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Article Archive: 2008

Dividends and the three dwarfs
12/31/08   Dividends
"The importance of dividends for providing wealth to investors is self-evident. Dividends not only dwarf inflation, growth, and changing valuation levels individually, but they also dwarf the combined importance of inflation, growth, and changing valuation levels. This result is wildly at odds with conventional wisdom, which suggests that, while the return from bonds is wholly dependent on income, stocks provide growth first and income second. It is startling to realize that dividend growth has averaged less than 1 percent above inflation during the past 200-year period. And it is shocking that real per-share dividend and earnings growth on the S&P 500 Index since 1965 has been zero."

GMAC, the Fed, and moral hazard
12/30/08   Government
"These are important questions, because this is not the last time that bondholders are going to be asked to give up money they're owed in order to save a company. In fact, a much bigger bond exchange is looming: one from GM itself. And nowhere are moral hazard considerations more important than when it comes to the tactics of distressed-debt exchanges. If a bailout is coming anyway, then a smart bondholder will always stay out of any exchange. And if most bondholders are smart, then no distressed company can effect a significant debt reduction without declaring bankruptcy."

Capitalism is worst system except for the rest
12/30/08   Government
"Fixing the price of any other commodity, including labor, has proven to be a failure, an affront to the inviolable invisible hand. Yet when it comes to setting the interest rate that will keep the economy on an even keel, we put our faith in a chosen few to get it right. All sorts of unintended consequences flow forth from central bankers' fixing of a short-term rate."

Will work for praise
12/30/08   Management
"Beyond brand-hungry strivers, masses of free laborers continue to toil without ever seeing a payday, or even angling for one. Many find compensation in currencies that predate the market economy. These include winning praise from peers, earning an exalted place within a community, scoring thrills from winning, and finding satisfaction in helping others."

Home prices post record 18% drop
12/30/08   Real Estate
"Home prices posted another record decline in October, falling 18% compared with a year earlier, according to a closely watched report released Tuesday. The 20-city S&P Case-Shiller index has posted losses for a staggering 27 months in a row. In October, 14 of the 20 cities set fresh price decline records."

Buffett wins $224 million storm bet
12/30/08   Buffett
"Billionaire Warren Buffett.s Berkshire Hathaway Inc. won a $224 million bet that Florida would escape major damage from hurricanes this year."

21 dumbest moments in business 2008
12/29/08   Fun
"We don't know whether to laugh or cry. Our annual list of the year's most laughable moves proves that, even in moments of crisis, stupidity lives on."

Former WaMu employees tell of the push to lend
12/29/08   Real Estate
"As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers'. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes. Yet even by WaMu's relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer."

Bailout of Long-Term Capital
12/29/08   Government
"The financial crisis is a result of many bad decisions, but one of them hasn.t received enough attention: the 1998 bailout of the Long-Term Capital Management hedge fund. If regulators had been less concerned with protecting the fund.s creditors, our current problems might not be quite so bad."

Trickledown meltdown
12/28/08   World
"In this very poor corner of Bangladesh, where rice farmers get by on household incomes of less than $1 a day, where the most popular mode of transportation is the pedal-rickshaw and where life doesn't seem to have changed for centuries, it's hard to believe that anyone could be affected by the crisis that has humbled Wall Street and Canary Wharf. But the credit crunch is the main topic of conversation in the rice paddies and village bazaars here. It is hard to find anyone, from vegetable sellers to floor sweepers, whose life has not been affected by the collapse of institutions in New York and London."

Accounting standards wilt under pressure
12/27/08   Accounting
"World leaders have vowed to help prevent future financial meltdowns by creating international accounting standards so all companies would play by the same rules, but the effort has instead been mired in loopholes and political pressures."

U.S. Treasuries head toward wekly loss
12/26/08   Markets
"Rates on one-month and three-month Treasury bills fell below zero as investors sacrificed interest-rate payments to protect their principal. Rates on one-month bills were minus 0.05 percent, and three-month rates were minus 0.01 percent."

A mortgage bailout plan's paltry results
12/26/08   Government
"Basically, the plan was to offer as much as $300 billion in government-guaranteed home loans to people whose current mortgages exceed the value of their houses; 400,000 people would benefit, it was said. Well, the early returns are in, and the program is, at this point, a flop. There have been only 312 applications, according to the Department of Housing and Urban Development. At that rate, the three-year program would help only about 5,400 borrowers."

Obama's program flunks basic math
12/26/08   Government
"O'Neill did the math so you don't have to. Each job 'will cost $250,000, which doesn't suggest much labor intensity for the dollars spent,' he said. 'It makes me wonder if any of the planners or commentators are good at arithmetic.' They're not good at arithmetic. And one wonders about their facility with economics."

December surprise
12/26/08   Markets
"Before investors panic at the prospect of publicly-traded oil companies writing down hundreds of millions or billions of barrels of "proved reserves" for accounting disclosure purposes next year, they need to consider where the volumes in question will have gone. Were they merely shifted from the "proved" to "probable" category--thus not affecting the amount of oil that would ultimately be produced--by a temporary oil glut arising from a global recession, or did their existence depend on an oil-price bubble that is unlikely to reflate?"

California will run out of money in February
12/26/08   Government
"Property taxes, the mainstay of any state's income, have been frozen for many homeowners since a proposition was passed in the late 1970s. A separate measure, introduced in the 1980s, means that income taxes cannot be raised without the agreement of two-thirds of the state's lawmakers. Meanwhile, a raft of other ballot measures control spending, meaning that only 25 per cent of California's spending is considered "discretionary". The rest has been "earmarked" for a particular cause or project."

Solar meets polar
12/26/08   Government
"Old Man Winter, it turns out, is no friend of renewable energy. This time of year, wind turbine blades ice up, biodiesel congeals in tanks and solar panels produce less power because there is not as much sun. And perhaps most irritating to the people who own them, the panels become covered with snow, rendering them useless even in bright winter sunshine."

U.S. holiday sales tumble
12/26/08   Economy
"Consumers spent at least 20 percent less on women.s clothing, electronics and jewelry during November and December, resulting in what may be the biggest holiday-shopping sales decline in four decades."

The south sea bubble of 1720
12/26/08   Fun
Bird and Fortune on the South Sea Bubble.

Gable's favourites from 2008
12/26/08   Fun
"Globe cartoonist shares his favourites from 2008"

Merry Christmas!
12/25/08   Christmas
"A collection of links to help inspire a little Christmas cheer."

Get ready for a lost decade
12/24/08   Government
"How many times have you heard that we've learned the lessons of the Great Depression and won't repeat the same mistakes? That statement is a bit of a false promise, since there was only one Great Depression, and many, many steps were taken and not taken, with no chance to rerun the experiment over and over to figure out what worked, or would have worked, and what didn't."

What's in a name?
12/24/08   Stocks
"Underlying the best brands are usually sales pitches of great stuff. Macs don't crash. The iPhone 3G is fast. FedEx gets there every time. The Lexus parks itself. Canon is the professional's camera. Even Pepsi - the company that more or less created modern branding with the slogan "The Taste of a New Generation" - decided in the end that, actually, it was easier to sell soda with the Pepsi Challenge taste test. At the very top of the Interbrand list you will find Coca-Cola, the great outlier of the brand world. Far from the model of how brands work, Coke is the great exception. The vast majority of great brandmakers knows that you cannot sell products by telling people about your brand - you can sell your brand only by telling them about the product."

California crisis may crunch jobs
12/24/08   Government
"Republican Governor Arnold Schwarzenegger and the Democratic-controlled Legislature are deadlocked on how to close a two-year budget gap that grew to $42 billion as job losses and stalled consumer spending reduced income and sales taxes. Schwarzenegger and Democratic leaders met yesterday without a resolution and are scheduled to continue talks through the holidays. "

Online shopping and the Harry Potter effect
12/23/08   Markets
"Her findings suggest that the long tail is far from the revolution Anderson claimed. The tail is indeed getting longer, but isn't, as Anderson thought, growing fat with choice. Instead it is getting both flatter and thinner, filled with ever more products that sell few or no copies. Low overheads or no overheads, that kind of long tail is not a rich man's world, least of all for producers. Suppliers are always going to be better off concentrating on the mass-market money-spinners, says Elberse."

Should you invest in the long tail?
12/23/08   Markets
"It was a compelling idea: In the digitized world, there.s more money to be made in niche offerings than in blockbusters. The data tell a different story."

U.S. home prices drop by record 13.2%
12/23/08   Real Estate
"Purchases declined 8.6 percent to an annual rate of 4.49 million, from a 4.91 million rate in October that was less than previously estimated, the National Association of Realtors said today in Washington. The median price dropped 13.2 percent from a year earlier, the biggest decline since records started in 1968. Separately, the Commerce Department reported today that new-home sales fell 2.9 percent last month to a 17-year low."

Five things you should know about bear markets
12/22/08   Hallett
"North American stocks have been halved. Overseas stocks have lost even more. Indeed, bear markets can be frightening but they are necessary. In order to enjoy the long-term rewards of investing in stocks, investors must shoulder the associated risks. One of those risks is the occasional emergence of a bear market (a decline of 20 per cent or more). To better understand this risk, here are five things you need to know about this unwelcome beast."

Daddy, where do bailouts come from?
12/22/08   Government
"I know it must sound strange, Junior. Many of the companies getting government money did bad things. They took risks with other people's money. They padded their own pockets instead of watching out for their customers. And they lost a lot of money in the process."

All the regulations money can buy
12/22/08   Government
"When congress and two presidents get tired of shoveling our unborn grandchildren's money into the bad debt inferno, sure as night follows day our public servants will embark on an orgy of regulatory rule making intended to ensure that nothing like this ever happens again. How'd that work out last time?"

So, Scrooge was right after all
12/21/08   Christmas
"It's a little-known fact that the first economic rationalist was Ebenezer Scrooge. That's because economists simply can't understand why people would do something as stupid as giving presents at Christmas. Conventional economics teaches that gift giving is irrational. The satisfaction or "utility" a person derives from consumption is determined by their personal preferences. But no one understands your preferences as well as you do. So when I give up $50 worth of utility to buy a present for you, the chances are high that you'll value it at less than $50. If so, there's been a mutual loss of utility. The transaction has been inefficient and "welfare reducing", thus making it irrational. As an economist would put it, "unless a gift that costs the giver p dollars exactly matches the way in which the recipient would have spent the p dollars, the gift is suboptimal". This astonishing intellectual breakthrough was first formulated in 1993 by Joel Waldfogel, an economics professor now at the University of Pennsylvania, in his seminal paper, The Deadweight Loss of Christmas."

What I like about Scrooge
12/21/08   Christmas
"Here's what I like about Ebenezer Scrooge: His meager lodgings were dark because darkness is cheap, and barely heated because coal is not free. His dinner was gruel, which he prepared himself. Scrooge paid no man to wait on him. Scrooge has been called ungenerous. I say that's a bum rap. What could be more generous than keeping your lamps unlit and your plate unfilled, leaving more fuel for others to burn and more food for others to eat? Who is a more benevolent neighbor than the man who employs no servants, freeing them to wait on someone else?"

The case for Ebeneezer
12/21/08   Christmas
"As I became older, I decided that Mr. Dickens had given Ebeneezer Scrooge an undeserved reputation for villainy, placing him in such company as Uriah Heep, Iago, Dr. Moriarty, or Snidely Whiplash, to name but a few. It is my purpose, in making this holiday defense of my client, to present to you a different interpretation of the story, that you will see the villainy not in my client's character, but in Charles Dickens' miscasting of the true heroes of the time of which he wrote, namely, the industrialists and financiers who created that most liberating epoch in human history: the industrial revolution."

US market may be past a bottom
12/21/08   Markets
"While despair still prevails, there are finally certain hints to suggest that the US market may have bottomed, or at least, is in an advanced stage of bottoming."

News you can lose
12/21/08   Stocks
"The peculiar fact about the current crisis is that even as big papers have become less profitable they've arguably become more popular. The blogosphere, much of which piggybacks on traditional journalism's content, has magnified the reach of newspapers, and although papers now face far more scrutiny, this is a kind of backhanded compliment to their continued relevance. Usually, when an industry runs into the kind of trouble that Levitt was talking about, it's because people are abandoning its products. But people don't use the Times less than they did a decade ago. They use it more. The difference is that today they don't have to pay for it. The real problem for newspapers, in other words, isn't the Internet; it's us. We want access to everything, we want it now, and we want it for free. That's a consumer's dream, but eventually it's going to collide with reality: if newspapers. profits vanish, so will their product."

Wicked investments
12/20/08   Stingy Investing
"What constitutes a sin stock? The answer is very much in the eye of the beholder. Tobacco, gambling and defence companies are routinely condemned by the socially responsible crowd. You might want to add various Wall-Street financial firms to the list of the damned given their recent antics."

Is the medicine worse than the illness?
12/20/08   Grant
"The world ran out of trust in 2008 -- but there is no shortage of money because the Fed is printing like mad. It's the wrong approach, with potentially dire consequences, says James Grant."

Nanny State 2008
12/19/08   Government
"Do you really want to live in a world where giant inflatable apes are banned? Reason.tv takes a short, depressing look at nanny state bans that were passed or proposed in 2008."

Is it all over for stocks?
12/19/08   Markets
"Stocks look like a pretty good investment - certainly better than they were a year ago. You absolutely shouldn't get out simply because the recent return numbers are scary. The latest bad news about the economy shouldn't drive you away either. Much of that is reflected in prices now. Even for many not-especially-brave investors, it's time to consider buying, not selling."

In defense of scrooge
12/19/08   Christmas
"It's Christmas again, time to celebrate the transformation of Ebenezer Scrooge. You know the ritual: boo the curmudgeon initially encountered in Charles Dickens's A Christmas Carol, then cheer the sweetie pie he becomes in the end. It's too bad no one notices that the curmudgeon had a point - quite a few points, in fact."

Options expiration week
12/19/08   Markets
"As the graph shows, for the last 21 years, the week leading up to options expiration (red) has been consistently bullish and the weeks before and after bearish in terms of both returns and percentage positive."

How sticky are wages?
12/19/08   Management
"There's been a huge shift in power in recent years from labor to capital: corporate profits have been rising much faster than wages for some time now. It makes sense that capital would make use of its newfound power to reduce labor costs in a deflationary environment of rising unemployment. During the boom, companies laid off workers because those workers demanded, and cost, too much money. Now that workers have lost their negotiating leverage, we might start seeing more across-the-board pay cuts."

GM and Chrysler will get $13.4 Billion
12/19/08   Government
"General Motors Corp. and Chrysler LLC will get $13.4 billion in emergency government loans in exchange for substantially restructuring their businesses, President George W. Bush announced. Another $4 billion will be available to GM in February providing Congress releases the second half of the $700 billion Troubled Asset Relief Program fund originally set up to bail out financial institutions. The automakers have until March 31 to meet the conditions of the loans, including demonstrating they have a plan to become profitable, or be forced to repay."

The age of obligation
12/19/08   Debt
"Excessive debt is the key to this crisis; it is the reason we are confronting no ordinary recession, curable by a simple downward adjustment of interest rates. It is the reason we still have to fear, if not a second Great Depression, then very likely the biggest recession since the 1930s. We are living through the painful end of an age of leverage which saw total private and public debt in the US rise from about 155 per cent of gross domestic product in the early 1980s to something like 342 per cent by the middle of this year."

Employee free choice act is unconstitutional
12/19/08   Law
"The government-chosen panel could well impose terms that might cripple the firm competitively. Consider that the takings clause surely prevents the government from forcing any person to buy real estate for twice its market value from a seller. That same principle applies to this labor law: No government should be able to force a firm to hire labor at $50 per hour when the company is not willing to pay half that much."

Federal Reserve is damned either way
12/19/08   Markets
"The burden of debt increases as prices fall, creating self-feeding spiral. This is what Fisher called the "swelling dollar" effect. Real debt costs rose by 40pc from 1929 to early 1933 by his count. Debtors suffocated to death. Brian Reading from Lombard Street Research has revived this neglected thesis and come up with some disturbing figures. US household debt is now $13.9 trillion, down just 1pc from its peak last year. Meanwhile household wealth has fallen 14pc as property crashes, a loss of $6.67 trillion. The debt-to-wealth ratio is rocketing."

Deleveraging can save jobs
12/18/08   Government
"One part of the solution to the current crisis is for Congress and the Treasury to restore, temporarily, the option for companies to deleverage by retiring debt at a discount without incurring tax liability. Tax-code and regulatory changes in the 1980s limited this option by treating the difference between the original issue price of debt and the lower amount for which it's repurchased as taxable income. The resulting tax liability on this "phantom income" decreases liquidity and blocks necessary restructuring of distressed corporate balance sheets. It also creates a perverse preference for bankruptcy that destroys asset values, jobs and customer relations. Finally, it puts American companies at a disadvantage relative to their competitors in nations with more accommodating tax structures, such as Germany and France. We believe American enterprises should be encouraged to deleverage, whether by exchanging newly issued or existing stock for debt, or using cash from asset sales. This is the worst possible time to impose a tax liability on companies trying to avoid layoffs by reducing their interest payments on debt. Freed from a tax on phantom income, thousands of companies will become stronger through deleveraging."

Seth Klarman one on one
12/18/08   Klarman
"First, value investing is intellectually elegant. You.re basically buying bargains. It also appeals because all the studies demonstrate that it works. People who chase growth, who chase highfliers, inevitably lose because they paid a premium price. They lose to the people who have more patience and more discipline. Third, it.s easy to talk in the abstract, but in real life you see situations that are just plain mispriced, where an ignored, neglected, or abhorred company may be just as attractive as others in the same industry. In time, the discount will be corrected, and you will have the wind at your back as a holder of the stock."

Counterfeiting vs. monetary policy
12/18/08   Government
"The justifications for Federal Reserve Act of 1913 was to prevent bank failure and maintain price stability. Simple before and after analysis demonstrates that the Federal Reserve Bank has been a failure. In the century before the Federal Reserve Act, wholesale prices fell by 6 percent; in the century after they rose by 1,300 percent. Maximum bank failures in one year before 1913 were 496 and afterward, 4,400. During the 1930s, inept money supply management by the Federal Reserve Bank was partially responsible for both the depth and duration of the Great Depression."

Pan Am dies, America lives
12/18/08   Government
"The whole financial crisis is about the death of responsibility: the buck stopped nowhere. Everyone profited from toxic paper. Bernard Madoff, he of the alleged multibillion-dollar Ponzi scheme, is only the latest example. Irresponsibility has also characterized Detroit. I don.t see how you restore responsibility with a bailout."

The great unraveling
12/17/08   World
"The stranger, a Western businessman, slipped into the chair next to me at an Asia Society lunch here in Hong Kong and asked me a question that I can honestly say I've never been asked before: 'So, just how corrupt is America?'"

Fed reduces borrowing costs to zero range
12/16/08   Markets
"Treasuries rose, pushing yields to record lows, after the Federal Reserve cut the main U.S. interest rate to a range of zero to 0.25 percent and said central bankers will do whatever is necessary to ease the longest recession in a quarter-century."

The unwisdom of crowds
12/16/08   Markets
"At the very opening of the book, Bagehot illustrates with exquisite simplicity how, at least in a boom economy, traders on margin can "harass and press upon, if they do not eradicate, the old capitalist." The old capitalist in question is the poor sap who believes all this stuff about neither-a-borrower-nor-a-lender-be and is foolish enough to be using his own cash"

Fat discrimination tax
12/16/08   Government
"It made the financial news, because everyone knows it's not really about health. But even the numbers don't add up. New York Governor, David Paterson, has proposed a 15% tax on sugar-sweetened sodas, calling it an obesity tax. That makes it sound like it has a noble intention of public health concerns over obesity, when, as the Financial Times noted, it's really just a way to raise money to help address the state's $13.3 billion deficit. But even that's pretty sorry math."

Unemployment: worse than it looks
12/15/08   Economy
"As U.S. jobs disappear at a rapid clip, the official unemployment figure seems understated. While November's 6.7% rate is a full 2% higher than the same time last year, the rate remains well below the 10.8% postwar peak, reached in November 1982. One issue is that the official unemployment number captures only a slice of the total joblessness in the U.S. To be counted as unemployed in this statistic, a worker must not have a job, be currently available for work, and have actively sought employment within the last four weeks. In other words, a lot of the jobless are left out of the government's tally."

The Perfect Ponzi
12/15/08   Crime
"As the investigations into Bernie Madoff's gigantic Ponzi scheme continue, one thing is becoming clear: The reason it lasted so long and got so huge is that it was superbly executed."

Finding the gaps
12/15/08   Markets
"In short, to arbitrage, you need both access to credit and confidence that market conditions will return to normal. Both are in short supply. If we want the financial system to recover, we need the arbitrageurs to come back."

How high-risk mortgages crept north
12/13/08   Real Estate
"The untold story of how elements of the first Conservative budget in 2006 encouraged big U.S. players such as AIG to make a push into Canada, creating our version of subprime mortgages"

Suddenly vulnerable
12/13/08   World
"In two respects, however, India has a big advantage over China in coping with an economic slowdown. It has all-too extensive experience in it; and it has a political system that can cope with disgruntlement without suffering existential doubts. India pays an economic price for its democracy. Decision-making is cumbersome. And as in China, unrest and even insurgency are widespread. But the political system has a resilience and flexibility that China's own leaders, it seems, believe they lack. They are worrying about how to cope with protests. India's have their eyes on a looming election."

How can you spot a wall street crook?
12/13/08   Crime
"The key concept here, developed by MIT professor and noted hedge-fund theorist Andrew Lo, is "serial correlation." Simply put, serial correlation is the degree to which each month's returns in a fund mirror the results of the month before. A fund that returns the exact same amount every month is perfectly serially correlated. Madoff's returns were strikingly consistent month after month, year in and year out. That kind of performance - a nice, smooth line going up no matter what the market does - is a really good sign that you should look more closely."

'Already bankrupt' GM won't be rescued by loan
12/13/08   Stocks
"For General Motors Corp., the question is no longer whether it will get a government loan or if Chief Executive Officer Rick Wagoner will be replaced. It's whether anything can prevent the largest U.S. automaker from sliding into bankruptcy. "

The American Dream?
12/13/08   Real Estate
"Using a unique data set that links up well-being and housing consumption, this paper sets out to measure systematic differences between homeowners and renters, in term of moment-to-moment emotions, life satisfaction, joy and pain derived from domains of life including home and neighbourhood, family life and time use. A remarkable similarity between homeowners and renters is found. Controlling for demographics and income, homeowners do not report higher levels of well-being by any measure in this data set. In fact, they report to be less healthy, derive less joy from love and relationships, spend less time with friends and on active leisure, and also experience less positive affect during time spent with friends. Their time use patterns reveal little evidence of them being "better citizens". Due to self-selection in the housing tenure choice, these results are likely to represent upper bounds of the causal benefits of homeownership. Homeowners who live in ZIP code areas with higher rates of homeownership report more positive attitudes only if other owners are similar to them in socio-economic terms, lending some support to the idea of beneficial social interaction among owners."

Muni-bond funds face record losses
12/13/08   Bonds
"With the stock market down more than 40% and Treasury bond yields at 50-year lows, municipal bonds can seem an attractive option. And while some managers see once-in-a-lifetime bargains in the muni market, several funds have cratered."

The case for bonds
12/13/08   Bonds
"Boring is beautiful - or so it feels in this time of wild and crazy stock market swings. In this case we're talking about investment-grade corporate bonds, which are dirt-cheap right now for the same reason that stocks are: The market turmoil has pounded down their prices. The result is historic opportunities in bonds issued by blue-chip companies."

Self-employed? Make sure business is for real
12/13/08   Taxes
"Take a business-like approach to pursuing revenues in your business. Have a marketing plan, and be prepared to explain how you plan to increase revenues over time. Next, make sure you understand, and can explain, what it will take to be profitable (how many widgets you need to sell, how many performances you need to make, etc.). Finally, try to avoid reporting losses for more than a couple of years. This could raise a flag on your tax return."

Dividend ETFs: One way to ride out the storm
12/13/08   Dividends
"A jump back into the stock market right now will pay dividends right away. This is not a market-timing call, but rather a statement of fact. If you buy into an exchange-traded fund that tracks the broad stock market, you'll put yourself in a position to start receiving a surprisingly good flow of dividends."

'Financial psychopaths' wreak havoc
12/13/08   Crime
"Two of the most remarkable frauds in the history of finance were exposed this week. They are just beginning to unravel and as such we don't fully understand the magnitude of the crimes. But already I can tell you they are of epic, even cinematic, proportions. This is really from the "can't make this stuff up" school of news. These two miscreants aren't just every day corner-cutters, they are world-class whack."

'Dilbert' on how to save your career
12/13/08   Fun
"I'm drawing a series right now where he gets laid off and he has to go through a really tough bunch of interviews to try and get another job. At one point he is asked whether he would take a bullet for a prospective employer and they make him go to a firing range to prove it."

'Illegal' glacier investment juiced returns
12/12/08   Crime
"His funds were the envy of the imploding hedge fund sector, managing to deliver a 159-per-cent return so far in a year marred by the worst bear market in decades. Now Otto Spork, a former dentist, is facing allegations that the fund's returns were juiced by unsubstantiated valuations in several underlying investments in Icelandic glaciers."

The IBM fortune and the funeral home director
12/12/08   Thrift
"A couple of months ago, Robert McDevitt died at 90 in Binghamton, N.Y., my hometown. He ran a nice-enough but unremarkable funeral home near the center of town, about two blocks from where my parents now live. Over the past week, his will has become public, revealing that while McDevitt spent his time embalming local bodies and soothing mourners -- he was worth $250 million."

Top broker accused of $50 billion fraud
12/12/08   Crime
"Bernard L. Madoff, a former chairman of the Nasdaq Stock Market and a force in Wall Street trading for nearly 50 years, was arrested by federal agents Thursday, a day after his sons turned him in for running what they said their father called "a giant Ponzi scheme." The Securities and Exchange Commission, in a civil complaint, said it was an ongoing $50 billion swindle, and asked a judge to seize the firm and its assets. "Our complaint alleges a stunning fraud that appears to be of epic proportions," said Andrew M. Calamari, associate director of enforcement in the SEC's New York office."

$73 an hour: adding it up
12/11/08   Stocks
"That figure - repeated on television and in newspapers as the average pay of a Big Three autoworker - has become a big symbol in the fight over what should happen to Detroit. To critics, it is a neat encapsulation of everything that's wrong with bloated car companies and their entitled workers. To the Big Three's defenders, meanwhile, the number has become proof positive that autoworkers are being unfairly blamed for Detroit's decline."

Market bottom by year-end
12/11/08   Markets
"It is one of the ironies of stock-market timing that it is easier to forecast where the market will be in several years than where it will be in several days. And, according to a valuation model from a research firm with an excellent long-term record, the stock market is likely to be significantly higher in several years' time -- regardless of whether the final low of the last year's bear market has been seen."

Housing goals we can't afford
12/11/08   Government
"The Community Reinvestment Act was passed in 1977 when bank competition was sharply limited by law and lenders had little incentive to seek out business in lower-income neighborhoods. But in 1995 the Clinton administration added tough new regulations. The federal government required banks that wanted .outstanding. ratings under the act to demonstrate, numerically, that they were lending both in poor neighborhoods and to lower-income households."

Tobin's Q indicates 'horrific' market bottom
12/09/08   Markets
"The 2008 slump in global equities has further to go if Tobin's Q ratio is any guide, according to CLSA Ltd. strategist Russell Napier. The ratio, a method of valuing U.S. companies developed by Nobel Prize laureate economist James Tobin, indicates that the Standard & Poor's 500 Index, set for its worst year since 1931, may sink by another 55 percent to 400 when the market bottoms around 2014, London-based Napier said. The ratio divides total market capitalization by the cost of replacing assets."

Want to lend money to Uncle Sam?
12/09/08   Bonds
"What would your reaction be if you had a friend who had reached the limit on 20 different credit cards and then came to you to borrow $100? Then imagine that you actually said yes, and when you went to give your friend the $100, he or she actually asked for $101 just for the privilege of loaning the money. Well, that is exactly what is happening (to a lesser degree) in the US T-bill market. As just another example of the crazy times we are living in, the yield on 3-Month Treasuries went negative today."

Contango pays most in decade
12/08/08   Markets
"In the worst year ever for oil, investors can lock in the biggest profits in a decade by storing crude."

Most likely to succeed
12/08/08   Academia
"This is the quarterback problem. There are certain jobs where almost nothing you can learn about candidates before they start predicts how they'll do once they're hired. So how do we know whom to choose in cases like that? In recent years, a number of fields have begun to wrestle with this problem, but none with such profound social consequences as the profession of teaching."

Market woes hit newer ETFs
12/08/08   Indexing
"The market mayhem hasn't stopped fund companies from rolling out scores of new exchange-traded funds this year. But it has made it tough for many of these young funds to gain traction, and that could mean trouble for investors."

After crappy decade, stocks always do great?
12/08/08   Markets
"There's a new refrain that a lot of folks keep repeating these days: When stocks do as badly as they have over the past decade, they usually do great over the following decade. Sadly, like a lot of stock market refrains, it's not really true."

Private matters
12/08/08   Academia
"Why do private firms stay private? Empirical evidence on this issue is sparse, as most private firms in the US do not report their financial results. We investigate why private status matters by taking advantage of a unique dataset of large, leveraged private firms with SEC filings. Unlike a number of other studies, we find that neither the existence of growth opportunities, nor the desire of firm founders to diversify, is a principal determinant of the decision whether or not to retain private status. Rather, the existence of private benefits of control appears to serve as the most significant incentive to stay private. Family-controlled firms have significantly lower probabilities of filing for an IPO, while a board structure that grants management relatively more autonomy lowers the probability of an IPO filing as well. Crosssectional analysis of profitability and ex post performance suggests that while private benefits of control may encourage firms to stay private, they do not have detrimental effects on firm efficiency. In contrast, firms controlled by private equity specialists appear to place a low value on control benefits and are likely to go public as a means of cashing out."

Macroeconomics is complete bunkum
12/08/08   Economics
"I confess that the only Hayek book I made it through without my eyes glazing over was 'The Fatal Conceit.' It's a slim volume written later in life, apparently after Hayek discovered humbleness, an unusual discovery for an economist. His thesis is simple - 'I don't care how smart you are, you can't keep track of all this s**t.' Economists who believe they can centrally plan a national economy and optimize - what, some flaky set of poorly defined aggregates? - are deluded. Politicians who promote these delusions to arrogate power to themselves are knaves. And voters who buy this fantasy are dupes. Yet Hayek be damned, here we go again."

When the golden eggs run out
12/07/08   Markets
"Risky assets look more attractive now than they have in ages. Corporate-bond spreads are sufficient to compensate for the kind of default levels seen in the Depression. Stockmarkets in America and Europe now offer a dividend yield that is higher than the yield on government bonds, something that has happened only rarely in the past 50 years."

Help Mississippi, not Michigan
12/07/08   Government
"Yet if GM represents all that is bad about the American economy, particularly manufacturing, it does not represent the breadth of our industrial landscape. Indeed, even as the dull-witted leviathan sinks, many nimble companies have shown remarkably resiliency."

Discounters face battle on minimum pricing
12/07/08   Law
"Manufacturers have been racing to enforce minimum-pricing policies since last year, when the Supreme Court ruled them to be legal, and not a violation of antitrust law. EBay and a group of other retailers and antitrust advocates are meeting Thursday in Washington to craft a strategy to overturn that ruling."

The limits of Apollo's power
12/07/08   Markets
"Part of the allure of private-equity honchos like Mr. Black is that they made an art out of making money during the boom years. Their fist-pounding negotiations were legendary. Their corporate turnarounds became Harvard Business School case studies. Their multiple homes, black-tie parties, sports cars and yachts were alternately envied and vilified. Today, with Wall Street in tatters and the easy money long gone, the question now for Mr. Black and his peers is whether they have enough moves left to turn the bleak outlook for private equity into something rosier for themselves, their companies, their investors and the legions of workers they employ."

Imbalances threaten survival of liberal trade
12/07/08   World
"In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy."

Where have all your savings gone?
12/07/08   Thrift
"For American and European savers it has been a lost decade. After two booms and two busts, stockmarkets have earned them nothing, or less, in the past ten years. Low interest rates have made bonds and bank deposits unrewarding too. Were it not for the tax relief they receive, contributors to personal pension plans would have been better off keeping their money under their mattresses. It will be little consolation to Westerners that savers in Japan have known this empty feeling for far longer."

Leucadia's unmined potential
12/06/08   Value Investing
"Leucadia National may be the closest thing to what Berkshire Hathaway was 20 years ago, before Berkshire became so large that Warren Buffett needed investments of several billion dollars to move the needle."

Foreclosures soar 76%
12/05/08   Real Estate
"This means that one in 10 borrowers in America are either delinquent or in foreclosure. Many of those troubled borrowers are in California and Florida, which have among the highest delinquency rates in the nation."

The 2008 male recession?
12/05/08   Economy
"According to today's BLS report, the U.S. economy has lost 2.352 million jobs in the last year (Nov. 2007 to Nov. 2008). Further analysis shows that 82% of the job losses (1.932 million) were jobs held by males, and only 18% of jobs losses (430,000) were jobs held by females (see top chart above). Further, the November unemployment rate for men is 7.2% vs. only 6% for women, and the gap in jobless rates between men and women has been increasing for the last six months (see bottom chart above). What's going on?"

Grant sees 'disastrous inflation'
12/05/08   Grant
A Bloomberg audio podcast of a conversation with James Grant

A conversation with Nassim Taleb
12/05/08   Taleb
"A conversation about economics with Nassim Taleb author of "The Black Swan""

High yield credit spreads out of control
12/04/08   Bonds
"With the 10-Year Treasury currently yielding about 2.65%, high-yield borrowers currently have to pay nearly 23% per year to borrow money for a ten-year period. It's going to take pretty high margins to maintain profitability in this kind of environment."

Capitalism: the remix
12/04/08   Government
"The nastier this recession gets, the more people will talk about the discrediting of markets and the failure of deregulation. So the next time the Dow dives off a cliff, splash your face with ice water and remember two things: This end-of-capitalism talk is bunk, and it distracts us from the debate we should be having. The real question is how to manage the necessary shift in the balance of our mixed economy. Outlandish though it may sound now, red-blooded capitalism must be part of the answer."

US stock market returns
12/04/08   Markets
"This analysis clearly shows the strong long-term relationship between real returns and the level of valuation at which the investment was made."

The economic fight of the year
12/03/08   Economy
"In one corner stands Amity Shlaes, senior fellow at the Council on Foreign Relations, Bloomberg columnist, and author of The Forgotten Man, a history of the Great Depression. She points out that federal spending during the New Deal did not restore economic health. Unemployment stayed high and the Dow Jones Industrial average stayed low. In the other corner stands Nobel laureate Paul Krugman, a professor at Princeton University and a columnist of The New York Times. He believes that the New Deal didn't spend enough."

Economists have abandoned principle
12/03/08   Government
"Practically every day the government launches a massively expensive new initiative to solve the problems that the last day's initiative did not. It is hard to discern any principles behind these actions. The lack of a coherent strategy has increased uncertainty and undermined the public's perception of the government's competence and trustworthiness."

Are we watching the death of OPEC?
12/03/08   World
"The plunge from $148 a barrel to $50 a barrel in less than five months has opened huge fissures in the Organization of Petroleum Exporting Countries. Some members, such as Iran and Venezuela, are desperate to raise oil prices so they can balance their national accounts. More-conservative members, such as Saudi Arabia, can balance their budgets even at current prices and have room to fear they will be the scapegoats if the global recession deepens."

The other half of "artists ship"
12/01/08   Management
"As companies grow they invariably get more such checks, either in response to disasters they've suffered, or (probably more often) by hiring people from bigger companies who bring with them customs for protecting against new types of disasters. It's natural for organizations to learn from mistakes. The problem is, people who propose new checks almost never consider that the check itself has a cost."

Wheat from chaff
12/01/08   Markets
"The bottom line is simple. Stocks are a claim on a long-term stream of future cash flows. Even if one allows for a terrible and surprisingly deep continuation of the current recession, stocks appear reasonably priced or undervalued based on a careful analysis of long-term cash flow prospects."

The model made me do it
12/01/08   Derivatives
"At the bottom of every financial model there is in fact a stubborn lie - the pretense that financial markets operate in the manner of a physical process, subject to the iron laws of statistics, like atoms bouncing around in a thermodynamic equilibrium. This beguiling analogy makes it too easy for geeks like me to lose sight of a timeless truth: If atoms could talk to one another, then the laws of thermodynamics would get broken every day by clouds of stampeding gases."

10-year treasury yield lowest since 1955
12/01/08   Markets
"At 2.81%, the yield on the 10-Year Treasury Note has fallen to its lowest level since 1955. Below we highlight two charts of 10-Year Yields from 1900-1962 (monthly) and 1962-present (daily). While 2.81% is low compared to the last 50 years, the yield was actually lower than that from about 1935 to 1955."

Findependence day
12/01/08   Books
"The protagonists grapple with two key concepts - financial independence and guerrilla frugality. Financial independence (the book's title is a contraction of the term) refers to the goal for most of us: the day on which our assets are large enough to cover our living expenses and we don't have to work for a living anymore. ... Guerrilla frugality is the key means to achieve the end, financial independence."

Funny money
12/01/08   Fun
"I enjoy looking at political cartoons and in recent weeks they have certainly taken on a financial focus"

Fueling up the next bubble
12/01/08   Government
"The market normally dispatches the grim reaper to punish foolish entrepreneurs and credulous investors on a slay-as-you-go basis, returning talent and salvageable assets to the fertilizer heap. When played right, only the participants in the game lose their shirts. The cautious crowd gets to watch and say 'Tsk-tsk, they should have known better.' Sometimes, just sometimes, a crazy idea works. When it does, the lucky, smart and bold earn rich rewards. This rare dispensation of disproportionate wealth, along with the knowledge that failure is rarely fatal, is what motivates the thoughtful risk taking that propels genuine progress. Welcome to capitalism in its purest form. When the grim reaper's hand is staid by the twin forces of mass delusion and public policy, the game of capitalism mutates."

Stock market finally at fair value
12/01/08   Markets
"The good news, however, is that, after 15 years of being overvalued, the S&P 500 is finally priced to deliver an average long-term return: about 9%-10% in nominal terms and 6% after adjusting for inflation. That's nothing to scream and yell about, but it's likely to be a lot better than cash."

Holes in our socks
12/01/08   Economy
"Right about now, most businesses are trying to work out how their customers are likely to respond to the recession. Looking back to the last really nasty recession - the early 1980s - isn't much help for low-cost airlines, cell-phone companies, Internet retailers, producers of organic and fair-trade food, and many other businesses barely imagined at the dawn of the Reagan era. The economy has simply changed too much since then for experience to be a reliable guide."

It's official: recession since Dec. '07
12/01/08   Economy
"The National Bureau of Economic Research said Monday that the U.S. has been in a recession since December 2007, making official what most Americans have already believed about the state of the economy."

Wall Street winner: buy now
11/28/08   Watsa
"With the S&P drop year-to-date of 50% -- not seen since 1931 -- and how worried the investment community is, it just seemed to us a lot of fear may already be discounted in the stock markets. You can't say this is the bottom, markets are a discounting mechanism and certainly still can go down some; however, we thought it was an appropriate time to close our equity index hedges."

The reluctant CEO of the year
11/28/08   Watsa
"Only a handful of financial companies worldwide are in better shape now than before this crisis started. Fairfax Financial is one of them. CEO Prem Watsa managed to make $2 billion and thumb his nose at his opponents at the same time"

Corporate jets and congress
11/27/08   Government
"This is the age-old story of those in sin throwing the first stones. And they do so without shame because they assume we are so ignorant we will not see them as the hypocrites they are. So what is going on here? Once again we of the public are being played for fools. Our politicians who are in total disarray on the economy are taking cheap shots at those who are helpless and hopeless."

Third Avenue Q4 2008
11/27/08   Whitman
"In other words, deep value and high quality alone are not sufficient conditions for investing in common stocks. Deep value pricing and high quality assets must be accompanied by creditworthiness, and it's super hard to be credit worthy today if a corporation has to access credit markets for loan instruments other than demand deposits."

Montier has 'never been more bullish"
11/27/08   Montier
"Societe Generale SA strategist James Montier said he's never been so bullish after the financial crisis dragged down prices for stocks, corporate bonds and inflation-protected government debt."

BCE fails key test
11/27/08   Stocks
"Shortly after markets closed on Tuesday, a team of auditors in KPMG's Toronto offices ushered a trio of BCE Inc. executives into a meeting room to advise them that the world's largest leveraged takeover had effectively been killed. The culprit? A five-line clause that virtually no one had noticed in the company's much-scrutinized $35-billion sale agreement. Over the course of more than two hours, the solemn auditors explained to BCE's stunned chief executive officer George Cope and two of his senior executives that the communications company had not passed a so-called solvency test, one of the last hurdles standing in the way of a Dec. 11 deadline to close the sale of the company to a group lead by the Ontario Teachers' Pension Fund. Now, baring a financial miracle, there is little hope that the deal will survive."

Landmark BCE takeover in doubt
11/26/08   Stocks
"The massive planned privatization of telecommunications giant BCE Inc. is in jeopardy after the company failed a preliminary solvency test conducted for the would-be purchasers, led by the Ontario Teachers' Pension Plan Board. BCE said Wednesday it received a 'preliminary view' from auditing firm KPMG that 'based on current market conditions, its analysis to date and the amount of indebtedness involved,' it does not expect to be able to deliver an opinion on the closing date of Dec. 11 that BCE 'would meet the solvency tests as defined in the definitive agreement.'"

The myths of market underperformance
11/26/08   Markets
"Most members of the media strive for accuracy in their reporting and work very hard to get the facts right. The problem - many of the assertions that get the highest profile are based on flawed analysis of past stock market performance by pundits who distort history to get media coverage for their alarmist claims or by well meaning commentators who quite simply get the facts wrong. Among the common cautionary claims about investing in the stock market: 1. Investors made no money in the market from the mid 60s to early 80s. 2. It took 25 years for the market to recover to the level reached in 1929. 3. When inflation is taken into account, investors have lost money for long periods of time."

The wealth effect in reverse
11/25/08   Markets
"The hyper-anxiety is not irrational pessimism, though it may prove unfounded. Every major episode of this crisis -- from Bear Stearns's failure to General Motors' possible bankruptcy -- has come as a surprise. Similarly, the crisis's three main causes have repeatedly been underestimated: the burst housing "bubble"; fragile financial institutions; and a reversal of the "wealth effect." Of these, the last is least recognized."

Fed commits $800 billion more to unfreeze lending
11/25/08   Government
"The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion. The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington."

Home prices in record decline
11/25/08   Real Estate
"The S&P Case-Shiller Home Price national index recorded a 16.6% decline in the third quarter compared with the same period a year ago. That eclipsed the previous record of 15.1% set during the second quarter. Prices in Case-Shiller's separate index of 10 major cities fell a record 18.6%, while its 20-city index dropped a record 17.4%"

James Grant pops Greenspan's bubbles
11/24/08   Grant
"Such proofs of Grant's foresight -- the power of mind over mania -- fill his new anthology, 'Mr. Market Miscalculates,' a bracing tonic as U.S. equities suffer what may prove their worst year since 1931. We've all met Mr. Market. He's the manic-depressive business partner invented by value investor Benjamin Graham. When the sun is shining, he urges you to sell him your share of the business. When night falls, he begs you to buy him out. Price is no object. Grant's omnibus offers a blow-by-blow account of one man's battle with this crank, from dot-com binge to mortgage meltdown."

Housing market gets even weaker
11/24/08   Real Estate
"The national median existing-home price in October was $183,300, down 11.3% from a year ago when the median was $206,700."

Treasury traders paid to borrow
11/24/08   Markets
"Owners of Treasuries may soon get paid to borrow as the U.S. tries to break a logjam in the $7 trillion-a-day repurchase market. Treasuries are in such high demand that investors are lending cash for next to nothing to obtain the securities as collateral through so-called repos, which dealers use to finance their holdings. The problem is many parties involved in repos aren't delivering the bonds because there is no penalty for not doing so, causing 'fails' to exceed $5 trillion, according to the Federal Reserve Bank of New York."

Buffett will give more info on derivatives
11/24/08   Buffett
"Billionaire investor Warren Buffett will provide more information to investors on how he calculates losses on his Berkshire Hathaway Inc.'s derivative bets in the firm's annual report early next year. The report will disclose 'all aspects of valuation' and cover 'deficiencies in the formula' for pricing the derivatives, 'which we nevertheless use,' Buffett said in an e- mail"

Does extreme stress signal a snapback?
11/24/08   Markets
"Another encouraging sign is the shrinking value of U.S. stocks relative to nominal U.S. gross domestic product. At the market peak in 2000, stocks were valued at twice the size of the economy, but the relationship has adjusted this year to an estimated 59%, well below the long-term average of 79%. To get back to 79%, the S&P 500 would have to rise 36%, to 1,090. The relationship got as low as 40% in the late 1940s, when investors feared another depression, and in the inflationary 1970s."

And you thought 1931 was bad
11/24/08   Markets
"Even after Friday's large stock market rally, only 10 of the stocks in the Standard & Poor's 500, the premier American stock index, are higher than they were at the end of 2007, and the index itself is down almost as far as it was in the worst year it ever experienced, at the height of the Great Depression."

The most volatile market ever
11/24/08   Markets
"Over the last 50 trading days, the average absolute daily percentage change of the S&P 500 has been...wait for it...3.82%! That means the S&P 500 is averaging a daily move of up or down nearly 4%."

Citigroup gets guarantees
11/24/08   Government
"Citigroup Inc., facing the threat of a breakup or sale, received $306 billion of U.S. government guarantees for troubled mortgages and toxic assets to stabilize the bank after its stock fell 60 percent last week. Citigroup also will get a $20 billion cash injection from the Treasury Department, adding to the $25 billion the company received last month under the Troubled Asset Relief Program. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8 percent dividend."

The new deal didn't always work
11/22/08   Government
"Many people are looking back to the Great Depression and the New Deal for answers to our problems. But while we can learn important lessons from this period, they're not always the ones taught in school."

Some ETFs fall short on pricing
11/21/08   Indexing
"For the thinly traded ETFs, many of the most problematic trades seem to take place moments after the market opens. For example: On Nov. 14, an investor sold 500 shares of First Trust S&P REIT Index ETF for $8.18 -- about 12% below the value of the fund's underlying holdings -- at two seconds past 9:30 a.m. EST. Three minutes later, 1,000 shares sold at a price about 3% below. By 10 a.m. the discount had settled to about 1%."

Simply spectacular
11/21/08   Stingy Investing
"It's been a rough year for investors. But you wouldn't have known it if you had followed Benjamin Graham's advice. Instead of bemoaning losses, you would be counting profits."

S&P 500 index: now more poor, less standard
11/21/08   Indexing
"Every once in a while the committee faces a rare situation where a large portion of the S&P 500 Index does not meet one or more requirement they have outlined. Usually the simply ignore it and hope that it just goes away on its own."

Diminishing ratios, booming yields
11/21/08   Markets
"With all the carnage in the markets, perhaps it's no surprised P/E ratios are on the decline. What's impressive is by how much."

Individual investor stock allocations
11/21/08   Markets
"Here's a terrific sentiment read: the amount of money individuals have exposed to equities relative to their historical average. The chart below shows equity allocations by individual investors above and below their normal 21 year mean allocation to stocks (the 21-year mean allocation to stocks is typically 60%). The present reading puts us 15% under the 21-year historical mean."

The Treasury once again can borrow for free
11/21/08   Bonds
"Ok, the Treasury can not borrow for free. Three month Treasury bills, according to Bloomberg, yield something like 2 basis points."

The case for buying oil stocks
11/21/08   Markets
"Last week, the Paris-based International Energy Agency released its World Energy Outlook 2008 - a 578-page book full of future supply, demand, and price estimates which this year also included an eagerly-awaited study of 800 of the world's largest oil fields. Here's the executive summary: Buy oil stocks."

The next crisis -- Africa
11/20/08   World
"The recent drop in oil and other commodity prices makes it almost a certainty that some unstable commodity-exporting nations will reach a crisis stage in the next few months. The only question is, which countries are likely to erupt first?"

Did hated speculators lower oil prices?
11/20/08   Markets
"Whither the speculators? They were this summer's front-page news, the subject of congressional hearings, editorials and nightly newscasts. The claimed culprits of oil's price rise, everyone fell over themselves to be tougher on them."

Hank, let me help you help this great country
11/20/08   Fun
"By giving money to bankers who have made many stupid loans you have made life harder for bankers who have never made stupid loans. By aiding the dumb banks you prevent the smart ones from replacing them. It may be that just now smart bankers are the last thing we need -- but one day they may come in handy, and so we should do what we can to keep them from getting discouraged. Here's where I come in: I'm not a banker of any kind, but a mere writer. My little literary enterprise can absorb many billions of taxpayer dollars without consequence to the banking industry, or even to U.S. gross domestic literary output. If anything, other writers would have an opportunity to write more, as I, busy managing my new pile of cash, will naturally have no time to write."

Patient Capital Q3
11/20/08   Value Investing
"The next several quarters are likely to be quite difficult but out of these difficulties will emerge the opportunity to create portfolios of great businesses that will offer the potential for a substantial return over the next five years. For the first time in a long time we are starting to feel excited about the returns available to the prudent and patient investor!"

It's time to buy
11/20/08   Dreman
"First, do not flee the market by selling your quality stocks. Yes, it's the worst bear market since 2000--02, and stocks are trading at valuations not seen in decades, but equities will come back. Second, because credit is subject to unpredictable crunches and it's impossible to guess when this bear will end, don't buy on margin. Third, don't hold shares of companies that will need cash to expand or refinance. There is a good chance they won't be able to borrow."

Treasury yields drop to record lows
11/20/08   Bonds
"Treasury yields declined to record lows, with two-year notes dropping below 1 percent for the first time, as global stocks slumped and a deepening recession drove investors to the safest assets. Yields on two- and five-year notes and 30-year bonds dropped to the least since the Treasury began regular issuance of the securities. Ten-year note yields touched the lowest since 2003 after yesterday's release of the minutes of last month's Federal Reserve meeting showed policy makers expect the economy to contract through the middle of 2009 and more interest-rate cuts may be needed to counter deflation."

A sea of unwanted imports
11/20/08   World
"Gleaming new Mercedes cars roll one by one out of a huge container ship here and onto a pier. Ordinarily the cars would be loaded on trucks within hours, destined for dealerships around the country. But these are not ordinary times. For now, the port itself is the destination. Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property."

The new order
11/20/08   Bonds
"That marginal buyer is gone, and isn't likely to come back any time in the foreseeable future. Admittedly, it isn't as though leverage is being pushed to zero in the fixed income markets, but haircuts (i.e., the amount of margin that must be posted) are now such that levered buyers cannot force efficiency. Take something simple like Fannie Mae 5-year bullet bonds. Should have a very small spread versus Treasuries given the government backing of the GSEs, but instead the spread is currently around 1.45%. It seems like an arbitrage. But in order for an actual arbitrager to realize a decent IRR on the trade, it probably needs to be leveraged 20x or so. Now maybe one can actually get that amount of leverage versus Agency collateral, but what happens if the trade initially goes against you? The potential margin calls would kill you. Its a difficult arbitrage to actually realize."

Complex and pricey
11/19/08   Indexing
"The fund holds a motley collection of 21 ETFs and fully three make up less than 1% of the portfolio. Compare the complexity of this fund with the simplicity of the ING Streetwise Balanced Fund, which has 40% in bonds and 60% split equally among Canadian, U.S. and other developed markets."

We're not dead yet
11/19/08   Value Investing
"In our opinion someone who says quant equity investing has no future is basically saying that value and momentum will no longer work to pick investments. As we noted above we can see where people get this idea. Many investors using these strategies have had poor recent performance, and it.s clear that these strategies are no longer a secret. Although we can't 'prove' that quant investing has a future, we can demonstrate that quant strategies have had a successful long-term past - and that their recent performance is not inconsistent with this track record."

Just say no to Detroit
11/17/08   Government
"Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998."

The perils of efficiency
11/17/08   Markets
"The logic behind these reforms was simple: the market would allocate resources more efficiently than government, leading to greater productivity. Farmers, instead of growing subsidized maize and wheat at high cost, could concentrate on cash crops, like cashews and chocolate, and use the money they made to buy staple foods. If a country couldn't compete in the global economy, production would migrate to countries that could. It was also assumed that, once governments stepped out of the way, private investment would flood into agriculture, boosting performance. And international aid seemed a more efficient way of relieving food crises than relying on countries to maintain surpluses and food-security programs, which are wasteful and costly."

Joe investor, the markets are all yours
11/16/08   Markets
"This is a huge change for the little guys. Rob Arnott, who oversees $35 billion at Research Affiliates LLC in Newport Beach, Calif., puts it this way: "The question that hardly anyone ever thinks about is: Who's on the other side of my trade, and why are they willing to be losers if I'm going to be a winner?" Ever since the 1970s, the person on the other side of your trade has almost always been someone who manages billions of dollars and has millions of dollars to spend on gathering more information than most individuals ever could. Now, however, as Mr. Arnott says, "You can -- and probably do -- have a counterparty on the other side of your trade who absolutely has to sell, perhaps at any price." You would be very wise to give these distressed sellers a little bit of your cash, which they overvalue, in exchange for some of the stocks and bonds that they are undervaluing."

Bill Miller Q3 2008 commentary
11/14/08   Miller
"There is little dispute among knowledgeable investors that U.S. (and global) equities are extraordinarily attractive on a wide variety of measures based on historical standards. The worry is they may go a lot lower before they eventually recover, as the current crisis unfolds and as the economy undoubtedly gets worse. This worry is legitimate. After all, to most of us, stocks seemed quite cheap at the end of September, and now they are a whole lot cheaper. So what to do? The data indicate there is now a mountain of cash on the sidelines, enough in money market funds to buy about half the market capitalization of the S&P 500."

How AIG got Uncle Sam over a barrel
11/14/08   Stocks
"The Treasury has secured crowd-pleasing concessions; for example limits on executives. bonus payments. But the real question is whether the preference shares are safe. AIG has a trillion-dollar balance-sheet. There is now a thin buffer of core equity between the taxpayer.s preference shares and any further losses. The hope is still that as markets recover, AIG can sell the crown jewels of its insurance business at a premium to book value. That may well take years. Plenty of time to reflect on how an offer of a temporary loan, to a company that barely made the list of systemically vital firms, spiralled into one of the biggest corporate bail-outs ever."

Wall street lays another egg
11/14/08   Markets
"Not so long ago, the dollar stood for a sum of gold, and bankers knew the people they lent to. The author charts the emergence of an abstract, even absurd world - call it Planet Finance - where mathematical models ignored both history and human nature, and value had no meaning."

The end
11/13/08   Markets
"Eisman wasn't, in short, an analyst with a sunny disposition who expected the best of his fellow financial man and the companies he created. 'You have to understand,' Eisman says in his defense, 'I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn't give a shit what it sold.'"

A conversation with Bill Ackman
11/12/08   Markets
"Charlie Rose: A conversation with Bill Ackman, major investor and hedge fund manager of Pershing Square Capital Management LP."

As trouble brews, banks turn the screws
11/12/08   Markets
"In Canada, Judge Morawetz, an experienced former insolvency lawyer, balked. According to affidavits and reports submitted to his court, Circuit City had landed the life-saving DIP loan by effectively allowing a cross-border raid on its profitable InterTan division. Before handing over a penny to Circuit City, a syndicate of banks led by Bank of America insisted that the Canadian subsidiary pledge as security all the assets and property owned by its chain of 772 stores, known as The Source by Circuit City. On top of that, Circuit City was given the right to demand cash advances from InterTan, while banks were given extraordinary powers to .sweep the cash. of the Canadian branch at their whim after only five days advance notice."

Et in Arcadia Ego
11/12/08   Education
"In short, private education in America spends money like a drunken sailor with Warren Buffett's credit card." [Some harsh language.]

Buy CBS shares
11/12/08   McElvaine
"CBS has $40-billion in assets and is trading at a price/earnings multiple of five times. Mr. McElvaine began nibbling away at the stock last Friday and bought more on Monday, when the Canadian stock market was closed for the Thanksgiving holiday. As he sees it, CBS is in a number of different businesses that, combined, are worth at least twice what the stock is trading at."

A scientific revolution for economics
11/12/08   Economics
"If empirical observation is incompatible with a model, the model must be trashed or amended, even if it is conceptually beautiful or mathematically convenient. So many accepted ideas have been proven wrong in the history of physics that physicists have grown to be critical and queasy about their own models. Unfortunately, such healthy scientific revolutions have not yet taken hold in economics, where ideas have solidified into dogmas"

Everything you knew about bonds and equities
11/12/08   Markets
"The broader picture is that this is the reversal of a 50 year relationship, one in which bond yields have been above equity yields. That trend is now about to be undone, by Edward.s estimation."

The corn isn't green
11/12/08   Markets
"H.L. Mencken once remarked that there is a "well-known solution to every human problem - neat, plausible, and wrong." That quote comes to mind when considering the vocal group of neoconservatives, agribusiness lobbyists, and politicians that claims that the best way to cut American oil imports, and thereby impoverish the petrostates (and, in theory, reduce terrorism), is to require automakers to manufacture "flex-fuel" cars that can burn motor fuel containing 85 percent ethanol or methanol."

Beware of fees
11/12/08   Brokers
"Insult is about to be added to the injury done to your investment portfolios in the past year. With the value of your account falling, you may find yourself paying higher commissions to trade stocks, as well as miscellaneous fees from which you were previously exempt. Not convinced on the merits of putting money into the markets right now, with share prices knocked way off their peaks of last summer? Now you have the additional motivation of being able to avoid parasitic fees by reinflating your depleted account."

Upside of the down dow
11/12/08   Graham
"The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment."

The crisis and what to do about it
11/10/08   Markets
"The salient feature of the current financial crisis is that it was not caused by some external shock like OPEC raising the price of oil or a particular country or financial institution defaulting. The crisis was generated by the financial system itself. This fact - that the defect was inherent in the system - contradicts the prevailing theory, which holds that financial markets tend toward equilibrium and that deviations from the equilibrium either occur in a random manner or are caused by some sudden external event to which markets have difficulty adjusting. The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it. To understand what has happened, and what should be done to avoid such a catastrophic crisis in the future, will require a new way of thinking about how markets work."

Shipping floored
11/10/08   Markets
"An industry once plagued by insufficient capacity now sees ships stuck idle at port. Shipping is in crisis. The Baltic Dry Index which measures shipping costs in commodities sunk to its seventh weekly decline this week to 829 points, and is down more than 93 percent since hitting a record peak in May."

Fuld solicited Buffett offer
11/10/08   Management
"Fuld's failure to save Lehman, after rescuing it three times before, is a story about how the most indomitable man on Wall Street became addicted to leverage and intoxicated with the power it brought. It is a tale about the inability to repair a financial model wrecked by a lack of limits and transparency, a story pieced together from interviews with former Lehman executives and outsiders familiar with the firm. Isolated, surrounded by acolytes and unaware of the rivalries tearing his firm apart, Fuld was too prideful to accept the fast-eroding value of the empire he had built, too slow to cut a deal."

Bonus jackpot can be yours in 5 easy steps
11/10/08   Fun
"If even the steelworkers union can parse the Wall Street doublespeak, the doublespeak has lost its power to persuade. Too many people know too many things. The problem of how to get paid on Wall Street must be radically reframed."

You pay a high price for a cheery consensus
11/10/08   Buffett
"There may well be some period in the near future when financial markets are demoralized and much better buys are available in equities; that possibility exists at all times. But you can be sure that at such a time the future will seem neither predictable nor pleasant. Those now awaiting a "better time" for equity investing are highly likely to maintain that posture until well into the next bull market."

I.O.U.S.A. 30-minute movie
11/09/08   Debt
"Wake up, America! We're on the brink of a financial meltdown. I.O.U.S.A. boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. Burdened with an ever-expanding government and military, increased international competition, overextended entitlement programs, and debts to foreign countries that are becoming impossible to honor, America must mend its spendthrift ways or face an economic disaster of epic proportions."

Time to ditch the style box
11/08/08   Funds
"Looking over the last 15 years, the style box is very correlated with itself. The lowest correlation is 75%, between largecap value and smallcap growth. That is not a reason to categorize managers; the difference between the average largecap value and growth manger is teensy. It is even true between largecap value and smallcap growth. And in more recent years, the correlations have been tightening to nearly 90% at worst."

Investors lick wounds from dividend cuts
11/08/08   Dividends
"Thirty-six companies listed on Standard & Poor's 500-stock index have cut or suspended dividends 46 times in 2008, sucking some $33.3 billion from investors' pockets, according to Standard & Poor's. From that sum, $30.8 billion came from financial companies, representing 37 individual actions."

Disappointing diversification
11/08/08   Markets
"We argue that it is no accident that the age of restrictive capital accounts also saw remarkably low equity market correlations. Cross-border diversification opportunities identified by early papers (Grubel 1968) were indeed 'too good to be true.' Once investors can take advantage of low correlations elsewhere, they will rise. Initial investors may benefit since liberalisations tend to be followed by capital gains (Henry 2000). Yet risks will not fall anywhere near as much as initially hoped, as the covariance with other stock markets inevitably increases. In this sense, the gains from international diversification are akin - at least in part - to a Fata Morgana. Investors may chase it, only to discover that it perennially disappears in the distance."

Long-term opportunities amidst the fear
11/05/08   Markets
"This short essay covers three topics. First is a little perspective on recent events. Second are some thoughts on where we might go from here. And finally, a comment on the behavioral finance issues around what we are going through, with an emphasis on why it.s so hard to act in this type of an environment."

Everyone's watching
11/03/08   Behaviour
"Markets work best when investors are thinking for themselves, and tend to go awry when the obsession with what everyone else is doing becomes a dominant concern. Maybe what investors really need is to periodically take a market-information vacation."

How AIG failed
11/03/08   Stocks
"The lesson, of course, is simple, but hard to learn: it's not the risks you measure which bring you down, it's the risks you don't measure. But protecting against those risks is very, very hard."

Challenging the crowd in whispers
11/02/08   Shiller
"I clearly remember a taxi driver in Miami explaining to me years ago that the housing bubble there was getting crazy. With all the construction under way, which he pointed out as we drove along, he said that there would surely be a glut in the market and, eventually, a disaster. But why weren.t the experts at the Fed saying such things? And why didn.t a consensus of economists at universities and other institutions warn that a crisis was on the way?"

Stocks below net current asset value
11/02/08   Graham
"One of Graham's investment fund strategies, as explained in his best-selling book The Intelligent Investor, was to buy stocks that are valued at a discount to their net current asset value. Graham called such stocks "bargain issues." In other words, Graham would look for stocks whose current assets less total liabilities was worth more than what the stock was trading at. This meant that any plant, property and equipment, goodwill and long-term investments were free."

Ben Graham then and now
11/02/08   Graham
"In mid-1932, almost precisely at the bottom of the Great Crash, Benjamin Graham turned up as a freelance writer in the pages of FORBES. He was later to be known as the father of value investing and as a mentor to Warren Buffett. But at the time he was the manager of a fairly obscure hedge fund. That fund, which combined long and short positions but was mostly long, was hurting. It had tumbled 70% from its 1929 high. (The Dow was down 87%.) Stocks had got too cheap, Graham pleaded. The fact that profits were vanishing almost didn't matter. You could buy companies for less than their net liquidating value. You got the goodwill and the factories for nothing."

Cheap Japanese markets
11/02/08   Graham
"The Japanese market has been hit so hard this fall that some of its corporate titans are trading at prices that value guru Benjamin Graham would find to be bargains."

The other reason for Warren Buffett's success
11/02/08   Buffett
"Since the end of 1988, Berkshire's stock portfolio has grown from $3.56 billion to $69.51 billion. That is a spectacular average annual increase of 16.5%, far surpassing the 10.5% annualized return of the Standard & Poor's 500-stock index. Of course, this calculation is only a crude approximation, since it ignores the cash that Mr. Buffett added in -- and moved out -- along the way. Over the same period, the growth in Berkshire's book value per share, which reflects all of Mr. Buffett's activities, not just his stock-picking, was 19.9%. In other words, Mr. Buffett's skill at picking publicly traded stocks pales alongside the value he has added to the company through other means."

'Tax event' may be next for bruised PPNs
11/02/08   Derivatives
"For a supposedly safe investment, there sure are a lot of risks associated with principal-protected notes. Tax changes being considered by the Canada Revenue Agency could, in the words of one issuer of principal-protected notes (PPNs), "have a material adverse effect" on these investments. And then there's the experience of the U.S. investors who hold PPNs issued by the once illustrious but now bankrupt Lehman Brothers. They're waiting in line to get paid along with other creditors."

Dig a grave for those wretched PPNs
11/02/08   Derivatives
"I've called them the worst of both worlds - bad for equity investors and inappropriate for those seeking a predictable flow of income. And professional money managers would never buy one; the odds are stacked against them. I'm talking about principal-protected notes, or PPNs."

Good riddance
11/02/08   Bogle
"In Berkshire Hathaway's 2005 annual report Warren Buffett offered the parable of the fictional Gotrocks family. Sole owners of corporate America, this huge clan sits back and collects the generous rewards of investing. Until fast-talking helpers arrive and persuade some family members to pay the helpers to try to earn more at the expense of other family members. But in total the family ends up with less. Why? Because the Gotrocks are now paying the helpers, thus diminishing the total return earned by all the businesses in their portfolio. Worse, the Gotrocks are now forced to pay taxes on the capital gains incurred as the helpers swap stocks back and forth. After several go-rounds with different helpers, the Gotrocks finally listen to an old, wise uncle who advises them to fire all the helpers and simply reap 100% of their investment gains themselves."

All bets are off
11/02/08   Markets
"diversification has surely not offered the benefits most pension funds expected. Indeed, it may have had perverse results. In the old days, with equities trading at below-average valuations, funds would now be on a buying spree. They could afford to ignore the short-term risks because of the long-term nature of their liabilities. Pension funds thus acted as an automatic stabiliser for the market. This time round, that does not seem to be happening. One reason may be accounting changes which make pension-fund managers more focused on the short term. Another, however, may be the strategic drive to diversification. The Wall Street Journal has reported that CalPERS, America's largest public-pension fund, has been selling shares to meet commitments to put more money into private-equity firms."

Bad vibrations
11/02/08   Markets
"The great deleveraging, as it has become known, has also had a big impact on the currency markets. Many investors have been following a version of the 'carry trade', borrowing money in a low-yielding currency. All they had to do was earn a higher return from assets than the cost of their financing. Since the two big currencies with the lowest yields over the past year have been the dollar and the yen, those were the natural ones to borrow. When asset prices fall, however, this strategy is disastrous. Investors dash to sell assets and repay their debts. Since those debts were incurred in dollars and yen, that means they have to buy back those two currencies - hence their sharp recent rises."

World is 'drowning in oil' (again)
10/30/08   Markets
"Three months ago, the world was running out of oil. Seriously. I kid you not. Everywhere you turned, you heard whispers that the day of petroleum reckoning was at hand. Now there's too much oil, prodding OPEC to cut production targets for the first time in two years. Last week, the Organization of Petroleum Exporting Countries, confronted with the halving of oil prices since July, announced a 1.5 million barrel-a-day cut in output."

New ETFs can serve as caution signs
10/30/08   Indexing
"There are many notable exceptions, but all too often an ETF's debut coincides with the moment when investors should be starting to think about taking profits in the area of the fund's focus. As is evident in the table below, this isn't a new phenomenon. In 1996, the incipient ETF industry was bolstered by the addition of a quartet of Asian funds. Just 16 months later, Asian currencies nosedived and stock prices throughout the region collapsed, kneecapping investors with double-barreled blasts."

Channeling Graham and Dodd
10/30/08   Klarman
"Klarman assembled a who's who of prominent value investors - including Glenn Greenberg, David Abrams, Howard Marks and Thomas Russo - to write introductory commentary to each of the book's sections, drawing out the timeless wisdom in the original text and combining it with additional insight and examples relevant to today's market."

Is buy-and-hold dead and gone?
10/30/08   Markets
"The evidence shows that most investors get it wrong over and over again. According to a study called the Quantitative Analysis of Investor Behavior by financial research firm Dalbar, over 20 years through the end of 2007, the average equity-fund investor earned an annualized return of just 4.5%, vs. the S&P 500's 11.8% return. Why? In large part because investors, chasing performance, shift money out of lagging funds and into hot ones at the wrong times. We buy high and sell low repeatedly."

The man who beat the shorts
10/30/08   Watsa
"Born in India, Watsa graduated from the prestigious Indian Institute of Technology and moved to western Ontario in 1972 at age 22. Penniless, he lived with relatives while getting his M.B.A. from the University of Western Ontario and moonlighting at night selling air conditioners and furnaces. After taking over, and renaming, an underwriter of trucking policies called Markel, he added a dozen property and casualty insurers, among them the well-known New Jersey firm Crum & Forster and TIG Holdings, once part of San Francisco's Transamerica. Taking over management of the investments, Watsa produced (according to Fairfax) a compound annual return from 1993 to 2007 on its stock portfolio of 19.5% (versus 10.4% for the S&P 500) and on its bond portfolio of 10.1% (versus 6.6% for a Merrill Lynch bond index). One of his earliest backers--and later a friend--was famed investor Sir John Templeton, who died this year at age 95."

A return to thrift
10/30/08   Thrift
"Sometimes it takes a near-death experience to change bad behavior. Think of your friend who quit Lucky Strikes after a coronary incident. Or look at how banks are reducing their dependency on debt after watching rivals go belly-up. On Wall Street this process of reducing debt relative to equity is called deleveraging. Main Street should be deleveraging too."

Who's buying?
10/28/08   Markets
"Remember, when dealing with Mr. Market, fear is the cost of getting a good price. It looks very grim out there and it might get worse. But stock prices will reach their lowest when uncertainty reigns and expectations are at their lowest. Investors are currently very fearful and we think that it's time to get greedy."

Home prices in 20 U.S. cities fall 16.6%
10/28/08   Real Estate
"House prices in 20 U.S. cities declined in the year ended in August at the fastest pace on record as more properties went into foreclosure before the credit crisis deepened this month. The S&P/Case-Shiller home-price index dropped 16.6 percent in August from a year earlier, as forecast, after a 16.3 percent decline in July. The gauge has fallen every month since January 2007, and year-over-year records began in 2001."

Greasing the slide
10/27/08   Markets
"The great paradox of the sell-off, then, is that the factors that were supposed to increase the flow of information to investors, foster long-term thinking, and encourage contrarian positions did exactly the opposite. If there's a silver lining in all this, it's that investors who can endure past the present moment now have the chance to buy what at least look like very cheap stocks. Still, it's not surprising that investors have been unwilling to step up. It's hard enough to catch a falling knife. But it's nearly impossible when hedge funds are hurling it."

Evil Wall Street exports boomed
10/27/08   Derivatives
"While the collapse was most visible in the stock markets, the cause was the loss of confidence in the world's biggest bond market, structured finance. So far, it has led to the worst financial crisis since the Great Depression, the disappearance or takeover of more than a dozen banks, including three storied Wall Street firms, and almost $3 trillion in government expenditures and guarantees to contain the contagion."

Treasury may purchase stakes in insurers
10/26/08   Government
"The Financial Services Roundtable, a trade association of the 100 largest banks, securities firms and insurers, pressed Treasury to broaden its guidelines so that insurance companies, broker-dealers, automobile companies and institutions controlled by foreign banks could also sell stakes to the government."

Why do markets create bubbles?
10/26/08   Markets
"Bubbles are like pornography: Everyone has his or her own opinion as to what qualifies, but it is impossible to pen a precise definition. If you wish to push the metaphor further, both are also fun for a while, if you like that sort of thing, but apt to end up making you feel deflated and embarrassed. Bubbles are also embarrassing for the economics profession. It's not that we have no idea what causes bubbles to form, it's that we have too many ideas for comfort. Some explanations are psychological. Some point out that many bubbles have been stoked not by markets but by governments. There is even a school of thought that some famous bubbles weren't bubbles at all."

Qtrade retains crown
10/25/08   Brokers
"Now to the question of which brokers are best. Qtrade Investor, a small firm out of Vancouver, has taken top spot for the third straight year, while BMO InvestorLine, E*Trade Canada and TD Waterhouse also scored well. Qtrade is an example of a broker that does almost everything well. Whether it's keeping costs low, providing tools that help investors make smart decisions or offering a sturdy trading platform, Qtrade has it covered."

Student loan fugitives
10/25/08   Debt
"When faced with unaffordable monthly payments and relentless creditors, some see leaving the country as their only way out."

Realm of fantasy in credit insurance
10/24/08   Derivatives
"If you had a 100,000 car, what kind of world would it be where you'd consider paying 50 grand over five years to insure it? You'd either have to be such an appalling driver that you ought not to be on the road, or the world would be such a lawless and dangerous place that your 100,000 car should be among the least of your worries. We do not need the details of mathematical probabilities to see there is little sense in the idea of paying out insurance costs that are a huge chunk of the value of the thing to be insured. But that is exactly what participants in credit markets are being asked to do."

The revival of railroads
10/23/08   Buffett
"Last April, Warren E. Buffett flew to Kansas City, Mo., to join Matthew K. Rose for a ride in a vintage 1930s railcar. Buffett, the billionaire investor from Omaha, and Rose, the chief executive of Burlington Northern Santa Fe (BN), munched on hamburgers and jelly beans as they chugged 430 miles up to Chicago. Along the way, they talked about Burlington Northern's unlikely turnaround and how the once-stalled railroad could build on its recent momentum."

An axis in need of oiling
10/23/08   World
"In sum, Iran, Russia and Venezuela are all likely to be left short of cash - and facing a diminution in their international clout. 'Never confuse brilliance with a bull market,' goes a Wall Street saying. The leaders of the oily trio may have thought high oil prices were an adequate substitute for good governance. In many quarters, the difference is now painfully clear."

The economy works
10/23/08   Buffett
"Buffett, speaking to California first lady Maria Shriver's Women's Conference in Long Beach, said he has no idea what will happen in the coming two years but was confident that over a 10-year span the stock market would outperform cash-based investments, such as certificates of deposits and savings accounts, which can lose value when inflation is subtracted from gains."

Credit crunch humour
10/23/08   Fun
"I went to buy a toaster and it came with a bank . . . "

Myths about the financial crisis of 2008
10/23/08   Markets
"The financial press and policymakers have made four claims about the nature of the crisis. 1. Bank lending to nonfinancial corporations and individuals has declined sharply. 2. Interbank lending is essentially nonexistent. 3. Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels. 4. Banks play a large role in channelling funds from savers to borrowers. Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false."

Companies win, investors lose
10/22/08   Accounting
"The Canadian accounting standards board announced last week that they would let companies reclassify certain assets to delay reporting losses to investors. What happened was exactly what was warned about in these pages two weeks ago. Companies are being given more leeway to manipulate net income. In short, Canadian banks and insurers will report higher income than they otherwise could have in their forthcoming year-end reports."

Montier: 'Analysts are rubbish'
10/22/08   Montier
"Seemingly everyone, on both sides of the Atlantic, is now taking about recession. Even Mervyn King. So why, asks SocGen's James Montier in his latest issue of Mind Matters, is the investment research industry still predicting earnings growth of between 12 and 15 per cent? He's got a chart to illustrate that analysts are exceptionally good at one thing and one thing alone - telling you what has just happened."

Junk-bond yields bode ill for stocks
10/22/08   Bonds
"Unsurprisingly, yields in the corporate bond market have recently risen to nine-year highs and high yield, or junk bonds, are trading at record levels as well. Usually junk bonds yield 4.5 to 5 percentage points more than the 10-year Treasury, but now that spread is about 14 points."

Russia and the crisis
10/22/08   World
"Dmitry Medvedev dreams of turning Moscow into a global financial centre, but he has an awful long way to go. For Russia.s markets have slumped. Even after recent one-day rallies, the dollar-denominated RTS index and the rouble-denominated MICEX index have shed around two-thirds of their value since mid-May (see chart). These falls are bigger than in any other emerging markets, dealing a blow to Kremlin claims that Russia is a safe haven from global financial turmoil."

Rippling economic turbulence
10/22/08   Taleb
"As the financial sector shifts, so does the reach of the jolt to economic structures around the world. Economist Nassim Nicholas Taleb and his mentor, mathematician Benoit Mandelbrot, speak with Paul Solman about chain reactions and predicting the financial crisis."

Next likely bank failures
10/20/08   Stocks
"U.S. banks large and small are buckling under the pressure of the credit crisis. The Federal Deposit Insurance Corp. has seized 13 institutions this year, most recently Washington Mutual. The regulator, which maintains a list of "problem" banks, doesn't disclose which others raise red flags. But one measure, the so-called Texas Ratio, may offer a clue."

Perspective on the bear market
10/20/08   Hallett
"The decline in stock prices triggered by the U.S. financial crisis has been frightening at times. Most shocking has been the sheer velocity of the decline, which rivals that of the crash of 1929. And despite a recent rally, there is enough bad news to push stock prices back down. But unless you believe the global economy will grind to a halt; I see five reasons why investors should be optimistic today."

There are old-school investors ...
10/19/08   Kahn
"Market's panic 'not so new to me,' says 102-year-old disciple of Benjamin Graham. He and his son Thomas like such banged-up stocks as Pfizer and Bristol-Myers Squibb."

The confidence game
10/19/08   Grant
"In the past two weeks, governments in Asia, Europe and the U.S. have effectively nationalized vast swaths of banking. Central banks have ramped up their money printing. In the past week alone, the Fed's balance sheet swelled by $179 billion, to a grand total of $1.77 trillion. In announcing such radical measures, intervening governments never fail to invoke confidence. They say they must restore it. Destroying confidence, however, is what governments do best. And the confidence they can restore is usually the kind that got us where we are today. Inflation and moral hazard led directly to the immense overvaluation of equities and residential real estate -- and of the bloating of the leverage that sustained those prices. Yet, to cure what ails us, credit creation and the public guarantee of banking liabilities are the policies today most favored."

Home prices seem far from bottom
10/19/08   Real Estate
"Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession. In hard-hit areas like California, Florida and Arizona, the grim calculus is the same: More and more homes are going up for sale, but fewer and fewer people are willing or able to buy them. Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates - all of which will reduce the already diminished pool of would-be buyers."

Take a deep breath, calm yourself
10/18/08   Zweig
"You can catch other people's emotions as easily as you can catch a cold. In an experiment by neuroscientist Elizabeth Phelps at New York University, people either watched someone else get a mildly painful electric shock or suffered the shock themselves. Their brain responses and their dread before the shock were highly similar in both cases, suggesting that seeing another person's fear is all it takes to make us afraid. Even encountering the circumstances under which the other person was shocked is enough to trigger your own fear. Viewed this way, today's financial markets -- in which tens of millions of investors watch each other's fears unfolding in real time on television and online -- constitute one giant panic-transmission machine."

Keep your money in the market
10/18/08   Markets
"We will have a serious recession now, but a 1930s-style depression is highly unlikely. We will not let the money supply decline by 25 per cent, as we did in the '30s, and automatic stabilizers (like unemployment insurance) are now a significant element of fiscal policy. Don't forget that the US economy is still the most flexible in the world and our "innovation machine" is alive and well. No one has consistently made money by selling America short, and I am confident the same lesson is true today."

Q3 2008 Oakmark commentary
10/18/08   Value Investing
"In fact, we believe the decline in the market has created a very attractive environment for investing new capital. For most people, the right question to ask after a big decline is: 'Should I be investing more?'"

Whitman sampler of value stocks
10/18/08   Whitman
"Few investors in the market today are as bear-market-seasoned and savvy as Marty Whitman, 84-year-old founder of M.J. Whitman LLC, chairman and founder of Third Avenue Management and portfolio manager of Third Avenue Value Fund. Like Sam Zell, Leon Black and Eddie Lampert, Whitman's roots are in distressed-company investing."

Concentrated value investing
10/18/08   Value Investing
"Mohnish Pabrai, the Managing Partner of the Pabrai Investment Funds, has outperformed market indices over the last nine years by consistently believing in concentrated value investing. Pabrai likes to hold fewer stocks positioned in industries that he understands well, paying attention to two key variables: the intrinsic value of a business and its current price."

AIG: Europe's lethal loophole
10/17/08   Markets
"Before the financial crisis hit, AIG did a booming business in credit default swaps, complex instruments originally designed to protect lenders if borrowers fail to make debt payments. The biggest buyers were European banks, whose deals last year with AIG totaled a staggering $426 billion. But the banks didn't always buy the swaps as insurance against defaults - they often used them to skirt capital requirements."

Buy American. I Am.
10/17/08   Buffett
"I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities."

Former Vanguard guru is buying stocks
10/16/08   Neff
"In a small office in West Conshohocken, a legendary stock market bottom feeder has been having a feast. John B. Neff, who racked up record gains as manager of Vanguard's Windsor Fund over three decades, is buying stocks again."

Repeal the Glass-Steagall act
10/15/08   Government
"I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010" [from 1999 ...]

SEC agrees to accounting shift
10/15/08   Accounting
"The Center for Audit Quality, which represents accountants, said in a letter seven days later that perpetual preferred securities should be treated as equity because the holdings do not have a maturity date and 'the investor cannot recover its investment simply by holding the investment.'"

Dimon, Munger, Rohatyn: No more vegas
10/14/08   Munger
"Munger wants Wall Street balance sheets reduced by 70% and insists that the firms "be a market maker, a broker, an underwriter and a custodian of securities but not the hedge funds they have become." He wants to restrict leverage to 50% on every securities transaction except for the Treasury trading desk where "you're dealing with the safest securities around." That 50% margin level, incidentally, is the maximum that ordinary investors can obtain from their broker when they purchase common stock. Before their respective demises, Bear Stearns and Lehman Brothers were leveraged to the tune of $30 of debt for every $1 of capital."

Paulson urges banks to deploy capital
10/14/08   Government
"Treasury Secretary Henry Paulson urged banks receiving $250 billion in capital injections from the government to use the funds to spur economic growth. 'We must restore confidence in our financial system,' Paulson said in a statement in Washington. 'The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.'"

Fear factor
10/13/08   Markets
"There have been, and are, plenty of reasons for investors to freak out: the failure of banks; the demise of institutions like Lehman Bros.; the necessity for repeated, spastic government interventions. Nearly every economic indicator in the past few weeks, from auto sales to employment, has been negative. The stock of General Motors sunk to its lowest level since 1950. Banks are refusing to lend to one another. The traditional safe havens of investment, such as municipal bonds and money-market funds, have buckled. The trumpets of leadership are so uncertain, they sound like kazoos."

America for sale: price reduced
10/13/08   Value Investing
"At the depths of the 1973-74 bear market -- the worst of the post-war period -- when the Dow Jones industrial average was approaching its low of 577, Warren Buffett told Forbes magazine that he felt like "an oversexed guy in a whorehouse. This is the time to start investing." Buffett's words may have been indelicate -- Forbes ended up changing the world "whorehouse" to "harem" when the interview ran -- but the CEO of Berkshire Hathaway was on the mark because that era produced some of the best bargains of the past 50 years."

Traders' worst fears realised at Lehmans auction
10/13/08   Derivatives
"Analysts say the amount of money that has to change hands could be more than $200bn. Some estimates put the value of outstanding credit default swaps on Lehman Brothers debt at $400bn, although some of these trades have already been netted out because some investors both sold and bought CDS contracts. Exact figures are not available because a CDS is a private contract and is not traded on an exchange, but the payout will certainly be the biggest in the 10-year history of the market."

It's time to invest
10/13/08   Markets
"Martin J. Whitman, a professional investor for more than 50 years, said that as long as economies worldwide could avoid an outright depression, stocks were amazingly cheap."

Think long
10/12/08   Value Investing
"It is also possible to see bargains at the individual stock level. Both BP and Shell have a dividend yield equal to, or higher than, their p/e: an old rule of thumb for value investors. True, the oil price is falling sharply, but shares in oil companies lagged well behind the crude prices when it was soaring to $147 a barrel."

The market's silver linings
10/12/08   Value Investing
"Bolton's reasons for optimism aren't macroeconomic; the UK is almost certainly in recession for the first time in almost two decades. But he believes the high level of dividend yields compared to gilt yields, and the large cash positions in mutual funds and hedge funds, are good indicators that the market's fortunes may be about to change. "In some sectors, I'm seeing the lowest valuations I've seen in more than 30 years," Bolton says. He says he likes the look of the consumer cyclical sectors, such as the general retailers and media stocks. "Media has underperformed the market for the last seven consecutive years, and both [retail and media] are unloved by institutional investors [at the moment]," he says."

How this bear market compares
10/11/08   Markets
"The current bear market is already among the worst in history. Here is how it lines up - in losses and length - with those of the lasy 80 years."

U.S. will buy bank equity
10/10/08   Government
"U.S. Treasury Secretary Henry Paulson said the U.S. will buy equity 'as soon as we can' in banks and other financial institutions to restore market stability and revive economic growth."

The new age of frugality
10/10/08   Thrift
"On a shady lane in New Hope, Pa., a quiet revolution in American culture may be taking shape. Here, a family of four lives in a white, colonial-style house in a manner that once would have been considered All-American but more recently has been seen as just plain weird: They're frugal."

They warned us about the mortgage crisis
10/10/08   Government
"Some states, including North Carolina and Georgia, passed laws aimed at deterring rash loans only to have federal authorities undercut them. In Iowa and other states, mortgage mills arranged to be acquired by nationally regulated banks and in the process fended off more-assertive state supervision. In Ohio the story took a different twist: State lawmakers acting at the behest of lenders squelched an attempt by the Cleveland City Council to slow the subprime frenzy. A number of factors contributed to the mortgage disaster and credit crunch. Interest rate cuts and unprecedented foreign capital infusions fueled thoughtless lending on Main Street and arrogant gambling on Wall Street. The trading of esoteric derivatives amplified risks it was supposed to mute. One cause, though, has been largely overlooked: the stifling of prescient state enforcers and legislators who tried to contain the greed and foolishness. They were thwarted in many cases by Washington officials hostile to regulation and a financial industry adept at exploiting this ideology."

Lehman credit-swap auction sets payout
10/10/08   Derivatives
"Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market."

Defaults and a near-death experience
10/10/08   Markets
"It is a remarkable fact that the United States, despite having the largest, strongest and richest economy in the world, has--and has always had--a banking and bank regulatory system that is an irrational mess."

We have the tools to manage the crisis
10/10/08   Government
"First of all, there is now clear recognition that the problem is international, and international coordination and cooperation is both necessary and underway. The days of finger pointing and schadenfreude are over. The concerted reduction in central bank interest rates is one concrete manifestation of that fact. More important in existing circumstances is the clear determination of our Treasury, of European finance ministries, and of central banks to support and defend the stability of major international banks. That approach extends to providing fresh capital to supplement private funds if necessary."

Eveillard proteges prowl for bargains
10/09/08   Value Investing
"The two, who hunt the globe for companies whose worth they believe analysts have misjudged, viewed International Speedway more as a media company. It's a classic page out of the playbook of value investors, something that comes naturally to de Vaulx and de Lardemelle, who worked for years under one of the best: Jean-Marie Eveillard."

Buying the bargains in health care, energy
10/09/08   Dorfman
"Dorfman noted that drug-company stocks are selling at similar multiples to tobacco stocks, "and the last time I looked, tobacco stocks didn't save people's lives." After five years of being sold hard, Dorfman likes the look of pharmaceutical stocks, and he also is interested in metals and energy stocks because they soared early in the year and have now been hammered to bargain levels. Dorfman also suggested that investors avoid the "glamour premium" of gold stocks."

Profit from panic
10/09/08   Stocks
"The "other Berkshire" is Fairfax Financial a P&C insurer headed by brilliant capital allocator Prem Watsa. Fairfax is about as close as you can get to investing in a company that does great in good markets and exceptionally well in disastrous ones."

Fear and value
10/09/08   Dividends
"The trend of late is clear: yields are rising, dramatically so in recent months. European yields lead the pack at 4.93% at last month's close, based on S&P Global Equity Indices. The U.S., Asia Pacific and the developed world-ex-US are also posting substantially higher dividend yields compared to recent years. For reasons that need no explanation, however, investors are reluctant to avail themselves of these higher yields. For comparison, the yield on the benchmark 10-year Treasury Note closed out September 2008 at 3.85%."

Why the ECB can't fix Europe
10/09/08   World
"The European Central Bank joined the United States Federal Reserve and other major central banks in cutting key interest rates by half a point on Wednesday in a concerted move to stabilize financial markets and avert recession, but the ECB's power to stem the financial crisis in Europe is limited, economists say."

US open: happy anniversary
10/09/08   Markets
"There is still plenty of opportunity for financials to fall. Paulson and the US Treasury are coming under increasing pressure to follow the UK.s lead and recapitalise US banks. Paulson himself has said he thinks more banks will fail. Credit markets are still showing extreme stress. Commercial paper lending still has not normalised and interbank rates continue to widen. The TED and the Libor-OIS spreads are at all-time highs today."

Iceland takes over Kaupthing
10/09/08   World
"'It's difficult to find any parallels to what's happening in Iceland in the industrialized world,' Jensen said. 'You'd have to look to emerging markets, and after the Asian crisis, for example, those economies contracted about 10 percent.' The debts of the Icelandic banking system are too big for the government to repay. 'There is no way that the Icelandic population can assume responsibility for the private debt' that the banks have built up, Haarde said yesterday."

Central banks cut rates in coordinated move
10/08/08   Government
"The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point. Today's decision follows a global meltdown that sent U.S. stock indexes heading for their biggest annual decline since 1937"

Fed to purchase U.S. commercial paper
10/07/08   Government
"The Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened to cut off a key source of funding for corporations."

3% days becoming the norm
10/07/08   Markets
"Oh what we all wouldn't give for just a week of sub-1% moves! Over the last month (23 trading days), the S&P 500 has seen 10 days where the index rose or fell (mostly fell) by more than 3%. You have to go all the way back to 1938 to find another one-month period where there were this many 3% days. As shown in the chart below, there were many multi-year periods between 1950 and 2007 where the S&P 500 didn't have even one 3% day. If you're not a regular market participant and someone that is tells you we are experiencing something that hasn't happened since the Great Depression, they're not joking!"

Warren E. Buffett braves a crisis
10/06/08   Buffett
"In the midst of a financial crisis, a towering figure of American business steps forward with his reputation and financial resources for public good and personal gain. Their times and personalities are vastly different, of course. But J. Pierpont Morgan's role in the Panic of 1907 has its echo in Warren E. Buffett's actions during the current financial troubles."

Is junk a bargain?
10/06/08   Bonds
"The recent selloff has shocked junk investors, who had grown used to monthly returns in a range of negative 1% to positive 2%. Based on some statistical measures, September's 8% drop should have occurred only once in 27,777 years, according to Leverage World, a weekly publication of Garman Research."

Pursuit of an edge
10/06/08   Markets
"This particular type of market failure occurs when two conditions are met. First, people confront a gamble that offers a highly probable small gain with only a very small chance of a significant loss. Second, the rewards received by market participants depend strongly on relative performance. These conditions have caused the invisible hand to break down in multiple domains. In unregulated housing markets, for example, there are invariably too many dwellings built on flood plains and in earthquake zones. Similarly, in unregulated labor markets, workers typically face greater health and safety risks. It is no different in unregulated financial markets, where easy credit terms almost always produce an asset bubble."

Help wanted: compliance officer
10/04/08   Crime
"In these trying times, it will come as a great relief to many to learn that there will be at least one new hire on Bay Street between now and Christmas (2009). The subject of this post is a little unusual for PrefBlog, but I.m just trying to help out and spread the news of a vacancy. And besides, this is hilarious."

Buffett: My fix for the economy
10/03/08   Buffett
"Warren Buffett suggested Thursday that the U.S. Treasury team with private investors to buy the distressed mortgage assets at the center of the controversial $700 billion Wall Street bailout, and said the price tag of the rescue plan may have to rise."

Alarm led to action
10/02/08   Markets
"Behind the scenes, the credit markets had almost completely frozen up. Banks were refusing to lend to other banks, and spreads on credit default swaps on financial stocks - the price of insuring against bankruptcy - veered into uncharted waters. Moreover, the drain on money funds continued. By the end of business on Wednesday, institutional investors had withdrawn more than $290 billion from money market funds. In what experts call a 'flight to safety,' investors were taking money out of stocks and bonds and even money market funds and buying the safest investments in the world: Treasury bills. As a result, yields on short-term Treasury bills dropped close to zero. That was almost unheard of."

Lehman bankruptcy gets ugly
10/02/08   Stocks
"It's looking like Lehman, contrary to the conventional wisdom, may have been too big to fail after all. And the fallout from the bankruptcy may further undermine investors. confidence in the financial system."

This economy does not compute
10/01/08   Markets
"Certainly, markets have internal dynamics. They're self-propelling systems driven in large part by what investors believe other investors believe; participants trade on rumors and gossip, on fears and expectations, and traders speak for good reason of the market's optimism or pessimism. It's these internal dynamics that make it possible for billions to evaporate from portfolios in a few short months just because people suddenly begin remembering that housing values do not always go up. Really understanding what's going on means going beyond equilibrium thinking and getting some insight into the underlying ecology of beliefs and expectations, perceptions and misperceptions, that drive market swings."

Buffett buys GE preferred
10/01/08   Buffett
"General Electric Co. plans to offer $12 billion in common shares and billionaire investor Warren Buffett's Berkshire Hathaway Inc. will buy $3 billion stake of preferred shares."

Cities are cutting back projects
10/01/08   Government
"Cities, states and other local governments have been effectively shut out of the bond markets for the last two weeks, raising the cost of day-to-day operations, threatening longer-term projects and dampening a broad source of jobs and stability at a time when other parts of the economy are weakening."

A contrarian gets the last laugh
10/01/08   Value Investing
"Vito Maida says he's lucky. But he could just as easily say, "I told you so." More than four years ago, with stock prices roaring upward and a global real estate boom gaining pace, the Toronto money manager sat down to pen his thoughts on the markets, and realized that his views were out of step with the rest of the financial world."

Canada may face housing bust: Shiller
10/01/08   Real Estate
"The Canadian housing market could face a similar housing bust to the United States, particularly in more bubbly markets as Vancouver and Calgary, said Robert Shiller, the Yale University professor who predicted both the 1990s stock market boom and bust and the US housing slump."

U.S. home prices declined 16.3% in July
09/30/08   Real Estate
"The S&P/Case-Shiller home-price index dropped 16.3 percent from a year earlier, more than forecast, after a 15.9 percent decline in June."

Corporate bonds worse than equities
09/29/08   Bonds
"Even though equity markets are down nearly 7% today, the corporate bond market is even worse. Below we highlight a price chart of an ETF that tracks an index of investment grade corporate bonds (LQD). As shown, the ETF is down nearly 10% today!"

The 50-100 year storm has arrived
09/29/08   Markets
Keen slides from a Fairfax presentation.

U.S. House rejects rescue plan
09/29/08   Government
"The financial-rescue plan intended to restore confidence in the U.S. banking system collapsed in partisan wrangling as the House of Representatives voted down the proposal backed by the Bush administration and congressional leaders of both parties."

Lehman's '100% principal protection' means pennies
09/29/08   Bonds
"A brochure pitching $1.84 million of notes sold by Lehman Brothers Holdings Inc. in August, a month before the firm filed for bankruptcy, promised '100 percent principal protection.' Buyers had 'uncapped appreciation potential' pegged to gains in the Standard & Poor's 500 Index, the brochure said. In the worst case, they would get back their $1,000-per-note investment in three years. Only the last in a list of 15 risk factors mentioned the biggest danger: 'An investment in the notes will be subject to the credit risk of Lehman Brothers.' Lehman's Sept. 15 bankruptcy leaves holders of the notes waiting in line with other unsecured creditors for what's left of their money."

Citigroup to buy Wachovia banking assets
09/29/08   Stocks
"Citigroup will acquire Wachovia's massive deposit network, as well as over $300 billion worth of Wachovia's loan portfolio and the company's debt. Citigroup said it will absorb up to $42 billion of losses on those loans, while the Federal Deposit Insurance Corporation will be on the hook for anything beyond that."

Breakthrough on rescue plan
09/28/08   Government
"Companies that sell debt to the government will issue stock warrants to the government so that taxpayers 'can gain as companies recover' from economic difficulties, Conrad said. "

The monster that ate Wall Street
09/28/08   Derivatives
"What the bankers hit on was a sort of insurance policy: a third party would assume the risk of the debt going sour, and in exchange would receive regular payments from the bank, similar to insurance premiums. JPMorgan would then get to remove the risk from its books and free up the reserves."

Tumult jars bond-tracking ETFs
09/26/08   Indexing
"Exchange-traded funds that track bonds have been running into trouble trading at prices that match their underlying values, raising questions about one of their key promises to investors."

Fate of bailout plan remains uncertain
09/25/08   Government
"The talks broke up in angry recriminations, according to accounts provided by a participant and others who were briefed on the session, and were followed by dueling press conferences and interviews rife with partisan finger-pointing. In the Roosevelt Room after the session, the Treasury secretary, Henry M. Paulson Jr. literally bent down on one knee as he pleaded with Nancy Pelosi, the House Speaker, not to 'blow it up' by withdrawing her party's support for the package over what Ms. Pelosi derided as a Republican betrayal. "I didn't know you were Catholic," Ms. Pelosi said, a wry reference to Mr. Paulson's kneeling, according to someone who observed the exchange. She went on: "It's not me blowing this up, it's the Republicans." Mr. Paulson sighed. "I know. I know." It was the very outcome the White House had said it intended to avoid, with partisan presidential politics appearing to trample what had been exceedingly delicate Congressional negotiations."

Economists urge congress not to rush
09/25/08   Markets
"More than 150 prominent U.S. economists, including three Nobel Prize winners, urged Congress to hold off on passing a $700 billion financial market rescue plan until it can be studied more closely."

JPMorgan buys WaMu's deposits as thrift is seized
09/25/08   Stocks
"The U.S. government closed Seattle-based Washington Mutual amid customer withdrawals of $16.7 billion since Sept. 15, the Office of Thrift Supervision said in a statement. WaMu had 'insufficient liquidity' and was in an 'unsound' condition, the OTS said."

Housing costs: Half your income?
09/25/08   Real Estate
"More than 7.5 million homeowners spend at least half of their income on housing; 19 million are above 30%. That's 53% of all homeowners with mortgages. No wonder Americans feel strained."

It's the bailout, stupid!
09/25/08   Buffett
"Compared to the ham-handed hastiness in Washington, Warren Buffett's helping hand to Goldman Sachs was an elegant and brilliant stroke for both parties. The greatest investor of our time becomes the largest shareholder of our finest investment bank turned bank holding company."

I won't give Goldman my $200 Million lottery win
09/25/08   Fun
"Tomorrow's Europe-wide lottery offers a tax-free, lump-sum jackpot worth about $200 million. When I hand over my winning ticket, though, I will face a dilemma: Where do I stash my luck-gotten gains?"

Warren Buffett explains his Goldman investment
09/24/08   Buffett
"Well, I can't tell you it's exactly the right time. I don't try to time things, but I do try to price things. And I've got a formula that says bet on brains, and bet of them when it's the right type of deal. And in this case, there's no better firm on Wall Street. We've done business with them for years, with Goldman, and the price was right, the terms were right, the people were right. I decided to write a check."

Beware ETNs
09/24/08   Funds
"Perhaps this might be a good time for a story to remind your readers about the difference between an ETN and ETF: an ETN is just a pre-paid forward contract, a form of debt security. There is no underlying basket of assets, unlike mutual funds or ETFs."

Beware ETNs, Part 2
09/24/08   Funds
"This alone makes it very dangerous to buy an ETN: you're taking a huge amount of counterparty risk and not being paid for it at all. If this had happened a couple of years ago, I might have suggested a monoline wrap to set investors' fears at rest."

Credit traders sowing seeds of destruction
09/24/08   Markets
"The $62 trillion market for credit- default swaps, created to protect banks from loan losses, helped fuel a near-meltdown in the financial system and now may be regulated for the first time."

Goldman to raise $7.5 billion from Berkshire
09/23/08   Buffett
"Goldman Sachs Group Inc. will raise at least $7.5 billion from Warren Buffett's Berkshire Hathaway Inc. and public investors in a bid to quell concerns that pushed up the Wall Street firm's borrowing costs and hurt its stock."

Income 2008
09/23/08   Stingy Investing
"Do you dream of relaxing on a sunny beach, drink in hand, while your investment portfolio throws off piles of cash? That's the life of an income investor. To help you get to that beach as quickly as possible, we have once again ranked the biggest trusts and stocks in Canada based on their ability to put steady streams of cash into your wallet."

Retirees need only 60% of working income
09/23/08   Retirement
"The Russell finding is closer to the 50 or 60% replacement ratio that actuary Malcolm Hamilton has often cited, and for similar reasons: "Certain living expenses tend to drop significantly during retirement as most retirees are mortgage-free and no longer incur employment costs such as daily transportation," says Irshaad Ahmad, president and managing director for Russell Canada"

Stopping a financial crisis, the Swedish way
09/23/08   World
"A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar? It does to Sweden. The country was so far in the hole in 1992 - after years of imprudent regulation, short-sighted economic policy and the end of its property boom - that its banking system was, for all practical purposes, insolvent. But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing."

CEO murdered by mob of sacked Indian workers
09/23/08   World
"Corporate India is in shock after a mob of sacked workers bludgeoned to death the chief executive who had dismissed them from a factory in a suburb of Delhi."

A disability epidemic among a railroad's retirees
09/23/08   Government
"Virtually every career employee - as many as 97 percent in one recent year - applies for and gets disability payments soon after retirement, a computer analysis of federal records by The New York Times has found. Since 2000, those records show, about a quarter of a billion dollars in federal disability money has gone to former L.I.R.R. employees, including about 2,000 who retired during that time. The L.I.R.R.'s disability rate suggests it is one of the nation's most dangerous places to work. Yet in four of the last five years, the railroad has won national awards for improving worker safety. 'Short of the gulag, I can't imagine any work force that would have a so-to-speak 90 percent disability attrition rate,' said Glenn Scammel, long one of Capitol Hill's top experts on railroads. 'That defies both logic and experience.'"

Hedge fund returns money
09/22/08   Funds
"The best-performing hedge fund manager of the past two years has closed down his funds and is returning money to investors after concluding that the danger of losing money from a bank collapse is too high."

Lessons from a 'lost decade'
09/22/08   Markets
"Most dismiss the idea that America could suffer the same fate as Japan, but some of the differences are overstated. For example, some claim that Japan's bubble was much bigger than America's. Yet average house prices nationwide rose by 90% in America between 2000 and 2006, compared with a gain of 51% in Japan between 1985 and early 1991, when Japanese home prices peaked"

Oil traders caught in squeeze
09/22/08   Markets
"Crude oil climbed more than $25 a barrel, the biggest gain ever, as traders scrambled to unwind positions on the October contract's last day of trading. The more-active November contract rose $6.62."

The day the ticking time bombs went off
09/21/08   Derivatives
"The underlying philosophy behind derivatives sounds terrific. The weak can get rid of risks they can't handle and the financial system should be stronger as a result. In the right hands, derivatives can perform this role. But the general practice is very different, as the great investor Warren Buffett worked out years ago. His 2002 letter to his Berkshire Hathaway shareholders made headlines by condemning derivatives as "financial weapons of mass destruction". They were "time bombs, both for the parties that deal in them and the economic system"."

The mortgages of the future
09/21/08   Real Estate
"Mortgages could be structured differently, so that adjustments in payments would be made as a matter of routine - systematically, automatically and continuously - starting even before any distress is perceived by borrower or lender. By avoiding thousands and even millions of individual family crises, we might also make institutional crises, like the collapse of Lehman Brothers and Bear Stearns, less likely."

Whitman's glass-half-full take on market
09/21/08   Whitman
"Marty Whitman, the octogenarian dean of deep-value investing, sees great bargains to be snapped up from the current stock market meltdown. "It's a great time," enthused the 83-year-old founder of New York-based Third Avenue Management LLC before speaking yesterday at a conference organized by AIC Ltd. "We can't try to pick the bottom, but it seems to me that there are great values out there now, just like in 1974," the firm's co-chief investment officer said in an interview."

Take advantage of the dividend tax credit
09/21/08   Taxes
"It's interesting, but the marginal tax rate on eligible dividends is now lower than the rate on capital gains in most provinces at most income levels. In fact, at lower income levels, the marginal tax rate on eligible dividends is often negative. That is, adding more eligible dividend income to your tax return can actually reduce your overall tax bill. Why? Because the dividend tax credit available will offset not only that dividend income, but the tax on other income as well. British Columbia has the deepest negative marginal tax rate in 2008 at negative 15.55 per cent for the lowest income earners. This means, for example, that if you live in B.C., are in the lowest tax bracket, and you add one dollar of eligible dividend income, you'll actually pay 15.55 cents less in tax than without the dividend. What a bargain."

Top-earning pirates
09/21/08   World
"Depletion of fortune due to rum and wenches was not assessed, nor were divisions of treasure among the crew. Plunders were often split in equal shares, with the captain receiving double--not much of a premium for leadership. A good lesson to modern shareholders: The best way to achieve fair compensation and rule out golden parachutes is to have your leaders expecting murderous revolts if they hoard profits."

Ban the shorts? A BIG mistake!
09/19/08   Government
"For all the talk of capitalism now being dead given the government's plan to likely assume much of the banking industry's mortgage-related illiquid assets as well as the takeovers of Fannie Mae, Freddie Mac and AIG, the SEC's action is far more ominous for those who believe in free markets."

Pain spreads as credit vise grows tighter
09/19/08   Economy
"Lenders of all types had already been raising the bar for borrowers, turning away all but the best customers. This week, they became even less willing to part with their money, further crimping budgets and family spending. An economy propelled by easy credit for more than a decade is fraying as credit disappears. American Express, to take one striking example, is reducing the maximum credit limit for half of its tens of millions of cardholders."

John Bogle says U.S. government seems 'punch drunk'
09/19/08   Bogle
"John Bogle, who created the $106 billion Vanguard 500 Index Fund in 1976, said the U.S. government is 'punch drunk' with proposals to rescue the financial system."

Mathematicians predicted crash years ago
09/19/08   Markets
"Mandelbrot, 83, contends that portfolio theory, which tries to maximize return for a given level of risk, treats extreme events (like, say, yesterday's market shockers) with 'benign neglect: it regards large market shifts as too unlikely to matter or as impossible to take into account.' The faulty assumption of modern portfolio theorists, in Mandelbrot's view, is that price changes do not drift far from the mean when observing daily ups and downs - so extreme events are exceedingly rare. 'Typhoons, in effect, are defined out of existence,' he wrote."

Paulson, Bernanke push new plan
09/19/08   Markets
"U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed moving troubled assets from the balance sheets of American financial companies into a new institution. "

Money markets get a lifeline
09/19/08   Markets
"The Treasury Department and Federal Reserve took steps Friday to help stabilize the U.S. money market fund industry, which has come under severe strain following the dramatic events that took place across the financial system this week. The Treasury said it would guarantee up to $50 billion dollars for the next year for both retail and institutional investors."

Short sellers under fire
09/19/08   Markets
"The SEC said today that it will halt short selling of U.S. banks, insurance companies and securities firms through Oct. 2, while the Financial Services Authority in the U.K. banned short sales of financial shares for the rest of the year. "

AIG booted out of the Dow
09/18/08   Markets
"Dow Jones & Company, which oversees the 30-stock index, said that Kraft Foods (KFT) will take AIG's place."

Russian emergency funding fails to halt stock rout
09/17/08   World
"Russia poured $44 billion into its three largest banks and halted stock trading for a second day in a bid to stem the most severe financial crisis since its devaluation and debt default a decade ago. The Finance Ministry extended the repayment period on loans available to OAO Sberbank, VTB Group and OAO Gazprombank to three months from one week. The benchmark Micex stock index plunged as much as 10 percent, taking its three-day decline to 25 percent, and brokerage KIT Finance said it's in talks with investors to sell a stake after failing to meet some obligations."

Counterparty risk and CDSs
09/17/08   Derivatives
"Given the crisis on Wall Street and the focus on American International Group Inc., one of the world's largest insurers, everybody is suddenly talking about counterparty risk. What is counterparty risk, and why is it now an issue? In the simplest terms, counterparty risk is the chance that the person on the other side of a deal - the counterparty - won't be there when it's time to pay up. Take an example most people can relate to: Selling a home. There's always the chance that when it comes time to close the deal a month or so down the road, the buyer won't show up or won't have the money."

Global equity market declines
09/17/08   Markets
"There's no doubt about it -- it's bad everywhere" [Falling like a BRIC. China -68.34%, Russia -57.44%, India -36.36%, Brazil -33.04%.]

Money market fund says customers could lose money
09/17/08   Funds
"The fund said that because the value of some investments had fallen, customers now have only 97 cents for each dollar they had invested. This is only the second time in history that a money market fund has 'broken the buck' - that is, reported a share.s value was less than a dollar."

A map of the limits of statistics
09/16/08   Taleb
"We can identify where the danger zone is located, which I call "the fourth quadrant", and show it on a map with more or less clear boundaries. A map is a useful thing because you know where you are safe and where your knowledge is questionable. So I drew for the Edge readers a tableau showing the boundaries where statistics works well and where it is questionable or unreliable. Now once you identify where the danger zone is, where your knowledge is no longer valid, you can easily make some policy rules: how to conduct yourself in that fourth quadrant; what to avoid."

AIG gets up to $85 Billion Fed loan
09/16/08   Stocks
"The U.S. government agreed to lend as much as $85 billion to American International Group Inc. in exchange for a 79.9 percent stake to save the country's biggest insurer from collapse."

Steeper drop in Canada's existing home prices
09/15/08   Real Estate
"The average price of a home sold in Canada's major markets dropped 5.1% in August from a year ago, the largest decline in more than 12 years, according to the Canadian Real Estate Association. House prices have dropped for three straight months and it's probably only the beginning, says Benjamin Tal, senior economist with CIBC World Markets."

AIG falls
09/15/08   Stocks
"AIG, seeking to raise $20 billion in capital and sell $20 billion of assets, rejected investments from buyout firms KKR & Co., TPG Inc. and J.C. Flowers & Co., people familiar with the talks said. AIG instead sought a $40 billion bridge loan from the Federal Reserve, the New York Times reported, citing an unnamed person. The shares plunged $6.25 to $5.89 at 9:42 a.m. in New York Stock Exchange composite trading. Warrren Buffett, chairman of Berkshire Hathaway Inc., 'is thought to be in talks' with AIG about a possible investment, the Insurance Insider reported today, citing unidentified sources." [It seems likely that Buffett would take a pass on the firm but be willing to buy some of its assets at fire-sale prices.]

Lehman files biggest bankruptcy case
09/15/08   Stocks
"Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, succumbed to the subprime mortgage crisis it helped create in the biggest bankruptcy filing in history. The 158-year-old firm, which survived railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management a decade ago, filed a Chapter 11 petition with U.S. Bankruptcy Court in Manhattan today. The collapse of Lehman, which listed more than $613 billion of debt, dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990." [So much for the too big to fail idea]

Skimming the froth
09/15/08   Markets
"Emerging markets have been subject to some violent downswings in the past and, with the economic health of some countries deteriorating, there is scope for some nasty shocks in terms of corporate profits and bank losses. Long-term investors may be willing to put up with the bad news in the hope of a rebound in 2009 but it seems unlikely that we will be hearing any more safe haven talk for a while."

Wall Street banks teeter
09/15/08   Stocks
"In one of the most dramatic days in Wall Street.s history, Merrill Lynch agreed to sell itself to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, hurtled toward liquidation after it failed to find a buyer. The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments. But even as the fates of Lehman and Merrill hung in the balance Sunday night, another crisis loomed as the insurance giant American International Group appeared to teeter. A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive."

Bank of America said to buy Merrill
09/14/08   Stocks
"Bank of America Corp. reached a deal to acquire Merrill Lynch & Co. for about $44 billion, the Wall Street Journal reported, after shares of the third-biggest U.S. securities firm fell by more than 35 percent last week and smaller rival Lehman Brothers Holdings Inc. neared bankruptcy."

Lehman said to prepare bankruptcy filing
09/14/08   Stocks
"Lehman Brothers Holdings Inc. prepared to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm and Wall Street prepared for its possible liquidation. Lehman and its lawyers are getting ready to file the documents for bankruptcy protection tonight, said a person with direct knowledge of the firm's plans. A final decision still wasn't made, though none of the other options being considered appeared to have much standing, the person said, declining to be identified because the discussions haven't been made public."

Value and momentum everywhere
09/13/08   Academia
"We study jointly the returns to value and momentum strategies for individual stocks within countries, stock indices across countries, government bonds across countries, currencies, and commodities. Value and momentum generate abnormal returns everywhere we look. Exploring their common factor structure across asset classes, we find that value (momentum) in one asset class is positively correlated with value (momentum) in other asset classes, and value and momentum are negatively correlated within and across asset classes. Long-run consumption risk is positively linked to both value and momentum, as is global recession risk to a lesser extent, while global liquidity risk is related positively to value and negatively to momentum. These patterns emerge from the power of examining value and momentum everywhere at once and are not easily detectable when examining each asset class in isolation."

Florida's big insurance problem
09/13/08   Government
"When Hurricane Ike took a left on Sept. 8, heading away from Florida, locals breathed a sigh of relief. Not only are their homes on the line with each burst of violent weather but their pocketbooks are increasingly at risk, too. Over the past four years, Florida taxpayers' vulnerability to a major weather catastrophe has grown. The quasi-governmental company that was conceived as an insurer of last resort, Citizens Property Insurance, has become Florida's top underwriter of homeowners' insurance. Citizens now has more than $433 billion of property exposure on its books, and Florida has exacerbated that risk by getting into the reinsurance business as well."

Paulson, Bernanke resisting aid for Lehman
09/13/08   Government
"Henry Paulson and Ben S. Bernanke may have to weather more speculative attacks on financial institutions as they resist using public funds to aid the sale of Lehman Brothers Holdings Inc."

Hurricane Ike may cost insurers up to $18 Billion
09/13/08   Disaster
"Ike may cause $8 billion to $18 billion in insured losses on land as it moves from coastal Galveston to Houston and further inland, the Oakland, California-based firm said in an e- mailed statement today. Disruption to energy production is 'not expected to be extensive,' the firm said. Flagstone Reinsurance Holdings Ltd., the Bermuda-based insurer, predicted damage of $10 billion to $16 billion industrywide."

Warren Buffett's happy housing story
09/11/08   Buffett
"Not every subprime lender is drowning in red ink. Berkshire Hathaway subsidiary Clayton Homes, the nation's largest maker and financer of prefab and mobile homes, has been a bright light in a mortgage market that has generated $500 billion in write-downs since the start of 2007."

Ways to gauge value
09/10/08   Value Investing
"It's what every analyst likes to cite and probably the most widely used tool on Wall Street. But the price/earnings ratio, or P/E, of a stock might not be the perfect gauge of its value, especially now."

Retailers reprogram workers
09/10/08   Management
"Retailers have a new tool to turn up the heat on their salespeople: computer programs that dictate which employees should work when, and for how long."

Thinking long term about the equity premium
09/10/08   Markets
"The equity premium has been that large because people were extremely unsure how compelling global events would play out - at the time those events were occurring. Try to appreciate the incredible uncertainty associated with two World Wars, the Great Depression and the Cold War."

What your global neighbors are buying
09/08/08   World
"How people spend their discretionary income - the cash that goes to clothing, electronics, recreation, household goods, alcohol - depends a lot on where they live. People in Greece spend almost 13 times more money on clothing as they do on electronics. People living in Japan spend more on recreation than they do on clothing, electronics and household goods combined. Americans spend a lot of money on everything."

American savers have drawn the short straw
09/08/08   Thrift
"American savers, take a bow. This is your moment of vindication. Your hour of glory. And you earned it (in a manner of speaking). You resisted the siren call of plastic teaser APRs, dutifully living within your means to store money for a rainy day. You never took out an interest-only mortgage. Never had to pawn the copper pipes from your exurban McMansion to pay the reset on your liar loan. Your credit score would have gotten you into Harvard at age 12. Good for you! Your reward: injurious savings yields, inflationary rot, and election-season neglect, all served up with a dollop of institutional insecurity."

Fannie, Freddie credit-default swaps
09/08/08   Markets
"Investors may be forced to unwind contracts protecting $1.47 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. government seized control of the companies in a bid to bolster the housing market. Thirteen 'major' dealers of credit-default swaps agreed 'unanimously' that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today."

International exposure has never hurt so bad
09/07/08   Markets
"The declines recently in global equity markets have really been astounding. Japan, Spain, Brazil, India, Italy, South Korea, Singapore, Sweden, Taiwan, and Hong Kong all join China and Russia with equity markets off at least 30% from their 52-week highs. North American countries rank 1,2,3 as far as countries holding up the best. International exposure has never hurt so bad."

Long-Term Capital: It's a short-term memory
09/07/08   Markets
"A financial firm borrows billions of dollars to make big bets on esoteric securities. Markets turn and the bets go sour. Overnight, the firm loses most of its money, and Wall Street suddenly shuns it. Fearing that its collapse could set off a full-scale market meltdown, the government intervenes and encourages private interests to bail it out. The firm isn't Bear Stearns - it was Long-Term Capital Management, the hedge fund based in Greenwich, Conn., and the rescue occurred 10 years ago this month."

Student tax planning can save a bundle
09/07/08   Taxes
"So, if you've got a child heading off to postsecondary school this year, congratulations, I expect your child will make smarter decisions. And there are some smart decisions related to your child's tax planning that can help too. Let me share some of those today."

U.S. takeover of Fannie, Freddie
09/07/08   Markets
"Under the plan, the Treasury will receive $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie and Freddie. The government will receive annual interest of 10 percent on the initial investments. As a condition for the assistance, Fannie and Freddie will have to reduce their holdings of mortgages and securities backed by home loans. The portfolios 'shall not exceed $850 billion as of December 31, 2009, and shall decline by 10 percent per year until it reaches $250 billion,' the Treasury said."

Mad TV - Free Credit Card
09/06/08   Fun
A skit on the perils of credit from Mad TV

The 65 mpg Ford the U.S. can't have
09/05/08   World
"If ever there was a car made for the times, this would seem to be it: a sporty subcompact that seats five, offers a navigation system, and gets a whopping 65 miles to the gallon. Oh yes, and the car is made by Ford Motor (F), known widely for lumbering gas hogs."

Your dog's bite could bankrupt you
09/04/08   Law
"But all dog owners need to understand their potential liability should their animal bite, maul or, heaven forbid, kill someone. A single bite could cost you tens of thousands of dollars -- a lawsuit hundreds of thousands -- and your insurance coverage might not apply. If the attack is especially serious, you could even go to jail."

Buffett becomes vulture
09/02/08   Buffett
"Ron Peltier runs HomeServices of America Inc., the second-largest U.S. real estate brokerage, and unlike No. 1 NRT Inc., his company is making money in the worst housing slump since the Great Depression. HomeServices also has a parent, Warren Buffett's Berkshire Hathaway Inc., with $28 billion of cash to help finance the purchase of brokerages that can't weather the housing recession. By contrast, NRT's parent Realogy Corp., owned by Leon Black's Apollo Management LP, has at least $875 million of debt that has an 89 percent chance of defaulting within five years, credit-default swaps tracked by London-based CMA DataVision indicate."

10 questions for John Dorfman
09/02/08   Dorfman
"The Robot screen contains low P/E outliers. It calls our attention to some of the very cheapest stocks in the market, in the bottom percentile of price/earnings ratios. It screens out stocks that have excessive debt. From this screen we recently bought Om Group (OMG), the largest U.S. dealer in cobalt. It also deals in metal powers. The stock is selling for less than book value and less than six times earnings. We also bought some Cal-Maine Foods (CALM). It produces and sells eggs. Now that some of the crazier diet fads seem to be receding, I figure that eggs can rebound a little bit as part of a well-rounded diet for most Americans. The stock sells for 6 times earnings."

Buffett's best man
09/02/08   Munger
"Munger, 84 and blind in one eye, walks stiffly to the stage. A prestigious physics professor waits to interview him, but once the lanky, thick-bespectacled guest starts blaspheming some favorite targets, the prof rarely gets a word in edgewise. Munger's topic du jour is the spiraling credit crisis: He flings vitriol at bankers, saying they've been selling investors "a hapless mess of super-complexity." The accounting profession has "disgraced itself" with its lax standards, and so has academia. "The idea that we need derivatives is just so much twaddle," he says. Yet despite all this inanity and skullduggery, Munger still sees the investing world as a place where common sense can triumph -- if only because "it isn't so common.""

The death of the credit card economy
09/01/08   Debt
"The most revolutionary notion in commerce today is one of the oldest. If you want to buy something, you may actually have to pay for it. We are reverting from a "borrow and buy" economy to the "cash and carry" model of our grandparents."

Is debt your destiny?
08/31/08   Debt
"Credit changes the way we spend and think. If you're broke, research shows, there's a good chance you'll stay that way a long time. But there are ways to fight the pattern."

A nightmare on Wall Street
08/29/08   Markets
"Like a Hollywood monster that is impervious to bullets, the credit crisis refuses to lie down and die. The authorities have bombarded it with interest-rate reductions, tax cuts, special liquidity schemes and bank bail-outs, but still the creature lumbers forward, threatening new victims with every step. Global stockmarkets are suffering double-digit losses this year, and credit markets are once again gummed up."

September: The horror story
08/29/08   Markets
"The Dow during the average September has lost 1.13%, which compares to an average gain among all other months over the last 112 years of 0.75%. That works out to an average spread between September and all others months of 1.88 percentage points per month -- which is impressively large. Nor is September's awful record the result of just a few years in the sample. The pattern in fact is remarkably consistent: September was among the worst performing months in all but one of the decades of the 20th century. Only between 1911 and 1920 was its performance above par, when its average performance for the decade came in second."

The Halloween effect in US sectors
08/28/08   Academia
"All US stock market sectors and industries perform better during winter than during summer in our sample from 1926-2005. In more than two-third of all sectors and industries this difference in summer and winter returns, known as the Halloween effect, is statistically significant and in half of all sectors and industries risk premia are negative during summer. However, while all sectors and industries show this effect, there are large differences across sectors and industries. The effect is almost absent in sectors related to consumer consumption but strong in production sectors."

There's more to the story than dividend yield
08/27/08   Dividends
"There are two ways a company returns capital to shareholders: dividends and share buybacks. True yield measures the dividend yield, adjusted for any growth or shrinkage in the number of shares outstanding."

Real national prices decline to Q4 2002 levels
08/27/08   Real Estate
"In real terms, the Case-Shiller National Home price index is off 25% from the peak. Real prices are now back to the Q4 2002 level (nominal prices are back to mid-2004)."

Consumers as accurate as economists
08/27/08   Economics
"Thomas and Alan Grant of Baker University in Kansas analyzed surveys of U.S. and Australian consumers collected from 1978 through 2005. For the U.S. data they used the Michigan Survey, which involves monthly telephone interviews with 500 households. The U.S. respondents were asked several questions, including how much prices will go up or down in the next 12 months. On average, the consumers predicted inflation rates that were off by 1.1 percentage points. The researchers compared the results with those found with the Livingston Survey of professional economists, finding a similar error in predictions."

An active value strategy in disguise
08/27/08   Indexing
"In this paper we critically examine the novel concept of fundamental indexation. We argue that fundamental indexation is by definition nothing more than an (elegant) value strategy, because the weights of stocks in a fundamental index and a market capitalization-weighted index only differ as a result of differences in valuation ratios. Moreover, fundamental indices more resemble active investment strategies than classic passive indices, because (i) they appear to be at odds with market equilibrium, (ii) they do not represent a buy-and-hold strategy and (iii) they require several subjective choices. Last but not least, because fundamental indices are primarily designed for simplicity and appeal, they are unlikely to be the most efficient way of benefiting from the value premium. Compared to more sophisticated, multi-factor quantitative strategies, fundamental indexation is likely to be an even more inferior proposition."

These Olympics are unreal
08/25/08   Fun
"These Olympics are unreal. And that's not a good thing exactly how we planned it."

Wise investing: no substitute for saving
08/25/08   Thrift
"The problem is that while the financial-services industry is very good at marketing and selling investment products, it's very bad at marketing and selling thrift, and living within one's means. After all, the only thing which is marketed more aggressively than investments is credit products. But if you want a financially comfortable retirement, the first best and pretty much only thing you need to do is save a lot of money while you're working."

The backstory on the Buffett book
08/25/08   Buffett
"One of the most anticipated books of the fall is "The Snowball: Warren Buffett and the Business of Life." The title's publisher, Bantam, paid $7.2 million for the North American rights and expects to sell more than 1 million hardcover copies of "The Snowball," which is due out Sept. 29. Few investors have generated as much sustained public interest as Mr. Buffett, one of the world's richest men, with a fortune estimated as high as $62 billion. R.R. Bowker's Books in Print says there are an estimated 60 titles in print about him, with more than a dozen new ones on tap this year. Now Bantam is about to find out whether there's a limit to Buffetmania."

The giant pool of money
08/23/08   Markets
"A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money."

Dazzling dandelions foment new commodities craze
08/22/08   Fun
"Commodities speculators have a new darling: dandelions. Each day brings a new Wall Street report touting dandelion leaves and flowers for use as both feed for livestock and fuel for vehicles." [Drink some dandelion wine while soaking in the silliness.]

Three hours with Warren Buffett
08/22/08   Buffett
"I think I said one time that, you know, you only find out who's been swimming naked when the tide goes out. Well, we found out that Wall Street has been kind of a nudist beach. There's--it's just one discovery after another of firms that either didn't know what they were doing or that did things that they shouldn't have knowingly. And all of the troubles have not been revealed the first time around, usually, so there's considerable disillusionment that's set in in terms of are these guys telling us the truth now or maybe they just don't know what the truth is."

Clouds gather again over the Pampas
08/22/08   World
"At 55% of GDP, Argentina's public debt is still large. But the cost of servicing it has been low, partly because of the tough restructuring Mr Kirchner imposed on bondholders. Even so, to service its debts, the government needs to find an extra $2.5 billion or so next year. It cannot tap the international capital markets, because it has still not settled with some bondholders nor its sovereign creditors in the Paris Club. Instead, it is relying on Hugo Chavez. This month Venezuela's president bought another $1 billion in Argentine bonds (taking his total purchases to $7 billion). The latest bonds pay interest of 15% - the same rate agreed by Domingo Cavallo, a former finance minister, in a notorious bond swap in 2001 on the eve of the collapse."

Timing errors affect performance
08/21/08   Hallett
"treat your investments like a bar of soap; the more you touch them, the smaller they get. This saying is so true. In practice, I've rarely found any need to make many changes more often than every two years. Advisors who can't resist the itch to rejig client portfolios should at least keep a running score of how their 'new' advice fares against the 'old,' unchanged portfolio in subsequent years. If the changes detract from performance more often than not, this should be kept in mind the next time the itch to switch returns."

Rebundling Passive Performance
08/19/08   Stingy Investing
"Advisors using actively managed funds have taken a beating from index-fund advisors in the popular press over the issue of fees. But the argument for indexing is usually made by relying on raw index returns and usually targets investors who don't want advice. The case for indexing is substantially weaker when all of the costs associated with advice on passive portfolios are added up."

Running a hedge fund is harder than it looks
08/19/08   Funds
"Do you remember a time, only a short while ago, when virtually anybody could start a hedge fund? It seemed so easy: billions of dollars were being thrown around like confetti, even at first-time managers. You could make money with your eyes closed. Or so it seemed."

The key to happiness is freedom not income
08/19/08   World
"Off and on, usually provoked by the release of a new study, the media will turn to the question of happiness and incomes. While the Wall Street Journal has exhibited a tendency to tout research that shows that the rich are happier, the results are far less clear-cut. Once a certain income level has been reached (typically, enough to provide for a middle class standard of living in that society and allow one to accumulate a cushion for emergencies) more money does not produce much if any gains in happiness. And some findings have been under-reported in the US. For instance, while some studies have found that being in the top income group or having high educational attainment is correlated with higher levels of happiness, living in socially stratified societies leads to less satisfaction across all groups. And remember, Nigeria, hardly a bastion of wealth, has scored as the happiest country in a multi-year international survey. An article today in the Financial Times suggests that researchers may have been looking at the wrong axis in looking for a strong correlation between income and happiness. Roberto Foa (a researcher in the same international survey mentioned above) contends that freedom is a far more important factor than economic attainment."

A glossary of incompetence
08/19/08   Fun
"The "Peter Principle" states that "in a hierarchy, every employee tends to rise to his level of incompetence; the cream rises until it sours." People who show competence are promoted whether or not they are qualified to perform competently at the next level. Eventually they go beyond their limits, become incompetent, and stop getting promoted. Macbeth, a success as a military commander, rose to become an incompetent king. Which is to say, "nothing fails like success."" [An oldie but a goodie.]

Two years inside the cauldron of capitalism
08/19/08   Education
"The weirdest and creepiest episode is when a student writes to the entire school, confessing to a 'regrettable property-damage incident', a gorgeous euphemism for urinating against a neighbouring student's door. 'His behaviour had made him realise he still had work to do figuring out exactly who he was.' Ye-es . . . or maybe he should just resolve not to pee against people.s doors in future. Even more creepily, Delves Broughton finds that he no longer responds to such tosh with a healthy snort of laughter. 'It was serious, right? Leadership. Core values. Transformation. Being true to oneself.' It takes his wife - his American wife - to inject some common sense. 'These people are freaks..'"

Court upholds ABCP plan
08/18/08   Markets
"Investors whose funds have been locked up for more than a year in frozen asset-backed commercial paper may get their money back within as little as two months after an appeal court ruled a $32-billion restructuring plan is fair and legal."

Abnormal returns from the U.S. senate
08/18/08   Government
"The actions of the federal government can have a profound impact on financial markets. As prominent participants in the government decision making process, U.S. Senators are likely to have knowledge of forthcoming government actions before the information becomes public. This could provide them with an informational advantage over other investors. We test for abnormal returns from the common stock investments of members of the U.S. Senate during the period 1993--1998. We document that a portfolio that mimics the purchases of U.S. Senators beats the market by 85 basis points per month, while a portfolio that mimics the sales of Senators lags the market by 12 basis points per month. The large difference in the returns of stocks bought and sold (nearly one percentage point per month) is economically large and reliably positive."

Another inconvenient truth
08/17/08   Debt
"America's infamous debt clock, near New York.s Times Square, was switched off in 2000 after the national burden started to fall thanks to several years of Clinton-era budget restraint. However, it was reactivated two years later as the politically motivated urge to splurge once again took over. The debt has since swollen to $9.5 trillion, with the value of unfunded public promises (if you include entitlements such as Social Security and Medicare) nudging $53 trillion.or $175,000 for every American.and rising. On current trends, these will amount to some 240% of GDP by 2040, up from a just-about-manageable 65% today."

Opening the door to savings
08/17/08   Cestnick
"I'm commonly asked: "Now that I'm married, what tax benefits exist?" The fact is, having a spouse can come with some tax opportunities. And by the way, a spouse under Canadian tax law includes a common-law partner (same sex or not) that you've been living with in a conjugal relationship for 12 months or more. So, when I use the term "spouse" today, I'm referring to legally married couples, or those common-law partners I just mentioned. While there will be other ideas, the following are six of the key opportunities available to spouses."

Foreclosure fallout: Houses go for a $1
08/14/08   Real Estate
"So desperate was the bank owner of 8111 Traverse Street to unload the property that it agreed to pay $2,500 in sales commission and another $1,000 bonus for closing the $1 sale; the bank also will pay $500 of the buyer's closing costs. Throw in back taxes and a water bill, and unloading the house will cost the bank about $10,000."

Longleaf Partners Q2 2008 letter
08/14/08   Value Investing
"We do not know how long economic uncertainty and shareholder fear will last. Bear markets do not die of old age. The mispricing, however, is providing the opportunity to own high quality companies with terrific five year outlooks that imply high long-term IRRs. We are aggressively adding personal capital to the Funds and encourage our partners to do the same. Given that bullish sentiment is at its lowest level in 14 years and that some are recommending exiting equities altogether, there is plenty of panic in the air. Historically, the best time to invest has been when owning stocks has felt the worst."

Third Avenue Q3 2008 letter
08/14/08   Whitman
"Distress securities seem to be trading at ultra attractive prices. Discounts have widened appreciably for the common stocks of very well-capitalized companies where the common stocks trade at meaningful discounts from readily ascertainable net asset values ('NAVs'); and where the prospects appear good that over the next five years, such NAVs will increase by not less than 10% per annum compounded. Admittedly, near-term outlooks are generally poor. But, TAVF focuses not on the near-term outlook, but on buying what is 'safe and cheap'. I have the unique perspective of being a distressed investor for many decades, and safe and cheap on a long-term basis seems to be about as attractive as it was in the 1970s."

The wisdom of crowds?
08/13/08   Markets
"When people discover that I am an economist, they rarely ask me for my views on subjects that economists know a bit about - such as how to respond to climate change or pay less at a supermarket. Instead, they ask me what will happen to the economy. Why is it that people won't take "I don't really know" for an answer? People often chuckle about the forecasting skills of economists, but after the snickers die down, they keep demanding more forecasts. Is there any reason to believe that economists can deliver?"

One third owe more than house is worth
08/12/08   Real Estate
"Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations."

Value stock losers Buffett, Miller poised as winners
08/11/08   Value Investing
"The five prior times since 1952 that growth beat value two years in a row, the latter group recovered and won by 17 percentage points annually on average for seven years, the data from Societe Generale show. Cheap stocks are becoming more attractive because of tumbling commodity shares, which had led the five-year bull market that ended in October, according to Societe Generale's James Montier"

Bankrupt retailers: pushed to the brink
08/11/08   Law
"All filers are covered by the new bankruptcy law, but the changes were particularly harsh on retailers. For companies that already are short of cash - and, in the current environment, unlikely to find new financing - these new provisions in the law can amount to a death sentence. "Liquidity is sucked out of the debtor in a way that it becomes hard to survive," says Lawrence Gottlieb, chair of the bankruptcy and restructuring practice at New York law firm Cooley Godward Kronish, who has represented creditors' committees in the bankruptcies of Sharper Image and Linens 'n Things."

Why Generation Y is broke
08/09/08   Thrift
"Today, people in their 20s and 30s are more educated than ever before. Some 85% of those aged 25 and older hold a high school diploma, and 27% have a college degree. This generation of adults is also, of course, the most technologically sophisticated to date, with about half using cell phones for text messaging and 90% on e-mail. And yet stats indicate our generation's financial literacy is abysmal, with personal finances to match. Only 52% of high school seniors passed a recent national financial literacy test, meaning adults entering the work force do not know enough about basic budgeting, interest rates or taxes to make sound decisions for their own lives."

Perceptions about income influence lottery purchases
08/09/08   Behaviour
"Do you feel poor ... or at least a lot poorer than your friends and neighbors or the people you pass on the street? Then be careful. There is evidence that this feeling will cause you to do ridiculous things with your money and perhaps undermine your opportunity to eventually become richer. You might even throw your money away on the lottery."

CanWest woes may force Fairfax's hand
08/09/08   Value Investing
"Fairfax Financial Holdings Ltd. has made a name as a patient, deep-value investor in the mould of Warren Buffett's Berkshire Hathaway Inc., so the company has been surprised to find itself cast lately in the role of an activist player."

Robert Tattersall
08/09/08   Value Investing
"If you can tolerate double-digit losses like the ones we've seen recently, veteran fund manager Robert Tattersall suggests picking up a classic book on value investing and then just sitting tight. "

Value funds may be poised for comeback
08/09/08   Value Investing
"There's an old chestnut about value investors that says they're never wrong, they're just early. Unfortunately for the professional ones, when you run a mutual fund that gets marked to market every day though, it doesn't really matter. If you're early, you're wrong, and if you're wrong, you get redeemed as investors chase performance like a dog chases a rolling Frisbee."

Transfers can come with tax surprises
08/09/08   Taxes
"Be aware that you'll be subject to the U.S. estate tax as any U.S. citizen if you're considered "domiciled" in the United States. Simply residing in the U.S. doesn't make you "domiciled" there. Domicile is a concept that involves an intention to permanently reside south of the border. And so, it seems that domicile is something to be avoided. Perhaps - but only if careful planning is undertaken before your transfer, because not being domiciled in the United States can lead to tax problems too. Let me explain."

The plight of the value investor
08/09/08   Miller
"This is a tough time to be a value investor. The value philosophy tries to outsmart the stock market by investing in companies that are deemed undervalued, often trading at a low multiple relative to earnings. It was developed by Benjamin Graham and championed by Berkshire Hathaway's (BRK.A) Warren Buffett"

Manulife shows Mawer love
08/07/08   Funds
"Mawer is that rarity in the mutual fund industry, a company that does everything well, whether it be Canadian equity, U.S. and international equity, balanced or bond funds. You've probably never heard of Mawer, but Manulife certainly has. Just recently, it introduced a new lineup of Mawer-managed funds that are sold by Manulife agents. Announcements like this aren't rare in the fund industry. Many insurers strike deals in which they stick their names on funds run by smart outside firms. What's different here is the marketing fuss that Manulife is making over its new lineup of Mawer funds. You'd almost think Warren Buffet himself was on board."

'Stealth' housing bailout
08/06/08   Real Estate
"The numbers are staggering and likely to get much larger. What we have here is, through a variety of programs, a stealth bailout where more than a trillion dollars of taxpayer guarantees have been extended to the housing market, both to keep it going and to clean up the mess from the past."

Do economists need brains?
08/05/08   Economics
"These new neuroeconomists saw that it might be possible to move economics away from its simplified model of rational, self-interested, utility-maximising decision-making. Instead of hypothesising about Homo economicus, they could base their research on what actually goes on inside the head of Homo sapiens. The dismal science had already been edging in that direction thanks to behavioural economics. Since the 1980s researchers in this branch of the discipline had used insights from psychology to develop more 'realistic' models of individual decision-making, in which people often did things that were not in their best interests. But neuroeconomics had the potential, some believed, to go further and to embed economics in the chemical processes taking place in the brain."

Patient Capital Q2 2008
08/04/08   Value Investing
"As we had hoped these investor fears have provided us with some investment opportunities. Indeed we have invested some of our capital in what we believe to be very strong companies that offer the potential for excellent long [term] returns."

U.S. turns away from decades of deregulation
08/01/08   Government
"The housing and financial crisis convulsing the U.S. is powering a new wave of government regulation of business and the economy. Federal and state governments alike are increasingly hands-on in their effort to deal with failing businesses, plunging house prices, worthless mortgages and soaring energy prices. The steps add up to a major challenge to the movement toward deregulation that has defined American governance for much of the past quarter-century since the "Reagan Revolution" of the early 1980s. In fact, some proponents today of a bigger oversight role for government are Republican heirs to the legacy of President Reagan."

Sometimes even I will go with the flow
07/31/08   Markets
"One such process suggested itself a few months back in the ABN Amro Global Investment Returns Yearbook for 2008, written by Paul Marsh, Elroy Dimson and Mike Staunton. It contains a fascinating chapter on momentum in the stock market. The conclusion was that buying momentum stocks is a rather sensible strategy, not the work of a raving madman determined to lose all his wealth."

From good to great ... to below average
07/31/08   Management
"Nine of the eleven companies remain more or less intact. Of these, Nucor is the only one that has dramatically outperformed the stock market since the book came out. Abbott Labs and Wells Fargo have done okay. Overall, a portfolio of the 'good to great' companies looks like it would have underperformed the S&P 500."

Legg Mason Q2 letter
07/30/08   Miller
"A group of us were standing around a few weeks ago when Warren Buffett wandered over. Chris Davis had dubbed us the Value Support Group, as we all adhered to that approach to investing. We were commiserating over how badly we had done in this market, how valuation appeared not to matter and had not for the past couple of years, how it was all about momentum and trend, and how we were all losing clients and assets over and above our losses in the market. It seemed like we needed a 12-step program to cure us of our addiction to buying beaten-up stocks trading at large discounts to our assessment of their intrinsic value."

How can the New York Times be worth so little?
07/30/08   Stocks
"At its current $12.48 stock price - down 46.3% from a year ago - Times Co. has a $1.79 billion market cap. To put this in perspective, CBS recently acquired tech publisher CNET, a much weaker media brand, for $1.8 billion. Add in the company's $1.1 billion of debt, subtract $42 million for its cash on hand, and the company's total enterprise value - a valuation measure that totals up those items in such a fashion - is just $2.85 billion."

Selling the family jewels
07/30/08   Stocks
"Selling heirloom assets is frequently a last-ditch alternative. In instances in which assets have appreciated massively (such as SunTrust's Coca-Cola stock or Merrill's stake in Bloomberg), the sales can generate hefty tax bills. Such moves are also recognitions that management has screwed things up so royally in the core business that it has no alternative but to sell the remaining assets that the market still likes. But in this climate, many banks may find they don't have a choice."

Sell-side analysts more accurate than buy-side
07/29/08   Markets
"Investors rarely have access to the buy-side analyst reports of institutional investors, and according to a new study by a trio of Harvard Business School researchers, they likely aren't missing much. The study finds buy-side analysts are more optimistic and less accurate than their sell-side counterparts, who freely distribute their recommendations."

Fairfax Financial beats bad markets
07/28/08   Value Investing
"Prem Watsa, Chair of insurance conglomerate Fairfax Financial Holdings Ltd., began to worry about a credit meltdown a few years ago. So he and his investment team devised a defensive strategy. Today, Fairfax is in great shape financially, despite lousy markets. The company has even defied gravity and two weeks ago its credit was upgraded. This reflected its stellar investment performance on its US$19.8 billion investment portfolio, good operations at its underlying insurance companies and a jump in shareholders. equity from US$2.856 billion in 2006 to US$4.8 billion today."

Financial education unlikely to be of any help
07/28/08   Education
"Teaching people how to manage their money is unlikely to make them any better off, research by the financial regulator reveals. As Britons struggle to adjust to rising inflation, higher borrowing costs and general economic uncertainty, it has emerged that there is little evidence that the millions poured into financial education programmes are of any help."

Bear market opportunities
07/28/08   Dreman
"Should you flee the market, given all this? It's a tough call, but I wouldn't. For one thing, the Administration and Congress can play a much larger role in alleviating the liquidity crisis than they have up to now. This being an election year, I have a strong feeling we'll see considerably more help from them in the next few months. Most likely the Fed will eventually move to fight inflation. Raising rates usually hurts the markets at first, but over time stocks have been one of the best inflation hedges you can find. In these circumstances, I wouldn't try to be too clever. You don't see market timers who own yachts. If you pack up now, chances are you'll miss a good part of the next bull market. A large part of the gains are always made in the first few months of one, when market-timing investors are still on the sidelines."

How to leave your wife
07/28/08   Thrift
"If your marriage is crumbling, you need to pay attention to money matters -- or suffer harsh consequences. Here's what to do, men." [A link to a similar article for women is provided near the top of this article. But thrifty couples will work hard to avoid divorce.]

Can a family eat on $100 a week?
07/27/08   Thrift
"Did we make it? First, let's say that any reduction in my grocery bill was welcome, as most weeks we spend nearly $250 at a grocery store. That's well above the $182 budget the U.S. government considers "moderate" for a family of our size and ages. Spending less than half what we normally do was tough. A $100 budget gave us $1.19 a meal per person, obviously not enough for dinners or coffees out and barely enough to put decent meat on our plates."

The Big Mac index
07/27/08   World
"Many of the currencies in the Fed's major-currency index, including the euro, the British pound, Swiss franc and Canadian dollar, are overvalued and trading higher than last year's burger benchmark. Only the Japanese yen could be considered a snip. The dollar still buys a lot of burger in the rest of Asia too. China's currency is among the most undervalued, but a little bit less so than a year ago."

Lawyer finds gaping hole in securities law
07/26/08   Law
""Allowing a member to resign and therefore escape sanction for improper acts committed while a member of a [self-regulatory organization] can hardly be said to protect investors. ... Certainly, the public would have less confidence in capital markets where sanctions for misconduct could be avoided by a simple letter of resignation," Judge Carnwath wrote."

SEC plans to broaden curbs on short sales
07/26/08   Markets
"The top U.S. securities regulator remains steadfast in a plan to broaden an emergency rule to curb abusive short selling despite opposition from the hedge fund industry and other short sellers. U.S. Securities and Exchange Commission Chairman Christopher Cox told lawmakers Thursday the agency would soon propose expanding the rule covering the shares of 19 major financial firms to the entire market."

Shortsighted naked-short solution
07/26/08   Markets
"The latest Wall Street cesspool is the short-selling arena, where greedy hedge funds, beleaguered investment and commercial banks and an incompetent regulator--the Securities and Exchange Commission--have made bollocks out of a crucial arena of the markets."

Selling your cottage needn't be so taxing
07/25/08   Taxes
"Let's assume that James now owns the cottage. He could shelter the cottage from tax by designating it as his PR for the years prior to 1982. For years after 1981, only one exemption is available and the couple would designate the cottage for those years. The result is twofold: There is no tax to pay on the sale of the cottage this year since it has been designated as a PR for every year it was owned. Further, Kate has not yet designated a property as her PR for the years prior to 1982. She could designate the Oakville home for those years. The result? We've now sheltered part of the eventual gain on the Oakville home as well."

Dividends more reliable than share price rises
07/25/08   Dividends
"Growth in dividend payments is far more reliable than rises in share prices, according to analysis by Fidelity International. The research found that dividend payments from the UK market have shown an annual increase in all but five years since the beginning of 1965."

Fill up on pre-poll bargains
07/24/08   Markets
"A point few fully recognise - one I've never seen mentioned anywhere - is the robust historical anomaly of US stocks outperforming non-US stocks in the few months just before presidential elections. Regardless of which election you start with, or whether stocks rise or fall through the period, or whether US stocks start off leading or lagging, US stocks overwhelmingly outperform non-US stocks in the election run-up from June through October. In non-election years the reverse has been slightly true. So overall, in all years, there is no such nation effect - only when it comes to presidential elections."

The smartest advice I ever got
07/24/08   Markets
"I was nine years old, and I saw my father reading the financial pages. They didn't look like the sports pages or the comics, so I asked him what they were. He said, "Well, these are stocks." I said, "What's a stock?" And he said, "See this thing? This represents a company. And see this 'plus .25'? That means that if you own one share of this company today, you have 25 more than you had yesterday." And I said, "I can have this thing yesterday, I can go to sleep, wake up and have 25 more and not do any work?" And he said, "Yes." I had come in from mowing the grass for three hours to earn 25. So the lesson I took was that in the stock market you can make money without doing any work. And since I have always had an almost infinite capacity for indolence, I thought, "This is great.""

Wall Street's laughing all the way to the bank
07/24/08   Markets
"The credit crisis really puts the free in free market. The freest market is supposed to be the United States, and the evidence in favour of that argument is mounting. It's just not what you think. Free, in this case, means a free ride for a select group of people. Wall Street never looked so good, or bad, depending on your perspective."

Bad news sparks a stampede
07/23/08   Behaviour
"After IndyMac Bancorp failed, customers waited in line for hours to collect their money. The police had to be called in to quell the crowd. The scenes brought to mind dire moments from the Great Depression. On the Federal Deposit Insurance Corp. Web site, IndyMac customers were told: ''If the balance in your account . . . is less than $100,000, no action is required on your part at this time.'' The money is insured. Many behavioral economists watching people herd in line at the bank -- or flush their portfolios of Fannie Mae and Freddie Mac stock -- sense a deep even primal, response at play. I suppose the only way to say this is to just say it: People are acting like frogs. When a group of frogs senses they are about to be visited by the dreaded snake, they do not hop in separate directions. They bunch up together. And they fight to get in the middle. Sheep do it. Minnows do it. It turns out that humans do, too, particularly in financial crashes."

Are we a nation of financial illiterates?
07/23/08   Education
"How important is widespread financial literacy to the health of a modern society? Well, I would say very. So would Lusardi. When you have a society with a modern and fairly complex financial system, it's probably not a good sign that more than half of the citizenry can't handle even the basics"

The marks of a great value investor
07/23/08   Value Investing
"John Templeton's market aphorisms was that "the time to buy is at the point of maximum pessimism", although I believe he has a good claim also to be the true originator of the saying that the four most dangerous words in investment are "this time it's different". Does he think that we have reached such a point in the credit crisis? Alas, we shall never hear his views again, following his death two weeks ago at the grand age of 95."

Are P-E's past their prime?
07/22/08   Markets
"The price-earnings ratio is a popular tool for investors. But these days, as both prices and earnings fluctuate rapidly, the p-e tool is getting extra attention because it tries to answer a key question: With the broad Standard & Poor's 500-stock index down almost 20% from its October peak, are stocks cheap enough to make them a great bargain for long-term investors?"

Why no outrage?
07/21/08   Grant
"Through history, outrageous financial behavior has been met with outrage. But today Wall Street's damaging recklessness has been met with near-silence, from a too-tolerant populace, argues James Grant"

How to control your fears
07/21/08   Zweig
"What goes on inside your head when your portfolio implodes? One of the fear centers in your brain, the amygdala, can respond to upsetting stimuli in 12 milliseconds, or one-25th the time it takes to blink your eye. These brain cells fire when an attack dog snarls at you, a spider drops down your shirt or the Dow Jones Industrial Average takes a dive."

SEC retrenches on new short-selling rules
07/18/08   Markets
"Under the new rule, the SEC will require short-sellers to secure borrowed shares before putting on their short sales, preventing "naked" short-selling, in which a trader doesn't properly locate shares to borrow. Naked short-selling can add extra downward momentum on a stock because without being forced to borrow the shares first, traders can short a limitless amount of stock. But the emergency rule, which is in effect for 30 days, only applied to those 19 companies among Wall Street's biggest. They are companies whose shares are not typically hard to locate or scarce for shorting, a fact that angered many earlier in the week. The American Bankers Association wants the SEC to include shares of regional banks under the requirements, and no doubt hundreds of small company chief executives would also like to be covered."

Prepare to have a nose for a bargain
07/18/08   Graham
"Stocks should be bought like groceries and not like perfume. A few days ago, I was reminded of this advice from Ben Graham, the father of value investing, by David Shapiro, the manager of the value-orientated Collins Stewart UK Focus Fund. And with the FTSE 100 index falling 250 points between last Friday and this Wednesday . wiping more than 50bn off the value of the UK.s top companies . the equity market certainly seems more like Aldi or Lidl than an eau de toilette counter at Harrods. In fact, the scent wafting from most dealing desks has smelled suspiciously like Whiff of Fear."

John Templeton
07/18/08   Value Investing
"Sir John Templeton spent his life going against the flow. In September 1939, when the war-spooked world was selling, he borrowed $10,000 to buy 100 shares in everything that was trading for less than a dollar a share on the New York Stock Exchange. All but four eventually turned profits. In early 2000, conversely, he sold all his dotcom and Nasdaq tech stocks just before the market crashed. His iron principle of investing was 'to buy when others are despondently selling and to sell when others are greedily buying'. At the point of 'maximum pessimism' he would enter, and clean up."

S&P500 dividend yield highest since June 1995
07/16/08   Markets
"The S&P 500 is currently yielding the most it has since June 1995 at 2.49%. After declining for about 20 years from the early 80s to the late 90s, the dividend yield has been on a steady rise this decade."

Seeing bad loans
07/16/08   Markets
"While a fraction of the nation's banks are expected to buckle under their growing burden of bad loans, federal regulators, bank executives and analysts agree that the vast majority of institutions are sound. Bank customers are not panicking, particularly since most of their deposits are insured. But shareholders, whose investments are by no means guaranteed, are running scared. It is becoming increasingly clear that even the strongest banks will be grappling with bad loans for years - and that the outlook for the industry could worsen further if the economy and the housing market continue to weaken. The collapse of IndyMac Bancorp last week fanned long-smoldering worries that even healthy banks confront significant challenges."

Curbing short-selling abuse
07/15/08   Markets
"The naked short regulations promise to have more teeth than last weekend's announcement that the SEC would police rumors on Wall Street. That was widely interpreted as a weak attempt to herd cats. Traders now won't be able to skirt borrowing rules to short shares of a rival firm. Up until now, traders were merely required to "locate" shares they'd be borrowing to short. As in: "Yeah, my cousin Vinny in Hoboken has them." The location requirement is a weaker standard that leaves plenty of room for "interpretation" if not outright abuse. Pre-borrowing is a much firmer commitment and eliminates the probability that a stock lender will lend out the same shares to several different traders."

SEC to limit short sales
07/15/08   Markets
"The requirement would prohibit the practice known as naked short selling, in which traders avoid the financial burden of borrowing shares when betting they'll fall." [A long overdue move.]

European recession looms
07/15/08   World
"The eurozone is tipping into a deeper downturn than America itself despite the tremors in the US mortgage industry, and may already be in full recession for the first time since the launch of the single currency."

Nation demands new bubble
07/15/08   Fun
"A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest. "What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future," said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. "We are in a crisis, and that crisis demands an unviable short-term solution.""

Scotiabank to buy E*TRADE Canada
07/14/08   Brokers
"Scotiabank will purchase E(*)TRADE Canada for USD$442 million (approximately C$444 million), subject to regulatory approvals. The completion of today's announcement will double Scotiabank's footprint in the Canadian online investing market." [There goes another independent broker.]

Paulson seeks authority to shore up Fannie, Freddie
07/14/08   Markets
"Treasury Secretary Henry Paulson put the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages. Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank."

The prescient are few
07/13/08   Indexing
"The researchers found a marked decline over the last two decades in the number of fund managers able to pass the False Discovery Rate test. If they had focused only on managers running funds in 1990 and their records through that year, for example, the researchers would have concluded that 14.4 percent of managers had genuine stock-picking ability. But when analyzing their entire fund sample, with records through 2006, this proportion was just 0.6 percent - statistically indistinguishable from zero, according to the researchers."

Mexicans and machines
07/13/08   Economics
"'No job is safe from the robot threat!' warns Carey. Of course, the warning is more than a little tongue-in-cheek. There.s no need to take a sledgehammer to a robot, because, although technology shakes up the labor market, it ends up giving us higher living standards as well as more and better job opportunities." [Warning: Video contains scenes of violence and humour.]

Welcome to the nanny state nation
07/13/08   Fun
"Even if we don't particularly like something we should be wary of banning it because every ban is backed up by the force of law. Plus, would you want to live in a nation that bans everything that offends someone?"

Stop worrying, and learn to love the bear
07/12/08   Zweig
"When you bought into the gospel of "stocks for the long run," did you have any idea how long the long run can turn out to be? Exactly 10 years ago, the Standard & Poor's 500-stock Index was at 1164; it closed Friday at 1239. That's an annualized average return of 0.63%. At that rate, it will take you 111 more years to double your money in the stock market."

IndyMac seized by U.S. regulators
07/12/08   Stocks
"IndyMac Bancorp Inc. became the second- biggest federally insured financial company to be seized by U.S. regulators after a run by depositors left the California mortgage lender short on cash."

Mortgage giants face pressure
07/11/08   Markets
"One possible scenario if Fannie and Freddie's financial position worsens: Under existing law, if either company were severely low on capital, it could fall under the control of their government regulator, which would then be responsible for the firm. That step -- known as placing it in a conservatorship -- would allow the mortgage company to continue operating, but the extent of its abilities in such a distressed situation remains unclear."

The $5 trillion mess
07/11/08   Markets
"They own or guarantee $5 trillion worth of mortgages- nearly half of all the country's outstanding home loan debt - and they're crashing. Big time. If Fannie Mae and Freddie Mac go under, it will wreak yet more havoc on an already wrecked housing market - making loans tougher to come by and possibly pushing hundreds of billions of dollars in cost on to U.S. taxpayers."

Why Buffett is buying
07/10/08   Buffett
"Buffett, 77, can afford to throw a little mud on his competitors in the private equity industry. Wall Street's acquisition machine has seized up, while Buffett, in the valedictory chapter of a career stretching back more than 60 years, is on a buying spree. He has $35.6 billion in cash to spend, and he's looking for companies that he can buy at a reasonable price, that have experienced managers he trusts, products with strong market positions or other competitive advantages."

Warren Buffett gets busy
07/10/08   Buffett
"But Buffett is putting things in perspective. Recession does not equal the second Great Depression or economic Armageddon. Rather, Buffett seems to be following the tried and true investing axiom that the best time to make long-term bets is when fear is at its peak. And make no mistake, this is a market ruled by fear right now."

Spending safely
07/10/08   Retirement
"If you're getting ready to retire, you may already be familiar with "the 4% solution." For more than a decade, financial advisers have warned retirees that draining over 4% of their nest eggs in their inaugural retirement year could ultimately lead to financial ruin. The 4% mantra started with Bill Bengen, 60, a soft- spoken investment adviser in El Cajon, Calif., who has written a series of landmark research papers since 1994 on safe withdrawal rates. What most people don't realize, though, is that Bengen no longer recommends the 4% rate."

Your post-subprime portfolio
07/10/08   Retirement
"Saving for retirement has never been easy, but the past year has made a complicated task all but overwhelming. The ongoing collapse of the credit markets, sparked initially by problems in subprime mortgages, has challenged some of investors' most cherished and reliable investment beliefs and strategies. Auction-rate securities sold as "cash equivalents" ended up sticking investors with huge losses, supposedly low-risk bond funds blew up, and for those who thought they'd pay for retirement by selling the house.well, need we say more?"

Fannie Mae, Freddie losses make them 'insolvent'
07/10/08   Markets
"While leading the St. Louis Fed, Poole roiled markets in 2003 when he said the government should consider severing its implied backing of Fannie Mae and Freddie Mac and said the companies lack the capital to weather financial market disruptions. In 2006 and 2007 he called for lawmakers to strip Fannie Mae and Freddie Mac of their charters."

John Templeton dies at 95
07/08/08   Funds
"John Templeton, the billionaire U.S. philanthropist who made his fortune as the pioneer of global investing in the postwar boom, has died. He was 95."

How are we doing?
07/07/08   Economy
"When a presidential election year collides with iffy economic times, the public's view of the U.S. economy turns gloomy. Perspective shrinks in favor of short-term assessments that focus on such unpleasant realities as falling job counts, sluggish GDP growth, uncertain incomes, rising oil and food prices, subprime mortgage woes, and wobbly financial markets. Taken together, it's enough to shake our faith in American progress. The best path to reviving that faith lies in gaining some perspective - getting out of the short-term rut, casting off the blinders that focus us on what will turn out to be mere footnotes in a longer-term march of progress."

Dividends start to crumble
07/06/08   Dividends
"If you look at dividend payouts in the past 12 months, there has been a 9.73 percent increase overall, Silverblatt said. Still, that's less than the rate the payouts rose from 2004 to 2007. Each of those years, dividend increases exceeded 11 percent, he said. Many companies are now decreasing the rate at which they increase their dividends." [How to turn 9.73 percent growth into an alarming headline.]

Market turmoil? It doesn't rattle Warren
07/06/08   Buffett
"This week's market turmoil might make you feel nauseous but it makes Warren Buffett giddy - or more so at least. Back in February, while on a visit to Toronto, Mr. Buffett told an audience that he was '370 points giddier,' referring to a drop in the Dow Jones industrial average. He added that he wasn't quite elated yet. 'Things are not ridiculously cheap.' The index is 1,000 points lower today from back then, so presumably Mr. Buffett is closer to giddiness than he was six months ago. Wouldn't it be nice to enjoy markets that roil and plunge like he does? If you invested like Mr. Buffett, you would."

Bear market freak out
07/06/08   Markets
"When it comes to investing, human nature is not our friend, and will consistently lead us to do the wrong thing at the wrong time. The chart to the right shows how investor funds have flowed into stock mutual funds so far this decade. Notice how we poured money into the stock market after the great years and panicked and sold after declines. A clear pattern of buying high and selling low, something I'm pretty sure investors didn't consciously set out to do."

Mutual fund flows and investor returns
07/06/08   Academia
"We examine the timing ability of mutual fund investors using cash flow data at the individual fund level. Over 1991-2004 equity fund investor timing decisions reduce fund investor average returns by 1.56% annually. Underperformance due to poor timing is greater in load funds and funds with relatively large risk-adjusted returns. In particular, the magnitude of investor underperformance due to poor timing largely offsets the risk-adjusted alpha gains offered by good-performing funds. Investors in both actively managed funds and index funds exhibit poor investment timing. We demonstrate that our empirical results are consistent with investor return-chasing behavior."

Superstar CEOs
07/03/08   Management
"Compensation, status, and press coverage of managers in the U.S. follow a highly skewed distribution: a small number of .superstars. enjoy the bulk of the rewards. We evaluate the impact of CEOs achieving superstar status on the performance of their firms, using prestigious business awards to measure shocks to CEO status. We find that award-winning CEOs subsequently underperform, both relative to their prior performance and relative to a matched sample of non-winning CEOs. At the same time, they extract more compensation following the award, both in absolute amounts and relative to other top executives in their firms. They also spend more time on public and private activities outside their companies, such as assuming board seats or writing books. The incidence of earnings management increases after winning awards. The effects are strongest in firms with weak governance, even though the frequency of obtaining superstar status is independent of corporate governance. Our results suggest that the ex-post consequences of media-induced superstar status for shareholders are negative."

British house prices fall
07/01/08   Real Estate
"House prices in Britain have fallen at their fastest annual rate for 16 years, new figures show. Average property values in June stood 6.3pc cent lower than a year before - the biggest such drop since the 1990s crash, the Nationwide building society said."

My $650,100 lunch with Warren Buffett
07/01/08   Buffett
"What would you pay to have lunch with the richest man in the world? For me and Mohnish Pabrai - a friend who, like me, runs a U.S.-based investment fund - the answer is $650,100. That's how much we forked over for the privilege of dining with Warren Buffett on June 25."

The new economics and the pursuit of happiness
07/01/08   Behaviour
"The revolution begun by Kahneman and Tversky is now some three decades old, and it is generating excitement well beyond the borders of academe--and so this is a good time to examine whether it has lived up to its promise. Bruno S. Frey's Happiness and Dan Ariely's Predictably Irrational together offer a fine occasion to begin such a reckoning. Not all the revolutionaries in economics are discussed by Frey; the media star Levitt does not even make an appearance. Ariely, who teaches at MIT, helps to fill in the picture. Like Levitt, he has climbed the best-seller list with some of the most counterintuitive findings of behavioral economics. One is dry and humorless, the other is sprightly and inviting, but between them these books offer an overview of what this new economics is all about, and enable us to evaluate whether it is as innovative as its adherents claim."

The Robot stalls
07/01/08   Dorfman
"Each stock we chose early in January had a market value of at least $500 million. They all had announced more than a penny of profit per share in the latest 12-month period. They had more shareholder equity than debt, and a low share price relative to earnings. We chose the cheapest stocks without having more than one in a particular industry sector."

Seth Klarman interview
07/01/08   Klarman
"Seth Klarman is nobody.s idea of a fast-buck, quick-change investor. Since helping to found Boston-based Baupost Group in 1982 with $27 million pooled from four families, he has emulated prototypical value-investment role models like Warren Buffett and the late Benjamin Graham. He buys underpriced equities and securities of bankrupt or distressed companies and usually steers clear of leverage and shorting, though last year he made very profitable investments in credit protection and recorded his best-ever annual return (52 percent)."

MoneySense Top 200 Summer Update
07/01/08   Stingy Investing
"For most of us, picking stocks is as tricky as ordering a seven-course dinner at a swanky new restaurant. Lots of items on the menu sound appetizing, but that's where our knowledge ends. Rather than simply point and hope, smart diners look for an expert opinion on the restaurant's offerings. To provide smart investors with a similar scouting report, we're pleased to present you with our candid take on all of Canada's largest stocks. We've worked hard to produce a rating system that's easy to use, logical, and appealing to all types of investors. We think the Top 200 provides you with a more objective look at large Canadian stocks than you're likely to find from any other single source. If you're looking for a sensible take on any large Canadian stock, you'll find the Top 200 to be an invaluable way to generate promising investment ideas."

What we value
06/30/08   Tilson
"A final reason for the dearth of value investors is the human desire to be part of the crowd. If you didn't own Internet stocks during the late 1990s, not only did you suffer lousy returns, but you also felt excluded. As Montier points out, "Contrarian strategies are the investment equivalent of seeking out social pain." That's not easy to do."

Roses among the wallflowers
06/30/08   Markets
"Consider two hypothetical portfolios the researchers put together. The first owned just those stocks that traded each market day of the previous year, while the second held those stocks that had at least one no-trade day. From the beginning of 1962 through 2003, according to the researchers. calculations, the second portfolio outperformed the first by an annualized average of eight percentage points. That's a big gap. By contrast, the average small-cap stock outperformed the average large-cap issue during that period by only 2.9 percentage points, annualized, according to the researchers. And the typical value stock beat the average growth stock by 5.5 points a year."

Information diffusion based explanations
06/30/08   Academia
"In this paper we develop information based factors which outperform other popular factors used in the multifactor pricing literature such as the Fama and French size and book-to-market factors. The first factor is based on the age of an asset, measured by the number of months since the asset's IPO, while the second factor is based on the percentage of trading days an asset does not trade in a given year. Both factors attempt to capture the quality and speed of information diffusion on the market. Our information factors perform particularly well on momentum portfolios, which, Hong et al (2000) have shown to result from gradual-information diffusion. This gradual information diffusion explanation is consistent with the information argument underlying our factors, namely that, assets plagued with information problems can be miss-priced for sustained periods of time. Furthermore, our multifactor model successfully prices most industry portfolios and performs as well as the Fama and French model when pricing the 25 size/book-to-market sorted portfolios."

The internet is the new 'exchange'
06/29/08   DRPs
"Robert Gibb has 30 stocks with dividend reinvestment plans and share purchase plans in his portfolio. Only two of these stocks he bought through a broker. Normally, he exchanges shares with other people he finds on an online message board."

Equal weight indexing: five years later
06/28/08   Indexing
"Often the most powerful investment ideas are simple. The simple concept of equal weighted indexing has attracted billions of dollars in assets in last five years. While the headline cause of asset flows has been outperformance over market capitalization indices, sophisticated investors have realized that equal weighting creates a different set of risk factor exposures than market capitalization weighting that seem to work over the long term. Further, the concept randomizes factor mispricings in the market. As trading costs shrink globally, and as investors realize that turnover of equal weighted indexing is only about a fifth of active managers, we expect the concept to gain ground. Equal weighting has been used in fixed income indexes to a certain degree, and given the results of it working in international markets, we would not be surprised to see interest in equal weighted international products."

Do-it-yourself ETF may not be worth your time
06/28/08   Indexing
"Is the war against money management fees going too far? Investors - the more enlightened ones anyway - have battled high fees for years, forcing the industry to parry with low-cost index mutual funds and exchange-traded funds as well. Now, spurred by ultra-low trading commissions, some investors and financial planning pundits are aiming their guns at ETFs, arguing that you can dispense with them and create your own index funds, under certain circumstances, such as having a big enough portfolio. The arguments make sense on paper, but they're not without their shortcomings. The reality is that ETFs are pretty hard to beat if you want to invest in an index." [Fabrice makes a couple of good points and a few lousy ones. But here's his take on unbundling ETFs.]

Record $2.1 Million for lunch with Warren Buffett
06/28/08   Buffett
"The big spender who won this year's "Power Lunch with Warren Buffett" charity auction with a record high bid of $2,110,100 is Zhao Danyang of the Hong-Kong based Pure Heart China Growth Investment Fund, according to a spokesperson for San Francisco's Glide Foundation."

How Canada stole the American Dream
06/28/08   World
"Believe it or not, we now have more wealth than Americans, even though we work shorter hours. We drink more often, but we live longer and have fewer diseases. We have more sex, more sex partners and we're more adventurous in bed, but we have fewer teen pregnancies and fewer sexually transmitted diseases. We spend more time with family and friends, and more time exploring the world."

The housing abyss
06/27/08   Real Estate
"Steve Hawks, owner of RE/MAX Platinum real estate agency in Henderson, Nev., says he has been flooded with calls from people interested in "buying and bailing" - that is, buying an additional house while their credit is still good, then walking away from the old one unless they can cut a favorable deal with the lender. So far the number of people who have done so appears to be small. But Hawks says banks are receptive to lending for such purchases because they figure the buyer will be able to afford the new, cheaper place. Also, says Hawks, they know that, since the buyer's credit will become damaged, he or she won't pull the same trick on them, at least for a few years." [More madness from U.S. lenders.]

Eveillard takes dim view of U.S. stocks
06/27/08   Value Investing
"Fed policies under Greenspan, Eveillard says, precipitated "one bubble after another" -- from the implosion of technology stocks in the late 1990s to the recent real-estate price collapse and the related financial-services industry meltdown. "In the last two or three years, the financial acrobatics were extraordinary," Eveillard said. "You could get a mortgage without having to document your income, your assets, or whether you had a job."When financial history is written five or 10 years down the road," he added, "Greenspan will be seen as the worst Fed chairman since the Fed was created in 1913.""

Grim expectations
06/27/08   Economy
"Mr Taylor described how the low and stable inflation of the previous two decades emerged from a more disciplined monetary policy, inspired in part by Friedman's analysis. 'In the United States when the inflation rate approached 4% in 1968, the federal funds rate was about 5%. When the inflation rate approached 4% in 1989, the federal funds rate was about 10%, clearly a much larger response.' Once again, America's inflation rate is at 4% but the fed funds rate is just 2%. With inflation high and interest rates low, many are worried that the lessons set out by Mr Taylor and by Mr Friedman before him are being ignored."

Is income volatility really rising? For whom?
06/26/08   Economy
"The key driver of rising average levels of income risk is that life among the already risky has become even riskier. Indeed, you really need to look to the riskiest 5 percent of the distribution to find the rise in income risk. And this rise in risk among the already risky is so great as to be responsible for nearly all the rise in average income volatility. And who are these riskiest 5 percent? Jensen and Shore find that they are particularly likely to be self-employed."

Mohnish Pabrai interview
06/25/08   Pabrai
Mohnish talks markets, Buffett, and stocks. He is keen on American Express and Berkshire Hathaway.

Eight centuries of financial crises
06/25/08   Academia
"This paper offers a 'panoramic' analysis of the history of financial crises dating from England's fourteenth-century default to the current United States sub-prime financial crisis. Our study is based on a new dataset that spans all regions. It incorporates a number of important credit episodes seldom covered in the literature, including for example, defaults and restructurings in India and China. As the first paper employing this data, our aim is to illustrate some of the broad insights that can be gleaned from such a sweeping historical database. We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies. Major default episodes are typically spaced some years (or decades) apart, creating an illusion that 'this time is different' among policymakers and investors. A recent example of the 'this time is different' syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements."

Active Fund Performance At A Passive Price
06/25/08   Stingy Investing
"Frugal investors are often attracted to index and exchange traded funds because they offer a simple way to buy a diversified stock portfolio at a low cost. But there are other options for thrifty individuals who want to take a more active approach. I explored the money-saving possibilities of buying stocks held by index funds instead of the index funds themselves in the May 2008 edition of the Canadian MoneySaver. This month, I'll investigate a similar method for active funds where the potential savings can be much higher."

Warren Buffett says sell to me, not 'porn shop'
06/25/08   Buffett
"Warren Buffett is in Toronto, fielding questions from a crowd of 300 executives. One asks what makes people want to sell their companies to him. The Berkshire Hathaway Inc. chief executive officer replies that he tells a prospective seller to think of the company as a work of art. ``You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever,'' he says at the February meeting. ``Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.''"

How $10 trades change everything
06/24/08   Stingy Investing
"In the latest Wealthy Boomer video interview -- which went up today -- Norman Rothery of The Rothery Report comes to an interesting conclusion about online trading and $10 commissions (or $9.95, which amounts to the same thing.) With a full-service brokerage, exchange-traded funds (ETFs) are a convenient way to get access to multiple stocks with a single trade. But once you move from commissions in the multiple hundreds of dollars to $10 a trade, suddenly it becomes cost-effective for individual investors to buy each component stock in an index, or cherry-pick the better ones."

DRIPs a cheap way to invest
06/24/08   DRPs
"There's no free lunch, even when investing on your own without an adviser. You still pay commissions to buy company shares, exchange-traded funds and income trust units. But you can get a free dessert (so to speak) if you reinvest the dividends to buy more shares, ETFs and trust units."

Portfolio dilution excessive in Canada
06/24/08   Hallett
"Drilling down more deeply reveals that the worst dilution occurs in our own tiny stock market. Look at virtually any wrap program and find out where most of the funds or managers are focused. I'll bet it's on Canadian stocks."

SP/Case-Shiller home prices fell 15.3% in April
06/24/08   Real Estate
"Home prices decreased 1.4 percent in April from a month earlier after a 2.2 percent decline in March, the report showed. The figures aren't adjusted for seasonal effects, so economists prefer to focus on year-over-year changes instead of month to month."

Mistaking consumption for investment
06/24/08   Real Estate
"During the housing bubble a lot of people confused consumption with investment, a fact now becoming painfully obvious in Britain as prices fall and businesses suffer. As in the United States, home owners helped inflate a wider bubble by plowing money into housing-related consumption, from granite kitchen countertops to living room furniture to under floor heating. The illusion, or justification, was that this consumption, often financed via mortgage debt, was actually investment in a can't-miss real asset. It wasn't, it's stopping and the impact on the economy will be considerable."

Bank failures to surge in coming years
06/23/08   Stocks
"Only three banks have failed so far in 2008. But that number is set to surge as the credit crunch slows economic growth and hammers some lenders that grew too fast during the recent real-estate boom, experts say. The roots of today's banking crisis grew out of the boom and bust in the real estate market."

The Texas ratio and Canada's big banks
06/23/08   Stocks
"Back in the recession of the 1980s, when the oil market was in the tank and banks in Houston and Dallas were dropping like rain in April, Gerard Cassidy and his team of bank analysts at RBC Dominion Securities came up with a way to predict the likelihood of any given bank failing. They took the total of a lender's non-performing loans and divided it by the sum of its tangible equity capital plus its loan-loss reserves, yielding the Texas ratio. It's a nifty idea. What Mr. Cassidy and his team discovered was that when a bank's Texas ratio got to 100 per cent, or one to one, it was likely to become toast. The ratio was an accurate predictor of Texas bank failures and also worked a treat with troubled New England banks in the next recession in the early 1990s. Applying it to today's U.S. banking scene, MarketWatch says Mr. Cassidy and his colleagues predict that at least 150 U.S. banks will go bust in the next two or three years, and if the current economic slump morphs into a recession as deep as the ones in the 1980s and 1990s, that number may get as high as 300."

Value investors: Beware the value trap
06/23/08   Value Investing
"Norm Rothery, chief investment strategist at Windsor, Ont.-based investment research and counselling firm Dan Hallett & Associates Inc., recommends investors avoid value traps by using a nine-point system developed by Joseph Piotroski, professor of accounting at Stanford University. According to his system, returns on assets and cash flow from operations should be positive. Also, there should be momentum in fundamentals: For example, gross margins and debt should be changing for the better. Still, it's inevitable even the best of the value practitioners will stumble into value traps on occasion."

Unbundling Canadian ETFs 2008
06/21/08   Stingy Investing
"It is easy to get a simple, low fee, and broadly diversified portfolio with ETFs. Most investors can safely stop here. But perhaps I can entice you to read on about a few specialized situations. When it comes to ETFs I like to consider two options for long-term investors. The first option is to purchase the ETF and hold on. The second option is to bypass the ETF and buy the stocks that it owns. At first glance, the choice between buying a low-cost exchange-traded fund that holds many stocks or buying each individual stock appears to be obvious. The exchange-traded fund is likely to be the better bargain. However, buying stocks directly may be a good choice for some investors because the Canadian stock market is very small and it is dominated by a few big names. By holding only a few stocks you can reasonably approximate, or even fully replicate, some ETFs."

Rising from the stock market rubble
06/21/08   Value Investing
"The lock that commodities have on the Canadian market has made mutual funds with a value strategy a singularly awful investment in the past few years. But the Celestica story is a reminder that well-chosen value stocks do offer potentially fantastic rebound potential. What beaten-down Canadian stocks might be ready to pop? Let's nose around the portfolios of some of the country's top value fund managers and see what they're holding."

Study finds pension-plan returns top 401(k)s
06/21/08   Retirement
"Pension-plan returns outperformed 401(k) retirement accounts from 2003 to 2006, the most recent bull market, according to a study. Pension plans beat 401(k) plans by 1.7 percent in 2003, 2 percent in 2004, 1.1 percent in 2005 and 1.6 percent in 2006, said the survey released today by Watson Wyatt Worldwide, a global consulting company based in Arlington, Virginia. Looking at a broader period, 1995 to 2006, pensions outperformed 401(k)s by 14 percent, the study said."

Defined benefit vs. 401(k) plans
06/21/08   Retirement
"This most recent comparison finds that between 1995 and 2006, DB plans outperformed DC plans by an average of 1 percent per year. Earlier studies also found that, over time, DB plans attained higher returns than did 401(k) plans."

London 'cityboy' unmasks world of analysts
06/20/08   Brokers
"As a utilities analyst at Dresdner Kleinwort, Geraint Anderson was advising clients how to invest. At the same time, through an anonymous London newspaper column, he was telling readers how analysts wrote 'utter gibberish.'"

Corporate democracy is a myth
06/20/08   Management
"We are in this situation because there is no leadership in the executive suite. Why did we get here? Because in corporate America there are no true elections. It is tyranny parading as democracy. It.s a poison running through the blood of corporate America. Perhaps, with enough public support, the lawmakers and regulators will take note."

It's mine, I tell you
06/20/08   Behaviour
"The endowment effect was controversial for years. The idea that a squishy, irrational bit of human behaviour could affect the cold, clean and rational world of markets was a challenge to neoclassical economists. Their assumption had always been that individuals act to maximise their welfare (the defining characteristic of economic man, or Homo economicus). The value someone puts on something should not, therefore, depend on whether he actually owns it. But the endowment effect has been seen in hundreds of experiments, the most famous of which found that students were surprisingly reluctant to trade a coffee mug they had been given for a bar of chocolate, even though they did not prefer coffee mugs to chocolate when given a straight choice between the two."

Your lifestyle may hurt your credit
06/19/08   Debt
"Most borrowers know a late payment or high outstanding balance can hurt their credit. But what about frequenting a massage parlor, retreading a tire, or visiting a marriage counselor? Such activities count, too, according to a suit filed by the Federal Trade Commission in federal court in Atlanta on June 10 against card issuer CompuCredit"

Why we're gloomier than the economy
06/19/08   Behaviour
"Ask Americans how the economy is doing, and their answer is stark: It is not just bad, it is run-for-the-hills terrible. Consumer confidence is at its lowest level in almost 30 years. Only 12 percent of Americans think the economy is in good shape. On the Internet, comparisons to the Great Depression are widespread. But the reality is different. According to most broad measures of how the economy is doing, it's not all that grim."

'Brainwashing 101 for dummies' (and investors!)
06/18/08   Behaviour
"Yes, Wall Street's got a great con game going, but it only works because America's 95 million investors are willing victims, love playing along, actually letting Wall Street get away with it! I call it "Brainwashing 101 for Dummies." Insiders use fancier terms like neuroeconomics, behavioral finance and the new "science of irrationality." But labels aside, you're being brainwashed. And Wall Street's laughing all the way to the bank at how easy it is to dupe gullible investors by using the 11 rules of "Brainwashing 101 for Dummies." We got them for you: Everything you'll ever need to know about the big con."

Remember, Cassandra was right
06/18/08   Montier
"Some are trying to argue that the mess in the US economy/housing market/credit market is an example of Taleb's black swan. Nothing could be further from the truth. Black swan events are inherently unpredictable. However, the events unfolding now are sadly all too predictable. They are following the standard pattern for a debubbling process. Numerous psychological barriers prevent us from listening to Cassandra, but it may pay to remember that her predictions were all too accurate."

The road to revulsion
06/18/08   Montier
"Indeed, one of the lessons that should be learnt from the Japanese experience is that the banks were second round losers, a point made by Albert Edwards recently. They didn't really begin to underperform the rest of the market until the second Japanese recession of its debubbling process. They really started to suffer when their consumers (Japan Inc) started to struggle."

Long-term performance following rights issues
06/18/08   Academia
"This study finds evidence of significant long-term underperformance following rights issues made during 1986-95 in the UK. The findings are resilient to a number of methodological controls. In contrast, our results for a smaller sample of open offers made during 1991-95 show strong positive performance over a 5-year post-issue period, implying that firms making open offers had better growth prospects than firms making rights issues. During 1986-90, a period when open offers were rarely used, firms appeared to be making rights issues to exploit overvaluation. However, this was not evident for rights issues made during 1991-95, a period when open offers were more commonly used."

Third Avenue Q2 2008 letter
06/17/08   Whitman
"One of the important lessons from the Bear Stearns debacle for TAVF is to avoid owning common stocks where the businesses need to have relatively continuous access to capital markets in order to survive as going concerns."

Pass the buck
06/16/08   Accounting
"Statements such as .IFRS is already being used in most of the world.s major capital markets,. are clearly deceptions. Other claims, like that IFRS is .capable of consistent interpretation and application. around the world, contrast sharply with what the audit firms tell their clients in private. One large firm summed up IFRS as follows for its clients: More choice, less detail. Clearly, the private advice to clients is at odds with the public marketing efforts to investors."

We ain't got to show you no stinking credibility
06/16/08   Markets
"In short, mortgage foreclosures and defaults are just now hitting their stride, and we are likely to observe a second round of credit fears as those losses mount. The U.S. dollar has enjoyed a brief rebound on tightening talk from the Fed, which is likely to quickly dissipate as soon as those credit concerns revive. Meanwhile, commodity price pressure is likely to diminish by the end of summer as the result of a continuing economic downturn coupled with a flight-to-safety which will reduce monetary velocity."

Credit crunch prepares feast for value hunters
06/15/08   Value Investing
"Value investors look at measures such as price-to-earnings and price-to-book ratios to find stocks that are trading at bargain prices. A key premise of value investing is that markets often overreact to negative news, pushing stocks below their true worth. The idea is to buy the stocks when nobody else wants them, so you can profit when the market comes back to its senses. Sound simple? It isn't. Buying stocks others are ditching requires a strong contrarian streak and loads of patience while you wait for the price to recover. Sometimes it takes years; sometimes it never happens."

Fair value accounting rarely fair
06/15/08   Accounting
"Brooks added that,while FVA attempts to value investment vehicles by interpreting today's market value, proponents of this accounting standard fail to appreciate how the market works. "Fair value accounting will show a TSX sticker price for 3,000 shares the same as 300,000 shares - but the market shows us differently," explains Brooks."

'Lazy Portfolios' for stagflation
06/13/08   Indexing
"If you don't have a Lazy Portfolio now is the time to build your own using the eight models below. And remember, back in the bad old days of the 2000-2002 bear-recession, one of them, the Coffeehouse, was killing the S&P 500 by 15 percentage points each of the three years -- more proof passive investing beats action. You also don't need a lot of funds with this strategy. That's important if you're young, new at the game or just don't have a lot of money to invest and can't afford to plunk down the $33,000 for the initial investments in an 11-fund portfolio. So let's look at the smaller portfolios first to prove the point. Here's a comparison of the bottom lines of all eight Lazy Portfolios."

Canadian Tax Freedom Day: June 14
06/13/08   Taxes
"The latest Tax Freedom Day in Canadian history was recorded in 2005, when it fell on June 25. Since 2005, Tax Freedom Day for the average Canadian family has steadily decreased. Tax Freedom Day dropped to June 23 in 2006 and June 18 in 2007. This year, Tax Freedom Day arrives four days earlier than in 2007. While recent Tax Freedom Days show a slight reduction in the tax burden, it is nevertheless a fact that Tax Freedom Day this year is over 40 days later than it was 47 years ago. In 1961, the earliest year for which the calculation has been made, Canadian Tax Freedom Day was May 3. By 1981, it had advanced to May 30, and in 2008 Tax Freedom Day will, as noted, fall on June 14."

Hedge funds can vote at CSX meeting
06/12/08   Law
"CSX argued that the brokerage firms, which nominally own the shares although they have no economic stake in the company, had good business reasons to vote as the hedge funds wish. If they did not do so, such firms would risk losing business from the hedge funds. Judge Kaplan said there were 'persuasive reasons' for concluding that the funds 'beneficially owned at least some and quite possibly all' of the shares bought by the brokerage firms to hedge their swap positions."

America's hottest investor
06/12/08   Funds
"Henry, himself a long-time shareholder in Heebner's funds, says what first impressed him about Heebner was a little gambit he had going in finance class. Classmates would bring him silver dollars, which Heebner would exchange for dollar bills. Says Henry: "Ken was hoarding silver dollars on the idea that silver was going to keep appreciating, which would eventually force the Treasury to stop issuing new silver coins." And that's exactly what happened. "It was funny as hell - he'd be sitting there with piles of silver dollars on his desk - but Ken had it nailed," Henry says. "He saw something the rest of us didn't. That's Ken - that's always been Ken." Asked about the silver dollars, Heebner smiles and reveals that it was more than a lark for him. At one point he'd accumulated 13,000 silver dollars and had even taken out a bank loan to help finance his little venture. "The Treasury had these uncirculated silver dollars in bags in vaults. You could walk in with a thousand dollars, and they'd give you a bag of 1,000 silver dollars." It's still the best deal he's ever seen, he says: "You couldn't lose, but you could make a lot." Heebner figures he eventually netted around $15,000, but he was less successful when he tried to parlay his experience into a term paper about why silver prices were going up: "I didn't get a very good grade.""

Trader, father, veteran, convict
06/11/08   Crime
"As famous CEOs marched off to jail, so did lots of guys like Craig Gile. The Citigroup trader had a wonderful life - until the Feds decided to make an example of him. Was it fair?"

Stocks buffett would love
06/10/08   Buffett
"Buffett hasn't asked for our help, but we've identified five companies to lighten his pocketbook. Even if he doesn't buy them, the stocks should appeal to mortals, too."

How long will you live?
06/10/08   Retirement
"The hardest question in retirement planning is the first one: How long do you expect to live? I'm afraid recent developments are making that question even harder to answer. But it's unavoidable, so what's the smart way to think about it now?"

Downsizing the American home
06/10/08   Real Estate
"During the housing bubble, KB Home priced out first-time homebuyers by building bigger. Its new, more modest model provides a glimpse of what the return of the housing market may look like."

Companies promise CEOs lavish posthumous paydays
06/10/08   Management
"You still can't take it with you. But some executives have arranged for the next best thing: huge corporate payouts to their heirs if they die in office."

Buffett's big bet
06/09/08   Buffett
"Will a collection of hedge funds, carefully selected by experts, return more to investors over the next 10 years than the S&P 500? That question is now the subject of a bet between Warren Buffett, the CEO of Berkshire Hathaway, and Protege Partners LLC, a New York City money management firm that runs funds of hedge funds - in other words, a firm whose existence rests on its ability to put its clients' money into the best hedge funds and keep it out of the underperformers. You can guess which party is taking which side."

The hidden costs of fuel subsidies
06/07/08   World
"Why should China keep domestic fuel prices at about half of the global average? The usual answers are to keep inflation in check and stave off social instability that could result if prices were to rise too quickly. But by distorting fuel prices, China is encouraging fuel consumption and discouraging the use of new energy. Since the Chinese still live in an $80-a-barrel oil environment, demand for anything from cars to chemical products will spiral higher and raise the risks of economic overheating. Increasing subsidies on fuel will crowd out more investment in other areas, such as education or health care, to name two possibilities."

Why oil prices will tank
06/06/08   World
"In a normal oil market, the cost of producing the last, most expensive barrel of oil needed to satisfy worldwide demand sets the price for every barrel the world over. Other auction commodity markets work much the same way. So even if Saudi Arabia produces at $4 a barrel, if the final, multi-millionth barrel required to heat houses and run cars costs $50, and is produced, for argument's sake, at a flagging field in West Texas, the world price is $50. That's what economists call the equilibrium price: It's where the price that customers are willing to pay meets the production cost, including a cushion, naturally, for profit or "the cost of capital." But today, the sudden surge in demand and the production bottlenecks have thrown the market radically out of balance."

About 1 in 11 mortgageholders face loan problems
06/06/08   Real Estate
"All told, about 8.8 percent of home loans were past due or in foreclosure, or about 4.8 million loans. That is up from 7.9 percent at the end of December. (About a third of American homeowners do not have mortgages.) Delinquency and foreclosure rates started rising from historically low levels in late 2006 and have picked up speed in nearly every quarter since. Analysts say at first past due mortgages represented mostly high-risk loans made to borrowers with blemished, or subprime, credit. Now, as the economy has weakened and home prices have fallen in many parts of the country, homeowners with better loans are also falling behind."

Lipstick On A pig
06/06/08   Real Estate
"Credit scores used by the mortgage industry are often supplied by credit-reporting agencies that also offer borrowers assistance in figuring out how to game the system. They use computer programs that suggest tactics that can lift scores for a few days or weeks. This credit gentrification occurs quietly at the beggining of the loan process, and like a summer-before-college nose job, nobody has to know."

Odd numbers
06/06/08   Markets
"Now in a new paper, M.I.T.'s Mozaffar Khan and Hai Lu of the University of Toronto show some compelling evidence that significant front-running does exist. Khan and Lu looked at the level of short sales between 2005 and 2007 surrounding days when a chief executive sold stock."

How to retire on $12,000 a year
06/04/08   Thrift
"The solution is social. It is called sharing, having enough social skills to multiply your effective income to a level far greater than it could be made with ordinary cash. The prosperity of the past 50 years has raised our expectations. We want to own our house, to have our own bedroom, our own bathroom, our own car, our own phone (preferably mobile) and our own TV, and we want to eat what we want for dinner, not what everyone else is having. That makes life very expensive. The productive social alternative is sharing. Economists call it "economies of shared living." Most of us think about it in regard to marriage."

From communism to environmentalism
06/03/08   World
"My deep frustration has been growing exponentially in recent years due to the facts that almost everything has already been said, that all rational arguments have been used and that global warming alarmism is still marching on. The whole process is already in the hands of those who are not interested in rational ideas and arguments. It is in the hands of climatologists and other related scientists who are highly motivated to look in one direction only because a large number of academic careers has evolved around the idea of man-made global warming. It is, further, in the hands of politicians who maximize the number of votes they receive from the electorate. It is also -- as a consequence of political decisions -- in the hands of bureaucrats of national, and more often of international, institutions who try to maximize their budgets and careers regardless of the costs, truth and rationality. It is in the hands of rent-seeking businesspeople who are -- given the existing policies -- interested in the amount of subsidies they receive and look for all possible ways to escape the positive, general welfare enhancing functioning of free markets. An entire industry has developed around the funds these firms are getting from the government."

Value investing and behavioral finance
06/03/08   Tweedy
"My partners and I at Tweedy, Browne have in the past been skeptical of academic studies relating to the field of investment management primarily because such studies usually resulted in the birth of financial paradigms which we believe have no relevance to either what we do or to the real world. A whole body of academic work formed the foundation upon which generations of students at the country's major business schools were taught about Modern Portfolio Theory, Efficient Market Theory and Beta. In our humble opinion, this was a classic example of garbage in/garbage out. One could have just as easily manipulated the data to show that corporations with blue covers on their annual reports performed better than corporations with green covers on their annual reports. Although none of the three of us was fortunate enough to have studied under the late Dr. Benjamin Graham when he taught at Columbia Business School, we were fortunate enough to have observed some of his best students who either worked at or were customers of Tweedy, Browne from the late 1950s through the present. Tom Knapp, who was a partner at Tweedy, Browne from 1958 until the early 1980s, both studied under Ben Graham and worked for Ben's investment firm, The Graham-Newman Corporation. Walter Schloss, another alumnus of Graham-Newman, has made his office at Tweedy, Browne since he set up his private investment partnership in 1955. Still going strong at 84 and still housed at Tweedy, Browne, Walter has what we believe is the longest continual investment record of any individual in our field. Among others, Warren Buffett was a frequent visitor to Tweedy, Browne in the 1960s and early 1970s. My father was the primary broker for Warren in his purchase of stock in Berkshire Hathaway, and I can remember posting trades in Berky at $25 per share when I started working in 1969. Our exposure to these legendary investors whose investment principles were based on the teachings of Ben Graham, was the reason for our skeptical view of more modern investment theories."

Want to be rich? Don't get too happy
06/03/08   Behaviour
"University of Illinois psychology professor Ed Diener and others have established that while money won't buy happiness, happy people tend to earn more than sad people. A few years ago, however, investing legend John Templeton wrote Diener a letter that had the professor scratching his head. "Is life satisfaction always great?" Templeton asked. "Maybe a little bit of dissatisfaction is okay." "I started wondering," Diener recalls, "do you have to be happier and happier? How happy is happy enough?" Thus, a new study was born. Diener and his colleagues used data from the World Values Survey, which measures the happiness of respondents on a scale of 1 to 10 (with 10 the happiest). They found that income did indeed increase along with happiness but not at the very top."

Seth A. Klarman's 2007 MIT remarks
06/03/08   Klarman
"Institutional constraints and market inefficiencies are the primary reasons that bargains develop. Investors prefer businesses and securities that are simple over those that are complex. They fancy growth. They enjoy an exciting story. They avoid situations that involve the stigma of financial distress or the taint of litigation. They hate uncertain timing. They prefer liquidity to illiquidity. They prefer the illusion of perfect information that comes with large, successful companies to the limited information from companies embroiled in scandal, fraud, unexpected losses or management turmoil. Institutional selling of a low-priced small-capitalization spinoff, for example, can cause a temporary supply-demand imbalance. If a company fails to declare an expected dividend, institutions restricted to owning dividend-paying stocks may unload shares. Bond funds allowed to own only investment-grade debt would dump their holdings of an issue immediately after it was downgraded below BBB by the rating agencies. Market inefficiencies, like tax selling and window dressing, also create mindless selling, as can the deletion of a stock from an index. These causes of mispricing are deep-rooted in human behavior and market structure, unlikely to be extinguished anytime soon."

Taleb: the prophet of boom and doom
06/03/08   Taleb
"For the non-mathematician, probability is an indecipherably complex field. But Taleb makes it easy by proving all the mathematics wrong. Let me introduce you to Brooklyn-born Fat Tony and academically inclined Dr John, two of Taleb.s creations. You toss a coin 40 times and it comes up heads every time. What is the chance of it coming up heads the 41st time? Dr John gives the answer drummed into the heads of every statistic student: 50/50. Fat Tony shakes his head and says the chances are no more than 1%. 'You are either full of crap,' he says, 'or a pure sucker to buy that 50% business. The coin gotta be loaded.' The chances of a coin coming up heads 41 times are so small as to be effectively impossible in this universe. It is far, far more likely that somebody is cheating. Fat Tony wins. Dr John is the sucker. And the one thing that drives Taleb more than anything else is the determination not to be a sucker. Dr John is the economist or banker who thinks he can manage risk through mathematics. Fat Tony relies only on what happens in the real world."

All together now?
06/02/08   Management
"In fact, corporate marriages only rarely end in bliss - many studies have found that most mergers and acquisitions do little for the acquiring company's bottom line. A KPMG study of seven hundred mergers found that only seventeen per cent created real value, and that more than half destroyed it. And a McKinsey study of mergers that took place in the nineteen-nineties found that less than a quarter generated excess returns on investment."

The happiness ... gap
06/02/08   Behaviour
"Here's a bit of bad news for all my latte-loving, liberal-leaning friends who believe that jobs in retail stink, traditional religion is for morons, and income inequality has made society a lot worse off. You're a miserable bunch. I don't mean miserable, as in contemptible. I mean that as a group, you are not particularly happy people. In fact, you're far less likely to be happy with your lives than, say, a gun-owning truck driver who goes to church, shops at Wal-Mart, and makes half the money you do."

Value strategies reward patience
06/02/08   Value Investing
"The academic community has generally come to the conclusion that value investment strategies, on average, outperform growth strategies. Where the agreement ends is on the reasons behind the outperformance."

Wall Street says -2 + -2 = 4
06/02/08   Accounting
"Here's how it works, according to Richard Bove, an analyst at New York-based Ladenburg Thalmann & Co. A company decides to designate $100 million of its subordinated bonds as subject to mark-to-market accounting. The price of the bonds drops to 80 cents on the dollar from 100 cents. So the firm books $20 million on the 'presumed savings that you have on your liabilities,' Bove said. 'In the real world you didn't save a dime,' he said. 'You still owe the $100 million. It's another one of these accounting rules that basically takes you further and further away from reality.'"

Conventional wisdom, foiled again
06/02/08   Value Investing
"It is widely assumed that a stock.s price will rise when it is added to a major stock market index. As is often the case with conventional wisdom about the stock market, however, the truth is more complicated. In fact, a new study has found that over the long term, stocks that are dropped from an index generally outperform those that are added."

Chou runs his fund the way he runs his life
05/31/08   Chou
"At lunch Francis lamented that "I've become a bond trader." He finds it is very time-consuming because "there is a lot of haggling that goes on." His days are now filled with calls from bond dealers who know that Francis is an interested buyer. He is on everyone's speed dial. In the 2002 Chou Fund report, Francis said "distressed securities involve companies that have one or more serious deficiencies including weak economics, stretched balance sheets, liquidity problems, incompetent management, accounting frauds, potentially mutant cockroaches - you name it.""

Housing bubbles collapse inward
05/30/08   Real Estate
"The trends that pushed housing demand toward distant suburbs and rural areas were not sustainable. Although housing in outlying areas was relatively less expensive, a few years of double-digit appreciation quickly made these homes unaffordable for most households, especially after the sub-prime mortgage crisis (which started in August 2007) shut down non-conventional lending. Speculators could only profit from flipping when prices were rapidly increasing. When prices stalled and started to fall in 2006, investor demand for residential properties evaporated, and many speculators left holding unsold properties were forced into foreclosure. There is also some evidence that household preferences for larger homes may be shifting. In part, this is simply because of sharp increases in commuting costs."

Through the floor
05/30/08   Real Estate
"As house prices in America continue their rapid descent, market-watchers are having to cast back ever further for gloomy comparisons. The latest S&P/Case-Shiller national house-price index, published this week, showed a slump of 14.1% in the year to the first quarter, the worst since the index began 20 years ago. Now Robert Shiller, an economist at Yale University and co-inventor of the index, has compiled a version that stretches back over a century. This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, the worst point of the Depression."

Are your stocks protected by moats?
05/29/08   Books
"Thanks to The Rothery Report's Norman Rothery - with whom I had the pleasure of dining this week - I came across a copy of a book that is focused on the topic of economic moats. It's called The Little Book That Builds Wealth (Wiley, 2008), by Pat Dorsey, who is the director of equity research at Morningstar Inc. Morningstar is famous for its mutual fund ratings, but also rates individual stocks using an 'economic moat' rating system. The book divulges most of its approach to this system and makes for a fascinating read."

The folly of short term performance
05/29/08   Funds
"Investors often buy funds based on past performance, especially of the short-term variety. This is in part human nature--behavioural finance types might attribute it the tendency all of us have to try to impose order on chaos, even if it means attributing meaning to small patterns where there may be none. It may also be a matter of convenience--getting reliable information about fund holdings, management, and organisational factors such is incentive pay can be difficult. In the face of that difficulty, investors tend to place more weight than they should on easily available factors, such as short-term past performance."

Postcrisis bank stocks
05/29/08   Dreman
"It is time to ask: How could the managers of so many banks and brokerage houses have thrown out the rule book on risk?"

Wealthy? Here's some good news
05/27/08   Retirement
"When wealthy Canadians look at how much money they'll need to save up for retirement, they can be in for a shock. The latest report from the mutual fund industry recommends that you replace 80% of your working income when you retire. That means if you make more than $100,000, you'll need to save up two or three million bucks. Luckily, says actuary Malcolm Hamilton, if you're wealthy, you don't need anything close to an 80% replacement ratio to maintain your standard of living." [The table at the bottom of the page is the interesting part of this mini-article.]

The next Buffetts
05/27/08   Buffett
"We hope that the greatest investor of all time has many, many good quotes left. But we also have to acknowledge reality. Buffett is 77 and even his steady diet of Cherry Coke and hamburgers can't keep a guy going forever. Investors who would like to put their money into Berkshire Hathaway, Buffett's flagship company, have to deal with the unpleasant fact that Buffett may be on his last lap or two as champion of the stock market marathon. That raises a fascinating question: who is the next great Buffett-like investor going to be? He or she must be a great stock picker, of course. But that's just the beginning. What distinguishes Buffett is not only his stock market acumen. It's also his willingness to state his opinions in plain English, his independent turn of mind, and his willingness to treat investors as if they were his partners."

Joining the dark side
05/27/08   Montier
"So we have covered three potential sources of short ideas. What happens if we put them all together? The parameters I used to define my shorts were a price-to-sales > 1, an F score of 3 or less, and total asset growth in double digits. This proved to be a powerful combination. Between 1985 and 2007 a portfolio of such stocks rebalanced annually would have declined over 6% p.a. compared to a market that was rising at the rate of 13% p.a. in Europe"

Is Royal getting risky?
05/26/08   Stocks
"I was most interested to learn that Royal Bank had an Assets-to-Capital ratio of 22.05 as of the 1Q08 filing. It is my understanding that the general maximum allowed by OSFI for this ratio is 20.0, which may be increased to 23.0 upon prior application to the Superintendant. Is this correct? If so, then: (a) When did Royal Bank apply to have the maximum increased? (b) On what grounds did the Superintendant allow the increase? (c) Were any terms, conditions, or time limits attached to the approval?" [You'll be rewarded if you take some time to more fully explore Mr. Hymas' PrefBlog.]

Patient Capital Q1
05/26/08   Value Investing
"In fact we strongly believe that there is more trouble to come. Historically, there has never been a time when real estate values have declined dramatically without serious economic fallout."

Buffett sees U.S. in recession
05/25/08   Buffett
"Warren Buffett, whose business and investment acumen has made him one of the world's wealthiest men, was quoted in an interview published Sunday as saying the U.S. economy is already in a recession. Asked by Germany's Der Spiegel weekly whether he thinks the U.S. could still avoid a recession, he said that as far as the average person is concerned, it is already here."

How the finance gurus get risk all wrong
05/24/08   Markets
"Your money is at risk. No matter what you've put it in - stocks, bonds, derivatives, hedge funds, houses, annuities, even mattresses - there's always the chance that you could lose it or miss out on a bigger opportunity somewhere else. Anyone who would tell you otherwise is either a fool or a huckster. Then there are those who do warn of risk but package it into a simple numerical measure that seems to put it within manageable bounds. They're even more dangerous."

How thinking costs you
05/24/08   Behaviour
"Looking at data from every trade made by all investors in Taiwan from 1995 to 1999, Odean discovered that the "aggregate portfolio of individual investors suffers an annual performance penalty of 3.8 percentage points," which includes trading costs. If investors had simply bought the index and not traded at all, they would have done about 3.5 percent better. The amount of money lost was equivalent to 2.2 percent of Taiwan's gross domestic product."

An old enemy rears its head
05/23/08   World
"Even as America's economy teeters on the brink of recession and many European economies are slowing, central bankers in rich countries fear rising inflation. Yet the risks they face are smaller than those in emerging economies, where inflation has risen far more over the past year to its highest for nine years. There are also an alarming number of similarities between developing economies today and developed economies in the early 1970s, when the Great Inflation took off. Are the young upstarts heading for trouble?"

Home prices take record drop
05/22/08   Real Estate
"Though prices have dropped overall, homes still have retained much of the value they gained in the housing run-up that began in 2003. And of course that is a good thing for owners of homes who want to hold on to the value of their investments. But there are those who look at the big picture and predict that the current decline won't end until house prices are again affordable for many more Americans. For that to happen, prices must fall to about where they were before the bubble began, the theory goes. If so, there's still considerable room to drop. Census Bureau figures showed the median price (half cost more, half cost less) as $227,600 in March, having retreated from last year's $262,000. But even that deflated figure is 22% above the median price from 2003."

The question of global warming
05/22/08   World
"It is likely that biotechnology will dominate our lives and our economic activities during the second half of the twenty-first century, just as computer technology dominated our lives and our economy during the second half of the twentieth. Biotechnology could be a great equalizer, spreading wealth over the world wherever there is land and air and water and sunlight. This has nothing to do with the misguided efforts that are now being made to reduce carbon emissions by growing corn and converting it into ethanol fuel. The ethanol program fails to reduce emissions and incidentally hurts poor people all over the world by raising the price of food. After we have mastered biotechnology, the rules of the climate game will be radically changed. In a world economy based on biotechnology, some low-cost and environmentally benign backstop to carbon emissions is likely to become a reality."

Catch two-and-twenty
05/22/08   Funds
"But suppose that every institution handed its portfolio to hedge-fund managers. The average fund manager cannot earn more than the market. After costs, he must earn less. An individual pension fund or endowment might succeed in its search for higher returns. But because hedge funds and private-equity fees are higher than normal - often a 2% annual fee and a 20% performance fee - the effect of the shift would be to lower the average return of investors, not increase it. A 'catch two-and-twenty' is at work."

Is value dead?
05/22/08   Chou
"The cookie-cutter office building stacked amid high-rise condos and streetside retail is not where you'd expect to find the man who oversees $1.2 billion in funds, and who is said to be Canada's top stock-market bargain hunter. Taped to his door is a plain piece of paper that has been run through a printer: "Chou Associates Management Inc.," it reads, implying that nothing of much importance is happening here. The door is locked, but jiggle the handle of the door and out pops Francis Chou, whom I have come to ask about the strange decline in the once-dominant school of value investing. It's an investing style once described by the late, great value guru Benjamin Graham as the equivalent of rifling through a store's discount bin. In other words, if you are patient enough to search endlessly and smart enough to know the difference between a true bargain and a bad knockoff, then you can make terrific money."

Bernanke's bubble laboratory
05/21/08   Markets
"First came the tech-stock bubble. Then there were bubbles in housing and credit. Chinese stocks took off like a rocket. Now, as prices soar on every material from oil to corn, some suggest there's a bubble in commodities. But how and why do bubbles form? Economists traditionally haven't offered much insight. From World War II till the mid-1990s, there weren't many U.S. investing manias for them to look at. The study of bubbles was left to economic historians sifting through musty records of 17th-century Dutch tulip-bulb prices and the like. The dot-com boom began to change that."

Moody's ratings error probe
05/21/08   Derivatives
"Moody's Corp. plunged the most in nine years after the ratings company said it is conducting 'a thorough review' of whether a computer error caused it to assign Aaa rankings to debt securities that later fell in value."

Banks keep $35 billion markdown off income statements
05/19/08   Accounting
"Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional writedowns included in their balance sheets, regulatory filings show."

Rebate psychology
05/18/08   Behaviour
"Changing the way that identical income is described can significantly affect how people spend it. In an experiment I conducted at Harvard with my colleagues Dennis Mak and Lorraine Chen Idson, participants were given a $50 check. They were told that this money came from a faculty member's research budget, financed indirectly through tuition dollars. Roughly half of the participants had this money described as a 'rebate,' whereas the others had it described as a 'bonus.' When unexpectedly contacted one week later, participants who got a 'rebate' reported spending less than half of what those who got a 'bonus' reported spending ($9.55 versus $22.04, respectively). We observed this same pattern in other experiments when participants were asked to keep a written record of their spending, as well as in experiments in which the participants were allowed to purchase items in the lab. 'Rebates' are understood to be returns from money already spent. A rebate, psychologically speaking, is the return of a loss of one's own money rather than a pure gain provided by someone else, so it is unlikely to be seen as extra spending money."

The drawbacks of your assets being jointly owned
05/17/08   Taxes
"The term "joint ownership" is used to loosely describe one of two common legal relationships: Tenants in common, or joint tenancy with right of survivorship (JTWROS). Tenants in common owners each hold separate ownership interests that can generally be sold or transferred without the consent of the other owners. But JTWROS is more common. In the case of JTWROS, the survivorship feature means that when an individual dies, the deceased person's interest is automatically distributed to the remaining joint tenants. Think of this as a "winner takes all" game. The asset will pass to the surviving owners outside of the deceased's estate. The result? Probate fees are avoided."

Dead end for free trade
05/17/08   World
"The long-ago promise of the Canada-U.S. free-trade deal was about dismantling barriers - tariff and otherwise - along the world's longest undefended border. But those benefits are being slowly eroded as companies absorb ever greater costs - anything and everything to keep trade moving. Just-in-time inventory management has evolved into just-in-case. Companies are stockpiling inventory in both countries to cope with the increasingly unpredictable border, wiping out many of the efficiencies of integrated supply chains, according to recent studies by the Conference Board of Canada as well as the Canadian and U.S. Chambers of Commerce. Stockpiling isn't the only coping mechanism seeping into everyday business. Disturbingly, businesses are reverting to behaviour that was common before free trade, a trend that is eroding the benefits of Canada's open access to the U.S. market, the Conference Board concluded."

Berkshire's No. 2 man helps from the background
05/16/08   Munger
"The two men who run Berkshire Hathaway Inc. have an arrangement: Warren Buffett is the face of the company and Charlie Munger stays mainly in the shadows. That works well for the two billionaires, who together have developed one of the most successful investment records ever. But while Munger downplays his own contributions -- he is known for repeating "I have nothing to add" after Buffett's expansive comments at the Berkshire shareholder meetings -- his role is key to much of the company's success."

2008 Wesco notes
05/16/08   Munger
"Most assets are priced to a level where it is hard to get excited. It is hard to get 4% yield on a nice apartment, and it doesn't include replacing the carpets. Bonds of strong corporations are 4% yield. Corporate equities are paying 2% pa, growing 4% per year. Such a world isn't the one that made all of you able to come to the meeting. Last generation has been in hog heaven - some bumps, but it had easiest time getting ahead. In the eighteen years that preceded hog heaven, the purchasing power of Yale's endowment went down 60%. They were getting real investment return of 0%, negative. It is not at all impossible that brilliant investors like Yale get bad results in the future."

Decades lost
05/14/08   Accounting
"As Canada moves toward adopting International Financial Reporting Standards (IFRS) as the accounting standard for public companies, it is preparing to turn its back on decades of progress shoring up financial reporting in this country. Any regular reader of this column will know that Canada.s current mix of loose accounting and deficient securities enforcement is wholly unacceptable for investors. The introduction of IFRS in its current form will only make the situation that much worse."

Fixes for bad timing
05/14/08   Value Investing
"Investing too early is one of the more common sins of value investors. Watching as that well-researched idea you loved a few months ago falls 20% to 30% can be painful and nerve-racking. Bruce Berkowitz, of the highly successful Fairholme fund, calls it "premature accumulation." Getting your timing wrong is inevitable -- especially in today's market, in which stock prices continue to plumb new depths in a wide variety of industries."

Beer may not be recession-proof
05/14/08   Markets
"Miller CEO says cash-strapped beer drinkers are trading down to economy beers due to a slumping economy."

Malthus, the false prophet
05/14/08   World
"Given the fear that a new era of chronic shortages may have begun, it is perhaps understandable that the name of Thomas Malthus is in the air. Yet if his views were indeed now correct, that would defy the experience of the past two centuries."

Not so fast
05/12/08   Markets
"Research by the London Business School looked at 17 countries over 108 years. The countries with the slowest-growing economies (as measured by GDP growth over five-year periods) returned 8% a year; the markets in the fastest-growing economies, by contrast, returned just 5% a year. When a broader group of 53 economies, including many emerging markets, were examined, the tortoises beat the hares by a wider margin - 12% to 6-7%."

Has equity always earned a premium?
05/12/08   Markets
"Past performance is no guarantee, but history tells us that the equity risk premium has been persistent. This column shows that British investors enjoyed relatively high returns in the nineteenth century, though today.s UK market differs greatly from its formative ancestor."

Overplaying their hand
05/12/08   Miller
"There are different kinds of investors in the world. One kind is a long-term patient type who runs mutual funds for the average Joe. A second is a risk arbitrageur - known on Wall Street as an "arb" - who speculates on pending deals. When a proposed takeover surfaces and the target's stock price runs up, Mr. Patience tends to sell to the arbs, happy to take his profit and letting the arbs bear the risk of whether the deal gets done and at what price. Recently, however, two of the biggest and best-known mutual fund investors - Gordon Crawford of Capital Research Global Investors and Bill Miller of the Legg Mason Value Trust (LMVRX) blurred the distinction between the investment and arb worlds, and their shareholders paid the price."

Subprime in sheep's clothing
05/08/08   Real Estate
"Unlike subprime folk with expired teasers who have been putting capital into their homes for months and perhaps years, many Alt-A borrowers with years left on their payment-lite teaser periods are going to wake up one day to homes that have hugely deteriorated in price and have little if any equity in them. That is the exact recipe for foreclosure that bank insiders and credit analysts are warning about. Mark Zandi of Moody's Economy.com estimates that, by the end of June, 21.0% of all first-mortgage holders in the United States, or 10.6 million homeowners, will have zero or negative equity in their homes. For now, Alt-A loans are performing better than subprime mortgages. The risk, however, is that generally well-heeled Alt-A borrowers will adopt the same flippant attitude to paying their debts as lenders did in evaluating them. An additional pressure: 23.7% of Alt-A loans were not taken out for primary residences are often considered investments and have a higher rate of foreclosure. Only 8.7% of subprime mortgages were for absentee landlords, according to the New York Federal Reserve Bank."

Doubts raised on big backers of mortgages
05/06/08   Real Estate
"As home prices continue their free fall and banks shy away from lending, Washington officials have increasingly relied on two giant mortgage companies - Fannie Mae and Freddie Mac - to keep the housing market afloat. But with mortgage defaults and foreclosures rising, Bush administration officials, regulators and lawmakers are nervously asking whether these two companies, would-be saviors of the housing market, will soon need saving themselves."

Subprime outcomes
05/06/08   Real Estate
"Our second point is that house price depreciation - negative house price appreciation(HPA) - is the main driver of foreclosures. The easiest way to see this is to look at aggregate data. Figure 1 shows that periods of exceptionally high HPA in Massachusetts, as in 2002-2004, are associated with exceptionally low numbers of foreclosures, while periods of negative HPA, such as 1989-1991 and 2005-2007, are associated with high foreclosure rates. Cash flow problems at the household level, driven by job loss, for example, play a role, but only when HPA is low. For example, in 2001, a recession generated a record high number of delinquencies, a sign that many households had problems making monthly mortgage payments. During this time, however, there was a record low number of foreclosures in Massachusetts. Thus, the phenomenal levels of HPA in the early 2000s enabled many borrowers to either refinance or sell to avoid foreclosure."

Foreclosure woes require action
05/06/08   Markets
"Unemployment statistics, according to Bernanke, do not explain the increased delinquencies of many areas, including California, Florida and parts of Colorado, where foreclosure filings have increased even when unemployment generally have fallen. More revealing was the close correlation between declining home prices and high delinquency rates. On the home price decline map, states like California and Florida were drenched in red, indicating the worst losses. On the map revealing the highest foreclosure rates, the same states were also covered in red."

Rewarding failure
05/05/08   Management
"You might suppose that the stars are in near-perfect alignment for major reform of CEO pay. The mammoth pay and disastrous performance of Countrywide Financial's Angelo Mozilo, Citigroup's Chuck Prince, and Merrill Lynch's Stan O'Neal should be enough to make the public furious. Each CEO departed with $100-million-plus compensation after misadventures with subprime mortgages. Now add the economic slowdown to the mix; ordinary Americans are worried about making ends meet while failed pooh-bahs rake it in. Then throw in one more element - a presidential election. Put it all together, and how could change not be imminent?"

The siege of State Farm
05/05/08   Law
"For State Farm Insurance - the nation's leading auto and home insurer - coping with once-in-a-lifetime disasters is everyday business. Risk analysis is what it does, and its actuarial staffs are prepared for every eventuality. Almost. When Hurricane Katrina struck the Gulf Coast in 2005, it infamously brought a storm surge the likes of which the nation had never seen, causing more flood damage in one event than all the storms combined for as far back as there was data (37 years). Even that risk State Farm had anticipated. What it hadn't foreseen was that the storm surge would gut the home of a plaintiffs lawyer named Richard F. "Dickie" Scruggs, as well as those of his family, friends, and neighbors in Pascagoula, Miss. Scruggs was someone who could render all of State Farm's actuarial calculations irrelevant, because he had the power and know-how to force it to rewrite its contracts retroactively. He had been the scourge of Fortune 500 companies for two decades, precisely because he tended to change the rules of any game he chose to play."

Bear Stearns second brush with bankruptcy
05/05/08   Stocks
"Bear believed that if it failed to get a new agreement that reaffirmed JPMorgan's guarantee of Bear Stearns' obligations, Bear could have been cut off from JPMorgan's Fed-backed funding and forced into bankruptcy - an outcome that many investors assumed had been forestalled by the March 16 merger agreement. The dispute that nearly brought Bear down a second time turned on whether JPMorgan would stand behind Bear Stearns' massive credit default swap book and other liabilities. The firm's lack of access to other funding had Bear lawyers preparing for a possible bankruptcy the weekend before the revised merger agreement was unveiled."

Woodstock for capitalists 2008 blog
05/04/08   Buffett
"A shareholder asked how one can correct one's mind set away from a crowd mentality. Mr. Buffett said to read and re-read Ben Graham's The Intelligent Investor. He specifically said that chapters 8 and 20 are most poignant, but that the lessons from the book are as relevant today as they were when he first read Graham's book when he was 19 years old. He also said there are basically three lessons to take away from the book: (1) Think of stocks as owning parts of a business, (2) Use the market to serve you rather than instruct you, and (3) Always require a margin of safety when investing. In today's environment, these principles are critical, and I especially think the second one is important to remember, as, in my opinion, it can help investors tune out the rampant noise in the market, helping them improve their investment temperament over time."

Updates from the annual meeting
05/03/08   Buffett
"Qwest Center Omaha is filled to the rafters with Berkshire Hathaway shareholders. More than 30,000 people were expected to hear Warren Buffett and Charlie Munger talk about the holding company that includes brand names like Benjamin Moore paints and Dairy Queen ice cream stores."

Interview with Warren Buffett
05/02/08   Buffett
"CNBC's Becky Quick sits down with Warren Buffett to discuss the upcoming shareholder meeting, which starts Friday night and runs through Monday. Buffett refers to the annual event as "Woodstock for Capitalists.""

Warren Buffett deal interview
04/30/08   Buffett
"I think we're in a recession. I mean, a recession is defined in a certain way by the National Bureau of Economic Research, but I think it's defined by the man in the street a little differently than whether there have been two quarters of reported (negative) GDP growth. And incidentally, when GDP growth is below 1% a year it's really falling on a per capita basis because our population increases about one percent. So even though the National Bureau uses an absolute figure, it's up one-tenth they don't count that as a recessionary quarter, but the GDP per capita has gone down in a quarter where the gain is half a percent or something of the sort. We are in a recession, unless you want to stick strictly to the technical definition, which I really don't think has much meaning to the fellow who has lost his job or is facing a money-market fund that isn't paying him out, or whatever it might be."

Meet the Buffetts
04/30/08   Buffett
"Berkshire Hathaway's annual meeting happens May 3rd in Omaha and, once again, the company's billionaire chairman and CEO, Warren Buffett, will be in the spotlight. Last year, NBR brought viewers an interview with Buffett. This year, anchor Susie Gharib interviews Buffett's three children to find out what their father taught them about money and business."

New advice from on high
04/30/08   Buffett
"Everyone will be delighted to hear the details of the minority interest in the Mars-Wrigley candy giant that was made public this week. They will hang on to every hint of the future for Berkshire's huge position in railroad stocks (already profitable) and its staged acquisition of Marmon Group, which owns and leases 94,000 rail cars that must be used to carry the increasingly valuable coal from coast to coast. Think replay of 19th century railroad magnate here without the watered down stock and internecine battles with ruthless competitors." [I was uncertain about linking this one because of its focus on capital gains. Include dividends, which have historically been a major source of profits for stock investors, and the record of past returns improves dramatically.]

Pay the taxman by midnight or else!
04/30/08   Taxes
"Today of course is T-day in Canada: the annual tax filing deadline. If you owe the Canada Revenue Agency income taxes for calendar 2007, the penalty and interest clock starts ticking at midnight: the moment April 30th turns into May 1st. If the CRA owes you there is less urgency but if you have a refund coming, the sooner you file your tax return the sooner you can cash the cheque and put your money to work."

Warren Buffett - in 1974
04/30/08   Buffett
"Stay dispassionate and be patient is Buffett's message. "You're dealing with a lot of silly people in the marketplace; it's like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be OK." First the crowd is boozy on optimism and buying every new issue in sight. The next moment it is boozy on pessimism, buying gold bars and predicting another Great Depression."

Fee-only must mean just that
04/29/08   Brokers
"Canadian financial planners should eliminate the ambiguity by scrapping the phrase "fee-only" when charging fees computed as a percentage of client assets. Instead, they should use the term "asset-based," which is far less confusing for clients."

House prices decline
04/29/08   Real Estate
"House prices dropped 2.6 percent in February from a month earlier, after a 2.4 percent decline in January, the S&P/Case- Shiller report showed. The figures aren't adjusted for seasonal effects, so economists prefer to focus on year-over-year changes instead of month-to-month. The group's 10-city composite index, with a history back to 1987, fell 13.6 percent in the 12 months ended in February, also the most on record. Nineteen of the 20 cities in the index showed a year-over- year decrease in prices for February, led by a 23 percent slump in Las Vegas and a 22 percent decline in Miami. Charlotte was the only area showing a gain with a 1.5 percent increase. Compared with January, homes in all 20 areas covered dropped in value."

Economy in a recession, will be worse than feared
04/29/08   Buffett
"'This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think,' Buffett said. 'This will not be short and shallow.' 'I think consumers are feeling gas and food prices,' he added, 'and not feeling they've got a lot of money for other things.'"

One guy who has seen it all
04/28/08   Markets
"Today's trouble, the 89-year-old Mr. Bernstein says, is worse than he has seen since the Depression and threatens to roil markets into 2009 and beyond -- longer than many people expect."

Mars agrees to buy Wrigley
04/28/08   Buffett
"The purchase will be financed with $11 billion from Mars, $4.4 billion from Berkshire and $5.7 billion from Goldman Sachs Group Inc. Berkshire will also buy a $2.1 billion stake in the Wrigley unit once the purchase is completed."

Why today's hedge fund industry may not survive
04/27/08   Funds
"The immediate response may be that so naked a scam is inconceivable. Well, imagine a fund that leverages investors. money by borrowing massively in short-term money markets in order to purchase higher-yielding paper. Assume, again, that the premium gives a correct estimate of the risk. With sufficient leverage, this fund, too, is likely to make profits for years. But it is also very likely to be wiped out, at some point. Does this strategy sound familiar? It certainly should by now."

Immoral hazard
04/27/08   Markets
"The idea that occasional economic setbacks might benefit the system in the long run was one of the early ideas to disappear. Yet if you prop up weak sisters who would otherwise fail and in failing present their more efficient competitors with extra growth, you must surely weaken the system. Desperation pricing from weak firms who simply should not exist can weaken the profitability of a whole industry, as it has for the airlines. The average efficiency of most industries is reduced with at least some effects on our global competitiveness. With a slightly lower average return on equity, the ability to reinvest drops so that, in this world of moral hazard where recessions are few and mild, GDP growth is a little less than it might have been."

You can't pay them enough to leave
04/24/08   Real Estate
"When the city of Youngstown, Ohio, proposed incentives to move people out of declining neighborhoods, it sounded like a good idea - in theory. The city hoped to lure holdouts living on nearly empty blocks and relocate them to more lively areas, as part of its plan to remake itself in the wake of the steel industry's departure and the foreclosure crisis. It's already cleared some lots for things like playgrounds. Now Youngstown wants to close entire streets and bulldoze abandoned properties so it can shut down city services like street lighting, police patrols and garbage pick-ups that it can no longer afford to maintain. To do this on a large scale, the city needs to get about 100 residents to relocate. Each is eligible for $50,000 in incentives - plenty, in this town, to buy a new home and move. The hitch: Youngstowners don't seem to want to leave their homes, no matter how blighted or abandoned the neighborhood may be."

Doubling down in financials
04/24/08   Value Investing
"Do clients ever get upset with you? They read the paper and then see that their money manager is busy buying the financials. The single most common question I get: .Don't you read the newspaper? What is wrong with you?. So does the Pzena client need a strong stomach? Of course. We try and educate the clients before they open an account. We promise them that we will have these bad periods. Every single client, before they sign up, knows how badly we did in the last cycle. In the Internet bubble, the market was going up 30% a year, and we were going down. We were 60 percentage points behind the market, underperforming it for 10 consecutive quarters in '98, '99 and the first couple months of 2000. Now, that was extreme. The Internet bubble was extreme. We don't have such an extreme bubble today. But this is what we do: We buy bargains."

New-home sales in the U.S. plunge
04/24/08   Real Estate
"Purchases of new homes in the U.S. plunged more than forecast in March to the lowest level in almost 17 years as stricter loan rules and falling prices caused buyers to hold off. Sales dropped 8.5 percent to an annual pace of 526,000, the fewest since October 1991, from a 575,000 rate the prior month, the Commerce Department said today in Washington. The median sales price slumped 13.3 percent from the same time last year, the most in almost four decades."

Fooling some of the people all of the time
04/24/08   Books
"Now Mr. Einhorn has written a book. But instead of packaging the real or contrived "secrets" to his success - as cliche would have it - he has tried to do something less triumphant and far gutsier. In "Fooling Some of the People All of the Time," he turns the spotlight on a single, stubborn investment play that never made much money for him but created six years of headaches."

Sequoia fund to reopen
04/24/08   Value Investing
"The Sequoia Fund, after experiencing selling by investors, is reopening its doors May 1 to new investors for the first time since 1982. The $3.5 billion value fund is celebrated for outperforming the broader market during much of its 38-year history. For years, it was run by legendary stock picker William Ruane, who followed the same approach as Benjamin Graham and Warren Buffett."

Looking up to Warren Buffett
04/22/08   Pabrai
"Our brains are in sync with the speed at which the market is moving and totally out of sync with the speed at which a business is moving. It seems obvious: The market is repricing a company's stock very quickly. I can process very quickly; therefore, I make decisions based on that. You have to learn to dramatically slow your brain, which is very hard for most people. The reality is that you should make decisions based on how that business is changing, and that's a very slow process."

Hoisington letter
04/22/08   Markets
"Growth recessions, like full scale recessions, produce falling inflation, a margin squeeze on corporate profits, eroding stock prices, and declining interest rates. Thus, the difference is really one of semantics. The point for investors is not what type of recession we are experiencing, but rather how long the downturn will last. Our conclusion is that our present economic difficulties will persist for at least two years."

Triple-A failure
04/22/08   Derivatives
"Structured finance, of which this deal is typical, is both clever and useful; in the housing industry it has greatly expanded the pool of credit. But in extreme conditions, it can fail. The old-fashioned corner banker used his instincts, as well as his pencil, to apportion credit; modern finance is formulaic. However elegant its models, forecasting the behavior of 2,393 mortgage holders is an uncertain business. 'Everyone assumed the credit agencies knew what they were doing,' says Joseph Mason, a credit expert at Drexel University. 'A structural engineer can predict what load a steel support will bear; in financial engineering we can't predict as well.'"

Leucadia's 2007 letter
04/21/08   Value Investing
"One of us has been mumbling about Credit Armageddon for years and it seemed earlier this year that his fears were to be realized. At least for the time being, this nightmare has been avoided by strong government intervention. Unfortunately, we suspect that the wizards of Wall Street have not only made mischief in the mortgage market, but in all other loan markets as well and that the full effect of this is not yet visible. It seems that almost all financial institutions and investors have mispriced risk, and many financial institutions have found themselves carrying assets on their balance sheets at amounts considerably higher than market or their intrinsic worth. Recently, and often at the behest of regulators, financial institutions have been forced to sell these assets or to recognize the mark to market losses, all of which erodes net worth, forcing them to raise new equity capital and/or to reduce leverage, a process that has come to be known as deleveraging. It may take quite a while for the scrubbing of balance sheets and the unwinding of leverage to come to an end, and we suspect that not all will survive."

Older and heavier need not apply
04/21/08   Health
"General Mills has a model employer wellness program, according to the article. It issued a wellness mission statement that was distributed to all employees, saying: 'We would like every General Mills employee to have an active lifestyle, a healthy weight, a normal cholesterol level, normal blood pressure and to be a nonsmoker.' These are mostly euphemisms for thin and young. Evidence-based research to date has shown these health indices are primarily measures of genetics, aging and social stresses, and 'normal' levels have been redefined so low as to exclude most older, heavier or genetically predisposed people. The only way for most of these workers to meet these arbitrary benchmarks are to take controversial prescription drugs or engage in equally controversial and ineffective weight loss measures. It is exactly these discriminatory aspects of employer wellness programs, which reward and penalize workers based on arbitrary health indices, that caught the attention of the Department of Labor and lawyers earlier this year."

The wonder fish
04/21/08   World
"Our oceans are being drained of food. Doctors tell us to eat more fish; it's good for the brain and good for the heart. We yearn for our weekly sushi fix. And increasingly so do our friends in China, India, and elsewhere in the developing world. To meet this growing appetite, commercial fishermen are scooping up everything that's edible (and a lot of what's not). Couple that trend with the effects of global warming, and the situation has become so dire that some scientists think seafood stocks will totally collapse by 2048."

The economic skies might be falling
04/19/08   Watsa
"Investors around world saw sunny skies yesterday, but Prem Watsa is still prepared for a hard rain. The chair of Fairfax Financial Holdings Ltd. boasts that Canada's top-performing financial-services company of the past year is sitting on a billion-dollar life raft of cash and marketable securities - in case North America has the perfect economic storm."

Here comes the next mortgage crisis
04/17/08   Real Estate
"California should be the poster child for a mortgage-loan bailout. In few other places have so many taken on such onerous debts with so little equity. Unfortunately, the crisis in California is going to get much worse, and there is no bailout that will solve it. Why? Because if the first stage of the foreclosure crisis was about people who could not afford their mortgages, the next stage will be about people who have every reason not even to try to pay their mortgages."

Looking beyond the bailout
04/17/08   Dreman
"The government rescue of overleveraged financiers and underwater homeowners is still only beginning, and the signs that it will get bigger are manifold. The Federal Housing Administration has spent $21 billion since September staving off foreclosures. The House Financial Services Committee has proposed letting the FHA underwrite up to $300 billion in loans to borrowers. The last time the federal government stepped so directly into the mortgage business was at the bottom of the Great Depression. Congressmen from both parties are working on legislation to provide tax breaks and other help to much of the stressed homeowner population. The Administration has been reluctant to get involved in anything it would consider a bailout, but the rapidly darkening credit situation may leave it with no choice."

How your taxes turn into manure
04/16/08   Fun
"But it's also time to file your federal tax return. Yes, this is a pesky chore, but remember that paying taxes is not a ''one-way street.'' When you send your money to the government, the government, in return, provides you with vital services, such as not putting you in prison. The government also uses your money to pay for programs that benefit all Americans, such as the Catfish Genome Project."

Find the right broker for you
04/14/08   Brokers
"Your next stop is the Stingy Investor website. (Go to www.ndir.com and search for Canadian discount brokers). It's run by Norm Rothery, chief investment strategist at Dan Hallett & Associates Inc. Here you can find up-to-date comparisons of the fees and commissions charged by 15 Canadian online brokerages (as well as phone numbers and email addresses). What you pay usually depends on how many trades you make per quarter or year, how many shares you buy at a time and how many dollars you have in assets at the firm."

What Warren thinks...
04/14/08   Buffett
"You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that's too much to expect. Of course, you shouldn't get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that."

You thought you had an equity line
04/14/08   Debt
"Reeling from losses on their wretched loan decisions of recent years, lenders are preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines that they paid dearly to secure. In the last 30 days, lenders have sent several hundred thousand letters advising borrowers that their home equity lines of credit are frozen"

The meritocracy paradox
04/13/08   Behaviour
"In business, merit supposedly determines pay. But in fact, it's often the other way around, with pay determining merit. In controlled studies in which people were assigned random tasks with random pay, psychologists discovered people behave as if the higher-paid individuals have superior ability. And they do so even if they know that the pay scale was arbitrary. Outside of the laboratory the calculation of someone's ability is even more tricky."

A blunt former Fed chairman takes on Bernanke
04/12/08   Markets
"A few days ago an unusual event took place: Paul Volcker, the mythical U.S. Federal Reserve Board chairman from the Reagan years, criticized the policy of the current Fed chairman, Ben Bernanke, in a speech to the Economic Club of New York. Just so you grasp how extraordinary this was, you should first understand that normally a past Fed chairman scrupulously avoids saying anything at all about current Fed policy - for the simple reason that the current Fed chairman's words are one of his most important tools: They can sway markets. This ability does not fade entirely when a Fed chairman leaves. So when a past Fed chairman speaks, his words can clash with those of the present one and make that one's job difficult. Out of professional courtesy, past Fed chairmen therefore keep quiet; Mr. Volcker especially - the man who hiked interest rates to 20 per cent to kill inflation, at the cost of a deep recession. But last week Mr. Volcker spoke his mind bluntly. He said, in effect, that the current Fed is not doing its job."

Paul Volcker speaks in New York
04/12/08   Markets
"Former U.S. Federal Reserve Chairman Paul Volcker speaks in New York about practices leading to the current financial market crisis, the role of the Federal Reserve in preventing and dealing with such crises and the need for changes in market regulation."

And behind door no. 1, a fatal flaw
04/10/08   Behaviour
"The Monty Hall Problem has struck again, and this time it's not merely embarrassing mathematicians. If the calculations of a Yale economist are correct, there's a sneaky logical fallacy in some of the most famous experiments in psychology."

Behind Monty Hall's doors
04/10/08   Behaviour
"Mr. Hall continued: "Now do you see what happened there? The higher I got, the more you thought the car was behind Door 2. I wanted to con you into switching there, because I knew the car was behind 1. That's the kind of thing I can do when I'm in control of the game. You may think you have probability going for you when you follow the answer in her column, but there's the pyschological factor to consider." He proceeded to prove his case by winning the next eight rounds. Whenever the contestant began with the wrong door, Mr. Hall promptly opened it and awarded the goat; whenever the contestant started out with the right door, Mr. Hall allowed him to switch doors and get another goat. The only way to win a car would have been to disregard Ms. vos Savant's advice and stick with the original door. Was Mr. Hall cheating? Not according to the rules of the show, because he did have the option of not offering the switch, and he usually did not offer it."

Sell in May and go away
04/09/08   Academia
"We document the existence of a strong seasonal effect in stock returns based on the popular market saying 'Sell in May and go away', also known as the 'Halloween indicator'. According to these words of market wisdom, stock market returns should be higher in the November-April period than those in the May-October period. Surprisingly, we find this inherited wisdom to be true in 36 of the 37 developed and emerging markets studied in our sample. The 'Sell in May' effect tends to be particularly strong in European countries and is robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694. While we have examined a number of possible explanations, none of these appears to convincingly explain the puzzle."

Value investing is supposed to get ugly
04/09/08   Hallett
"One of the tenets of value investing is there will be times when it's going to get ugly. Problem is, for a lot of established value firms, things have never looked uglier - leading some advisors to question the wisdom of the strategy. But fund analysts say there is merit to what value firms are doing right now and investors should wait before they write off their value holdings."

Whither Black-Scholes?
04/08/08   Derivatives
"In fact, Black-Scholes may not be used that much in the markets to begin with. New research by veteran traders and best-selling authors Nassim Taleb and Espen Haug points in that direction. Clearly, a formula that isn't used can't have much of an effect on markets, let alone cause the massacre that began last summer."

Asleep at the wheel
04/08/08   Montier
"However, more importantly once earnings have peaked they often return to the low edge of the growth bands. This represents a 45%- 50% decline in earnings. This number holds for the US, Europe and the UK. So if you want to have a worse case scenario then a figure like this should be used."

Number twisting continues with fees
04/08/08   Hallett
"It was almost two years ago when a draft research paper - Mutual Fund Fees Around the World - made waves by proclaiming that 'total shareholder costs' for mutual funds sold in Canada were the highest among the 18 developed countries studied. Industry critics and investor advocates ran with the paper's figures, without scrutiny, to pad their case that the fund industry regularly sticks it to investors."

Bye bye AAA
04/07/08   Bonds
"The six remaining borrowers with the highest rating from both S&P and Moody's are: Automatic Data Processing Inc., Berkshire Hathaway Inc., Exxon Mobil Corp., General Electric Co., Johnson & Johnson and Toyota Motor Corp., according to data compiled by Bloomberg."

Hijacking the Hermitage Fund
04/07/08   World
"Corruption, intimidation, robbery, violent assault, forgery, large-scale fraud. No, not the subject of the latest John Grisham novel, but sensational allegations, made public Apr. 4 by Hermitage Capital Management.until recently the largest foreign portfolio investor in Russia. In a detailed and damning report, titled Criminal Justice.Russian-Style, Hermitage alleges the fund's Russian subsidiaries have fallen victim to an elaborate con designed to defraud the fund of hundreds of millions of dollars. The most sensational part of Hermitage's allegations is that the attempted larceny was carried out with the direct connivance of officials in the Russian police. Hermitage alleges the police seized documents and equipment that were instrumental to the attempted fraud, which involved bogus court cases based on forged documents, the aim of which was to sue Hermitage subsidiaries for hundreds of millions of dollars. "The most shocking thing is not that there are corporate raiders in Russia who attempt to steal your shares," says Jamison Firestone, managing partner of Firestone Duncan, Hermitage's law firm. "The shocking thing is that the police worked hand-in-hand with them, and actually performed the theft of the documents so that the corporate raiders could then do their work.""

Feast with the vultures
04/05/08   Value Investing
"A more rewarding approach may be to invest in companies such as Leucadia. Like Berkshire Hathaway, these are publicly traded holding companies run by managers with histories of sniffing out value. Yes, the risks are more concentrated. But returns, on average, exceed those of the typical value fund over the past decade. Patience is crucial, since returns can fluctuate unpredictably, rising in years when managers sell profitable investments and stagnating when they hold a lot of cash. Because of the stock market sell-off, share prices of many of these players are cheap vs. historic norms. And after largely sitting on the sidelines during the bull market, many of the companies are flush with cash. They are positioned to take advantage of lower stock prices as well as a projected spike in the default rate for U.S. speculative grade bonds."

Crossing the rubicon
04/04/08   Value Investing
"In light of the above comments, the partners of FPA came to a unanimous conclusion that the recent Federal Reserve actions and the potential new Congressional policies under consideration are likely to lead to a significantly higher level of long-term inflation in the U.S. We are more than disappointed in the substandard decision making that has taken place within the Federal Reserve and other governmental entities these last several years. The misguided monetary policies of the former Chairman of the Federal Reserve, Alan Greenspan, created an era of 'too big to fail' that has led to two major asset bubbles. With each successive bubble, the policy actions available to the Federal Reserve to reduce financial system risk have been systematically reduced. The extraordinary actions taken by the Bernanke Federal Reserve reflect acts of desperation rather than long-term policy solutions. The rapidly changing events within the capital markets are forcing the Fed to adopt policies that have the potential of long-term negative consequences."

Lenders swamped by foreclosures
04/04/08   Real Estate
"Banks are so overwhelmed by the U.S. housing crisis they've started to look the other way when homeowners stop paying their mortgages. The number of borrowers at least 90 days late on their home loans rose to 3.6 percent at the end of December, the highest in at least five years, according to the Mortgage Bankers Association in Washington. That figure, for the first time, is almost double the 2 percent who have been foreclosed on."

Spanish property auction flop
04/04/08   World
"House prices began their surge in 1998 spurred by falling interest rates as Spain prepared for euro membership. Spain has built about 5 million new homes since then, attracting immigrant labor from Eastern Europe and Latin America to fuel a boom that peaked in 2006. Now the turmoil in global credit markets is cutting demand. The world's biggest financial companies have reported about $232 billion in credit losses and writedowns since the start of 2007 and the credit shortage is filtering through to Spain."

Student lenders stifled
04/04/08   Bonds
"The collapse of the $330 billion auction-rate securities market has brought debt sales by U.S. public student-loan agencies to a halt. No municipal bonds backed by student loans were sold in the first quarter, the first time that happened in almost 40 years, according to Thomson Financial. The inability to obtain financing differs from states, cities, schools and hospitals, which sold $82 billion of bonds to fund public works and replace failed auction debt that stuck them with penalty rates as high as 20 percent."

Graham's metrics still apply
04/04/08   Graham
"Benjamin Graham, the father of modern security analysis, was a professor at Columbia University, taught Warren Buffett and wrote the most famous -- and arguably the best -- book on investing, The Intelligent Investor, first published in 1949. In a chapter on stock selection for defensive investors, he said they should look for large, dividend-paying companies with little debt and a consistent record of profitability, whose shares trade at low multiples to earnings and book value. We applied Graham's criteria to the Canadian market, using the FP Corporate Analyzer program to identify companies Graham would likely find attractive."

How fund manager didn't lose a bundle
04/03/08   Value Investing
"As for where Mr. Rodriguez is betting now? He's still bearish. He's on a "buyer's strike." But he is considering his next moves. He views the recent partial bailout of Bear Stearns as "a short term positive but a long term negative . for the dollar and for inflation." The reason? Once again those who behaved irresponsibly or worse are sticking everyone else with the tab. "This has expedited the socialization of risk and moral hazard, exponentially," he says. Stay tuned."

Dan on BNN
04/02/08   Hallett
Dan cautions against Ticker Temptation. Read his articles over here.

Beware: A 'safety net' full of holes
04/02/08   Brokers
"Regardless of what they're called or the advantages they claim to offer, these products have two things in common: very high commissions for your adviser and, thanks to fees averaging about 2% to 3% a year, very low returns for you. And you often have to pay a surrender charge, or exit fee, of 6% or more if you want to withdraw the money in the first six to eight years. Another feature you'll commonly find with these safety nets is confounding complexity. I've had plenty of clients who signed disclosure forms stating that they had read and understood the 473-page policy, yet they still had no idea what they were buying."

When I'm sixty-four
04/02/08   Gross
Mr. Gross advocates government measures that attempt to stop the slide in housing prices. Oh, and he's turning 64.

Revised CPR method helps save Arizonans
03/31/08   Health
"This is the worst-case scenario. If a person's heart stops pumping blood through the body, and they aren't in a hospital, they have only about a 2 percent chance of surviving without serious disability. But Arizona cities including Glendale are starting to find that a few simple steps can radically improve the odds."

The clean energy scam
03/30/08   World
"But several new studies show the biofuel boom is doing exactly the opposite of what its proponents intended: it's dramatically accelerating global warming, imperiling the planet in the name of saving it. Corn ethanol, always environmentally suspect, turns out to be environmentally disastrous. Even cellulosic ethanol made from switchgrass, which has been promoted by eco-activists and eco-investors as well as by President Bush as the fuel of the future, looks less green than oil-derived gasoline."

Out of print
03/30/08   World
"Few believe that newspapers in their current printed form will survive. Newspaper companies are losing advertisers, readers, market value, and, in some cases, their sense of mission at a pace that would have been barely imaginable just four years ago. Bill Keller, the executive editor of the Times, said recently in a speech in London, 'At places where editors and publishers gather, the mood these days is funereal' Editors ask one another, 'How are you?,' in that sober tone one employs with friends who have just emerged from rehab or a messy divorce.' Keller's speech appeared on the Web site of its sponsor, the Guardian, under the headline 'NOT DEAD YET.'"

Taleb outsells Greenspan
03/30/08   Books
"On a freezing day in March 2007, Nassim Taleb walked into a conference room at Morgan Stanley's Manhattan offices on 47th Street and Broadway to address a group of the firm's risk managers. His message: Your models don't work. Using a whiteboard to scribble out his calculations, Taleb, now 48, began one of his rants, this time against stress tests -- Wall Street lingo for examining how a market rout will play out. Stress tests are inherently risky because they ignore rare but potentially devastating events, Taleb said. 'Past shortfall doesn't predict future shortfall,' the options trader turned best-selling author recalls telling the assembled group of about 40. The risk managers, part of a tribe of mathematical model makers known in the finance world as quants, stared back at him blankly, and a debate ensued, according to people who were there. Only six months later, Morgan Stanley experienced its own rout. The world's second-biggest mergers adviser announced in December that it had written down its subprime-related holdings by $9.4 billion after the firm's traders misjudged how fast and far prices of the debt would fall. Their risk management had failed."

Canadian Discount Broker Commissions
03/29/08   Stingy Investing
"Our discount broker study referred to in Saturday's Financial Post"

Do-it-yourself broker
03/28/08   Brokers
"Individual investors continue to flock to online investing as a low-cost alternative to full-service brokerage accounts. As of December, 2007, Canadians had $179-billion invested in online or discount brokerage accounts, according to Investor Economics Inc. That's no trivial amount, although it's still dwarfed by the $720-billion stashed in full-service accounts, says senior consultant Guy Armstrong. "We're still predominantly an advice-oriented society.""

Buyers' revenge
03/28/08   Real Estate
"Analysts predict that as many as two million homeowners could enter foreclosure this year, caught by a slowing economy, falling house prices and, in many cases, adjustable mortgages with rates rising from high to higher. In Las Vegas, 1.9% of homes in the Las Vegas area were in the foreclosure process in January, almost triple the rate of a year earlier, according to First American CoreLogic Inc., a Santa Ana, Calif., real-estate and mortgage data company."

Small stocks, big profits
03/27/08   Stingy Investing
"Each December I grade the largest stocks in Canada for the MoneySense Top 200 ranking. But, as a personal project, I've also been grading Canada's smaller stocks at the same time, using the same methodology. The result? Over the past three years the top small stocks have actually done better than their larger counterparts in the Top 200. In 2004 the top small stocks gained 54.8%. In 2005 the tiny superstars climbed 44.6%. In 2006 the pint-sized overachievers advanced a further 18.3%. If you had bought the top-rated top small stocks in 2004 and rolled your gains into the new bunch each subsequent year, you would now be up 170%, not including dividends. That compares to a gain of about 152% for the top-rated stocks in the Top 200."

Grim realty
03/26/08   Real Estate
"According to the newly published S&P/Case-Shiller index, house prices in ten metropolitan areas fell by 11.7% in January compared with the year before, the biggest fall since the index was created in 1987. The larger 20-city index tumbled by 10.7%. Sunbelt cities which earlier saw the most dramatic price rises are now enduring the hardest falls."

Berkshire's free money beats LBO model
03/26/08   Buffett
"Credit-market gridlock has trapped Stephen Schwarzman, who relies on lenders to fund acquisitions, while leaving Warren Buffett free to pursue the debt-free deals that have helped make him the world's richest person. Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., has $59 billion in cost-free money from insurance premiums to invest. Schwarzman's New York-based Blackstone Group LP, manager of the biggest private-equity fund, is being forced to bypass Wall Street banks after they stopped financing most leveraged buyouts. Buffett and Schwarzman each takes a different approach to the same goal: finding companies they consider undervalued. Investors are betting Buffett's model will prevail, at least for now."

New Bear Stearns bid
03/24/08   Stocks
"JPMorgan and Bear were prompted to renegotiate after shareholders began threatening to block the deal and it emerged that several 'mistakes' were included in the original, hastily written contract, according to people involved in the talks. One sentence was 'inadvertently included,' according to a person briefed on the talks, which requires JPMorgan to guarantee Bear's trades even if shareholders voted down the deal. That provision could allow Bear's shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee, these people said. When the error was discovered, James Dimon, JPMorgan's chief executive, who was described by one participant as 'apoplectic,' began calling his lawyers at Wachtell, Lipton, Rosen & Katz to seek a way to have the sentence modified, these people said. Finger pointing over the mistakes in the contracts began as bankers blamed the lawyers and vice versa. As it began to look more possible late last week that the deal might be struck down, JPMorgan approached Bear in earnest on Friday about renegotiating the sale price to guarantee its completion and brought the Federal Reserve into the talks as well, people involved in the negotiations said."

Partying like it's 1929
03/24/08   Markets
"Normally, banks satisfy both desires: depositors have access to their funds whenever they want, yet most of the money placed in a bank's care is used to make long-term loans. The reason this works is that withdrawals are usually more or less matched by new deposits, so that a bank only needs a modest cash reserve to make good on its promises. But sometimes - often based on nothing more than a rumor - banks face runs, in which many people try to withdraw their money at the same time. And a bank that faces a run by depositors, lacking the cash to meet their demands, may go bust even if the rumor was false. Worse yet, bank runs can be contagious. If depositors at one bank lose their money, depositors at other banks are likely to get nervous, too, setting off a chain reaction. And there can be wider economic effects: as the surviving banks try to raise cash by calling in loans, there can be a vicious circle in which bank runs cause a credit crunch, which leads to more business failures, which leads to more financial troubles at banks, and so on. That, in brief, is what happened in 1930-1931, making the Great Depression the disaster it was."

Too dumb to fail
03/24/08   Markets
"In 1984, Continental Illinois, then one of the country's largest banks, found itself on the verge of collapse, after billions of dollars. worth of its loans went bad. To avert a crisis, the government stepped in, purchasing $3.5 billion of the soured loans and effectively taking over the bank. Later that year, at a congressional subcommittee hearing, Representative Stewart McKinney summed up the lesson of the rescue effort: 'Let us not bandy words. We have a new kind of bank. It is called too big to fail. T.B.T.F., and it is a wonderful bank.'"

10 ways to curb sleazy debt collectors
03/24/08   Debt
"It's tough conditions like these that tempt collectors to get rough with consumers. Given that the debt-collection industry has trouble restraining itself during good times, you can imagine how bad this could get."

My big fat IRS case
03/24/08   Law
"The young couple hauled in $40,000 in cash at their Greek wedding. They knew if they deposited $10,000 or more at once, the bank would have to file a "currency transaction report" and they'd have to wait in line to provide information. So they deposited their loot in smaller lumps. Soon, they were being investigated by Internal Revenue Service criminal agents and paying Chicago attorney Robert E. McKenzie $500-plus an hour to help them avoid seizure of their cash or worse. Carving up deposits to avoid a currency report is "structuring." Structuring is a felony. "It's scary. If you know of the $10,000 requirement and attempt to avoid it, you've committed a crime," says McKenzie, who convinced the irs to let the newlyweds go. You don't have to be dealing drugs, cheating on your taxes or paying prostitutes to run afoul of the structuring law. Even if the money is from a legal source and used legally, the government can charge you with a crime and/or demand you forfeit cash. By contrast, with money laundering, the cash has to be related to an underlying crime."

Panic of 1907 or not, trading stops on good friday
03/21/08   Markets
"The New York Stock Exchange is closed today, as it has been every Good Friday for almost 150 years, except 1898, 1906 and 1907. That last one was the same year as the infamous Panic of 1907, when the aggregate value of all U.S. stocks plunged by more than a third. Hence, a legend that persists 101 years later: Traders get to stay home the Friday before Easter not just because it's a Christian holy day but because of its association with one of history's great bear markets."

What makes a tightwad
03/20/08   Behaviour
"The researchers were surprised to find that despite perceptions that people always overspend, chronic underspending was far more widespread than thought, with tightwads outnumbering spendthrifts by 3 to 2. But researcher Scott Rick from the University of Pennsylvania said they found it wasn't the cost of an item or someone's income level that had an impact on their spending. Tightwads reported feeling an emotional pain when handing over their money. Spendthrifts, on the other hand, felt pleasure making a purchase."

When OSC goes green, lawyers see red
03/19/08   Law
"The regulator says financial estimates must be provided to investors where quantitative information is "reasonably available," and the company should explain that the estimate is highly uncertain. It should also consider providing the upper and lower ranges of financial exposure, as well as an analysis of the likelihood the event will actually occur. Almost overnight, environmental liability has been escalated to a major governance issue. Public companies are being asked to come clean or risk a big legal mess. But at least one of the country's senior environmental lawyers says the OSC is asking for trouble."

Chou's annual report for 2007
03/17/08   Chou
"We are long term investors and, in general, our bias has been to concentrate on stock selections and not worry about currency fluctuations. With years like 2007, the question arises as to whether there have been major disparities in annualized returns over the long term between a hedged portfolio and an unhedged portfolio; in other words, does one offer more advantageous performance results during currency fluctuations? Two studies, one covering the period from 1975 through 1988 and the other from 1988 through 2003, confirm that with respect to the long term there have been no material differences in returns."

JPMorgan buys Bear Stearns for $2 a share
03/16/08   Stocks
"JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $2 a share after a run on the company ended 85 years of independence for Wall Street's fifth- largest securities firm and prompted a bailout by the Federal Reserve."

How value investor Chou wins with bonds
03/15/08   Chou
"When you read about investment stars, portfolio managers who score high double digit and even triple digit annual gains, managers of bond portfolios usually aren't there. The reason - bonds are a different game, one where risk is less courted than avoided. But when the dust settles after big market busts, it's often the bond managers who are still standing. Francis Chou, 52, of Chou Associates Management Inc., is one of those survivors. His $90-million Chou Bond Fund (US$), established in the fall of 2005, soared to the No. 1 spot among 65 funds in the high yield sector with an average annual compound gain of 10.4 per cent for the two years ended Feb. 29, 2008, far above the 1.5 per cent average annual compound gain of peers in the period."

The next shoe to drop in housing
03/15/08   Real Estate
"The credit crunch has finally hit the traditional mortgage market. Investors are now shunning mortgage-backed securities issued by government sponsored enterprises Fannie Mae and Freddie Mac, which have been critical in keeping the real estate market from completely falling apart. Some fear this development will make it harder for people, even those with strong credit histories, to get a home loan."

What Citigroup says isn't what it does
03/15/08   Stocks
"Real estate developer John Wimmer paid Citigroup Global Markets Realty Corp. almost $1 million last year to lock in a 5.6 percent mortgage rate on the refinancing of six commercial properties. At the November closings, Citigroup, citing plummeting demand for mortgage bonds, boosted the rate to 7.123 percent."

F.D.R.'s safety net gets a big stretch
03/15/08   Stocks
"It was an old-fashioned bank run that forced Bear Stearns to turn to the government for salvation on Friday. The difference is that Bear Stearns is not a commercial bank, and is therefore not eligible for the protections those banks received 75 years ago when Franklin D. Roosevelt halted bank runs with government guarantees. Bear was, instead, emblematic of a financial system that grew up over the last two decades, one that largely marginalized traditional banking and that enabled lenders to evade much of the regulatory framework that had also begun during the Roosevelt administration."

Bear Stearns gets emergency funds
03/14/08   Stocks
"Bear Stearns Cos., teetering on the brink of collapse from a lack of cash, got emergency funding from the Federal Reserve and JPMorgan Chase & Co. in the largest government bailout of a U.S. securities firm. After denying earlier this week that access to capital was at risk, Bear Stearns Chief Executive Officer Alan Schwartz said today that the 85-year-old company's cash position had 'significantly deteriorated' in the past 24 hours. The central bank agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement today."

Lenders face still more misery
03/13/08   Accounting
"A closer look at the books of big lenders reveals several weak spots that haven't yet shown up in the financial results. At many banks, bad loans are piling up faster than the amount of money they're setting aside to cover them. Meanwhile, housing lenders booked income on vulnerable exotic loans and mortgage securities before they collected the money - paper gains that may be reversed through writedowns. Plus the values of some troubled loans, which have been trimmed modestly so far and shown up in previous losses, could still be overstated. Why haven't these items hit lenders' bottom lines? Largely because of the ambiguity and complexities of the accounting rules. Banks have a lot of wiggle room when it comes to reporting the profits and values of complex loans and securities. For one thing, their earnings can far exceed the amount of cash coming in the door. At the same time, their losses aren't always based on hard numbers but rather on debatable judgment calls. With the housing market showing no signs of recovery anytime soon, it's becoming clear that some of their assumptions have been overly optimistic."

Wall Street fears a big US bank is in trouble
03/12/08   Markets
"Global stock markets may have cheered the US Federal Reserve yesterday, but on Wall Street the Fed's unprecedented move to pump $280 billion into global markets was seen as a sure sign that at least one financial institution was struggling to survive."

Just think, the fees you could charge Buffett
03/12/08   Buffett
"The news that Warren Buffett is now the world's richest man led to the predictable round of stories about his frugal habits - the cherry Coke, the well-done steaks and the bungalow in Omaha that has been home for 50 years. There is a point here. Like Bill Gates, whom he has toppled from the top spot, Mr Buffett is primarily interested in the business rather than the wealth that results. Money is a means of keeping score rather than an objective in its own right: the fun, Mr Buffett has said, is watching it grow."

The Fed can't fix home prices
03/12/08   Government
"Where are the speculators, vultures and hedge funds? Where are the big money players willing to buy the exotic but still substantial mortgage-backed securities for which markets have ceased? The Fed's liquidity rush seems only to have convinced them the time is ripe for staying on the sidelines. To get to a real solution, speculators and investors need to believe that home prices are hitting bottom, that any mortgage debt they might buy today for 80 cents on the dollar today won't be worth 30 cents tomorrow. Then the vultures will pile in: The transfer of wealth from the overleveraged banks and hedge funds to those who kept cash handy will be shocking, ugly and cathartic -- but it will also be relatively quick. Credit markets will begin to function again. The economy will grow."

Loophole lets bank rewrite the calendar
03/11/08   Accounting
"In its financial statements for 2007, the French bank takes the loss in that year, offsetting it against 1.5 billion euros in profit that it says was earned by a trader, Jerome Kerviel, who concealed from management the fact he was making huge bets in financial futures markets."

Moody's, S&P defer cuts on AAA subprime
03/11/08   Bonds
"Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments. None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg."

Try, try again
03/11/08   Markets
"The U.S. Federal Reserve has come up with yet another way to kick-start the credit markets, if only its innovations would start working already. On Tuesday, the central bank said it is expanding its securities lending operations, allowing big Wall Street firms to borrow for longer periods and, for the first time, exchange triple-A mortgages not backed by Fannie Mae or Freddie Mac for Treasury bonds. That is to say, the Fed will let the big brokerages offload their hard-to-sell mortgage holdings for easy-to-sell Treasury bonds."

Hedge Funds reel from margin calls on treasuries
03/10/08   Markets
"The hedge-fund industry is reeling from its worst crisis in a decade as banks are now demanding more money pledged to support outstanding loans even when the investment is backed by the full faith and credit of the United States."

Morgan Stanley, Lone Star stick taxpayers on defaults
03/09/08   Real Estate
"The public's bill for maintaining foreclosed properties abandoned by lenders and investors may reach as much as $50 billion this year, according to Peter Sepp, vice president of the National Taxpayers Union in Alexandria, Virginia. The U.S. Congress is considering various bills to help cover some of the costs to towns and cities for securing and policing the empty homes, Sepp said."

Investing is about stacking the odds in your favour
03/09/08   Funds
"I go to the office in search of one thing. An asymmetric bet. In other words, an investment or business strategy where, in my judgment, there is limited downside if it doesn't work, and big upside if it does. That is an investment manager's Holy Grail. In searching for such a situation, you won't see an investment professional buying a 'risk-free' investment, other than a government bond. That's because 'risk-free' or principal protected securities, are an asymmetric bet in the wrong direction. The odds are stacked against the purchaser."

Same price, but fewer tax returns
03/09/08   Taxes
"QuickTax Standard for 2007 includes two returns for Canadians with more than $25,000 in income, compared with five returns in previous years." [Consider UFile instead]

Curve balls raise red flags for CRA
03/09/08   Taxes
"When filing your tax return this year, be aware that your past tax filings may have an impact on whether the CRA will accept this year's filing position. Consistency can be a good thing."

Preparing for a 'real estate apocalypse'
03/09/08   Real Estate
"The year has not been off to a great start. In figures released last week, a blustery February knocked existing home sales down by 11 per cent for the month, while residential building permits were down by a significant 47 per cent in January. Growing uncertainty over the U.S. economy, where housing values have plummeted in some states, has also cast a long shadow over the Toronto market."

TFSAs could spawn untaxed pensioners
03/05/08   Taxes
"The Tax-Free Savings Accounts (TFSAs) announced in last week's federal budget could become so popular that within 30 years they could supplant RRSPs and create a generation of senior citizens that pay no income tax at all, says actuary Malcolm Hamilton, worldwide partner with Mercer's, the pension consultants."

Third Avenue Funds Q1
03/05/08   Whitman
"Obviously, I feel good about TAVF's investment in MBIA. The Fund ought to do well under almost any scenario. By any objective standard, the MBIA investments are attractive ones with the insurance subsidiaries deserving of an AAA-Stable rating. Yet, there exists a sense of discomfort due to the dangers of Rating Agency subjective considerations and capricious regulators."

Gates no longer world's richest man
03/05/08   Buffett
"Warren Buffett is the richest man on the planet. Riding the surging price of Berkshire Hathaway stock, America's most beloved investor has seen his fortune swell to an estimated $62 billion, up $10 billion from a year ago. That massive pile of scratch puts him ahead of Microsoft co-founder Bill Gates, who was the richest man in the world for 13 straight years."

Home economics
03/04/08   Real Estate
"Even without lending and borrowing excesses, though, our high rate of homeownership would likely create problems as the economy slows. To recover from recession, economies need prices to fall until they reflect genuine supply and demand. With certain kinds of assets, like stocks, these adjustments take place quickly, sometimes viciously so. Buying and selling houses, though, is a far slower process. The good thing about this is that housing prices never suffer crashes on the scale that you sometimes see in the stock market. The bad thing is that it can take a long time for housing prices to reflect reality. Homeowners, as economists have shown, tend to remain unreasonably optimistic about the value of their homes, and they hate to drop their asking price. As a result, existing-home sales in the U.S. are now at a nine-year low."

Warren Buffett on Squawk Box part 1
03/03/08   Buffett
"Buffett says there's been a lot of de-leveraging, and there's still more to come. In many cases, the de-leveraging is happening at crazy prices. People who were out on a limb are having the limb cut off."

Warren Buffett on Squawk Box part 2
03/03/08   Buffett
"Becky asks why he thinks U.S. now in a recession. He replies he sees lots of indicators, including sales at his businesses and the reduction in people's net worth. He's sure there is a recession, not sure how far it will go."

Warren Buffett on Squawk Box part 3
03/03/08   Buffett
"Joe Kernen asks about recent purchases of Glaxo and Sanofi? Why? Buffett says he made the decision to buy those stocks and that with drug companies he knows less specifically about those companies than, say, a candy company. Hard to make a bet on a specific drug company based on a drug that might be in the pipeline. "If you have a group" of drug companies, you'll "probably do OK." Would he buy a domestic drug company? Yes, but he does like earnings coming from abraod than earnings coming from the United States. Most big drug companies in the U.S. do get a lot of their profits from overseas."

How a bubble stayed under the radar
03/01/08   Markets
"The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world. If people do not see any risk, and see only the prospect of outsized investment returns, they will pursue those returns with disregard for the risks. Were all these people stupid? It can't be. We have to consider the possibility that perfectly rational people can get caught up in a bubble. In this connection, it is helpful to refer to an important bit of economic theory about herd behavior."

Berkshire Hathaway 2007 Letter
02/29/08   Buffett
"Some major financial institutions have, however, experienced staggering problems because they engaged in the "weakened lending practices" I described in last year's letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: "It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine." You may recall a 2003 Silicon Valley bumper sticker that implored, "Please, God, Just One More Bubble." Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower's income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA - house price appreciation - would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight."

Money for old hope
02/28/08   Funds
"Under the normal rules of capitalism, any industry that can produce double-digit annual growth should soon be swamped by eager competitors until returns are driven down. But in fund management that does not seem to be happening. The average profit margin of the fund managers that took part in a survey by Boston Consulting Group was a staggering 42%. In part, this is because most fund managers do not compete on price. Instead, they persuade their clients to select their funds on the basis of past performance, even though there is little evidence to show that this is a good predictor of future success. Nor can investors be sure that the intermediaries who sell the funds - brokers, advisers and bankers - will steer them in the right direction. These middlemen often get a cut of the fund managers' fees, so they have little interest in recommending low-cost alternatives."

Canada's total government fiscal performance
02/28/08   Government
"To enable international comparisons, the OECD publishes National Accounts data for the total government sector. For Canada, the figures include the federal, provincial-territorial and local government sectors, as well as the Canada Pension Plan and the Qu bec Pension Plan. Based on OECD data, Canada's fiscal position is stronger than that of the other G7 countries (United States, United Kingdom, France, Germany, Japan and Italy). *The OECD expects Canada to record the largest budgetary surplus as a share of GDP in the G7 in 2007, 2008 and 2009. *It projects that Canada's total government net debt-to-GDP ratio, which has been the lowest in the G7 since 2004, will continue to decline in future years. *Canada is on track to eliminate its total government net debt by 2021. By doing so, it will be able to count itself among the few OECD countries that are in a net asset position."

Asset growth and stock returns
02/28/08   Academia
"Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks, a subgroup of firms for which other documented predictors of the cross-section lose much of their predictive ability. When we compare asset growth rates with the previously documented determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm's annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of U.S. stock returns."

Dividend tax slides below budget radar
02/28/08   Taxes
"The status quo will hold in dividend taxation until 2010, when a three-year phased adjustment begins. Myron Knodel, manager of tax and estate planning at Investors Group in Winnipeg, illustrated how this will work with an example involving $100 in dividends paid by a bank. The current federal tax rate on dividends means you'd net $85.46, assuming you were in the top tax bracket. By 2012, your net take on the same $100 would be $80.68, a decline of $4.78, or 5.6 per cent."

Walter J. Schloss Q&A 2008
02/28/08   Schloss
"Mr. Schloss started his limited partnership in the middle of 1955. In 1963, he earned the Chartered Financial Analyst designation. Waller's son Edwin joined the partnership in 1973 and the fund changed its name to Walter & Edwin Schloss Associates. Over the period 1956 to 2000, Mr. Schloss and his son Edwin provided investors a compounded return of 15.3% compared with the S&P 500.s annual compounded return on 11.5%."

Dividend growth beyond the TSX 60
02/27/08   Dividends
"The best dividend growth for stocks beyond the TSX 60 can be found in the financial sector - similar to the blue chips of the TSX 60. From 1995 to last July, however, mid-cap financial dividend stocks posted annualized gains of 20.2 per cent, compared with 17.9 per cent for their large-cap financial peers, and 10.8 per cent for the TSX Completion Index. Those figures do not include dividends."

Advice gets interesting
02/27/08   Government
"In the United States, with its plethora of tax-assisted vehicles, from 401 (k) to Individual Retirement Accounts to Roth IRAs, the calculation of where to put what asset to get the best after-tax yield has elicited some debate and a lot of actuarially inclined mathematics. Now it comes to Canada. A few years ago, when the capital gains inclusion rate was reduced the question became pointed: Why put assets that would yield capital gains in an account whose withdrawals would be taxed as interest? Still, it was a two-option universe, subject to asset allocation decisions: bonds inside and stocks outside. TFSAs change that simple calculation. Why not put interest and dividend-paying assets in the TFSA? There's no tax on withdrawals. What about stocks? As with an RSP, there's no potential for deducting capital losses. So the emphasis will be on finding steady performers with low volatility. This is where advice gets interesting is in determining the balance and types assets among all three accounts: open, registered and tax-free."

Canadian budget in brief
02/27/08   Government
"Maintaining strong fiscal management and continuing to reduce debt. Planned debt reduction for 2007.08 is $10.2 billion, and a total of $13.8 billion over the budget-planning period (2007.08 to 2009.10)."

Global investment returns yearbook 2008
02/25/08   Markets
"This year's thematic studies are about momentum, a subject of importance to all investors, whether their investment style favours it or not. We show that momentum profits in equities have been large and pervasive across time and markets, and present findings from the longest momentum study ever undertaken. We also discuss how supply and demand as well as financing mechanisms can work as important multipliers of momentum for real estate and for commodity prices. Our focus throughout is on the practical implications for investors."

Dark days for hedge fund king
02/25/08   Funds
"The steep losses have dealt a major blow to Asness, a University of Chicago-trained mathematician whose investing prowess catapulted him into the ranks of the super-rich, and his firm. Founded a decade ago with fellow Goldman Sachs alumni, AQR now faces the daunting prospect of employee defections, falling management fees, and credit problems."

Dividends: A world of smart yield plays
02/23/08   Dividends
"In the ongoing search for income investments, many U.S. investors are seeking yield instruments overseas. That's because foreign companies are increasingly initiating or boosting dividend payments. As of Feb. 13, the dividend yield on the S&P Euro 350 index was 3.2%, vs. a 2.1% yield for the S&P 500. And it's not just Europe. Stocks in Asia and emerging markets are also increasingly paying dividends."

Miscalculating the risks
02/23/08   Value Investing
"Inside his boardroom, Prem Watsa keeps an unusual artifact: a bronze bust of Sir John Templeton, the 95-year-old legend of value investing. The item was a 50th birthday gift for the chairman of Fairfax Financial Holdings Ltd., but also serves as a source of inspiration. The Templeton principles, after all, underpin much of Fairfax's investment philosophy: Be flexible; search around the world for the best bargains; and above all else, go against the crowd - buy when others are pessimistic, and sell when optimism rules. It's the last of these that led Mr. Watsa - until recently one of the most beleaguered executives on Bay Street - to one of the most stunning investments of his career, and has given him a way to silence his many critics. Fairfax this week disclosed an annual profit of $1.1-billion (U.S.) for 2007, nearly four times what the insurance and investment company had earned in its best year the year before. Much of that was the result of a single, contrarian bet the firm made that the world had got it wrong about risk."

Rising dividends are great
02/22/08   Dividends
"We love dividends. When we're having a bad day, nothing warms our soul like a juicy dividend increase. We're shallow that way. But not so shallow that we can't tolerate some dissension from people who actually have the temerity to argue that dividend increases maybe aren't the best use of a company's capital. And then these same people have the nerve to back up their case with cold, hard facts. When we looked at the title of the Thomson Financial report - "Baby, we got your dividend: What company actions do investors reward most?" - we were certain it would offer a ringing endorsement of our favourite investing strategy: Buying shares of companies that increase their dividends. So imagine our shock when the report told a different story. As you'll see, it doesn't suggest that dividend increases, per se, are a bad thing, but it does indicate that investors should pay attention to more than just the amount of cash companies pay out to shareholders, for dividend hikes can sometimes be a smokescreen for companies that are digging themselves into a hole."

Don't rerun that '70s show
02/22/08   Economy
"Will the next president be the second coming of Jimmy Carter? Given Thursday's economic headlines, full of dire warnings about the return of 1970s-style stagflation, you might think so. Realistically, though, the parallels between the problems facing the U.S. economy now and those of the late-1970s aren't that strong. That's the good news. The bad news is that the economy probably will look similar to, but worse than, the economy that undid the first President Bush. And it's all too easy to see how the next president could suffer a political fate resembling that of both the elder Mr. Bush and Mr. Carter."

Watsa says credit squeeze still in 'early days'
02/22/08   Value Investing
"Fairfax, which owns Canadian and U.S. insurers, said earlier today that fourth-quarter net income tripled to $563.6 million, or $30.15 a share, from $159.1 million, or $8.45 a share, a year earlier. Annual profit more than quadrupled to $1.1 billion, the Toronto-based company said. Fairfax had gains of $705.2 million in the quarter after the company bought credit-default swaps to profit from asset writedowns at U.S. banks. Losses and writedowns among the world's largest financial companies have risen to at least $146 billion after the subprime mortgage market collapsed amid record loan defaults. Watsa, 57, said there are more losses to come."

California exodus turns to stampede
02/22/08   Government
"Based on data from moving companies, California had the second-highest domestic population out-flow of any state in 2005, according to the report, "despite the beautiful weather, beaches, and mountains." The bad news for California is that it faces a $14 billion deficit this year, despite boasting one of the highest tax burdens in the nation. The report, published by the American Legislative Exchange Council shows jobs are not just leaving the country - they are moving from state to state, with the population following. "States are in direct competition with each other for human capital and business investment. State governments that think they can attract jobs and people, and grow their economies, by taxing their citizens at a higher rate than their neighbors are sadly mistaken," said Democratic Arkansas state Sen. Steve Faris, ALEC's 2008 national chairman."

Rich states poor states
02/22/08   Government
"State Winners and Losers, details the migration of thousands of Americans from areas with high tax burdens to places where they can experience greater economic freedom. States with a high propensity to tax and spend are fi nding their most wealthy and productive citizens moving across borders into areas that impose less of a financial burden."

The complete guide to free stock screen tools
02/21/08   Stocks
"There are a growing number of free stock screen tools on the Web, but trying to decide among the many available could be the cause of a headache or two. It would help to have a guide. Hence, the following survey: It describes some of the better packages with the help of reviews and experienced users."

Sensation seeking, overconfidence, and trading activity
02/20/08   Academia
"This study analyzes the role that two psychological attributes - sensation seeking and overconfidence - play in the tendency of investors to trade stocks. Equity trading data from Finland are combined with data from investor tax filings, driving records, and mandatory psychological profiles. We use these data, obtained from a large population, to construct measures of overconfidence and sensation seeking tendencies. Controlling for a host of variables, including wealth, income, age, number of stocks owned, marital status, and occupation, we find that overconfident investors and those investors most prone to sensation seeking trade more frequently."

Subprime loans defaulting even before resets
02/20/08   Real Estate
"During the boom, rapid price appreciation meant borrowers built up home equity quickly. That minimized defaults, since owners could draw from that equity to pay their bills - including their mortgages - through home equity loans. But prices fell starting in 2006,leaving borrowers with less home equity to draw upon when they run into financial problems. Median home prices fell 5.8 percent nationally, and by double digits in many areas. That, along with the deterioration in underwriting, changed the default math. Owners with mortgages worth more than their homes simply began walking away from their homes when costs become unmanageable."

Momentum and credit rating
02/19/08   Academia
"This paper establishes a robust link between momentum and credit rating. Momentum profitability is large and significant among low-grade firms, but it is nonexistent among high-grade firms. The momentum payoffs documented in the literature are generated by low-grade firms that account for less than 4% of the overall market capitalization of rated firms. The momentum payoff differential across credit rating groups is unexplained by firm size, firm age, analyst forecast dispersion, leverage, return volatility, and cash flow volatility."

Why your wallet feels thinner
02/17/08   Economy
"The U.S. Federal Reserve has been slashing interest rates to stave off a recession. One potential risk to that strategy: inflation. The bad news is that prices for many everyday items had already been ticking up, according to data from December 2004 and December 2007 collected by the U.S. Department of Labor. During that period, the Consumer Price Index, which measures the average change in prices over time for a basket of consumer goods and services, grew at a 3% annualized clip. But prices for many everyday items are rising even faster--and that's making everyone's wallet feel a little thinner."

Berkshire becomes largest Kraft shareholder
02/15/08   Buffett
"Buffett, the second-richest man in the U.S., is often mimicked by investors who follow his stock picks. Using that strategy for the past 31 years would have delivered annual returns of about 25 percent, double the return of the Standard & Poor's 500 Index, according to an academic study."

Seth Klarman's talk at MIT
02/14/08   Value Investing
"Many investors lack a strategy that equips them to deal with a rise in volatility and declining markets. Momentum investors become lost when the momentum wanes. Growth investors - who pay a premium for the fastest growing companies - don't know what to do when the expected growth fails to materialize. Highly leveraged investors, like some quant funds in the headlines, were recently forced to sell regardless of value when their methodology produced losses rather than gains. Counting on a government bailout for every market crisis seems a dicey proposition, especially when supposedly impossible events happen on Wall Street every few years. By the time the market drops and bad news is on the front pages, it is usually too late for investors to react. It is crucial to have a strategy in place before problems hit, precisely because no one can accurately predict the future direction of the stock market or economy. Value investing, the strategy of buying stocks at an appreciable discount from the value of the underlying businesses, is one strategy that provides a road map to successfully navigate not only through good times but also through turmoil. Buying at a discount creates a margin of safety for the investor.room for imprecision, error, bad luck or the vicissitudes of volatile markets and economies. Following a value approach won.t be easy for everyone, especially in today.s media-dominated, short-term oriented markets, in that it requires deep reservoirs of patience and discipline. Yet it is the only truly risk averse strategy in a world where nearly all of us are, or should be, risk averse."

Want higher returns? Don't take Prozac
02/14/08   Montier
"Take it from Montier, a well known bear, pessimism is not an easy road, even though it may be a straight one. "Nobody likes a bear," he said. "As a career move bearishness is not a great idea, in a bull market nobody listens and in a bear market nobody will pay you.""

Bill Miller Q4 2007
02/13/08   Miller
"I believe equity valuations in general are attractive now, and I believe they are compelling in those areas of the market that have performed poorly over the past few years. Traders and those with short attention spans may still be fearful, but long-term investors should be well rewarded by taking advantage of the opportunities in today's stock market."

Snow White killed the 'triple-A'
02/13/08   Buffett
"Well, when a company issues a 14 per cent bond when US Treasuries are below 4 percent and it's rated triple-A, we've now seen the cow jumping over the moon."

5 Stingy Stocks for 2008
02/12/08   Stingy Investing
"I look for two qualities when hunting for bargain stocks: they must be cheap and relatively safe. Not surprisingly, it is often difficult to find stocks that are both cheap and safe."

Wall Street losses partners never imagined
02/12/08   Stocks
"Less than a decade after Wall Street's last major partnership went public, stockholders are paying the price for bankrolling the industry's expanding risk appetite. Four of the five biggest U.S. securities firms lost about $83 billion of market value last year, almost 90 percent of their net income since 1999, data compiled by Bloomberg show. That cut the annual average return for Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. during those nine years to 9.7 percent from 16.8 percent. The private partnerships that once dominated Wall Street guarded their capital, used less leverage and limited their risk to trading blocks of stock for clients and shares of companies in mergers, said Roy Smith, a finance professor at New York University's Stern School of Business and a former partner at Goldman Sachs Group Inc. Since raising money from the public, many of the biggest firms have abandoned that caution."

Income 100 Update
02/10/08   Stingy Investing
"Looking for a steady cash flow? We've rated the best Canadian stocks and trusts for income investors. We've assessed 100 income trusts and 100 income-generating stocks for their ability to provide generous income for a reasonable price. The top firms get an A; good ones land a B. Our grades are based on market capitalization, yield (how much they pay out), reliability (how safe is the payout), and value (lots of assets at a low price). Use our grades as a starting point for your own research. Like any investment screen, the Income 100 is intended to help you hit upon a few good ideas that may deserve a place in your investment portfolio."

Patient Capital Q4
02/08/08   Value Investing
"The possibility of faltering earnings in a weakening environment coupled with a whiff of inflation has put market participants in a skittish mood. As a result, investors that were recently very optimistic are now frightened. We view economic contractions as a very normal part of the business cycle and welcome such times as an opportunity to purchase excellent businesses at very attractive prices."

Buffett "huge bull on the U.S. economy"
02/07/08   Buffett
"The second step is just as relevant, given all the nail-biting about whether or not we're in a recession. Hagstrom writes that "if you find yourself discussing and debating whether the economy is poised for growth or tilting toward a recession, whether interest rates are moving up or down, or whether there is inflation or disinflation, STOP! Give yourself a break. Except for his preconceived notions that the economy inherently has an inflation bias, Buffett dedicates no time or energy analyzing the economy.""

Warren Buffett makes news in Canada
02/07/08   Buffett
"Warren Buffett answered questions for almost 90 minutes yesterday during his appearance in Toronto to promote Business Wire's expansion into Canada. We focused on his credit, dollar and economy comments, but he made a lot of other news as well, including a revelation to Canada's National Post newspaper that he made "several hundred million dollars" owning the Canadian dollar, then sold, and now wishes he had kept his holdings in the Loonie."

Business Wire: A conversation with Warren Buffett
02/07/08   Buffett
Business Wire Canada Opening Reception: A Conversation with Warren Buffett (1 Hour 30 Minute MP3)

Can't pay? Just walk away
02/06/08   Real Estate
"Lenders are afraid that borrowers may find it's worth the hit to their credit scores, if they can drastically reduce their housing expenses. Someone with good credit and a $600,000 home in a town with cratering real estate prices could buy a similar house nearby for $450,000, and then let the other $600,000 mortgage go into foreclosure. The stage is set for this kind of thing particularly in California, where huge numbers of buyers used low or no-down deals to buy homes. The trend has even spawned at least one new business, San Diego-based YouWalkAway.com, which for a fee of $1,000 purports to guide clients through the process of ditching their mortgages. It launched in early January, and says it has already signed up 180 clients. California is a bit of a safe haven for these borrowers, since banks that repossess and then sell a foreclosed property for less than the mortgage that was owed on it cannot come after borrowers for the difference - as long as it's the initial mortgage, one that has not been refinanced. So if a borrower owes $200,000 and the bank sells the house for $170,000, the borrower comes out of it debt-free. And for many homeowners, the prospect of becoming debt-free is growing increasingly alluring."

Online brokers: Sizing up your RRSP options
02/05/08   Brokers
"Investors of all types can benefit from an online broker, be they conservative types who prefer bonds and GICs, aggressive stock traders or middle-of-the road types who want stocks, bonds and mutual funds. The challenge is to find the broker that best fits your needs. To that end, Portfolio Strategy has evaluated 13 online brokers to find the best choices in six areas relevant to RRSP investing."

Getting Knocked Down by Prime ARMs
02/05/08   Real Estate
"We've been reading a lot lately about how subprime mortgages have submarined the economy. Lenders and banks have been taken to the woodshed for irresponsibly giving money to home buyers with poor credit just so they could bundle up the mortgages and resell them as toxic residential-mortgage bonds. But, while there's no denying the subprime problem, on closer look it's clear that even prime borrowers were taking on more debt than they could afford. How bad is it? In Arizona, between the third quarters of 2006 and 2007, there was a 902% rise in foreclosures started against homeowners who had prime adjustable-rate mortgages, known as ARMs, according to the Mortgage Bankers Assn. ARMs, whether prime or subprime, are the real culprit in the housing crisis because they've allowed too many people to buy homes with almost no money down, with the hope that they could flip the properties or have rates drop before the loans reset. The rise in prime ARM foreclosure starts isn't isolated to a few states. Nationally, foreclosure starts related to prime ARMs jumped 253% in the third quarter of 2007 when compared to a year earlier."

What would Buffett buy?
02/05/08   Buffett
"How does he do it? Author Robert Hagstrom tried to compile Buffett's key investing strategies in his 1994 best seller, The Warren Buffett Way: Investment Strategies of the World's Greatest Investor. With Hagstrom's book as a source, Standard & Poor's Portfolio Services devised a stock screen that picks companies using criteria similar to those that fit the legendary investor's growth-oriented style. S&P updates this screen on a semiannual basis, during February and again in August. Over the years, the screen has put in a pretty good performance itself. From Feb. 13, 1995, through Jan. 17, 2008, the screen had an annualized return of 14.9%, vs. 8.2% for the S&P 500. In 2007, the screen stocks gained 15.7%, vs. 3.5% for the S&P 500. (All results reflect price appreciation only.)"

Fat tails and nonlinearity
02/04/08   Markets
"If you are involved in financial markets, you have gotten the memo about fat tails by now. But awareness of extreme events is not enough. Thoughtful investors must understand two interrelated aspects of the market. The first is the statistical properties of price movements, including important deviations from the bell-shaped distribution. Academics, risk managers, and quantitative investors have explored this aspect extensively. Researchers recognized decades ago that the distribution of price changes includes fat tails. The second aspect, and one often overlooked or misunderstood, is the mechanism that leads to the statistical imprint. Much of the work on the market's statistical properties is divorced from the propagating mechanism, while traditional theories of market efficiency assume the mechanisms. Crucially, understanding the mechanism provides insight into how and why markets fail."

The law of one price in financial markets
02/04/08   Academia
"It is good for a scientific enterprise, as well as for a society, to have well-established laws. Physics has excellent laws, such as the law of gravity. What does economics have? The first law of economics is clearly the law of supply and demand, and a fine law it is. We would nominate as the second law 'the law of one price,' hereafter simply the Law. The Law states that identical goods must have identical prices. For example, an ounce of gold should have the same price (expressed in U.S. dollars) in London as it does in Zurich, otherwise gold would flow from one city to the other. Economic theory teaches us to expect the Law to hold exactly in competitive markets with no transactions costs and no barriers to trade, but in practice, details about market institutions are important in determining whether violations of the Law can occur."

Housing meltdown
02/01/08   Real Estate
"Brace yourself: Home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms. That's even with the Federal Reserve's half-percentage-point rate cut on Jan. 30 While a 25% decline is unprecedented in modern times, some economists are beginning to talk about it. "We now see potential for another 25% to 30% downside over the next two years," says David A. Rosenberg, North American economist for Merrill Lynch (MER), who until recently had expected a much smaller slide. Shocking though it might seem, a decline of 25% from here would merely reverse the market's spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation."

The dash to trash
01/28/08   Montier
"The US market is not priced for even a shallow recession - let alone a deep one. Investors are piling on the risk by blindly believing that they can tell 'true' growth stocks from the young pretenders - however, history suggests that a monkey throwing darts would generally do a better job! Investors with an ability to hold cash should consider this option. Waiting for the 'fat pitch' may be one of the smartest ways of dealing with the current juncture. For those who have to be invested, discipline will be key. Sticking with a proven process and focusing on the long- term should bring (long-term) rewards. Tilting towards large cap, dividend paying stocks or large caps with the resource to transform cash piles into dividends are likely to be the safest place to hide."

Experience: Walter Schloss
01/27/08   Schloss
"Walter Schloss has lived through 17 recessions, starting with one when Woodrow Wilson was President. This old-school value investor has made money through many of them. What's ahead for the economy? He doesn't worry about it. A onetime employee of the grand panjandrum of value, Benjamin Graham, and a man his pal Warren Buffett calls a "superinvestor," Schloss at 91 would rather talk about individual bargains he has spotted. Like the struggling car-wheel maker or the moneylosing furniture supplier. Bushy-eyebrowed and avuncular, Schloss has a laid-back approach that fast-money traders couldn't comprehend. He has never owned a computer and gets his prices from the morning newspaper. A lot of his financial data come from company reports delivered to him by mail, or from hand-me-down copies of Value Line, the stock information service."

Why we have never used the BSM option formula
01/25/08   Academia
"Options traders use a pricing formula which they adapt by fudging and changing the tails and skewness by varying one parameter, the standard deviation of a Gaussian. Such formula is popularly called "Black-Scholes-Merton" owing to an attributed eponymous discovery (though changing the standard deviation parameter is in contradiction with it). However we have historical evidence that 1) Black, Scholes and Merton did not invent any formula, just found an argument to make a well known (and used) formula compatible with the economics establishment, by removing the "risk" parameter through "dynamic hedging", 2) Option traders use (and evidently have used since 1902) heuristics and tricks more compatible with the previous versions of the formula of Louis Bachelier and Edward O. Thorp (that allow a broad choice of probability distributions) and removed the risk parameter by using put-call parity. 3) Option traders did not use formulas after 1973 but continued their bottom-up heuristics. The Bachelier-Thorp approach is more robust (among other things) to the high impact rare event. The paper draws on historical trading methods and 19th and early 20th century references ignored by the finance literature. It is time to stop calling the formula by the wrong name."

ROIC patterns and shareholder returns
01/25/08   Academia
"Three main points emerged from the analysis of ROIC patterns. First, analysts need to consider the lessons of history when modeling rather than approaching each model as unique. Analysts should view the experience of a large sample of companies as a rich reference class. Second, the empirical evidence shows ROICs tend to revert to the mean, a level similar to the cost of capital. Randomness plays an important role in the mean-reversion process. Finally, some companies do deliver persistently high or low results beyond what chance would dictate. Unfortunately, pinpointing the causes of persistence is a challenge."

The worst market crisis in 60 years
01/25/08   Markets
"The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years. However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years."

Societe Generale reports EU4.9 billion trading loss
01/24/08   Crime
"Societe Generale SA said bets on stock index futures by a rogue trader caused a 4.9 billion-euro ($7.2 billion) trading loss, the largest in banking history. Jerome Kerviel, 31, was the trader responsible, the Paris- based bank said today. Societe Generale plans to raise 5.5 billion euros from shareholders after the loss and subprime- related writedowns depleted capital. The Bank of France, the country's banking regulator, is investigating the alleged fraud."

Generational housing bubble
01/23/08   Real Estate
"Communities in the United States face an historic tipping point. After decades of stability, we expect the ratio of seniors to working-age residents to grow abruptly, increasing by roughly 30% in each of the next two decades. We also expect that this change will make many more homes available for sale than there are buyers for them. The exit of the baby boomers from homeownership could have effects as significant as their entry, though with different consequences."

Unintended consequences
01/23/08   Economics
"One year from today, a new president moves into the White House. This president will be eager to carry out any number of plans . including, surely, plans to help the segments of society that most need help. Extending a helping hand, after all, is one of the great privileges and responsibilities of the presidency. But before charging ahead with such plans, the new president might do well to first ask him- or herself the following question: What do a deaf woman in Los Angeles, a first-century Jewish sandal maker and a red-cockaded woodpecker have in common?"

Why it's fair weather for Fairfax investors
01/21/08   Value Investing
"There was one reason Fairfax, a holding company with subsidiaries in the property and casualty and re-insurance business, landed in the company of the "recession-proof" fast-food restaurant and the seemingly unstoppable value investment vehicle run by the Oracle from Omaha Mr. Buffet: Credit Default Swaps. Analysts are twigging to Fairfax's portfolio of credit default swaps, with a "notional" value of US$18.5-billion against a purchase price of US$343-million, perhaps the perfect hedge against the economic turmoil that led to yesterday's dramatic stock market sell-off."

Pyramids crumbling
01/19/08   Gross
Bill Gross, Jimmy Stewart, and banking

Ambac cut to AA
01/19/08   Markets
"Ambac Financial Group Inc., the second-largest bond insurer, was stripped of its AAA credit rating by Fitch Ratings after the company abandoned plans to raise new equity. Ambac Assurance Corp. was lowered two levels to AA and may be reduced further, New York-based Fitch said yesterday in a statement."

Do cholesterol drugs do any good?
01/18/08   Health
"Yes, Wright saw, the drugs can be life-saving in patients who already have suffered heart attacks, somewhat reducing the chances of a recurrence that could lead to an early death. But Wright had a surprise when he looked at the data for the majority of patients, like Winn, who don't have heart disease. He found no benefit in people over the age of 65, no matter how much their cholesterol declines, and no benefit in women of any age. He did see a small reduction in the number of heart attacks for middle-aged men taking statins in clinical trials. But even for these men, there was no overall reduction in total deaths or illnesses requiring hospitalization - despite big reductions in "bad" cholesterol."

Homebuilding: Sharpest drop in 27 years
01/18/08   Real Estate
"Housing starts and building permits plunged in December much more than expected, resulting in a full-year decline in new home construction that was the sharpest drop in 27 years. And there is little sign things will get better soon. According to government data released Thursday, the full-year total for building permits posted the biggest drop in 33 years. The sharp dropoff in building is one of the reasons that many leading economists are growing increasingly fearful that an economic recession is near, if it hasn't already struck. The pace of housing starts in December dropped 14 percent to a seasonally-adjusted annual rate of 1.01 million in December, according to the Census Bureau report."

Appraiser exposes toxic debt tie to inflated values
01/18/08   Real Estate
"Perez valued eight unfinished properties at the Deere Lofts development on April 2. Some were missing ceilings, cabinets or sinks. Each had been bought the previous week for $90,000 to $167,000. Perez said they were worth $177,000 to $330,000, according to the U.S. Attorney's Office in Atlanta."

Why people believe weird things about money
01/14/08   Behaviour
"Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000? Assume for the moment that prices of goods and services will stay the same. Surprisingly -- stunningly, in fact -- research shows that the majority of people select the first option; they would rather make twice as much as others even if that meant earning half as much as they could otherwise have. How irrational is that?"

Inside a stock fraud
01/13/08   Crime
"His signature moves involved purchasing public shell companies and manipulating their shares in what the industry calls a "pump and dump" operation. The scheme, one of the oldest forms of stock market fraud, is a favourite of con artists. In Mitton's version, he would find a shell company, set up a personal network of buyers and sellers, release "news" and then direct the network's trading in company shares. The idea was to artificially create investor interest and trigger a jump in the company's stock price. Network players would unload any shares they held and pocket the profits before regulators, brokerages and average investors realized anybody had duped them. In the aftermath, Mitton usually left a trail of misery for victims who suffered everything from financial ruin to family breakups and humiliation."

Lennar's new homes fetch 60% less
01/10/08   Real Estate
"Lennar Corp.'s November sale of 11,000 properties in eight states set a price that may mark the bottom for the U.S. housing market: 40 cents on the dollar."

Online upstart stands out
01/10/08   Brokers
"An upstart online brokerage has bested the bank-owned competition in addressing one of the biggest complaints investors have about stock trading. Questrade Inc. will announce on Monday that clients can hold U.S. dollars in their registered retirement accounts. The industry norm is to allow only Canadian dollars in registered accounts, which means costly currency conversion charges are often unavoidable for investors who buy and sell shares listed on U.S. exchanges."

Robot Portfolio displayed human frailties
01/08/08   Dorfman
"Dorfman named his company Thunderstorm Capital in honour of those stocks that rise in popularity after a "frightening but temporary event that usually passes without lasting damage." The Canadian stocks we selected using his method each had a market value of more than $500 million. They had reported more than a penny of profit per share in the previous four quarters, and had more shareholder equity than debt. Their share price was low relative to recent earnings."

Do we really know what makes us healthy?
01/07/08   Health
"The dangerous game being played here, as David Sackett, a retired Oxford University epidemiologist, has observed, is in the presumption of preventive medicine. The goal of the endeavor is to tell those of us who are otherwise in fine health how to remain healthy longer. But this advice comes with the expectation that any prescription given - whether diet or drug or a change in lifestyle - will indeed prevent disease rather than be the agent of our disability or untimely death. With that presumption, how unambiguous does the evidence have to be before any advice is offered?"

Dirty deeds
01/05/08   Real Estate
"Still, even with novel and aggressive tactics, the path to resolution for many properties in Buffalo can be tortuous and protracted. A house at 1941 Niagara St. - one of dozens of properties that Cooper examined as a graduate studenthas yet to see its final chapter, though it may be close. In 1998, Elizabeth M. Manuel obtained a $34,500 mortgage on the property from IMC Mortgage (since acquired by Citibank). By 2002, the loan had been sold into a securitization trust administered by Chase Manhattan (now JPMorgan Chase) as trustee. It also went into default, and Chase began foreclosure proceedings. In a court filing, Manuel (who could not be located for comment) said she left the home while the foreclosure action was pending. More than five years later, though, the title remains in her name. The house, although still standing, has become a fire-gutted wreck. In May 2007, Nowak issued a default judgment against Chase for $9,000. But these cases can be notoriously difficult to untangle. Thomas A. Kelly, a spokesman for the bank, notes that Chase sold its trustee business to the Bank of New York Mellon (BK) in October, 2006, and couldn't locate anyone at Chase able to comment. But he reiterates the industry view that Chase can't be held responsible for maintaining a property it never owned. He acknowledges that if a home didn't seem worth taking as collateral, the bank may have made a decision to "just walk away." The value of 1941 Niagara, estimate city assessors, is $4,500, of which $4,300 represents the value of the land. The home, Cooper says, is slated for "imminent" demolition."

Canadian Discount Broker Commissions Updated
01/04/08   Stingy Investing
"Our list of the commissions charged for online trades by Canadian discount brokers."

Upside/downside calculator now with 2007 data
01/03/08   Stingy Investing
"Select a portfolio composed of up to 11 major asset types, then pick start and end dates. The calculator tells you how much you would have made or lost."

The match king
01/01/08   Crime
"If Birgitta is the patron saint of Europe, Kreuger was the patron saint of sinners; he was arguably the most brilliant and ambitious swindler who ever lived. In the first three decades of the 20th century, he built up an industrial empire founded on the most humble of innovations, the Swedish-made safety match, that lit a fire of speculative excess around the world creating, then burning through, fortunes that would be measured now in the billions."

The Top 200 Canadian Stocks for 2008
01/01/08   Stingy Investing
"This is the fourth annual MoneySense Top 200 and we are pleased to say that connoisseurs have dined out very well on our past reviews. In each previous edition, we picked what we call All-Around All-Stars - stocks that score well on both our growth and value tests. Our All-Stars have consistently produced double-digit returns. The 2006 team achieved average returns of 16%, while the 2005 All-Stars gained 38%, and the 2004 squad soared an amazing 58%. An RRSP investor who put $10,000 into the 2004 picks and rolled his or her gains into the new All-Star team each subsequent year would now have $25,200. And those results don't include the generous dividends that we picked up along the way."

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