Previous Columns
8:30 AM EST, Friday, August 3, 2007: I would be a lot richer if I had figured this out ten years earlier. I'd been playing around with the idea for the past week. Then today Wall Street Journal headline triggered it. The headline read "Hedge Funds That Predicted Home-Loan Woes Cash In." I knew about these woes eons ago. But I didn't systemically pursue the investment implications. My idea in publishing this chart regularly (maybe even every day) is that it will highlight sectors I should do trolling in for things to buy or things to sell. If I can find a sector early enough I stand to make huge gains quickly -- just as many of the hedge funds did this year. The Journal today talks of hedge funds rising 60%, 150% and 240% this year. This is not a heat map. That's a diagram/chart (whatever) looking backwards. I'm trying to look forwards to predict, not to report.

* Vanguard's top performing fund this year is its Emerging Markets Index (VEMAX), which is up 20.9% so far this year and which I've recommended repeatedly.
** Commercial buildings are now too pricey.
*** Consumers pulled money out of their homes by refinancing mortgages. That is over. Hence, consumer spending will drop.

I put my name and a link on the table because I figured everybody and their uncle will forward this table to their friends. I wanted their friends to be able to get to my column. (Readers bring feedback.)

How deep is the sub-prime crisis? From reader Steve Pedian:

As I analyze the current credit problems, I am reminded of Junk Bonds in the 1980s. Although unproven over a complete economic cycle, newly issued junk bonds were hailed as a safe investment that provided a very attractive return to investors. By 1990, however, the concept of newly issued junk bonds had been exposed as seriously flawed, defaults reached record levels, and the prices of many issues plunged. Historically many financial-market innovations have gained widespread acceptance before being exposed as ill conceived.

In the early 1980s deregulation enabled thrifts to expand into new and riskier areas of lending. Further, thrifts were not required to value their investment portfolios at market prices; they could continue to report high net income regardless of large and growing unrealized losses on their junk bond portfolios. The largest thrift owners of junk bonds: Columbia Savings and Loan, CenTrust S & L, Imperial S & L, Lincoln S & L, and Far West Financial Corp. were insolvent or on the brink of insolvency by the end of 1990. By 1990 a number of leading insurance companies had to take multimillion dollar write-offs on their junk bond investments and some teetered on the edge of insolvency. The point I am trying to make is that know one knows how far the current credit problems will flow. As the old saying goes, "You can't tell who is swimming naked until the tide goes out."

.Lessons from credit disasters past. FromBusiness Week by Michael Mandel (who's a really top-notch economist).

The subprime mortgage market is toast, at least for the foreseeable future. And now the turmoil at American Home Mortgage Investment Corp.—which made loans to home buyers with decent credit—suggests that the troubles are spreading to the broader mortgage market. Fearing the worst, investors are nervously demanding higher rates for bonds from corporations with no direct subprime exposure. But the history of the past 20 years indicates that the subprime debacle, as spectacular as it is likely to be, won’t knock out the broader flow of credit in the economy. Since deregulation took hold in the 1980s, the U.S. has developed a financial system with a high degree of redundancy. Worthy corporate and individual borrowers have more than one avenue for raising funds. The financial system has become like the Internet: able to reroute credit around damaged sections with relative ease.

The Pain Moves Beyond Subprime. FromBusiness Week, also.

The debt and leveraged-buyout markets have stalled, and more trouble lies ahead by Matthew Goldstein and David Henry

The flu in the financial sector has sapped the U.S. stock market of more than $200 billion since the start of the year. The question on investors' minds is: How far will it spread?

On July 31 the stock market resumed a downdraft that had begun a week earlier, and once again bad news from a financial company triggered the sell-off. Shares of American Home Mortgage Investment (AHM) plunged 88% after the Melville (N.Y.) lender to homeowners with decent credit histories warned that it's facing serious liquidity issues and may be forced to close. For the year, the widely followed KBW Bank Index of the 24 largest lenders has fallen 10%, caused mostly by the meltdown in the subprime mortgage industry. And because financial shares make up 20% of the Standard & Poor's 500-stock index—its biggest component—the pain has spread. Without them, the S&P would have been up 5.6% in 2007 through July instead of the 2.6% it logged.

Yet as challenging as conditions have gotten for financial-services firms, signs point to even more trouble in the months ahead—trouble that may continue to weigh on the broader equity market.
Financing at Risk

Subprime woes have moved far beyond the mortgage industry. Already, at least five hedge funds have blown up. The latest worry is that a recent slump in the markets for corporate loans and junk bonds will deepen, jeopardizing the financing of leveraged buyouts, a big profit driver for investment banks. What's more, fears are growing that banks may be on the hook for some of the $300 billion in loan commitments they've made for buyouts already in the pipeline. The mood has gone so somber that derivatives traders are betting that bonds issued by major investment banks will tumble to near junk territory. Goldman Sachs Group (GS) and Lehman Brothers (LEH) are being seen as no more creditworthy than casino operator Caesars Entertainment, according to an analysis of derivatives trades by Moody's Credit Strategies Group.

The situation probably isn't that bleak for the nation's biggest investment banks and brokers. The major rating agencies, Moody's Investors Service (MCO) and Standard & Poor's (which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP)), are sticking with their credit ratings for most financial institutions. Peter Nerby, a Moody's senior vice-president, says investment firms are good at managing risk and have ample resources to endure. "The key to risk management is avoiding body blows and big shocks, and that means staying very liquid," he says.

Even so, dark clouds loom over Wall Street. Nearly two dozen major financings for pending deals have stalled out, including already postponed issues for the buyouts of Chrysler Group (DCX) and General Motors' Allison Transmission (GM).
Falling Victim to the Turmoil

Wall Street is banking on the credit market improving in September after big institutional investors return from summer vacations. But that's hardly a given. Says Martin Fridson, CEO of Fridson­Vision, a high-yield-debt research firm: "Investment bankers and [private equity] sponsors say: 'Once we get past Labor Day, everything is going to be fine. We just need time for everyone to cool off a little bit, and then we'll be back in business.'" But given the new problems in the markets, he adds, "you can't have great confidence in that."

If debt investors remain wary, banks may have no choice but to reprice loans and junk bonds at higher interest rates—and eat the difference. Deutsche Bank (DB) analyst Michael Mayo estimates that lenders could lose as much as $6 billion for this reason alone.

There's a good chance that some pending buyouts simply won't get done, analysts say. That would be bad for investment banks for another reason: They collect their mergers-and-acquisitions advisory fees only after deals are completed. In the first half of 2007, private equity firms paid a record $9.6 billion in investment banking fees, a 35% jump over the first six months of 2006, according to M&A tracker Dealogic. Now, Wall Street firms are facing the prospect of some of those revenues drying up. Says analyst Brad Hintz of Sanford C. Bernstein: "The Street faces an earnings headwind as it enters the second half of 2007."

The turmoil in the credit markets, meanwhile, is likely to continue to claim new hedge fund victims both in the U.S. and overseas. Two big Bear Stearns (BSC) hedge funds imploded in June, and a third ran into trouble in late July. Meanwhile, the $11 billion Raptor Global Fund, managed by James Pallotta, posted a one-month loss of 9%, while two hedge funds run by Australia's Macquarie Bank were off 25% this year. And Sowood Capital Management is throwing in the towel. The onetime $3 billion fund lost nearly half its value in recent months after making bad bets on "credit spreads"—the difference between the yields on Treasurys and corporate debt.
'Too Much Liquidity'

The ultimate worry is that the trouble in the junk-debt markets will spread to the traditional corporate bond market and create a full-fledged credit crunch that would threaten the economy. That scenario may be unfolding. Issuance of investment-grade corporate bonds fell 72% in July from June's level and 34% from July, 2006, according to Dealogic. And some say the subprime-mortgage and leveraged-loan markets are harbingers of wider credit troubles. Greg Jensen, co-chief investment officer for money-management firm Bridgewater Associates, wrote in a July 31 client note: "Both problems are just the symptoms of…a significant financial fragility built on too much liquidity for too many years." Adds Leslie Rahl, president of Capital Market Risk Advisors in New York and former co-head of Citibank's (C) derivatives group: "Nothing stays rosy forever. We've been in a rosy world, with credit spreads at historically tight levels for some time now. But we seem to be leaving it."

The blowup at American Home is a reminder that the mortgage market remains a major threat as well. American Home's customers, after all, were borrowers with generally good credit histories—an indication that the mortgage mess is no longer confined to risky subprime borrowers. Through the rest of this year and into next, a raft of adjustable-rate mortgages will begin adjusting to higher interest rates. The higher monthly payments could squeeze even borrowers with good credit histories, leading to a new round of mortgage defaults.

All this could mean more pain for the financial sector—and for the broader stock market. Warns Bradley Golding, a managing director at Christofferson, Robb & Co., a money manager that invests in bonds: "The stock market has not caught up to the severity of the situation."

Can you make a fortune in commodities? Remember the hedge fund that lost billions betting on natural gas to rise, when it actually fell? I've never felt I could gamble on one commodity. There are two "gotchas." Like corn is in high demand because of ethanol. Its price should rise. Right. No, wrong. Its high prices convinced farmers to plant more. And the price fell, down 18.6% this year. Another approach is to buy a fund which buys a basket of commodities. (Remember my old adage: the only free lunch in investing is diversification). I am in one commodities fund. Last year it was flat. And I was disappointed. This year it's up 13.17% so far. And I'm happy.

Time for a trip out west -- really west. From today's Sydney Morning Herald:

The historic Western Australian town of Kalgoorlie will play host to hundreds of mining executives and investment types next week as the annual Diggers and Dealers talkfest kicks off.

Kalgoorlie (green arrow) is a big gold mining town in Western Australia, a state that's several times larger than Texas and even more remote.

In its 15th year, Diggers 2007 will be the largest event in the forum's history, with 1700 delegates descending on Kalgoorlie's Goldfields Arts Centre.

This year's forum has a golden tinge about it. Well-renowned gold bull and former Newmont Mining Corp president Pierre Lassonde is making the trip from the United States to officially open the event.

The forum will also hear presentations from 18 gold-focused companies, including majors Barrick Gold Ltd, Newmont Mining Corp and AngloGold Ashanti Ltd.

Monarch Gold Mining Company Ltd chairman Michael Kiernan, who has attended 12 Diggers' forums to date, said the event was a perfect venue for networking

"I always love to bump into guys I haven't seen for 100 years, have a couple of tinnies and chat," Mr Kiernan told AAP.

"It's personal networking, commercial networking, making sure the company is in the public eye and I always look from a mergers and acquisitions point of view, like a little piranha."

While Mr Keirnan will be singing the virtues of his gold play Monarch, all eyes will be on his takeover battle involving his other company, Territory Resources Ltd, for Consolidated Minerals Ltd.

ConsMin's presentation on day one is sure to draw a crowd.

The managing director of gold explorer Apex Minerals NL, Mark Ashley said the event would allow his company to speak to other operators in the Eastern Goldfields of WA about consolidation opportunities.

"It certainly brings a lot of people that you don't see during the year together," Mr Ashley said. ...

When it's time for delegates to unwind from a day full of talking, they can wet their whistle at one of Kalgoorlie's two biggest pubs, the Exchange or the Palace, which have stocked up on staff and beer to accommodate the influx.

Kalgoorlie's brothels are almost as famous at the town's rich mining history, with Langtrees adding a couple of extra girls for the three-day event.

"We'd normally run five to six (girls) and I've got a couple of extra girls coming up for the event," Langtrees Kalgoorlie manager Sharon Hallam said. ...

Diggers and Dealers runs from August 6-8.

Progress in Iraq: WASHINGTON, Aug. 2 — Defense Secretary Robert M. Gates said Thursday that he was discouraged by the resignation of the Sunnis from Iraq’s cabinet and that the Bush administration might have misjudged the difficulty of achieving reconciliation between Iraq’s sectarian factions.

Apple's hot new technology
Apple Computer announced today that it has developed a computer chip that can store and play high fidelity music in women's breast implants. The iTit will cost between $499.00 and $699.00 depending on speaker size.

This is considered to be a major breakthrough because women have always complained about men staring at their breasts and not listening to them

80% of women are against marriage. Why? 13 Reasons:

1. Men are like Laxatives ..... They irritate the crap out of you.

2. Men are like Bananas. . The older they get, the less firm they are.

3. Men are like the Weather . Nothing can be done to change them.

4. Men are like Blenders You need One, but you're not quite sure why.

5. Men are like Chocolate Bars .... Sweet, smooth, and they usually head right for your hips.

6. Men are like Commercials ....... You can't believe a word they say.

7. Men are like Department Stores ..... Their clothes are always 1/2 off!

8. Men are like Government Bonds .... They take soooooooo long to mature.

9. Men are like Mascara . They usually run at the first sign of emotion.

10. Men are like Popcorn ..... They satisfy you, but only for a little while.

11. Men are like Snowstorms .... You never know when they're coming, how many inches you'll get or how long it will last.

12. Men are like Lava Lamps ... Fun to look at, but not very bright.

13. Men are like Parking Spots All the good ones are taken, the rest are handicapped.

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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