deep
shit, he said, with a half chuckle. He was out of the game.
It was now all
someone elses fault.
He watched me
curiously as I scribbled down his words. Whats this for?
I told him I
thought it might be worth revisiting the world Id described in Liars
Poker, now that it was finally dying. Maybe bring out a 20th-anniversary edition.
nauseating, he said.
continues, despite the recession. I'm seeing new breakthroughs every
day. My recent favorite is from Hyperion Power Generation. They make a backyard
nuclear power reactor. (I don't make this stuff up.)
You bury this
thing in concrete in your backyard. Bingo you have enough hot water or gas to
drive a turbine to make 30 megawatts of electricity, enough for 20,000 homes.
Here are the facts:
$25 million installed for the nuke. Another $5 to $10 million for electricity
No maintenance for eight to ten years. Then Hyperion takes your old one and
replaces it with a new one.
Designed for remote places -- tar sands fields, military bases, islands, remote
First units to be shipped in four years. You won't believe the regulatory issues
still to be solved.
If you steal it, you can't make a bomb out of it. You can't even open it. It
runs at a thousand degree fahrenheit. Turn it off. It takes several months to
You have to bury it in concrete and protect it with 24/7 armed guards. Them's
are the regulations. But you can gang units and spread your guards over multiple
Allegedly, the thing will produce electricity at 5 cents a KWH. That's about
a third what I'm paying Con Edison.
don't know if this nuke actually works, since Hyperion hasn't sent me one to
test. All this is based on an interview I did yesterday with their CEO, John
professions. I don't make this up.
lawyers. "I married you because you were rich and civil. Now you're
no longer rich and your new poverty has made you a pain to live with. I'm outta
2. Life insurance
salesmen. "My assets are suddenly illiquid. If I croak tomorrow, my
estate will be devastated by the taxes. Time to buy insurance to pay the estate
taxes and leave something for the kids."
3. Three types
of lawyers: bankruptcy, mergers and acquisitions (for all the bank buys
as a result of TARP) and lawyers who understand banking regulation.
2. Online psychics.
a self-described internet medium, was running errands Sept. 30, the day the
Dow plummeted 770 points. "When
I got home that day, I had messages from 30 clients," Spears says.
While it doesn't
take a psychic to see that tough times lay ahead for the economy, online practitioners
of the divination arts say they're seeing a marked sift in the questions posed
by their clientele, with anxious consumers increasingly asking what's in store
for them financially in the months ahead. Believers who normally seek psychics
for advice on a cheating spouse are now asking whether a pink slip is in their
future, and internet psychics across the board saw a spike in traffic in the
days following the initial market crash.
The Plumber strikes: My plumber came yesterday to fix a small problem.
He accidentally broke a big pipe. That made his job bigger and his hours longer.
My plumber reminds of our Washington's financial bailout (also called TARP).
AIG comes in, begs for $75 billion, messes up. Now we hear it will cost us taxpayers
$150 billion, or more. As if you couldn't predict that.
If Joe the Plumber
hadn't existed, we would have had to invent him. It's easier to beg Washington
than to invent new products and services.
no fear, Barack is here. I voted and campaigned for him. But this
This cartoon is
not racist. It's funny.
Do not be offended.
These cartoons are funny. At least to my sick brain. I won at tennis
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.