Technology Investor 

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

Previous Columns
9:00 AM EST, Monday, November 24, 2008: The economy is spiraling downwards. It is impossible to escape the onrush of bad news. I won't bother you with most of it. It's too depressing. But first, some good news from my economist friend Dan Good:

According to Wikipedia, Americans used 138 billion gallons of gasoline in 2006. Now that gas is down about $2 a gallon, that puts $256 billion extra in the hands of consumers relative to what was expected earlier this year. Combine that with reductions in the price of home heating oil, plus reductions in the price of other imported commodities, and the benefit to consumers dwarfs the $150 billion stimulus package enacted earlier this year. Meanwhile, 10 year Treasury bonds are yielding under 3.4%, a potential boon for people looking to take out mortgages or refinance. The S&P 500 is now yielding more than the 10 year T-bill for the first time in many, many years; probably a great buy signal for stocks for those with courage and a long-term perspective.

That doesn't mean that all the doom and gloom is wrong. But the declines noted above are a bright spot, at least for the U.S. economy.

More declining assets and upcoming bankruptcies. They're the two prophecies you can, with confidence, make. For us investors, the rules remain:

1. Conserve cash.

2. Liquidate whatever you can, because tomorrow it will be worth less.

3. Watch out for your "permanent" borrowings. They may no longer be.

4. Don't buy anything today unless it's the bargain of all time. Few things are, as yet. Real estate owners have not adjusted to the new reality of lower prices.

5. Despite Friday's huge bounce, I don't believe we've reached "bottom." There's still huge amounts of hedge redemption selling to come. There's talk that the hedge fund industry will, by this time next year, be half the size it is now.

The evil at the root of this recession has been easy money. Remember Hamlet? In Act 1, Lord Polonius gives his son Laertes some wise advice:

Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.

Today's commerce, sadly, needs borrowing. Wisely used, it greases commerce's gears. Today it's indispensable. But ... please read this piece from Sunday's New York Times.

That Money Isn’t Leaving the Vault

SO goes the old saw about bankers: they loan you an umbrella when the sun is shining, only to ask for it back when it rains.

But with our economy and markets in a world of hurt, the nation’s banks were supposed to stow their self-interest and help start lending again.

When the Troubled Asset Relief Program (TARP) of the Treasury Department handed over $125 billion in taxpayer money to nine banks a month ago, they were supposed to lend to small businesses, home buyers and other worthy borrowers to keep the economy’s gears in motion.

At the time, the Federal Reserve Board and three bank regulatory agencies said: “The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers.”

Alas, that admonition wasn’t accompanied by any real requirements to lend. When the Treasury gave taxpayer billions to the banks, it attached no strings. So is it any surprise that lending is tight?

Reports from institutional and individual borrowers across the country indicate this. Nervous lenders are demanding that even healthy loans be paid back. Banks and other financial institutions, meanwhile, are reducing exposures to borrowers and doing whatever they can to discourage the assumption of further debt.

Borrowers I have heard from don’t want to get into trouble with their lenders by speaking publicly about their experiences. As a result, they will remain nameless. But their stories are all the same.

The problem is, unless the government puts serious pressure on the nation’s banks to start lending, the value of assets used as collateral will fall as individuals and institutions everywhere are forced to sell.

“Every bit of leverage is being pulled,” said Robert G. Smith, chairman of Smith Affiliated Capital, an investment management firm. “The brokerage firms are pulling in their lines and so are the banks. At the same time, there is nobody putting one cent of capital into positions. The name of the game, the stated goal of TARP, was to make loans. Regulators are inside these firms. Why is this not happening?”

A commercial real estate borrower in Texas who owns properties financed by GE Capital said his lender was tightening the screws — despite the fact that all of his loans were current and his properties robust.

He said GE Capital had told him that when his loan comes due, there will be no negotiation; either it must be paid off in full or foreclosure proceedings will begin.

But while GE Capital is among the banks playing hardball with some borrowers, it is tapping funds through the Federal Reserve Bank of New York, which makes it easier for the company to finance its operations at low cost.

A General Electric spokesman said that because of the current downturn the company needs to give extra scrutiny to certain loans, but that it is on track to lend $50 billion this quarter, down from $80 billion in the same quarter last year.

“We are being extra careful to avoid any potential future losses,” said Russell Wilkerson, the G.E. spokesman. “But fundamentally we have continued to do a lot of lending.” And, he added, the company has not received any money from TARP.

Last week, Bank of America announced that it would spend $7 billion to increase its stake in China Construction Bank. This, just weeks after receiving $15 billion from taxpayers.

Why, when the nation needs access to loans in the worst way, did Bank of America choose to deploy $7 billion overseas?

Robert Stickler, a Bank of America spokesman, said that no TARP money was used to increase its Chinese bank stake and that the bank had planned the investment and set aside money for it months earlier.

“A lot of banks have cut back their lending, but at Bank of America we are making every good loan we can make,” he said. “There is a recession out there and that does reduce the opportunity to make good loans.”

Indeed, with so many swooning assets on their books, it is easy to see why banks are inclined to hoard capital.

And the Treasury’s decision not to buy toxic mortgage assets with TARP money after it said it would do so has produced paper losses for the banks that hold these securities. The value of those securities rose when TARP was announced but fell significantly when the mortgage purchase program was abandoned.

“It was a waste of money to put $25 billion into Citibank when within days the value of its underlying mortgages fell because TARP decided against buying distressed mortgages,” said Jonathon M. Trugman, founder of Pendulum Capital Management, a hedge fund. “The uncertainty that Treasury has introduced with TARP has cost investors far more in declining stock and bond prices than the $700 billion that the program received from Congress.”

Individuals are also encountering headwinds when they tap into overdraft lines of credit tied to checking accounts, for example. On Nov. 7, Citibank joined a host of banks charging a $10 “overdraft protection transfer fee” on such lines of credit each time the bank has to transfer money into a customer’s checking account.

Liz Fogarty, a Citigroup spokeswoman, said the bank changed its policy “to be consistent across our overdraft protection services and align with industry practice. It in no way changes how customers can use their lines of credit.”

There is an ugly precedent for banks refusing to renew loans during a time of crisis, said Frederick E. Rowe, a money manager at Greenbrier Partners in Dallas. That is what Texas institutions did during the savings and loan crisis in the late 1980s. The consequences were disastrous.

As the overheated real estate market cooled back then, Texas banks hurried to shore up their capital by forcing repayment on good loans, because their (good) borrowers were the only ones who could do so. This put additional pressure on the very assets that backed the loans and a deflationary spiral began. So many banks in Texas failed because everybody tried to foreclose at the same time.

“The banks that have taken the taxpayer’s money ought to be part of the solution, but they are acting like war profiteers,” Mr. Rowe said. “If I were in charge, I would haul them all down to Gitmo, put them in a room and say, ‘You have used the taxpayer’s money to pervert our objectives. It is morally wrong and we are not going to stand for it.’”

Smartphones revisited. I've been inundated with smartphone emails. To repeat: I like the iPhone. I like the new BlackBerry Storm. I like the Google G1. I 'm not going to recommend one for you because it's all a matter of personal taste. Your major buying criteria are:

1. The keyboard. How easy is it for you to type on. There are three keyboards: real ones with buttons and glass ones with click feel (the Storm) and ones with just glass (e.g. the iPhone). The more you type, the more you need real buttons.

2. The screen's size. Movies, photos and games look better on a bigger screen. iPhone has the biggest screen.

3. Will it work on my next overseas trip? The Storm works everywhere. Others less so.

4. How well does it work with your email server? BlackBerries work best.

5. Does it have WiFi? The Internet works much faster on WiFi than on 3G.

6. The battery's life. The iPhone's life is very short, often less than a day. And you can't swap batteries. You can with BlackBerries.

Finally, do you really need a smartphone if all you make are phone calls? A cell phone is much cheaper than a smartphone. You don't have to buy the monthly data plan.

Old age humor. The fact that I think this is funny says something about my age or my brain, or both.

Thanksgiving "humor"
Why did the police arrest the turkey?
They suspected it of fowl play.

What happened to the Pilgrim who was shot at by an Indian?
He had an arrow escape.

Asked to write a composition entitled, "What I'm thankful for on Thanksgiving," a student wrote, "I am thankful that I'm not a turkey."

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.