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8:30 AM EST, Monday, February 26, 2007: I've never been a fan of mergers. Most work out for the management (who get big bonuses), but not for the shareholders (who usually get screwed as their stock declines). The latest mess merger (now predictably erupting) is Daimler's acquisition of Chrysler. There are three lessons:

1. If your company buys something big (like Daimler's acquisition of Chrysler) or something in a different industry (like AOL's buy of Time Warner) sell it.

2. If you sell your own company, take cash. Stick 50% plus in muni bonds and 50% in index funds initially -- until you figured out a long-term strategy. Remember the rule: It's much harder to keep a fortune, than to make it.

3. When there are rumors of a divestiture (a sale of a disaster acquisition), the stock often rises (e.g. DaimlerChrysler). That might be a good time to buy and angle for a short-term gain.

Is the stockmarket peaking? The economy remains robust , though easing. Housing's downtown is having a limited impact. But there are sufficient disturbing signs to argue in favor of "taking a little off the table." Short-term bank CDs are paying over 5%, which is not shabby. There are tea leaves to read: This weekend's Economist talks about margin debt. I'm not in favor of borrowing money to buy shares. But hedge funds do it, increasingly. And their prime broker banks make a great deal of money lending the funds the money to hang themselves with -- as some already have. From the Economist:

Margin debt reaches its highest ratio since the 1920s

MARGIN debt in the American stock market has reached a new record of $285 billion In other words, more borrowed money is being used to buy shares than ever before.

There are two ways of looking at this statistic. The first is to say that, thanks to inflation, nominal figures are always bound to reach new highs. The previous record was set in March 2000, so it was about time the margin figure set a new peak. After all, the Dow Jones Industrial Average has been consistently surging into record territory.

The alternative view is to point out that the last peak was reached at the height of the dotcom bubble. As David Rosenberg of Merrill Lynch observes, margin debt has jumped by $40 billion in the past three months, a similar rate to early 2000, when the markets were in frenzy. As a proportion of market value, margin debt is now at its highest since the late 1920s, an era that was a by-word for speculation (and resulted in the crash of 1929-32).

There are further signs that sentiment is getting overheated. The proportion of cash held in mutual funds has dropped to 3.9%, equal to its record low (although those lows were recorded only in 2005). Stockmarket analyst Alan Newman says we have gone almost 950 trading days without a 10% correction on Wall Street, the third-longest period in history.

Most investors will dismiss these worries out of hand. They will point to still-strong corporate profits, low price-earnings multiples (at least, relative to the heady days of 2000), the apparent cheapness of shares relative to government bonds, the amount of cash sitting on the sidelines in private-equity funds, and the health of the global economy, as signs that all is well. Indeed, it is probably because they feel that way that margin debt is so high.

Another factor that plays into investors’ willingness to gamble is the low level of volatility in the markets. Only commodities have recently seen big fluctuations. Low volatility has three potential effects.

The first is that, if markets are less jumpy, their risk is reduced. This will induce investors to pay more for a risky asset, such as shares.

The second factor is that many hedge funds thrive on volatility. When markets are less turbulent, they will have to work harder to realize their profits. One way of doing this is to use borrowed money to get a bigger bang for their buck--another potential explanation for the surge in margin debt.

A third factor is the way that banks control risk. They use value-at-risk, or VAR, models. These try to calculate the maximum amount of capital which might be lost from trading activities. A key component of these models is past volatility. When it is low, banks feel “safer”, and can put more capital to work. This helps explain low corporate bond yields, as well as rising share prices.

It is worth noting, however, that all three factors could be subject to quick revision. If volatility rises, shares will look riskier. Hedge funds will be tempted to cut their borrowings, and investment banks their trading positions. This could cause a sharp correction, as investors all try to head for the exits at the same time.

Until such an event occurs, the circle is virtuous. Low volatility props up markets, which keeps volatility low. What is needed for the circle to turn vicious is a trigger. So the bears are dependent on a satan ex machina--a huge corporate default, a geopolitical risk come true, or a bird-flu epidemic--to turn sentiment around. They are anti-Micawbers, waiting for something to turn down.

The Internet is not always the cheapest: Items:

1. I bought a round-trip ticket New York to Savannah. I checked Expedia, Cheaptickets, Kayak and Delta the airline. It was cheapest on Delta.

2. Our friend, the interior decorator, tells me antique dealers are now posting all their goodies on their web sites. But the price is typically 30% higher than what you can get in person. There are two reasons for this: First, it increases the perceived value of the stuff they sell. Second, it's possible some rich dude might actually buy it off the web. Meantime, the real clients know it's cheaper to call.

3. Buying more than one of item is always cheaper on the phone -- well, not always. But it is easier to bargain with a human than with a browser and web site.

Watch out for dust on your digital SLR photos: One day you'll see little gray spots on the photos from your pricey digital SLR camera. Welcome to that irritant called dust. And it's on your charge-coupled device CCD. First rule. Read the instruction manual. To get the CCD on my Nikon D100, I had to buy an $80 power supply. Second, to blow the dust off, I needed to buy a rubber blower at the local pharmacy. Then I had to figure out how to lock the mirror up so I blow on (but not touch) the CCD. After several tries, it worked. The first few times, I just moved the dust around. Finally I photographed a white piece of paper. Bingo, no dust. This problem doesn't happen with point-and-shoots, because they're sealed.

Golden moments: -1
Mother Superior called all the nuns together and said to them, "I must tell you all something. We have a case of gonorrhea in the convent."

"Thank God," said an elderly nun at the back. "I'm so tired of chardonnay"

Golden moments: -2
An elderly gentleman had serious hearing problems for a number of years.

He went to the doctor and the doctor was able to have him fitted for a set of hearing aids that allowed the gentleman to hear 100%.

In a month, the elderly gentleman went back to the doctor. "Your hearing is perfect. Your family must be really pleased that you can hear again."

The gentleman replied, "Oh, I haven't told my family yet. I just sit around and listen to the conversations. I've changed my will three times!"

Golden moments: -3
Two elderly gentlemen from a retirement center were sitting on a bench under a tree when one turns to the other and says:

"Slim, I'm 83 years old now and I'm just full of aches and pains. I know you're about my age. How do you feel?"

Slim says, "I feel just like a newborn baby."

"Really? Like a newborn baby?"

"Yep. No hair, no teeth, and I think I just wet my pants.

Alive and Well
There's no question: Owning your own business is the way to go. I saw a bunch over the weekend. I remain mightily impressed with the entrepreneurial spirit. It's alive and prospering.

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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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