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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, October 31, 2006: Lucky, or smart? I'd rather be lucky. My father always said, "Take some money home." He meant sell a little while you're lucky while the winds of fortune blow your way. Everyone knows I love Australian mining stocks (especially KZL, ZFX and MRE -- see yesterday's column. Click here.). Forbes talks about Australia in its current issue:

Australians like to call their homeland "The Lucky Country" in testament to their continent's bounteous riches, benign climate and geographic isolation from the world's trouble spots. Even the country's national colors are those of prosperity: green and gold.

The phrase "Lucky Country" is now used without irony, though it comes from the title of a book published in 1963 by social critic Donald Horne. He saw a nation in peril, Anglo-centric and drifting along on the back of its natural wealth, with business reliant on trade barriers and tariffs, and labor on union protection of wages and conditions.

"Working-class Britain that worked," was a more derisive description of the time.

Four decades on, Australia is much changed by immigration, particularly from Asia, and economic reform. The result has been a decade and a half of uninterrupted economic growth with low inflation and low unemployment, and a restructuring of the economy with a relative lack of social disruption by the standards of industrialized economies.

Australia still benefits from the wealth on and under its land and seas. Natural resources and energy companies remain well represented on our list of Australia's 40 biggest companies. BHP Billiton and Rio Tinto, two mining giants, occupy second and fourth places in the list. (Click here.)

The top ten is rounded out by banks, financial services firms, a telecoms group and food retailers. The full 40 spans multinationals in a range of industries, from Fosters, synonymous with beer but whose wine business is now its larger part, to Qantas Airways to Macquarie Bank, which has developed an investment banking niche in large-scale infrastructure and is the world's largest operator of private toll roads.

The growing prosperity of East Asia is Australia's latest slice of luck. China's industrial development has created a seemingly insatiable appetite for Australian minerals and fuels, while the rise of the region's consuming middle class has created new and growing markets for its agri- and foods businesses beyond Japan.

One out of two of Australia's export dollars are now earned in East Asia, and three out of four in the Asia-Pacific region as a whole, which is also the destination for more than half of Australia's foreign direct investment.

Developing economic relations with China, Japan and Indonesia in particular has become a policy priority for the government. Demand for Australian exports of raw materials, energy and food are likely to mean that the economy will grow this year by about half a percentage point more than last year's 2.5%.

A dark cloud on the horizon could be good for Australia -- providing it is a rain cloud. A couple of years of exceptionally dry weather have hit agricultural production, although exports have held up so far. Another year of drought, however, could bite into gross domestic product growth.

The greater risk to growth is inflation. The central bank raised rates in August for the second time this year to combat an inflation rate that had broken through its 3% target ceiling. A further rates rise from the current 6% before year's end is in the cards and could depress domestic demand.

A tight labor market is stoking the rise in prices. A shortage of skills is the growth constraint on the modern Australian economy....

Qwest continues to creep up. It's now above $9. It's a takeover prospect. That now makes three:
+ Qwest
+ Sovereign Bank
+ 3Com (Coms)

The fickleness of "HOT" markets: Once there were bird flu companies, then China stocks, then housing stocks, then alternative energy stocks. With rare exceptions most hot stocks are way down from where they were when they were "hot." The speed of falling in and out of favor is awesome (and I suspect, accelerating). Two solutions remain:
+ Broad diversification. Spread your bets.
+ Do what my father said, "Take some money home."

Once housing was burning hot, now? Here's my favorite financial columnist, James Surowiecki, from the latest issue of New Yorker:


In the past few months, it’s been almost all bad news for the housing market. Homebuilders have had to tell Wall Street that between twenty and thirty per cent of their contracts have been canceled. Janet Yellen, the head of the Federal Reserve Bank of San Francisco, has said that streets full of unsold new homes now make parts of Phoenix and Las Vegas look like “ghost towns.” Selling a home takes longer than it used to, and the inventory of existing homes for sale has gone up almost forty per cent in the past year. Yet, through it all, one fact has continued to provide solace to anxious homeowners and real-estate brokers alike: housing prices have stayed remarkably stable.

The lesson we’re supposed to take from this is that a home remains as solid and safe an investment as ever. After all, we’re constantly told, you have to go back to the Great Depression to find a full year in which housing prices fell. Unfortunately, the numbers upon which these comforting conclusions depend—namely, median home prices for the country—are unreliable and misleading.

There are plenty of statistics available about the housing market, but median home prices, which are tracked by both the National Association of Realtors and the Census Bureau, are what typically make headlines. They seem to tell buyers and sellers exactly what they want to know: how much the one has to spend, how much the other stands to make. The N.A.R. says that median sale prices for existing homes have risen fifty-seven per cent since 2000, and in many markets the increase has been much bigger than that.

Although these numbers come from an association that has a vested interest in making the housing market look healthy, they do provide a roughly accurate picture of how housing prices have behaved in the past six years. But if you’re trying to figure out what kind of investment housing is—what rewards you can expect and what risks you’ll run—median prices become a lot less useful. In the first place, the data don’t adjust for improvements in quality. People have been building bigger homes—the typical new home is about twenty-five per cent bigger than it was twenty years ago—and putting money into improvements like central air-conditioning, home theaters, and pools. And the impact of quality adjustments isn’t trivial; a study of home prices between 1977 and 2003 found that adjusting for quality reduced the return to homeowners by forty per cent.

As for the much vaunted statistic about housing prices never falling for a full year since the Depression? That’s true only if you forget about inflation. When you adjust for it, you find long stretches when housing prices tumbled and then stayed low for years; nationally, real home prices were actually eight per cent lower in 1991 than they were in 1979. What makes the problem worse is that sellers have recently been offering buyers huge incentives, ranging from granite counters to free cars and, in some cases, large rebates. These are, in fact, price cuts, but they never make it into the data.

Then, there’s the problem of sample bias. When you hear that housing prices in a city have gone up, you assume that all the homes in the city have become more valuable. But the numbers reflect only the homes that were actually sold in a given month, and, if more of those homes happen to be expensive, it’ll make the market as a whole look strong even if it’s really quite weak. This is what leads to the curious phenomenon of median prices rising even as the number of sales is plummeting and the backlog of houses on the market is soaring.

Because nominal median prices compare completely different groups of homes (all those sold in August, 2005, say, and all those sold in August, 2006), they can overstate how much prices go up during booms and understate how much they go down during busts. Luckily, there are other measures we can use. For example, the government compiles one index that tracks the repeat sales of homes that have mortgages with Fannie Mae and Freddie Mac, and another index that measures new-home sales while controlling for quality. The economist Robert Shiller, meanwhile, has created an index that controls for quality by tracking repeated sales of the same houses over more than a century. Together, these numbers give us a better picture of what happens to housing prices over time. And though they show that housing prices have risen sharply in the past decade, they also show that, over the longer haul, investing in a home is far from a sure thing; if you control for inflation and quality, Shiller found, real home prices barely budged between the eighteen-nineties and the nineteen-nineties. The idea that housing prices have nowhere to go but up is, in other words, a statistical illusion.

It’s an illusion, though, that has powerful effects. Clearly, it encouraged the speculative buying of the past few years. And it has also made sellers remarkably hesitant to cut prices, which has led to the huge backlog of unsold properties. Eventually, sellers are bound to realign their expectations with reality by trimming their asking prices. That will hurt people who were fooled into reckless speculation by assurances that investing in houses offered risk-free rewards. For most people, however, a decline in prices needn’t be so painful. If you’re planning to sell your home and buy another one, an over-all decline in housing prices leaves you no poorer than before. And, if you’re staying in your home, a drop in value can actually make things easier by lowering property taxes and insurance costs. Look at the bright side: at least you’ve got a roof over your head.

Travel tips - Part 2:
+ A noise canceling set of headphones is a must. It cuts down plane noise. Music from your iPod comes through crystal clear. You can sleep. I use Targus AWM02US. Worth every penny. $40. Click here.

Reforming the unreformable: Neat survey of France in this week's Economist. The magazine says France needs serious economic reform. But there are impediments. My favorites:
+ In a recent survey by Globescan, a polling group, 71% of Americans agreed that the free-market economy was the best system available, as did 66% of the British and 65% of the Germans. For France, the figure was 36%.
+ Marxist thinking still has a grip on the collective imagination. It comforts those at the bottom of the pile who rail at the recent explosion in executive pay. ... The 35-hour-week rules were based on the misapprehension that there is a fixed amount of work to be shared out.
(I love that one.)

Ridding irksome error messages: You plug something into your PC. It tries to install your shiny new thing, but fails. Forever after you're plagued by irritating Install Error messages. Solution: Right click on My Computer, Properties. Hardware tab. Scroll down. Delete (using the Delete key) the piece of hardware with the yellow exclamation point -- !

Favorite Borscht Belt humor:
+ A man called his mother in Florida, "Mom, how are you?"
"Not too good," said the mother. "I've been very weak." The son said, "Why are you so weak?" She said, "Because I haven't eaten in 38 days."
The son said, "That's terrible. Why haven't you eaten in 38 days?"
The mother answered. "Because I didn't want my mouth to be filled with food if you should call."

+ A Jewish boy comes home from school and tells his mother he has a part in the play. She asks, "What part is it? The boy says, "I play the part of the Jewish husband."
The mother scowls and says, "Go back and tell the teacher you want a speaking part."

+ Did you hear about the bum who walked up to a Jewish mother on the street and said, "Lady, I haven't eaten in three days."
She replied: "So force yourself,"

+ The doctor gave a man six months to live.
The man couldn't pay his medical bill, so the doctor gave him another six months.

+ The Doctor called Mrs. Cohen saying, "Mrs. Cohen, your check came back."
Mrs. Cohen answered, "So did my arthritis!"

+ Doctor: "You'll live to be 60!"
Patient: "I AM 60!"
Doctor: "See! What did I tell you?"

+ A doctor held a stethoscope up to a man's chest.
The man asks, "Doc, how do I stand?"
The doctor answers "That's what puzzles me!"

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. Thus I cannot endorse any, though some look mighty 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 Claire's law school tuition. Read more about Google AdSense, click here and here.
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