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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 9, 2007: It's October. A squirrely month in the markets. The month of many meltdowns. I can't predict. No one can. But I can prepare for badness. I can reduce my exposure to the upside (sell a little), buy a few puts, sell a little short, take a little money home. If I wanted to write a doomsday scenario, I would include three elements;

1. The dollar in free-fall. Overseas investors in America -- like the Chinese, the Japanese, the Saudis, the Kuwaitis, will one day wake up and ask themselves, "Do I really want my money in America's declining money?" A result: The Australian dollar is now over 90 cents U.S. for the first time in 23 years. With Australia's economy bouncing along on the back of booming Asia, Australian economists are tipping their dollar to sail higher and possibly to reach parity with the US dollar. In Australia there is speculation the Reserve Bank could lift interest rates as soon as next month and attract more investment monies. (We recently reduced rates here.) As I have bought more Australian securities, so others will, too.

2. Oil escalation. There's lot of talk that rising oil prices won't affect the economy. But if it hits $100? My oil guru, Jim Kingsdale has posted his latest excellent newsletter. In it, he says,

The Future May Be Closer Than We Think

That said, the next few months may be an extremely interesting period for oil-world. As we come to the normal heating oil inventory build time, experts have projected that global consumption requirements will sprint forward toward 88 million b/d. That is several million more than the world is used to providing. It is not clear to some observers that the requisite production will be forthcoming. If it is not, be prepared for much higher oil prices before year end.

The most interesting part of this story to me is not whether oil breaks $100 before year end. It is that the next few months could give us an indication of whether the spare production capacity claimed by Saudi Arabia actually exists. Or, on the other hand, whether the Peak Oil fundamentalists are right in saying that Ghawar, the Saudis’ huge reservoir of light sweet crude, is declining, thus giving them only limited spare production capacity of heavy sour crude, which is tougher to refine into useful products. In other words, the next few month may provide some important insights into how far along the road to Peak Oil the world actually is.

3. The housing free-fall. From the latest issue of the Economist:

Bad-news Bulls
Stock markets are breaking records again as if the credit crisis were ancient history. If only it were.

The news seems to go from bad to worse. In late September figures showed that the American housing market was in free fall, with both sales and prices plunging. On October 1st Citigroup and UBS, two of the world's biggest banks, said they were writing down $9.3 billion of debt between them because of the credit crunch.

Global stock markets have reacted not with dismay but with euphoria. Wall Street marked the Citigroup write-downs by driving the Dow Jones Industrial Average to a record high. The MSCI emerging-markets index has soared to new highs. This summer's turmoil seems to have been completely forgotten.

What explains this apparent insouciance? It seems that investors reckon they cannot lose. "Take your pick," says Gerard Minack, a strategist at Morgan Stanley: "Equity markets are either behaving as if the worst is over for credit and housing problems or they remain convinced that the [Federal Reserve] can offset whatever bad news may unfold." In other words, bad economic news means the Fed will cut interest rates and good news means recession will be avoided.

There are some signs to support the idea that the worst might be over in the credit markets. After strenuous effort, banks have managed to find buyers for $9.4 billion of the $24 billion needed to finance the takeover of First Data, a payments processor, by Kohlberg Kravis Roberts, a private-equity firm. According to JPMorgan, even the structured products that caused so much disquiet during the summer are moving again—$6.2 billion of collateralised-debt obligations were issued in the last week of September.

Risk appetite is resurfacing in currency markets, too. The "carry trade," the borrowing of low-yielding currencies to buy higher-yielders, is back in full swing; the Australian and New Zealand dollars have been surging. Having reached a 27-year high on October 1st, gold (often seen as a safe haven for nervous investors) suddenly lost 2.5 percent of its value in a day.

The bullish case seems fairly simple. The American economy may be slowing but the rest of the world, particularly emerging markets, can make up for it. As a result, corporate profits can continue to be strong. Profits forecasts are being revised down, but not dramatically so. Ian Scott, a strategist at Lehman Brothers, says that in America there have been just 71 profit warnings after the third quarter, compared with 114 warnings at the same stage in 2005 and 173 in 2004. The dollar's decline has added impetus to the earnings of American exporters and multinationals with overseas subsidiaries.

In this light, the credit crunch seems like old news. Even bank write-downs can be spun in a good light. Much of the panic in August was caused by fear of what banks had on their books; now the bad news is out, investors can relax.

In addition, many investors are looking back to 1998 when the Fed cut rates in response to a previous crisis in the finance industry—the collapse of Long-Term Capital Management, a hedge fund. The markets recovered quickly and the dotcom bubble reached its apogee. This time round, emerging markets (or even alternative energy stocks) might be the big winners. And in the short term at least, money that was pouring into the credit markets is now being invested in shares.

But not everyone buys the bulls' arguments. Experienced observers of the debt market, such as Tom Jasper of Primus Guaranty, a credit insurer, think the crunch is far from over. According to Moody's, a rating agency, the spread (excess interest rate) of high-yield debt over Treasury bonds has fallen from the crisis peak but is far higher than it was in June.

In the quick-to-rollover money markets, there is still a much wider spread than normal between the rate governments must pay to borrow money and the rate which big banks have to pay. That indicates investors remain nervous about the extent to which banks are exposed to losses from subprime mortgages, or large private-equity borrowers.

Problems in the housing markets are far from over, too. The latest gloomy statistic to emerge was a 21.5% annual fall in pending American home sales, a figure that is a leading indicator for actual sales. House prices will surely fall further and defaults increase, as homeowners struggle to cope with higher mortgage rates from "teaser" loans taken out in 2006.

That may well have a depressing effect on consumer sentiment, something which the Fed's rate cut last month may do little to help. Normally, interest-rate moves take 12-18 months to work their way through the economy. In any case, mortgage rates are barely lower than they were a month ago. The American economy could yet slip into recession, an event on which Goldman Sachs now places a 40% probability.

Even the argument that corporate profits are still strong does not look completely convincing. American profits are close to a 40-year high relative to national output, according to Longview Economics, a financial consultancy. That suggests they should return to the mean, especially as the profit numbers taken from national-accounts data look a lot weaker than those reported by quoted companies. The last time such a gap appeared was in the late 1990s, an era of much creative accounting.

And while the weak dollar may be good news for American exporters, it is bad for European companies. Having been strong in the early part of this year, the latest data on European economies have weakened sharply; Nicolas Sarkozy, the French president, is not the only one concerned by the euro's strength. There is the potential for turmoil in the currency markets, either because Europe takes a stand against the rising euro at the Group of Seven finance ministers' meeting on October 19th, or because international investors, who have to finance the American trade deficit, become alarmed by the weakness of the dollar. Stockmarkets might be able to rise above the problems of the credit markets. But whether they could gain ground in the face of foreign-exchange market turmoil as well seems a lot more doubtful.

How Nigerians scam eBay auctions: They join an auction for a high-priced item, like a laptop. They bid up the item -- way up. EBay cancels the auction because the price looks totally out of whack. The Nigerians (the same bunch that offer you a commission on locked-up funds) bid yesterday's laptop up from $1,850 to $7,700. Once the auction is closed, the Nigerians then send a "second chance" email to the bidders. Send them the money and they'll send you the laptop. If you believe that, I can give you a "second chance" on a local bridge. How about this one?

It's yours. Send me money. I'm told it's as good as cash.

The escalating, out of control corporate phone bill: My friend Jane Laino runs a consulting firm, DIgby 4 Group, devoted to corporate telecom expenses -- getting refunds for overbilling (it's rampant) and fixing expenses and networks to what makes sense. I asked her for the top four mismanaged areas. She started by telling me, "Most organizations do not know how much they are spending on communications expenses and do not accurately track it." She says the amount companies spend is amazing. She has one company spending over $30 million a year on telecom. Here are her top four problems:

1. Now you have Less Time to Check Vendor Bill Accuracy

Telecommunications service providers now contractually limit the amount of time you have to find billing errors (typically 120 days). Try to have this restriction eliminated or at least give yourself more time to find the errors (you can often get it extended to one year.)

2. Wireless: The Fastest Growing Communications Expense is the Hardest to Manage

Wireless communications expenses (Blackberries, cellphones, etc.) are exploding. Even if you have a corporate master contract, each wireless device has its own separate contract, each with a different expiration date, which most organizations do not track. If a device contract expires, the rates may go up or you may remain on an old billing plan that costs more than a newer plan would.

3. Spending a lot of Money on a New System, then Poorly Implementing It

Organizations now regularly spend hundreds of thousands of dollars on new telephone systems that do not work nearly as well as the old ones did. This is due, in part, to not documenting how your staff has built their work processes around your existing system, before you replace it. The end result is frustration for employees and reduced service to callers. A couple of examples:

A group of attorneys share an administrative assistant who answers each of their telephones live with the name of the attorney. The new telephone system does not let the assistant know who the call is for. A road-warrior is used to calling into the office, speaking to a number of people, then being sent to retrieve his own voice mail messages, then wants to leave a message for a few other people. This was easy to do with the old telephone system, but cannot be done with the new system. He has to keep hanging up and calling back. On our old system we pressed a single button when running out of the office to put the system in "night mode" meaning that the Automated Answering will come on right away when someone calls. With our new "improved" phone system we have to dial * + 18 + 190 to do the same thing.

4. Not Recovering Money due you from the IRS

The IRS has agreed to give back the 3% Federal Excise Tax billed on certain telecommunications charges (long distance calls, wireless voice plans, conferencing calling) for a 41-month period between March 2003 and July 2006. Any organization can recover this for the next 3 years by filing an amendment to their 2006 tax return. Despite the fact that many organizations are owed tens or hundreds of thousands of dollars, many have not taken advantage of this.

How companies innovate. This spoof came from the October issue of Condé Nast's Portfolio magazine. We've all watched in awe as the shaving companies -- Gilette and Schick -- have upped the number of razor blades per razor from one, to two, to three, to four and now...

To: All Departments
From: Alan J. Pendleton
Re: Launch of New Razor
Date: October 1, 2007

It has been one week since our company aggressively launched its newest product in the category of Personal & Beauty Products — Shaving. While it is too soon to make a full assessment, I feel as though there are some early indicators as to how well things are going. And in that regard, I regret to say, they are not going well at all.

Our goal, from the beginning, was to make a splash, with “boldness and innovation” as our rallying cry. On the plus side, the Boldness and Innovation Retreat was a huge success. ...

On the minus side, we probably didn’t adequately examine our decision to hit the market with a 17-blade razor. With hindsight being 20/20,

I believe these to be some of our missteps:

1. Seventeen was, simply put, too many blades. If any of you have ever held one of our razors to your face, I think you’ll agree it’s a terrifying experience.

2. The razor did not need to offer access to the Internet. Being the first “Web friendly” razor on the market sounded great but had no practical purpose and cost us millions in R&D.

3. Five pounds is too heavy for a razor. When you couple the weight with the danger of 17 blades and the fact that razors are used under wet, slippery conditions, it’s no wonder our sales came in well below projections.

4. Our projections were unreasonably high. Who came up with the number 200 million? Recent estimates put the U.S. population at 300 million. It’s beyond comprehension that no one flagged a projection that assumed two-thirds of the American public would buy this razor, especially when one takes into account that we didn’t market it to women.

5. Our effort to guerrilla-market by letting loose the Razor Boys in Times Square was not only irresponsible but also costly, both in legal fees and in damage to our image as a “thoughtful, family-minded company.” Did it not occur to anyone to run background checks on the youths to whom we gave 17-blade razors? ...

In conclusion, I think we can all agree that a memo is not an appropriate place to fire anyone, but we can also agree that this is an extreme circumstance. Therefore, if your name is Dale Phelps, Sheila Mulgren, or Robert McCutcheon, don’t come to work anymore.

Thank you,

Alan J. Pendleton
President, American Bathroom

Great quips from the old Hollywood Squares

Q. If you're going to make a parachute jump, at least how high should you be?
A. Charley Weaver: Three days of steady drinking should do it.

Q. You've been having trouble going to sleep. Are you probably a man or a woman?
A. Don Knotts: That's what's been keeping me awake.

Q. According to Cosmopolitain, if you meet a stranger at a party and you think that he is attractive, is it okay to come out and ask him if he's married?
A. Rose Marie: No; wait until morning.

Q. Which of your five senses tends to diminish as you get older?
A. Charley Weaver: My sense of decency.

Q. In Hawaiian, does it take more than three words to say 'I Love You'?
A. Vincent Price: No, you can say it with a pineapple and a twenty.

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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