Harry Newton's In Search of The Perfect Investment
9:00 AM EST,
Tuesday, November 25, 2008: When you've got to save the world's
largest bank, you know you've got some big problems. Mr. Market responded
to the government Citigroup largesse with a nice rally. I don't see the rally
lasting. But dumber things have happened. The sidelines remain a good place
to sit in cash, with a few new shorts, e.g. Best Buy (BBY) and Barnes and
speculation and much ignorance abounds. Too much for my taste. Martin Weiss
pains me deeply to announce that, despite the massive government rescue,
yesterdays collapse of Citigroup could ultimately lead to a shutdown
of the global banking system...
August, we devoted a full hour to this question in our X List
video, naming the most likely candidates for bankruptcy. So let me review
its primary conclusions and then take this discussion to the next level.
on our August X List was Citigroup, Americas second largest
banking conglomerate with over $2 trillion in total assets. The bank was
already suffering crushing losses in mortgages. But at mid-year, it still
had close to $200 billion in other mortgages on its books, denoting the
strong possibility of many more to come.
Citigroup had a massive portfolio of credit cards 185 million accounts
worldwide that we felt could be the final nail in its coffin. Even
before the most recent episode of the global financial crisis, Citigroups
losses on bad credit cards had surged by 67% from a year earlier. Worse,
the number of credit cards 90 days past due was going through the roof,
foreshadowing more large losses on the way. All of these weaknesses were
detailed in Citigroups financial statements. Not detailed, however,
are bets made mostly with borrowed money. They are bets on interest rates,
bets on foreign currencies, bets on stocks, bets on corporate failures,
even bets on bets. The bets are placed by banks with each other, banks with
brokerage firms, brokers with hedge funds, hedge funds with banks, and more.
They are often
high risk. And they are huge. According to the U.S. Comptroller of the Currency
(OCC), on June 30, 2008, U.S. commercial banks held $182.1 trillion in notional
value (face value) derivatives.1 And, according to the Bank of International
Settlements (BIS), which produced a tally six months earlier for the entire
world, the global pile-up of derivatives, including institutions in the
U.S., Europe and Asia, was more than three times larger $596 trillion.2
That was ten
times the gross domestic product of the entire planet
more than 40
times the total amount of mortgages outstanding in the United States
nearly 60 times greater than the already-huge U.S. national debt.
of derivatives claim that these giant numbers overstate the risk. They argue
that most players hedge their bets and dont have nearly that much
money at stake. True. But that isnt the primary risk these players
understand how all this works, consider a gambler who goes to Las Vegas.
He wants to try his luck on the roulette wheel, but he also wants to play
it safe. So instead of betting on a few random numbers, he places some bets
on the red, some on the black; or some on the even and some on the odd.
He rarely wins more than a fraction of what hes betting, but he rarely
loses more than a fraction either. Thats similar to what banks like
Citigroup do with derivatives, except for a couple of key differences:
#1. They dont bet against the house. In fact, there is no house to
bet against. Instead, they bet against the equivalent of other players around
#2. Although they do balance their bets, they do not necessarily do so with
the same player. So back to the roulette metaphor, if Citigroup bets on
the red against one player, it may bet on the black against another player.
Overall, its bets are balanced and hedged. But with each individual player,
theyre not balanced at all.
#3. As I said, the amounts are huge millions of times larger than
all of the casinos of the world put together.
are the urgent questions that, as of today, remain largely unanswered:
What happens if there is an unexpected collapse?
What happens if that collapse is so severe it drives some of the key players
Most important, what happens if these players cant pay up on their
This is the
question I have asked here in Money and Markets month after month. Almost
everyone said it was far-fetched, that I was overstating the risk. Yet,
each of the hypothetical events I cited in the above three questions have
now taken place in 2008.
witnessed the unexpected collapse of the largest credit market in the worlds
largest economy the U.S. mortgage market.
witnessed the bankruptcy or near-bankruptcy of three key players in the
derivatives market Bear Stearns, Lehman Brothers and Wachovia Bank.
also got the first answers to the last question: We saw the threat of a
major, systemic meltdown in the entire global banking system.
You can read
his full post at Martin
Weiss's Money and Markets.
out solar panels for your house. Under the
recent bailout plan's terms, homeowners qualify for a federal tax credit that
equals 30 percent of a photovoltaic system's cost beginning January 1. The
current cap of $2,000 is removed. Also, business owners will no longer trigger
payment of an alternative minimum tax by claiming the credit. According to
George Villec, owner of Geo Innovation in Arizona, the 30 percent federal
credit, combined with utility company rebates and state tax credits, will
make it possible to buy a system for a third of its actual cost. Your state
give gift cards for Christmas. Every retailer
is closing stores. Some are closing altogether. And some are going bankrupt.
You'll need a government bailout to get your gift cards redeemed for real
stuff you don't need.
buy anything -- unless it's on sale. Everything is. Always question
the price. Everything is on sale. Or there's a cents-off coupon somewhere.
Clothing. Jewelry. Hotels. Computers. Electronics. Apartments. Buildings.
Always offer a ridiculously low price and be prepared to walk. Cash works
even better. Timing is key. "Call me when you need my money." Don't
get emotionally involved. In today's world, there's always a better
Dumb. Dumb. Verizon Wireless has admitted that some of its employees
viewed Obama's cellphone records without authorization. My takeaway:
records, voice mails and emails are easily monitored. Your laptop is easily
hacked, despite your "erasing" stuff. Do not use electronic
communications if you're doing something you don't want others to know about.
Skip all electronics. Speak to them in person.
your grass to four inches, not two. Four
inch cut grass grows longer roots. This useful advice comes from our local
grass expert who experimented with growing different heights of grass in a
plastic ant farm, of all things. Finally, you've learned something useful
from this column.
it now. Inspire urgency. Kotter is a Harvard Business School professor.
He's found that 70% of the time corporations do big things -- like implement
new growth strategies, put in new IT systems, reorganize to cut expenses --
they fail. He writes in his new book, "If a sense of urgency is
not high enough .., everything else becomes so much more difficult. The difficulties
add up to produce failure, pain, disapointment and that distressing 70%."
You can read
the book in an hour. I did last night. It's got some useful ideas. In my old
management days, we used to believe in "Just doing it, not analyzing
it endlessly. If we analyzed we'd lose the oppoortunity. ." Nice t-shirt,
But Nike make it only in boys sizes.
TEACHER: Maria, go to the map and find North America.
MARIA: Here it is.
TEACHER: Correct. Now class, who discovered America?
how do you spell 'crocodile?'
TEACHER: No, that's wrong
GLENN: Maybe it is wrong, but you asked me how I spell it.
TEACHER: Winnie, name one important thing we have today that we didn't have
ten years ago.
Washington not only chopped down his father's cherry tree, but also admitted
it. Now, Louie, do you know why his father didn't punish him?LOUIS: Because
George still had the axe in his hand.
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
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