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8:30 AM EST, Tuesday, August 7, 2007:
"The (stock)market can stay irrational longer than you can stay solvent." -- John Maynard Keynes.

What can charts tell us of the trend? This is view of the Dow, charted on a daily basis.

This is a view of the Dow charted on a 60-minute basis.

Looks very different.

As I wrote yesterday, I'm not optimistic for the market until the extent of this credit crisis becomes clear. I suspect strange victims yet to emerge. Yesterday Oneida, dinnerware and flatware maker, had to pull a $120 million bond offering because the credit market were presently frozen.

In misery, there is opportunity.

Early yesterday morning (long before the market opened), I emailed my favorite guru. "What's happening?" I asked.

I think the great stuff you outlined in today's column is exceptionally bullish. I was worried that people weren’t panicking enough, but in the last couple days they seem to be. There’s all the articles you cite. There’s also the fact that people around the office are finally starting to freak out. Finally, there’s the cover of Businessweek with a house on fire. As I said, I like the high quality home builders here.

The good ones, D.R. Horton (DHI), Toll Brothers (TOL) etc.) trade at under 1x tangible book value. This is largely land purchased over the last five years. The value of that land has declined somewhat from the peak, but the value of the blended amount on the balance sheet should not be much below the levels on the book. Buying homebuilders (that don’t go bankrupt) has always paid at these levels over time, though there is certainly going to be a heck of a lot of volatility.

As for bankruptcy, some (perhaps Beazer Homes (BZH), perhaps Standard Pacific (SPF) will go bankrupt. BZH in particular is at risk of tripping its tangible net worth covenant and is under investigation for fraud at its lending business. BZH employees were telling people to lie about their income on mortgage applications. However, the likes of DHI and TOL have debt that is termed out for years (i.e. nothing due) and these businesses tend to generate cash in downcycles (as they liquidate inventory). So, the “smart” ones should have a fair degree of bankruptcy protection and you can get them at very attractive multiples if you take a couple year time horizon.

If they bounce 30%-50%, I run for the hills, but I like them here for now.

What was your last idiocy? When things go bust (like the water to house on the weekend), the logical way to fix the problem is deductive reasoning. Start with one possible cause, then deduce. It's not this. It's that. Etc.

The most effective way of figuring what's wrong is to start with one question: "What was the last thing you did?" This works well troubleshooting computers. Usually it's the last piece of software you loaded, the last file you opened, the last button you pushed that caused the problem. Start your search there.

Carry your bags on -- if you can. Some airlines say you're allowed only one bag. I routinely take two -- a 22" roll-on and a backpack containing my laptop. If you do check them include your contact details in several places. Airlines lose an amazing amount of checked luggage. From a Daily Telegraph (UK) article:

A baggage crisis at Heathrow has led to suitcases being piled up in corridors at the airport, left outside in the rain or sold at auction houses. ...

Heathrow is suffering a continuing crisis because of a chronic shortage of handlers and creaking infrastructure. Last month this led to a backlog of up to 40,000 bags.

BA has even started trucking unclaimed luggage to Milan for sorting. Figures released this week revealed that the national carrier is losing more bags than any other major European airline, with more than 300,000 failing to turn up on carousels at Heathrow between April and June.

An average of 15,000 a month fail to be traced within 48 hours, according to the Association of European Airlines (AEA).

A BA spokesman said that bags that cannot be traced to their owners are sold at auction houses after three months and the proceeds - in the "tens of thousands of pounds" every year - are donated to charity. ...

There is no law governing what should happen to lost luggage. Under the Montreal Convention, an international agreement on airlines' various liabilities to passengers, a limit of £850 compensation can be claimed. The AEA figures for the second quarter this year showed that on every BA Boeing 747 flight carrying 350 passengers, an average of 10 people would not find their bags on the carousel.

Air France and Lufthansa, which both carried three million more passengers than BA during this period, performed better, with one in 62 passengers losing bags.

'Great Unwind' May Be Here. This is from yesterday's Heard on The Street from the Wall Street Journal:

As Problems Spread To Broad Bond Market, Top Brokers Could Suffer

The problems have been gathering for months, beginning with subprime loans and spreading outward. Now Wall Street firms face the risk of a broad bond-market unwind, leaving vulnerable five years of record earnings and stock run-ups.

Investors are worrying about more than just reduced earnings growth. It's the overall uncertainty, they say: The unintended risks of "bridge" loans stuck on balance sheets or even how to value a new set of exotic securities that can't find buyers. This could weigh on Wall Street stocks -- be it Lehman Brothers Holdings Inc. or Goldman Sachs Group Inc. -- for months to come.

Analyst Brad Hintz of Sanford C. Bernstein & Co. predicts "performance will decline" at the top five U.S. brokers for the second half of the year. "The halcyon days," he adds, "may be over for now." Perhaps that's why chatter around some firms suggests job cuts could be coming if conditions don't improve by September.

The worries stretch across a number of areas. In the past few weeks, trading has fallen off to a trickle in some asset-backed bonds, issued at double-A or triple-A ratings. With no bidders lining up, valuations and ratings have been left uncertain. Investors are also finding it harder to trade some risky high-yield, or "junk," bonds and leveraged loans for borrowers with high debt levels.

The pullback in liquidity has been made worse by the usually slow summer-vacation season. That has hurt the chances Wall Street securities firms can offload their bridge-financing commitments for pending private-equity deals, which have soared this year.

For months, analysts and bankers had predicted that rising debt levels for hedge funds, buyouts and Wall Street dealers might eventually snap, leading to a "great unwind" of lower prices and forced selling. Now, some say, the process has begun.

For the Wall Street firms, analysts say the current crunch could mean cutbacks in lucrative fees for financing and advising on fewer private-equity buyouts, and the risk of losses on loans to finance hedge-fund positions and "hung" financing commitments. They also face reduced profits if they must trim their sails by cutting the size of their balance sheets.

"A lot of investors are realizing that the same very loose lending standards that were applied to homeowners have also been applied to corporate" bonds as well, says Albert Edwards, the global strategist at the Dresdner Kleinwort unit of Allianz SE who popularized the term "the great unwind" and believes such an unwind has been under way since early this year.

Others disagree. "I don't see it as a great unwind, but a correction to more reasonable levels. It's more like the great return to rationality," says Peter Andersen, a junk-bond manager at Dreman Value Management. "Overall, it's a healthy thing, but it's quite painful living through the adjustment."

So far, investors are skeptical that an unwind won't claim some victims. Bear Stearns Cos. shares are now off nearly a third year-to-date, and its co-president and co-chief operating officer, Warren Spector, resigned yesterday. Merrill Lynch & Co. shares are off by a quarter, and Lehman shares nearly 30%.

A Wall Street executive who markets hedge funds and other alternative investments said the valuation of some collateralized-debt-obligations pools backed by other securities such as mortgages -- which sport nominally top-notch credit ratings -- has become highly uncertain. "Someone says they're worth 50, and someone else says 90, and you can't sell at 30 because there aren't any bids," he said.

Such uncertainty creates a challenge for Wall Street firms that have made loans backed by such securities. Should they be marked down? And should investors who hold them with borrowed funds be forced to sell assets to give the lenders an extra cushion of safety?

By the fraught psychology of the bond market, this could trigger more problems than it is supposed to prevent.

"When you have something like this, there's a debate about where to mark these things," said Alex Ehrlich, global head of prime brokerage at UBS AG, which has extended credit to some clients that hold such securities. "Nothing's trading, so you have to exercise great care and caution in where you mark. We're trying to be pragmatic. When you're caught up in this situation, you know the market is dysfunctional; you have to come up with reasonableness standards. We try to come up with a theoretically fair value."

One symptom of the ailing market is fewer new issues. Friday, Thomson Financial said the 48 U.S. corporate-bond deals in July, which is ordinarily a slow month, constituted "the lowest monthly number since 1990." ...

Some analysts and Wall Street executives point to the strength of the global economy in their predicting the credit crunch will be short-lived. Buckingham analysts James Mitchell and John Grassano compare the current debt-market pullback to the brief two-month impact of credit-rating downgrades in 2005 of the two big U.S. auto makers.

Other Wall Street market participants say a recent $6 billion debt sale to help finance the buyout of DaimlerChrysler AG's Chrysler Group and a $2 billion bond issue by General Electric Co.'s General Electric Capital Corp. show the market is still open -- although the Chrysler loans were sold at a discount, and $10 billion of the debt remains on the underwriters' books.

If you didn't read yesterday's column headed "The Party's Over," please do. Here's the link.

Something to offend everyone
What do you call two Mexicans playing basketball?
Juan on Juan

What is a Yankee?
The same as a quickie, but a guy can do it alone.

What is the difference between a Harley and a Hoover ?
The position of the dirt bag

Why is divorce so expensive?
Because it's worth it.

Why is air a lot like sex?
Because it's no big deal unless you're not getting any.

What do attorneys use for birth control?
Their personalities.

What's the difference between a porcupine and BMW?
A porcupine has the pricks on the outside.

Did you hear about the Chinese couple that had a retarded baby?
They named him "Sum Ting Wong".

What's the difference between a boyfriend and husband?
45 minutes

What's the fastest way to a man's heart?
Through his chest with a sharp knife.

Why do men want to marry virgins?
They can't stand criticism.

Why is it so hard for women to find men that are sensitive, caring, and good-looking?
Because those men already have boyfriends.

What's the difference between a new husband and a new dog?
After a year, the dog is still excited to see you

What makes men chase women they have no intention of marrying?
The same urge that makes dogs chase cars they have no intention of driving.

Why do men find it difficult to make eye contact?
Breasts don't have eyes.

How do you get a sweet little 80-year-old lady to say the F word?
Get another sweet little 80-year-old lady to yell *BINGO*!

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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