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9:00 AM EST, Tuesday, December 23, 2008: How goes investing? I asked my friend, a rich, talented investor and successful Wall Street graduate, had he been doing any investing recently, and if so, where? His answer:

No, other than meeting capital calls from prior commitments. I have no confidence that the new government (six months ago it was likely the Democrats would rule) will do anything positive and tax and spend, resulting in diminished wealth for those who have it and an inflationary environment once we get beyond the current trough. When inflation becomes a prospect or a reality, it may be time to invest in certain commodities. Other than that, I don't see opportunities ahead as corporate earnings will be downm affecting stock prices, inflation will destroy the value of bonds, real estate has yet to recover, private equity cannot be financed and venture capital has no exit possibilities. Pretty gloomy future.

Why the Ultra-Short Sector ETFs are a gigantic ripoff. The idea is simple. You pick a sector going south. You find an ETF which shorts the sector. Because you're so convinced of your own brilliance, you pick a double short ETF or what they call an ultra-short fund. That way, for ever point your index falls, you'll make two. Like many others, I've been sucked in by Wall Street B.S. on the charms of these things -- they juice up your returns. I've written about them. But they're a total ripoff.

Cramer ranted and raved about them last night. He mentioned an article on RealMoney. I go there. Cramer's right. The ultra-short ETFs are wrong. Here's the article.

Why Short Sector ETFs Aren't So Smart - Part 1
By RealMoney Guest Contributor
12/22/2008 12:23 PM EST
URL: http://www.thestreet.com/p/rmoney/etf/10454525.html

This article is by Eric Oberg, who worked in fixed income, currencies and commodities for Goldman Sachs for 17 years before retiring as a managing director.

What would you say if you bought an index fund, only to find out that it lagged the benchmark by 30%? 80%? Over 100%? I am sure you'd be dismayed, disappointed and disgruntled.

What if you had perfect foresight and decided at the beginning of this year to go short U.S. real estate and short financials? What if I told you about an easy way to implement these trades, and to implement them with two or three times leverage? You'd expect to clean up, right?

What if I told you that if you were spot-on with your market call, positioned half of your portfolio in each short, you would still be down 23.4% year to date?

That's better than the overall market, sure, but still a little perplexing, I mean, how could you be down for the year with one of the most prescient market calls of all time?

Yet this is exactly what would have happened if you were long the double-levered short-biased ETFs on the U.S. real estate and financial sectors year to date. In fact, one would have been better off being short the double levered long funds vs. long the double levered short funds to implement this strategy.

Given that the double-levered long-side ProShares Ultra Real Estate ETF (URE) was down nearly 80%, one would expect its complement (the ProShares UltraShort Real Estate ETF (SRS) ) to be up 80% instead of losing nearly half of its value, given they are based on the exact same index, right?

The same goes with the financial sector ETFs. Given that the double-levered, long-sided ProShares Ultra Financial ETF (UYG) was down nearly 85%, you'd expect its complement (the ProShares UltraShort Financial (SKF) ) to be up 85% rather than flat. As the car rental commercial says, "Not exactly..."

To be fair, these funds do exactly what they set out to do -- track the daily changes in these indices. But that is also their fatal flaw as any sort of long-term investment or portfolio hedge. It is the daily rebalancing of the portfolios in combination with the market volatility and the leverage that has eaten into the returns of what appeared to be a savvy bet. And the irony of it all is that these funds, due to their structure, actually contribute to the volatility, thus directly contribute to their own failure as instruments for anything other than a day trade.

The following is a little bit of an over-simplification, because there are elements of path dependency, the element of compounding slight NAV deviations that affect returns and a few other technicalities, but let me try to explain how on earth it is possible to be double short an index that is down 40%, yet still be worse off than if you were long that index.

I am sure most people are familiar with the concept that if you go down 20% one day, then up 20% the next, you are still worse off than when you started (100 times 0.80 equals 80, and 80 times 1.20 equals 96). This is similar to what happens with these double-levered short side ETFs (the two-times long-side ETFs look like they do what they should), you get shorter on the way down, making bounces hurt more, because you lose more of your capital account.

So when you're frequently rebalancing, volatility nibbles away at your returns. When volatility goes to extreme levels, it eats away at your returns ... and with leverage, it devours your returns. This is essentially a short volatility position, and the short volatility position can outweigh the short index position, as evidenced by the returns in the chart. So these ETFs are not quite as effective as one would think as a mainstay in the portfolio, as a hedge or otherwise; in fact, they may be completely ineffective, or even counterproductive, at achieving objectives.

What's worse, though, is that by their very construct, these ETFs exacerbate the volatility. By bifurcating an index into long side and short side ETFs, they eliminate an "out" for the market maker, causing the market maker to actively hedge in the underliers. With a normal security, all buyers and all sellers come to a central meeting place, and buyers can be matched easily with sellers, and we reach price discovery. But when you set up a specifically one-sided instrument, rather than one common product that people can be either long or short, you contribute to dislocations.


What makes this even more bewildering is that ETFs, with their create/redeem process, should eliminate or curtail arbitrage, so there should not be any significant net asset value distortions, and that indeed does not appear to be the case.

To be fair, these funds do exactly what they set out to do -- track the daily changes in these indices. But that is also their fatal flaw as any sort of long-term investment or portfolio hedge. It is the daily rebalancing of the portfolios in combination with the market volatility and the leverage that has eaten into the returns of what appeared to be a savvy bet. And the irony of it all is that these funds, due to their structure, actually contribute to the volatility, thus directly contribute to their own failure as instruments for anything other than a day trade.

The following is a little bit of an over-simplification, because there are elements of path dependency, the element of compounding slight NAV deviations that affect returns and a few other technicalities, but let me try to explain how on earth it is possible to be double short an index that is down 40%, yet still be worse off than if you were long that index.

I am sure most people are familiar with the concept that if you go down 20% one day, then up 20% the next, you are still worse off than when you started (100 times 0.80 equals 80, and 80 times 1.20 equals 96). This is similar to what happens with these double-levered short side ETFs (the two-times long-side ETFs look like they do what they should), you get shorter on the way down, making bounces hurt more, because you lose more of your capital account.

So when you're frequently rebalancing, volatility nibbles away at your returns. When volatility goes to extreme levels, it eats away at your returns ... and with leverage, it devours your returns. This is essentially a short volatility position, and the short volatility position can outweigh the short index position, as evidenced by the returns in the chart. So these ETFs are not quite as effective as one would think as a mainstay in the portfolio, as a hedge or otherwise; in fact, they may be completely ineffective, or even counterproductive, at achieving objectives.

What's worse, though, is that by their very construct, these ETFs exacerbate the volatility. By bifurcating an index into long side and short side ETFs, they eliminate an "out" for the market maker, causing the market maker to actively hedge in the underliers. With a normal security, all buyers and all sellers come to a central meeting place, and buyers can be matched easily with sellers, and we reach price discovery. But when you set up a specifically one-sided instrument, rather than one common product that people can be either long or short, you contribute to dislocations.

In Part 2 of this article (not yet published), we'll look further at how volatility eats up the returns on short sector ETFs and sabotage their own performance.

This is the "must-read" piece on the Madoff scandal. It's a leader (front article) from the Economist of December 20. It sums up everything you need to know about the $50 billion Bernie Madoff Ponzi scheme fraud.

The Madoff affair

Dumb money and dull diligence
Like mould, Madoffs flourish in the darkness

WRITING about one of the great swindles of the 1930s, J.K. Galbraith pointed to three traits of any financial community that he believed put it at risk of fraud. There was the tendency, he wrote in 1961, to confuse good manners and good tailoring with integrity and intelligence. There was the sometimes "disastrous interdependence" between the honest man and the crook. And there was the "dangerous cliché that in the financial world everything depends on confidence. One could better argue the importance of unremitting suspicion."

The case of Bernard Madoff, a New York financier who has allegedly confessed to running a pyramid scheme that destroyed up to $50 billion of his clients' money, has all three traits (see article). The former chairman of NASDAQ was as well known to insiders on Wall Street as he was in the posh Palm Beach Country Club in Florida, where he was a pillar of Jewish philanthropy. His clients were fiercely loyal; they had to be or he would cut them out of his hallowed investment circle and month-after-month returns of metronomic regularity. And he thrived in an era of cheap credit, when greed and gullibility became far more powerful than fear and suspicion.

What marks Mr Madoff's case out, however, is the calibre of investor he suckered. It is not the first time that wealthy people have been swindled out of huge sums of money, nor will it be the last. But never have so many big financial institutions—the oxymoronic "smart money"—been so bilked by an individual. It is here that investors, as well as the authorities, should tighten the thumbscrews and demand more transparency.

Oxymorons

Tragicomically, a handful of global banks that had fared well during the financial meltdown of the past 18 months are on the list of those caught out. HSBC, a British bank, Santander of Spain, and BNP Paribas of France: all bear a share of losses that add up to $33 billion, according to a Bloomberg tally. So were the suave private bankers of Switzerland and Singapore.

It is, however, the reputation of the big funds of hedge funds—some belonging to the banks, others at firms like Britain's Man Group and America's Tremont Capital Management—that have been most damaged. They charge whopping fees, say 1.5% of assets, largely on the basis of their ability to pick out clever people to manage their clients' money. Their business has flourished partly because the hedge-fund industry is so opaque: if investors could dig out more information for themselves, they would not have to pay others to penetrate the veil for them. They are also the largest investors in hedge funds, accounting for about half the investment in the industry, or $800 billion at the end of last year.

Yet for all their insights and access, some of them missed red flags billowing over Mr Madoff's business, such as the way he kept custody over his clients' accounts, handled the trades himself and employed an obscure accounting firm. They ignored warnings from lesser mortals, such as one in 2001 from MAR/Hedge, a diligent trade journal. They never wondered why, though the sums he managed were vast, he rarely caused a ripple in the markets. Their argument that enlightened self-interest is a reason to leave the hedge-fund industry largely unscrutinised and unregulated looks ever harder to sustain.

The investors were not the only dullards. The regulators, too, were taken for a ride. The Securities and Exchange Commission (SEC), Wall Street's regulator in chief, overlooked Mr Madoff's investment-advisory business, even though it had assets under management of $17.1 billion at the start of 2008. The outgoing head of the SEC has admitted the commission made a hash of the Madoff case, failing to act on warnings made nearly a decade ago.

Not even the best of regulators (and the SEC is not that) can be sure of stopping a determined fraudster. The authorities can, however, help investors make better judgments by requiring more disclosure from hedge funds and other high-fee asset managers. It would have been particularly useful to know how much of their clients' money they were investing in inscrutable people and illiquid assets—even if, at the time, few investors may have cared.

The industry has made a fetish of keeping its clients—and competitors—in the dark about its holdings. But the credit crunch has revealed how few original ideas most of them held. Like sheep, many of them flocked to borrow money to enhance returns, parlaying this as genius. Some also turned to money managers like Mr Madoff, where they were mercilessly fleeced. Let the light shine in.

Everything you didn't want to know about Ford. There's more to what's wrong with the auto makers than their employees' high wages. Stupidity is a good part of it. This piece from Bloomberg, though long, is really good. I've bolded the amazing parts.

Ford Errant Forecast Hits Investors Missing Profits (Update1)

Dec. 22 (Bloomberg) -- In one of his first acts after joining Ford Motor Co. as chief executive officer in September 2006, Alan R. Mulally set up weekly meetings with his Asian- Pacific, European, and North and South American regional bosses - - people who rarely gathered in the fragmented company. They came together in person and on video screens in a large conference room at headquarters in Dearborn, Michigan.

Mulally told them to present reports during the meetings using green, yellow or red labels to show whether they were hitting their plans. Even though Ford was about to post the worst annual loss -- $12.6 billion -- in its history, every manager used only green labels in more than a month of meetings.

Finally in November of that same year, Mark Fields, who leads the North and South American units, flashed a red label because of a production delay with the new Edge wagon.

"A red basically says you're off plan," Fields says. "There was kind of dead silence. I was sitting next to Alan. Then Alan starts clapping. What he was communicating was it's okay to be transparent."

Mulally, the first outsider to lead the iconic 105-year-old automaker, began a bumper-to-bumper overhaul in 2006. Not only was Ford addicted to profits from large gas-guzzling vehicles that consumers were shunning. It operated as four separate companies, duplicating parts and labor costs while the global operations of its Asian rivals hummed in unison.

Two years into his work in progress, the CEO now faces his biggest test -- to endure the pounding of a global recession that made Chrysler LLC and General Motors Corp. wards of the state -- until 2010. That's when Mulally's transformation of Ford into a leaner global manufacturer of fuel-efficient cars should finally bear fruit.

"Did Ford wait too long?" asks John Casesa, a former Merrill Lynch auto analyst who's now a partner at consulting firm Casesa Shapiro Group in New York. "The answer is yes. To Mulally's credit, he's been on the right path. I hope it's not too little, too late."

Hope is one thing that's hardwired into Mulally's personality. Just weeks after taking the reins at Ford, he predicted that the company would be profitable by 2009 -- a forecast he pulled in 2008.

The global credit crisis hasn't shaken his faith. In September 2008, with U.S. auto sales plunging 27 percent, Mulally, 63, displayed in his office an almost boyish enthusiasm. He called Ford's first-quarter profit in 2008 "fabulous" and the design of the 2010 subcompact Fiesta "neat."

Mulally then took a reporter's legal pad to explain why the company won't go down after losing $24 billion since 2005. He methodically drew a grid showing Ford's finance, manufacturing and human resources functions and its four regions. The CEO wrote the words "working together" across it to stress the meaning of his One Ford plan.

"When we came together, we decided on One Ford," Mulally says. "We're going to operate as a global company. That's a new strategy. We were going to focus on the Ford brand. Huge, huge strategic decision. We were going to have a full complement of cars, utilities and trucks. Huge issue. The U.S. plan was to concentrate on the trucks and SUVs. That's the new Ford."

Two months later in November, with the decline in auto sales accelerating to 37 percent, Mulally and the CEOs of Chrysler and GM -- Robert Nardelli and Rick Wagoner -- took their private jets to Washington to beg for a bailout. While Ford was seeking a credit line in case it needed it, Chrysler and GM demanded cash fast to survive the year. To lawmakers, the CEOs' imperious behavior exemplified all that was wrong with Detroit.

After countless restructurings since the 1973 oil shock -- Ford alone has been through six major revamps -- the automakers still didn't make many fuel-efficient cars, still didn't match Toyota Motor Corp. and Honda Motor Co. in quality, and still hadn't pared down their plethora of duplicate brands: Ford's Mercury Milan and Lincoln MKZ are essentially the same car.

At a hearing of the U.S. House Financial Services Committee on Nov. 19, Representative Peter Roskam, a Republican from Illinois, asked Mulally if he would forgo his compensation. The CEO's enthusiastic embrace of restructuring didn't extend to his own pay. Mulally, who made $49.9 million in 2006 and '07, seemed oblivious to the public outrage over excessive CEO pay when he answered no.

"I think I'm okay where I am," Mulally said.

The CEOs flew home empty-handed. Two weeks later, the repentant bosses drove their hybrids for a return visit to Washington, armed with detailed restructuring plans and pledges to work for $1 a year and sell the company jets. Senate Republicans such as Richard Shelby of Alabama, home to nonunion plants owned by Toyota and Honda, rejected a House bailout measure because it didn't slash United Auto Workers wages and benefits.

The Bush administration's rescue of Chrysler and GM on Dec. 19 with $13.4 billion in emergency loans mimicked the outline of the House bill. In exchange for loans from the Treasury's $700 billion bailout fund, the two automakers must demonstrate plans for profitability by March 31 or repay the money and face bankruptcy. The deal, which requires the automakers to make labor costs competitive with their Asian rivals in the U.S. by the end of 2009, should enable GM and Chrysler to wring concessions from the United Auto Workers. ...

Mulally, in another show of confidence in himself and his company, opted out of the Paulson plan. Ford borrowed $23.4 billion in 2006 and says it would need government help only if the recession deepens. Mulally says his restructuring should start paying dividends in 2010 with the debut of his first fuel efficient "world cars" -- single models that are sold worldwide -- and the unprecedented drop of labor expenses.

The CEO brokered a UAW contract in 2007 that puts Ford's retiree health-care costs in a union trust starting in 2010. The company's labor costs including wages and benefits will drop to $58 an hour from $71 today, narrowing the gap with Toyota and Honda. Japanese automakers, who offer fewer benefits, pay U.S. workers about $49 an hour. With these changes, Mulally says, Ford will reach a milestone in two years.

"We expect our automobile business to be profitable in 2011," the CEO told the Senate Banking Committee in December.

Investors don't share the chief's bullishness. Ford's stock dropped only 7 percent from Sept. 5, 2006, when the company disclosed Mulally's hiring, to May 21, 2008. The CEO's retraction the following day of his profit forecast was a turning point for investors. Since then, Ford shares have tumbled 67 percent to $2.59, and hit a 26-year low of $1.26 on Nov. 19. GM shares plummeted 82 percent during the same period and Toyota's decreased 45 percent.

Moody's Investors Service today lowered its rating on $26 billion in Ford debt two grades to Caa3, or nine levels below investment quality.

Brian Johnson, a Chicago-based analyst at Barclays Capital, warned in November that Ford wouldn't have enough cash to operate by the second half of 2009 without a government bailout or drawing down its credit line.

"It's unrealistic of Alan to expect Ford to survive, let alone profit, when they're experiencing a 30-plus percent decline in sales," says Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, which rates Ford's debt a D, its lowest level. "Without a bankruptcy filing and a complete reorganization, Ford is not going to be profitable, period."

Mulally is dealing with the consequences of a litany of missteps and missed opportunities by his predecessors. Ford never learned the lesson from the Arab oil embargo in 1973 about the dangers of relying on only large vehicles for profits. With gasoline prices soaring in 1975, Congress forced automakers to improve the overall fuel economy of their fleets. From then on, Ford says, it made cheap small cars in the U.S. simply to comply with the law and rarely if ever made a profit on them.

Even as compact-car specialists Toyota and Honda began putting up plants in the U.S. in the 1980s, setting the stage for their conquest of the market, Ford kept building bigger vehicles with bigger profit margins. With its eight-cylinder F-Series pickup truck already the best-selling vehicle in the U.S., the company introduced the six-cylinder Taurus in 1985, a sedan that would become the top-selling car in America seven years later.

Ford squandered its profits from the late '80s on European luxury brands in an attempt to spiff up its middlebrow image and diversify its fleet. It purchased a controlling interest in Aston Martin in 1987 for an undisclosed price and acquired Jaguar two years later for $2.5 billion. In 1990, Ford introduced the Explorer, a boxy vehicle that got 15 miles to the gallon in city driving and that ignited the market for SUVs.

The Explorer was a cash cow, enabling Ford in the '90s to snap up Volvo for $6.4 billion and Land Rover for $2.73 billion. As the company slashed investments in refreshing its own branded cars, the Asians moved in: Toyota's Camry and Honda's Accord surpassed the Taurus as the top-selling U.S. cars in 1997.

Ford's $4.79 billion loss in 2001 after seven straight years of profit was a wake-up call for the Ford family, which controls the company. Chairman William Clay Ford Jr., who had held various executive jobs in the company, ousted CEO Jacques Nasser and took his job at age 44. After cutting 23,000 jobs in 2002, he chased fuel-efficiency by bringing out a $27,000 hybrid version of the Escape SUV. To make the hybrid, Ford licensed technology from Toyota.

The U.S. automaker began hemorrhaging money again in 2005 as Explorer sales fell 29 percent from the prior year. The CEO said in early 2006 that Ford would slice off another 30,000 jobs during the next six years. The automaker's U.S. market share had sunk to 17.5 percent in 2006 from 25.7 percent in 1995. Bill Ford needed help and began to pursue Mulally, then a vice president at Boeing Co., the No. 2 commercial aircraft maker.

The son of a mailman, Mulally grew up in Lawrence, Kansas, in the 1950s, then a small town of about 23,000. President John F. Kennedy's famous speech in May 1961 about landing a man on the moon spurred Mulally to study aeronautical and astronautical engineering at the University of Kansas in Lawrence in the hopes of becoming an astronaut.

"It was so exciting because it was so important," says Mulally.

While in college, he was evaluated by NASA , which discovered that he was slightly colorblind and thus ineligible for spaceflight. Mulally received a bachelor's degree in 1968 and a master's the following year.

He took an engineering job at Boeing in 1969 and steadily earned promotions to the top of the commercial aircraft unit in 1998. The Sept. 11, 2001, terrorist attacks in the U.S. made people afraid to fly and spurred air carriers to slash orders, driving down profit in Mulally's unit to $707 million by 2003. He cut jobs by more than 50 percent while making his factories more efficient and halved the average time for building a 737 aircraft to 11 days by 2006. That year, Mulally's do-more-with-less approach paid off, with his unit posting operating earnings of $2.7 billion.

Mulally says he initially rejected Ford's job offer because it was hard to leave Boeing after 37 years. Joining the automaker would also mean working for the Ford family, which has often demanded a say in major management decisions. The Fords control 40 percent of voting power through 70.9 million Class B shares, a structure set up when the company went public in 1956. Two family members, Bill Ford and his cousin Edsel Ford II, 59, sit on the board.

"The family is in a position to second-guess everything," says Gerald Meyers, a professor at the University of Michigan Business School and the former CEO of American Motors Corp. "You always have to think of it in terms of what will the Fords think. Anytime you have the possibility of being second-guessed, you come to be over cautious."

In 1978, CEO Henry Ford II stripped his president, Lee Iacocca, of some of his power. They clashed, and Iacocca was fired. Twelve years later, after Bill and Edsel Ford publicly complained that CEO Donald Petersen had relegated them to minor assignments on the board, the chief resigned.

Mulally, who signed a five-year contract to lead the automaker in September 2006, says he worked closely with Bill Ford to develop his strategy. The new CEO added to his predecessor's cuts, slashing at least another 25,000 jobs in North America.

"Bill Ford Jr. was so relieved when he came in," says David Lewis, a University of Michigan business professor who's written six books on Ford. "Releasing people, cutting jobs, cutting plants, really cutting into the fabric of Ford -- he couldn't bear himself to do some of the hard things that needed to be done."

In addition to gutting Ford, Mulally set a new course for its remaining employees. In his first week, he moved to end the Balkanization that was most acute between Ford's North American and European regions. Before Mulally, regional chiefs met no more than once a year.

"Probably the biggest shock for everybody was when I called everybody together," Mulally says. "They said, 'This is great, why don't we get together next year?' I said, 'Why don't we get together next week?' We were up against competition using all of its global assets, and we were this very regional operation. 'How is this going to work guys?'"

The company's prior attempt to stitch itself together was undone by turf wars between regions. In 1995, Ford created five vehicle design centers worldwide and centralized decision making in Dearborn. But bosses and engineers in the U.S. and Europe didn't cooperate enough and produced lemons like the first- generation Focus, says Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan.

After its U.S. release in 1999, the car was recalled for faulty panels, cruise control and rear wheels, and the North American unit had to re-engineer it. Ford quit trying to operate as a global company and reverted back to regional control in 1999.

"That's one of the big problems with Ford," says Virag. "They always had this division between Europe and North America."

Mulally says his weekly meetings force regional managers to cooperate and be accountable.

"Together we look at one set of data on one screen," he wrote in an e-mail to all employees during his second month at Ford in October. "We talk to each other with candor and respect. We will all participate, and we will all support each others' efforts."

In December, the CEO appointed North American executive Derrick Kuzak, 57, to a new position of worldwide product development head.

"A lot of what we're doing is bringing North America into One Ford," Kuzak says. "It drives investment efficiency. You have to do more with less. You're getting more out of engineers."

The same month that Mulally appointed Kuzak, he flew to Japan to meet with Toyota Chairman Fujio Cho. A student of Toyota's famously efficient global manufacturing process since his days at Boeing, Mulally keeps a book on the subject -- "The Machine That Changed the World" -- in his office. While the Japanese company has mastered the production of world cars such as the Corolla and Camry that are sold globally, Ford still does it backward: Its regions waste money making slightly different versions of the same model for sale in those areas.

In the U.S., the $16,000 Focus is produced near Detroit at one of Ford's busiest factories. Inside, robots weld body panels to frames before workers install engines, transmissions, seats and instrument panels. Almost all of these parts are made exclusively for the U.S. model; in Europe and Asia, the Focus is built mostly with different parts.

Ford's move to world cars requires the kind of top-to-bottom changes in manufacturing that have tripped up the company before. Since 2000, Ford has spent at least $5 billion to make its North American plants flexible so they could, like Honda's factories, change the type of vehicle they produce in a matter of days rather than a year. The problem for Ford is that its SUVs and cars are built so differently that one plant can't quickly switch between the two.

In 2005, the company shelled out $300 million to rebuild a truck plant in Wayne, Michigan, so it could easily flip-flop between different SUV models. Now that sales of these large vehicles have plummeted, Ford is spending millions more and at least 13 months to retool the same factory to make smaller cars.

Honda, which makes all of its vehicles basically the same way, is now pressing its advantage. At a plant in Ontario, Canada, Honda says, it needed only two months to ramp up production of the subcompact Civic while stopping output of Ridgeline pickup trucks.

At a Ford plant in Dearborn, Bob Bradley, 46, is at work preparing dies -- stamps used to make vehicle body parts -- for world cars. In his 13 years working in several Ford factories in the Detroit area, Bradley has seen their assembly lines decay.

"In order to prop up profits, they were not investing in the facilities," he says. "Our press lines were not in good shape."

Under Mulally's One Ford plan, Bradley is converting standards for dies so they match the ones used in Germany. He says workers support Mulally effort to improve manufacturing because he's been consistent.

"He's started to grow on people because he's proven himself little bit by little bit," says Bradley. "It's not like he has one message one week and a different message the next."

In 2010, the redesigned Focus and subcompact Fiesta will be Mulally's first world cars to roll off assembly lines in North America and Europe. At least 80 percent of their parts will be identical. Other models will also share the Focus platform, which includes the suspension and chassis. Ford will reduce the number of platforms to 9 in 2012 from 25 in 2005. In all, world cars may save Ford as much as $25 billion over four years, says Virag.

"You don't need to re-engineer everything," he says. "You don't need two sets of tools."

Six months into his new job, in early 2007, Mulally traveled to the Consumer Reports vehicle test center in Colchester, Connecticut, to work on another weakness at Ford --the quality of its fleet. Accompanied by two engineers and a spokesman, Mulally was the first Ford CEO to visit the center, whose rankings influence the sales of vehicles.

The CEO and his entourage watched David Champion, the senior director of the center, examine Ford's 2007 Edge wagon, which sells for $26,000. As Champion pulled the lever used to adjust the back of the seat, it broke off in his hand. Immediately, Mulally began to pepper his employees with questions.

"'How did we get to this point?'" the CEO asked, says Champion. "He looked at them with a 'what the hell are we doing' look. It was an uncomfortable time. He wants to understand how Ford has gone wrong and wants to fix it."

Under Mulally, Ford began ordering its managers to examine warranty claims daily and send information about defects to plants so they could be fixed. While the quality of Ford's vehicles has improved, Champion says, they still don't match those made by the Asian companies.

In the October 2008 issue of Consumer Reports, Toyota, Honda, Nissan Motor Co., Hyundai Motor Co. and other Asian brands captured the top 10 slots in the quality rankings. The U.S. automaker's Lincoln earned No. 11 while Mercury was No. 15 and Ford's namesake brand was ranked No. 17.

By early 2008, Mulally had something to crow about -- his job cuts in the prior two years helped Ford post a first-quarter profit. In March, he also agreed to sell Jaguar and Land Rover for $2.4 billion -- less than Ford's purchase price for Jaguar alone -- to Tata Motors Ltd. of India after shedding Aston Martin to an investment group for $931 million a year earlier.

In the next four months, as gas soared to $4 a gallon and credit markets froze, Ford's truck and SUV sales evaporated. Mulally realized that his turnaround plan wasn't moving fast enough.

In July -- on the same day Ford reported an $8.7 billion second-quarter deficit, the worst quarterly loss in its history - - the company said it would accelerate the production of fuel- efficient cars. The CEO says his weekly meetings made it possible to rush four more small cars designed in Europe to the U.S. market in 2010 and '11.

"We were all watching the fuel prices," Mulally says. "Nobody knew at what fuel price there would be a structural change on consumer behavior. What if we got together once a year?"

Almost four decades after the '70s oil crisis, Ford is set to finally offer a full mix of better-quality compacts, sedans and trucks -- allowing it to adjust to shifts in consumer demand as gas prices rise and fall.

But the company may need a bailout to get to 2010, because for all Mulally has accomplished, it's not enough, says Kevin Tynan, an auto analyst at New York-based Argus Research Corp. Mulally should have produced smaller cars faster and pushed for union concessions to take effect before 2010.

"He played the cards he was dealt," Tynan says. "What you needed was someone who would throw back the cards and say, 'This won't work.' You needed General Patton, somebody who is not going to accept this is how things are done. It was essentially a missed opportunity, maybe the last chance." ....

This is my humor. I think it's funny. Your mileage may differ.

News on Christmas from Washington
There will be no nativity scene in Washington, D.C. this year.

Despite extensive searching, residents have not been able to find three wise men and a virgin in the nation's capitol.

Good news: They have been able to find more than sufficient asses to fill the entire stable, and surrounding town.


The best Chanukah present
Another Chanukah dinner at the home of a learned and distinguished rabbi. The candles glow softly, the table is crowded with family, congregants, and visitors.

Suddenly, a flash of light, and the angel of the Lord appears.

"Rebbe," says the angel. "For your life of unselfish service and exemplary behavior, you are to be rewarded. You have the choice of infinite wealth, boundless wisdom or utter beauty. Pick one."

Without hesitating, the rabbi says, "Wisdom."

"Done!" says the angel, and disappears in a cloud of smoke and a bolt of lightning.

All heads wheel to the rabbi, who sits, stunned, an expression of dawning comprehension breaking across his shocked features.

There is a long silence. Finally his teenage grandson speaks. "Say something wise," the young man insists.

The old rabbi looks around the table and says, "I should have taken the money."

Quote Of The Day:
"I stopped believing in Santa Claus when my mother took me to see him in a department store, and he asked for my autograph." -- Shirley Temple


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.