Technology Investor 

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

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9:00 AM EST, Monday, October 27, 2008: As we enter another tough week, some simple repeats:

1. Do not try and pick a stockmarket bottom. There is no bottom, for now.

2. It's seriously difficult to be "smart," to make money in this market. I like UltraShorts. (See previous columns.) But being "smart" elsewhere is hard and illogical. Think: The U.S. started this mess. It borrows too much, lives beyond its means (huge budget deficit, huge trade deficit, no savings, etc.). Hence, move money to Australia. I did. I moved my money when the Australian dollar was 96 cents. It's now 60 cents. The U.S. dollar has skyrocketed. The Australian dollar has plummeted. No matter how crummy America's finances are, the dollar remains the safe haven. My mistake was twofold. First I got the "logic" wrong. Second, I should have sold my Australian currency when it fell 15%. Remember my inviolate 15% Stop Loss Rule? It applies to everything. And I mean everything, including currencies. I was lucky. I got out of my my commodities fund when it was only down 5% (at end September). Today it's down 31%.

3. Don't wait until tomorrow. Everything is changing ultra-fast. Do it NOW.

4. If you have anything remotely tied to the stockmarket, sell it now. Faith and hope are not a strategy. Everything is going lower.

5. Cash is king. You'll need the cash to live on, to buy things and to finance your business. You will not be able to borrow anything. Banks are not using the money the government is dumping on them to lend money to you and me. They are using those government monies to buy other banks. And if I were I a banker, that's exactly what I'd do. Buying a cheap bank will make you more money going forward than lending to Joe The Plumber. (Sorry about dragging him in.) See the Joe Nocera story below.

6. We are in for seriously hard times. You need to prepare for them. Your business's sales will fall. You need to reduce your personal and your business's expenses -- even more than you already have. It's time to hunker down. Send a copy of this column to your friends. Tell them I've been right. I'm not a bear because it's fashionable.

7. The government is seriously mismanaging this crisis. But, seriously, what did you expect? Remember that priceless line, "If the government were put in charge of Sahara Desert, within five years there's be a shortage of sand." We're seeing that. The biggest mistake our wonderful government made was letting Lehman Brothers go belly up. The second biggest mistake was forcibly taking over Washington Mutual. The third biggest mistake is presenting the banks and AIG with huge amounts of monies and no conditions. "You mean we can't spend $400,000 on a sales convention and have the Federal Government pay for it? You mean we can't keep paying bonuses to our executives? Surely having fun is what getting free money from Washington is what it's all about?"

Should I set myself up as consultant to banks on how to go broke in style and get a big Washington bailout? I suspect that business is already crowded. I know I'm cynical, but with real justification.

The government now needs to address the real problems -- lost jobs. When people lose their jobs, they can't pay their mortgages, their credit card debts, etc. And things spiral further downward. So far in 2008, we've lost one million jobs. And more job losses are coming by the day. Pumping money into banks will not stop jobs from being lost.

8. Wealth worldwide is being squeezed as asset prices plummet. This has huge implications for every form of commerce. People spend more when they think they're rich -- the value of their homes and stocks has risen. But when they think they're poor, they clam up and save. They don't go to restaurants, to Best Buy, to Tiffany's, etc. You need to make a spreadsheet of your diversified assets and figure realistically what they're worth (or not worth) today. You'll be surprised.

The center of this contagion is borrowing. Everyone and everything borrowed too much money. When it became evident that a heck of lot of people (and companies) couldn't pay the money back, the whole house of cards fell apart. I met with one of the nation's most accomplished financial executives on the weekend -- a man who's run several banks. Among his conclusions: When we finally tailor our lendings to what the American public can actually afford to pay back, we will find that Americans can only afford to buy half the cars and trucks they have bought in recent years. That's a huge reduction for that embattled industry, and all the industries that supply to the auto makers.

When will the banks start lending again? Want to be sick? Read this piece from Saturday's New York Times. This piece has nothing to do with politics, so you can believe it.

October 25, 2008
Talking Business
So When Will Banks Give Loans?

“Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?”

It was Oct. 17, just four days after JPMorgan Chase’s chief executive, Jamie Dimon, agreed to take a $25 billion capital injection courtesy of the United States government, when a JPMorgan employee asked that question. It came toward the end of an employee-only conference call that had been largely devoted to meshing certain divisions of JPMorgan with its new acquisition, Washington Mutual.

Which, of course, it also got thanks to the federal government. Christmas came early at JPMorgan Chase.

The JPMorgan executive who was moderating the employee conference call didn’t hesitate to answer a question that was pretty politically sensitive given the events of the previous few weeks.

Given the way, that is, that Treasury Secretary Henry M. Paulson Jr. had decided to use the first installment of the $700 billion bailout money to recapitalize banks instead of buying up their toxic securities, which he had then sold to Congress and the American people as the best and fastest way to get the banks to start making loans again, and help prevent this recession from getting much, much worse.

In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.

(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)

“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”

Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.

It is starting to appear as if one of Treasury’s key rationales for the recapitalization program — namely, that it will cause banks to start lending again — is a fig leaf, Treasury’s version of the weapons of mass destruction.

In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation. As Mark Landler reported in The New York Times earlier this week, “the government wants not only to stabilize the industry, but also to reshape it.” Now they tell us.

Indeed, Mr. Landler’s story noted that Treasury would even funnel some of the bailout money to help banks buy other banks. And, in an almost unnoticed move, it recently put in place a new tax break, worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: “It couldn’t be clearer if they had taken out an ad.”

Friday delivered the first piece of evidence that this is, indeed, the plan. PNC announced that it was purchasing National City, an acquisition that will be greatly aided by the new tax break, which will allow it to immediately deduct any losses on National City’s books.

As part of the deal, it is also tapping the bailout fund for $7.7 billion, giving the government preferred stock in return. At least some of that $7.7 billion would have gone to NatCity if the government had deemed it worth saving. In other words, the government is giving PNC money that might otherwise have gone to NatCity as a reward for taking over NatCity.

I don’t know about you, but I’m starting to feel as if we’ve been sold a bill of goods.


The markets had another brutal day Friday. The Asian markets got crushed. Germany and England were down more than 5 percent. In the hours before the United States markets opened, all the signals suggested it was going to be the worst day yet in the crisis. The Dow dropped more than 400 points at the opening, but thankfully it never got any worse.

There are lots of reasons the markets remain unstable — fears of a global recession, companies offering poor profit projections for the rest of the year, and the continuing uncertainties brought on by the credit crisis. But another reason, I now believe, is that investors no longer trust Treasury. First it says it has to have $700 billion to buy back toxic mortgage-backed securities. Then, as Mr. Paulson divulged to The Times this week, it turns out that even before the bill passed the House, he told his staff to start drawing up a plan for capital injections. Fearing Congress’s reaction, he didn’t tell the Hill about his change of heart.

Now, he’s shifted gears again, and is directing Treasury to use the money to force bank acquisitions. Sneaking in the tax break isn’t exactly confidence-inspiring, either. (And let’s not even get into the less-than-credible, after-the-fact rationalizations for letting Lehman default, which stands as the single worst mistake the government has made in the crisis.)

On Thursday, at a hearing of the Senate Banking Committee, the chairman, Christopher J. Dodd, a Connecticut Democrat, pushed Neel Kashkari, the young Treasury official who is Mr. Paulson’s point man on the bailout plan, on the subject of banks’ continuing reluctance to make loans. How, Senator Dodd asked, was Treasury going to ensure that banks used their new government capital to make loans — “besides rhetorically begging them?”

“We share your view,” Mr. Kashkari replied. “We want our banks to be lending in our communities.”

Senator Dodd: “Are you insisting upon it?”

Mr. Kashkari: “We are insisting upon it in all our actions.”

But they are doing no such thing. Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead. And those pleas, in this environment, are falling on deaf ears.

Yes, there are times when a troubled bank needs to be acquired by a stronger bank. Given that the federal government insures deposits, it has an abiding interest in seeing that such mergers take place as smoothly as possible. Nobody is saying those kinds of deals shouldn’t take place.

But Citigroup, at this point, probably falls into the category of troubled bank, and nobody seems to be arguing that it should be taken over. It is in the “too big to fail” category, and the government will ensure that it gets back on its feet, no matter how much money it takes. One reason Mr. Paulson forced all of the nine biggest banks to take government money was to mask the fact that some of them are much weaker than others.

We have long been a country that has treasured its diversity of banks; up until the 1980s, in fact, there were no national banks at all. If Treasury is using the bailout bill to turn the banking system into the oligopoly of giant national institutions, it is hard to see how that will help anybody. Except, of course, the giant banks that are declared the winners by Treasury.

JPMorgan is going to be one of the winners — and deservedly so.

Mr. Dimon managed the company so well during the housing bubble that it is saddled with very few of the problems that have crippled competitors like Citi. The government handed it Bear Stearns and Washington Mutual because it was strong enough to swallow both institutions without so much as a burp.

Of all the banking executives in that room with Mr. Paulson a few weeks ago, none needed the government’s money less than Mr. Dimon. A company spokesman told me, “We accepted the money for the good of the entire financial system.” He added that JP Morgan would use the money “to do good for customers and shareholders. We are disciplined to try to make loans that people can repay.”

Nobody is saying it should make loans that people can’t repay. What I am saying is that Mr. Dimon took the $25 billion on the condition that his institution would start making loans. There are plenty of small and medium-size businesses that are choking because they have no access to capital — and are perfectly capable of repaying the money. How about a loan program for them, Mr. Dimon?

Late Thursday afternoon, I caught up with Senator Dodd, and asked him what he was going to do if the loan situation didn’t improve. “All I can tell you is that we are going to have the bankers up here, probably in another couple of weeks and we are going to have a very blunt conversation,” he replied.

He continued: “If it turns out that they are hoarding, you’ll have a revolution on your hands. People will be so livid and furious that their tax money is going to line their pockets instead of doing the right thing. There will be hell to pay.”

Let’s hope so.

Acronyms for today:

CDS -- credit default swaps. Unregulated insurance against which no reserves were taken. (See last week's columns.) When they come due, no one can afford to pay them off -- except the U.S. Government.

Derivatives -- bets against something else. Also unregulated. Most bets are not covered by reserves. When they come due, no one can afford to pay them off -- except the U.S. Government.

FPD -- first payment default. Believe it or not, this is a real statistic and bankers track it. Yes, you got it. There are a huge number of people who borrowed money to buy a house and never made a single payment on their loan. Not one payment. How stupid could you lending money to someone whose ability to pay is so bad, they couldn't even make one payment.

Ninja loan: No Income, No Job, No Assets. They still got a mortgage. See FPD.

Liar loan: I lied about my income, often increasing it ten times, or as much as was necessary to get the mortgage.

NoDoc loan: I presented no W9 or any other documentation to back up my mortgage application. I wrote what the mortgage broker told me to write. See Liar loan and FPD.

I don't make this stuff up.

Still on sheep.
A young man who was sleeping in a farmers barn, comes running out of the barn and pounds on the farmers door. When the farmer answers, the young man starts yelling, the animals in your barn can talk.

Of course the farmer does not believe him.

He goes on further, when the animals thought I was asleep they started talking, The horses were talking, the chickens and the cows and the sheep in the pen I was sleeping in...

The farmer interrupts the young man, "That sheep is a lair."

If you're here a second time this morning, please read from the top. I added a bunch more stuff. Send me comments with your own experiences please.

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.