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9:00 AM EST, Wednesday, February 25, 2009. All bear markets are characterized by strong rallies. Hence yesterday's strong 4% rally. But -- and I reiterate my many-stated position -- things are gong to get much worse before they get better. That's the first thing. The second thing is that stocks are not cheap based on simple measures of P/E and liquidity ratios. Third, I don't sense any great enthusiasm for stocks -- other than day trading. And that's too dangerous for my tiny brain.

None of this to deny the superb rhetoric unleashed by the administration -- viz. last night's talk by Obama and yesterday's semi-optimism by Bernanke. If you didn't see Obama last night, please read the transcript which is here and here. He said all the right things. Here are a few choice excerpts:

+ But while our economy may be weakened and our confidence shaken, though we are living through difficult and uncertain times, tonight I want every American to know this: We will rebuild, we will recover, and the United States of America will emerge stronger than before.

+ We have known for decades that our survival depends on finding new sources of energy, yet we import more oil today than ever before. The cost of health care eats up more and more of our savings each year, yet we keep delaying reform. Our children will compete for jobs in a global economy that too many of our schools do not prepare them for.

+ Over -- over the next two years, this plan will save or create 3.5 million jobs. More than 90 percent of these jobs will be in the private sector, jobs rebuilding our roads and bridges, constructing wind turbines and solar panels, laying broadband and expanding mass transit. Because of this plan, there are teachers who can now keep their jobs and educate our kids. Health care professionals can continue caring for our sick. There are 57 police officers who are still on the streets of Minneapolis tonight because this plan prevented the layoffs their department was about to make.

+ Because of this plan, families who are struggling to pay tuition costs will receive a $2,500 tax credit for all four years of college.

+ I want to speak plainly and candidly about this issue tonight, because every American should know that it directly affects you and your family's well-being. You should also know that the money you've deposited in banks across the country is safe, your insurance is secure. You can rely on the continued operation of our financial system; that's not the source of concern.

+ This time -- this time, CEOs won't be able to use taxpayer money to pad their paychecks, or buy fancy drapes, or disappear on a private jet. Those days are over. ... I will not send -- I will not spend a single penny for the purpose of rewarding a single Wall Street executive, but I will do whatever it takes to help the small business that can't pay its workers or the family that has saved and still can't get a mortgage.

+ That is why, even as it cuts back on programs we don't need, the budget I submit will invest in the three areas that are absolutely critical to our economic future: energy, health care, and education.

+ It begins with energy. We know the country that harnesses the power of clean, renewable energy will lead the 21st century. And yet it is China that has launched the largest effort in history to make their economy energy efficient. We invented solar technology, but we've fallen behind countries like Germany and Japan in producing it. New plug-in hybrids roll off our assembly lines, but they will run on batteries made in Korea.

Thanks to our recovery plan, we will double this nation's supply of renewable energy in the next three years. We've also made the largest investment in basic research funding in American history, an investment that will spur not only new discoveries in energy, but breakthroughs in medicine, in science and technology.

We will soon lay down thousands of miles of power lines that can carry new energy to cities and towns across this country. And we will put Americans to work making our homes and buildings more efficient so that we can save billions of dollars on our energy bills.

But to truly transform our economy, to protect our security and save our planet from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy.

So I ask this Congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America. That's what we need.

And to support -- to support that innovation, we will invest $15 billion a year to develop technologies like wind power and solar power, advanced biofuels, clean coal, and more efficient cars and trucks built right here in America.

+ Speaking of our auto industry, everyone recognizes that years of bad decision-making and a global recession have pushed our automakers to the brink. We should not and will not protect them from their own bad practices. But we are committed to the goal of a re-tooled, re-imagined auto industry that can compete and win. Millions of jobs depend on it; scores of communities depend on it; and I believe the nation that invented the automobile cannot walk away from it.

+ Now, let me be clear. ... If your family earns less than $250,000 a year, a quarter million dollars a year, you will not see your taxes increased a single dime. I repeat: not one single dime.

Harvard is a dumb investor. I was going to pull 20 lessons out of this piece from Monday's New York Times. But it's better you read it and draw your own conclusions. You wonder how a college this smart and this rich could be this dumb.

Endowment Director Is on Harvard’s Hot Seat
Harvard may be the nation’s wealthiest university, but it is short on cash.

The school relies on its endowment to generate a third of the money for its operations, and the endowment is on the verge of posting its biggest loss in 40 years. With much of its money tied up for the long term, it is scrambling to meet some obligations, The New York Times’s Geraldine Fabrikant writes.

Harvard has frozen salaries for faculty and nonunion staff members, and offered early retirement to 1,600 employees. The divinity school has warned it may not be able to cover tuition for all its students with need, the school of arts and sciences is cutting its billion-dollar budget roughly 10 percent, and the university president said this week than the unprecedented drop in the endowment was causing it to delay its planned expansion, starting with a $1 billion science center, into the Allston neighborhood of Boston.

The school has even added to its debt by issuing $1.5 billion in new bonds, its largest such offering ever.

Turning the ship around turns heavily on Jane Mendillo, who took over the Harvard endowment on July 1 — which in hindsight looks like the worst possible moment to step into a job once held by some legendary investors. The endowment, the largest of any university in the nation, has shrunk by at least $8 billion, to $29 billion, since she arrived.

Undoubtedly, Ms. Mendillo inherited a complex portfolio, with many investments involving leveraged bets on equities and commodities that are difficult to unwind. Within days of her arrival, oil prices peaked and, with other commodities, began a precipitous fall. Stock prices commenced a sharp decline. Then came the cash calls on her portfolio.

In an interview with The Times, she recalled the Sunday in September when she learned Lehman Brothers would file for bankruptcy — a night she was celebrating her 50th birthday — as the beginning of her 12-hour workdays. “Clearly, that was a big turning point,” she told The Times, adding that her longer-term strategic goals were overrun by urgent needs, like raising cash.

“There were some things that I knew were going to happen and be challenges,” said Ms. Mendillo, who speaks softly, choosing her words carefully. “There were others that I don’t think anybody could have foreseen.”

One she might not have anticipated was the intense pressure caused by the Allston expansion, The Times said, citing one person with knowledge of the endowment. Several years ago, the university had envisioned an ambitious capital expansion program stretching for more than a decade. Lawrence H. Summers, then Harvard’s president, had raised the possibility of locking in interest rates that appeared to be at historic lows, a plan the university adopted, The Times said, citing several people familiar with the endowment.

All went well at first. But in the second half of last year, interest rates plummeted and Harvard turned to the endowment to meet hefty collateral calls, which could rise to $1 billion if rates remain weak, according to a person with knowledge of the university. According to a statement Friday from James R. Rothenberg, treasurer of the university, Harvard has taken a series of steps to reduce the risk associated with the transaction.

The endowment was squeezed partly because it had invested more than its assets, a leveraging strategy that can magnify results, both good and bad. It also had invested heavily in private equity and related deals, which not only lock up existing cash but require investors to put up more capital over time.

To free up cash, Ms. Mendillo has had to make some unpleasant choices, selling $1 billion in equities, including some in hedge funds with outstanding performances. A source familiar with the endowment identified Convexity Capital, run by one of her predecessors, Jack Meyer, as well as Baupost Group, led by Seth Klarman, The Times said. Though she would not confirm relationships with specific managers, Ms. Mendillo told The Times, “We have taken money from a lot of funds as the size of the portfolio has changed.”

She also sought to sell some of the endowment’s large private equity positions, to little avail.

Harvard, like other universities, has pushed into alternative investments, including private equity, which now constitute 13 percent of its total assets. In good times these investments return money as deals are completed. Now the returns have dried up, yet the commitments for new money remain, causing perhaps her greatest headache.

“The university needs cash, and we have investments that need capital,” Ms. Mendillo told The Times.

She has raised the equivalent of 3 percent of assets for a cash reserve. “For a long time, Harvard had a negative 5 position,” she said. “That means that 105 percent of the assets are invested at most times.”

Her critics say that Ms. Mendillo’s overall investment strategy is unclear and that while the crisis erupted faster and with more magnitude than could have been predicted, she could have moved more quickly to manage the risk. Supporters counter that her predecessors essentially left her hamstrung with a portfolio that was illiquid, and give her high marks on investing acumen.

“She does not beat you over the head with her knowledge, although it is clear that it is there,” Andrew K. Golden, who oversees the endowment at Princeton, told The Times.

Harvard has said its overall endowment portfolio declined 22 percent from July through October and that it could end the fiscal year in June down 30 percent. That performance is in line with the average for university endowments, though some have done better. Yale’s endowment was off 13.4 percent in the comparable four-month period, while Princeton’s was down 11 percent, and both have projected a total 25 percent drop for the fiscal year.

Like Harvard, many schools are responding by taking on more debt. Princeton sold $1 billion in bonds recently, its first taxable offering since 1994.

Before landing on the hot seat, Ms. Mendillo ran the much smaller endowment of Wellesley College. But she honed her investing style earlier at Harvard. After graduating from Yale and its school of management, she was an equity analyst and a consultant. David Swensen, a friend who manages Yale’s fund, advised her to work for Mr. Meyer if she wanted to learn portfolio management. She started covering steel and insurance industries, because “that was what was left over” and stayed 15 years.

Mr. Meyer racked up a stellar record running the endowment, putting Harvard’s returns second only to Yale’s. But complaints about the size of managers’ pay packages, relative to the academics’ pay, ultimately prompted Mr. Meyer and many of his acolytes to leave in 2005.

A period of relative instability ensued. Harvard hired Mohamed El-Erian, who stayed just two years before returning to a top post with Pacific Investment Management Company. Before and after Mr. El-Erian’s stint, the endowment relied on board members as interim managers.

Though the Harvard endowment posted a strong 8.6 percent gain in the year before Ms. Mendillo arrived, David A. Salem, who heads the Investment Fund for Foundations, says he believes that Mr. El-Erian did the school a disservice by hiring people to carry out certain strategies and then “jumping ship.”

Mr. El-Erian declined to comment for this article, The Times said.

Mr. Salem, who knows Ms. Mendillo from the board of the investment fund, also told The Times that Mr. El-Erian appeared to have left Harvard with an extremely illiquid portfolio, a situation complicated when a permanent replacement was not named for seven months after his departure.

The Times, citing two people familiar with Harvard’s strategy, said the endowment had entered into swap agreements under which it paid short-term interest rates and received the returns on stock and commodities indexes. Those indexes declined sharply in the third quarter last year, and Harvard had to come up with collateral just as it was forced to meet other cash needs.

Though she has let go about 25 percent of her staff, or roughly 50 people, as the portfolio shrinks, Ms. Mendillo seems intent on keeping 30 percent of the assets under internal management.

She is also trying to manage expectations.

“I am preparing the Harvard portfolio for the next one to three years for returns that will not be as attractive as what we expected on average,” she told The Times.

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.