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9:00 AM EST Monday, April 14, 2008: Is blood flowing in the streets? Has the market reached bottom? Is now the time to jump back in?

Are investors dumping their shares irrespective? One theory on picking a stockmarket bottom is that investors have to be panicking, throwing stocks out the window... blood flowing in the streets. Personally I don't believe we're there yet. In my opinion the fall in stockmarkets this year -- Dow is down 7.1%, NASDAQ 14% this year. Russell 2000 10% -- is not sufficient to allow for the economy's weakness -- yet. Bearish sentiment is not big enough. When everybody is a bear, that's when your know it's the bottom.

Moreover, everyone else's attempts to pick market bottoms recently have failed. Check out all the millions lost on pumping money into saving the financials.

Our big "problem" is that many of us have a little money we'd like to see earn more than the miserable 2% it's getting in banks and money market funds. We're getting itchy. Resist the itchiness. 2% and 100% capital preservation is far better than the alternative -- further capital losses. When in doubt, stay out and play tennis (or golf, if you must).

And then there's the economy. How bad is it? I refer you to this piece from the weekend's Economist (emphasis added):

America's economy is in recession. Don't expect a quick recovery

IT MAY not be official but it is increasingly obvious: America's economy has slipped into recession. The latest labour-market figures—a jump in the unemployment rate to 5.1% and the loss of 98,000 private-sector jobs in March, the fourth consecutive month of decline—point to a shrinking economy. So do surveys of manufacturing and services. So does Ben Bernanke, chairman of the Federal Reserve. On April 2nd he told a congressional committee that output was unlikely to “grow much, if at all, over the first half of 2008 and could even contract slightly.”

The official judges of American downturns—a group of academics at the National Bureau of Economic Research (NBER)—define a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.” (Contrary to popular belief, recession does not require two consecutive quarters of falling output.) Though the NBER's wonks will not pronounce for many months, their criteria look increasingly likely to be met.

The question now is: what kind of recession will this be? Shallow or deep; short or long? So far, it seems remarkably gentle, given that many think America is suffering its worst financial shock since the Great Depression. Since December the economy has shed an average of almost 80,000 jobs a month. In most recessions a rate of 150,000-200,000 is normal.

To be sure, this downturn has only just started. The labour market will surely worsen as firms cut back in the face of weaker consumer spending. But a buoyant world economy is still boosting American exports; a fiscal stimulus is on the way; real interest rates are around zero and likely to fall further; and, with the rescue of Bear Stearns, the Fed has given an implicit guarantee to Wall Street. So few forecasters expect outright slump. A liberal enough loosening of fiscal and monetary policy can stop recession turning into depression, and American policymakers have left little doubt that they will use their recession-fighting weaponry freely.

More controversial is the question of how long the weakness will last. Not very, Mr. Bernanke told Congress. Growth will strengthen in the second half of the year, nourished by lower interest rates and the fiscal package. In 2009, he suggested, the economy would be growing “at or a little above” its trend rate, which the Fed is thought to put at around 2.5%. Many investors seem to agree that the downturn will be short as well as shallow. Share prices have recovered since the Bear Stearns rescue, even as economic statistics have been gloomy. The S&P 500 stockmarket index is around 5% higher than it was a couple of weeks ago and is still only 13% below its all-time high.

Others are more pessimistic. In its latest World Economic Outlook, published on April 9th, the IMF slashed its forecasts for America's economy both this year and next. It now expects GDP to shrink in every quarter of this year. By the fourth quarter the economy will be 0.7% smaller than a year before. (Only three months ago the fund expected a rise of 0.9%.) Nor does the IMF expect 2009 to be much better: GDP will grow, but at well below its trend rate.

Such a dramatic divergence of official economic opinion is rare. And it matters. Recent recessions, as defined by the NBER, have been both short and shallow: those of 1990-91 and 2001 each lasted eight months, below the postwar average of ten. If the Fed is right, the 2008 recession may be shorter and shallower still. That would be remarkable, given the extent of the housing bust and credit turmoil.

If the IMF is right, weakness will last longer this time. America's new president will be elected against the backdrop of a shrinking economy and on taking office will face months of economic malaise. That in turn will imply bigger budget deficits, and redefine next year's big domestic policy debates: whether to roll back George Bush's tax cuts for the wealthy, for instance, and how ambitiously to reform health care. It could fuel protectionist and populist sentiment, particularly since Americans are already unusually fed up. A new CBS/New York Times poll finds that eight out of ten people think the country is “on the wrong track”, the most since the question was first asked in 1991.

The hangover's duration will depend on many things, from the strength of foreign economies to the degree to which American firms cut jobs and investment. But top of the list, given the recession's origins in the property bust and the credit crunch, are the fate of the housing market and the resilience of consumer spending. On both counts, the odds are against catastrophe but on a lasting headache.

By many measures the news from housing is still getting grimmer. Housing starts are at less than half their peak, and builders are continuing to cut back. Although this has begun to reduce the stock of unsold new homes, the frailty of demand means that supply still vastly outweighs sales. At 9.8 months' worth of sales, the stock is at a 26-year high. The official overhang of existing homes (which excludes those repossessed) is not much lower. The excess of supply over demand means that the fall in house prices is accelerating. According to the S&P/Case-Shiller index, house prices are 13% off their peak. They fell at an annual rate of 25% in the three months to January.

The drop in house prices so far has left some 9 million people, or 10% of all those with mortgages, owing more than their houses are worth. Among all mortgage borrowers, 6% are behind on their payments; among subprime borrowers, 17% are in arrears. Lenders are already foreclosing on more than 1m homes. The pessimists expect these figures to climb much higher, adding to supply and further depressing prices.

In the short term that is likely. But there are some signs of hope. Demand seems to have stabilised: since November total home sales have been running at an annualised rate of 5m or so (see chart 1). Lower prices have made houses a bit more affordable. And government action may help to ease the drought of mortgage finance stemming from the collapse of the subprime market and the contraction of the market for large (“jumbo”) mortgages, and to limit foreclosures.

At the height of the housing boom in 2006, non-traditional loans, such as subprime and jumbo mortgages, backed nearly 40% of home sales. Some $750 billion of financing disappeared as they shrank. Fannie Mae and Freddie Mac, America's government-backed mortgage behemoths, will fill part of that hole. The Bush administration recently announced changes to these institutions' capital rules, to let them buy up to an extra $200 billion of mortgages. Political momentum is also building to prevent a surge of foreclosures. For now Congress is debating some modest tax incentives. But a more ambitious idea is gaining support: to allow the Federal Housing Administration to refinance troubled mortgages at a discount.

Despite these hopeful signs, house prices will continue to fall until the excess inventory is worked off. Even the cheeriest analysts expect that average house prices will continue to fall this year. Worse, house-price deflation is only the first element of a quadruple whammy that is thumping American consumers. The other three elements are tougher credit conditions; a deteriorating labour market (with unemployment on the way up and wages slowing); and high commodity prices pushing up the cost of fuel and food.

Weekly private-sector wages rose by 3.6% in the year to March, the slowest pace since mid-2003. Headline consumer-price inflation is likely to have topped 4% in the same period, so for many real pay is falling. Economists at Goldman Sachs reckon that consumers' real discretionary cashflow—their income plus any new credit minus debt service and spending on essentials—has been shrinking since late last year.

Faced with all this, no wonder Americans are glum. The forward-looking bit of the Conference Board's measure of consumer confidence is at depths not seen since the recession of 1973. Indicators of financial stress outside housing, such as delinquencies on car loans and credit cards, are rising. And consumer spending, after years of resilience, has finally cracked. Not all economists share the IMF's view that spending is actually falling, but none doubts that it is at best barely growing. Because it makes up 70% of total demand, its feebleness does much to explain why the economy has tipped into recession.

On all four counts—house prices, credit, the labour market, and fuel and food prices—the consumer's position is likely to worsen in coming months. Granted, the imminent fiscal stimulus should help. Between early May and mid-July $117 billion will be paid out in tax rebates. The average American household with two children will get a cheque from Uncle Sam for up to $1,800 and will spend at least some of it.

Unfortunately, most of the forces dragging down consumer spending are likely to persist long after the cheques have been banked. Even with stronger exports, growth is likely to be too sluggish to raise incomes by a lot or offer much support to employment. Looser monetary policy will cushion but not avert financial deleveraging. Lending standards are usually tight for years after credit busts, not months. And by most estimates less than half the likely losses in America's financial sector have been written down. Meanwhile, lower house prices will reduce both homeowners' wealth and their potential collateral.

Even when house prices eventually stop falling, they will not suddenly soar. After years of tapping rising housing wealth to finance their consumption, Americans will need to build wealth the old fashioned way, by saving more. At 0.3%, the household saving rate is above its all-time nadir, but not by a lot (see chart 2).

No one knows by how much, or for how long, America's economy will be weighed down. The IMF's gloom is based in part on its reading of history. An analysis by the fund of post-war housing busts in rich countries, written in 2003, suggests that crashes typically last about four years and are often accompanied by banking crises. Economies end up 8% smaller, on average, than they would have been had they carried on growing at pre-crunch rates. Perhaps this time will be different, and the hangover will soon be gone. But given the scale of America's housing binge and of the financial crisis the bust has spawned, that seems unlikely.

Chase your customers and potential customers: Running your own business? Afraid of the downturn? Don't be. There is good news: First, your competitors are cutting back -- firing staff, reducing inventory, etc. Second, there are still customers but you need to become more aggressive -- find them. Don't wait for them to find you. Get on the phone. I have several vendors whom I've contacted for stuff - windows, carpentry, etc. None have called me to close the sale! And then there's the Internet. I have a bunch of friends who -- believe it or not -- are still resisting putting up a web site. I say to them, "But you'll sell more." They resist. Meantime, I hear the head of Niemann Marcus on CNBC this morning saying that his Internet business is booming and half of it "comes from outside our core trading area."

Paying your April 15 tax bill: Most brokers will now lend against your locked auction rate securities. But you need to check the terms: Some will lend you money but they have the right to call the loan in full at any time or perhaps in six months, e.g. before your securities are redeemed. Others will lend but demand repayment only when the securities are redeemed. You don't want your broker demanding his money back before you get yours. If he does, he'll sell your securities at a loss and you'll be screwed. I understand that UBS will now lend 100% of the par value of your ARPS. They'll lend a libor +50bps. non recourse. According to one reader, UBS was able to collateralize the other 50% with Treasurys from their FDIC bank in Utah. Previously they would only lend 50%. For more, see www.AuctionRatePreferreds.org.

Cash is king. Where is your cash? Increasingly I don't like many money market and bond funds. I increasingly fear what they contain. As I've harped on a thousand times, before you trust your broker and his fund, CHECK, CHECK, CHECK. I was reminded of this with a piece in Friday Wall Street Street which began:

Schwab Fund Pitched Safety, Courted Danger
YieldPlus Turns Toxic After Move to Embrace Mortgage-Backed Paper

The mortgage rout has laid waste one of discount broker Charles Schwab Corp.'s star mutual funds, with returns falling deep into negative double digits and investor defections.

Schwab YieldPlus, once the company's most popular bond fund, had pitched itself as a safe alternative to cash. But it stuffed mortgage-backed securities into its portfolio to pump up performance, and they have turned toxic. YieldPlus has lost 24% so far this year, while the average so-called ultra-short bond fund is down just 1.9%.

Now investors are suing, alleging that they were misled. The imbroglio is a setback for Schwab's effort to diversify itself beyond collecting volatile trading fees.

Started in 1999, the fund used to routinely beat bond indexes and peers. YieldPlus aimed to offer juicier yields than investors could find in alternatives such as money-market funds. One of its latest strategies was to focus on mortgage-backed securities, which made up half of its assets through February. Some of that paper was underpinned by subprime loans, a tactic that went awry when they started going bad last summer.

"We are very disappointed in the fund" and "in the losses a small percentage of our clients have incurred," Charles Schwab President Walt Bettinger said.

Schwab blames its problems on the credit crunch and says they affect a small part of the company, which is generally performing well. Schwab spokeswoman Sondra Harris said the firm continues to "manage the fund in the best interests of clients." She also said the "allegations of the lawsuit are without merit."

The firm has declined to make the fund's lead manager, Kimon Daifotis, available for interviews for several months, saying he is focused on running the funds. It also cites the lawsuit and a quiet period as its earnings release approaches next week as limiting its ability to comment more fully about the situation.

Schwab YieldPlus began under Mr. Daifotis, and Schwab brokers often advised clients with short-term certificates of deposit to switch in, saying YieldPlus aimed to provide generally steady monthly income with limited interest rate and credit risk.

It was one of the best sellers in the highly competitive fund industry during much of 2007. "Meet with one of the best bond fund managers," said a pitch from a press firm about Mr. Daifotis's visit to New York last August.

Then the credit crunch devastated mortgage-backed paper. YieldPlus took one blow in November when Interactive Data Corp. repriced some of the portfolio's debt downward. The fund's situation has "jaws dropping" among "veteran guys" in the industry, said Don Phillips, a managing director at fund tracker Morningstar Inc.

Investors have compounded Schwab's problems by pulling their money out. The fund's asset base, which peaked at $13.5 billion last year, had by last month dropped to $2.5 billion and by last week, to about $1.5 billion.

The best BlueTooth cellphone headset is cheaper: It's now only $69.99 at eCost.com.

From 93-year old reader and friend in Florida, Bob Bailey
These three Nuns die and when they arrived at the Pearlly Gates St. Peter met them and said before I can let You into Heaven, each of You must answer one question, so for the first Nun He asked "Who was the First Man, and She said Adam, so the Trumpets blared and the Angels sang and the gates opened, then He asked the second Nun,"who was the first woman", and She said Eve, and the Trumpets blared and the Angels sang, and the gates opend, then He asked the third Nun, "what was the first words Eve spoke to Adam", and She said, "Oh, that's a Hard One" and as St Peter was starting to explain, the Trumpets blared and the Angels Sang and the gates opened!!!!!. - Your 93 year old Friend in Florida, Bob Bailey

British news of note.
The Archbishop of Canterbury has finally got his way: British weather has been declared Muslim.

It's either Sunni or Shiite.

The Wal-Mart greeter
A very loud, unattractive, mean-acting woman walked into Wal-Mart with her two kids, yelling obscenities at them all the way through the entrance.

The Wal-Mart Greeter said pleasantly, "Good morning, and welcome to Wal-Mart. Nice children you have there. Are they twins?"

The woman stopped yelling long enough to say, "Hell no they ain't! The oldest one's 9 and the other one's 7. Why the hell would you think they're twins? Are you blind, or just stupid?"

"I'm neither blind nor stupid, Ma'am," replied the greeter. "I just couldn't believe someone would sleep with you twice. Have a good day and thank you for shopping at Wal-Mart."

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