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8:30 AM EST Monday, February 4, 2008: The weekend media was full of gloom and doom. Most contrarian "sophisiticated" investors regard this as a positive sign. They believe in "Don't fight the fed." This morning, Bloomberg reports

"Ben S. Bernanke's decision to lower interest rates 1.25 percentage points last month will end the dollar's two-year slide, according to the world's biggest currency traders. For the first time since 2003, investors are focused on relative growth prospects rather than absolute borrowing costs, according to Geoffrey Yu, a London-based strategist with UBS AG, the No. 2 trader. The steepest cuts by a Federal Reserve chairman in seven years will support economic growth in the U.S. as Europe slows, said BNP Paribas SA, the most accurate currency forecaster Bloomberg tracks. The dollar will gain at least 9 percent against the euro this year, UBS and BNP predict."

I'm not so sure. I remain in mulling mode. I continue to follow my mantra, "When in doubt, stay out."

Barron's had a piece by Vitaliy Katsenelson, author of the bool, "Active Value Investing: Making Money in Range-Bound Markets". His conclusion:

STOCKS ARE ALLEGEDLY CHEAP NOW, at 17 times 2007 earnings. And they are cheap by historical standards. Only seven years ago, they were at price/earnings ratios double today's; they are even cheaper if you compare their forward earnings yield of 6.7% to Treasuries' yield of 4.25%. They are cheap, cheap, cheap! Or so we've been told.

Unfortunately, the cheapness argument falls on its face once we realize that pretax profit margins are hovering at an all-time high of 11.9%, almost 40% above their average of 8.5% since 1980. Once profit margins revert to their historical mean, the "E" in the P/E equation will decline. If the market made no price change in response, its P/E would rise from 17 to 23.8 times trailing earnings.

Many disagree that the profit-margin reversion will take place. Here are the most common arguments against it, and some food for thought on why "common" doesn't necessarily translate as "wise."

Who said that margins have to revert to a mean; why can't they just remain high?

Profit margins revert to the mean not because they pay tribute to mean-reversion gods, but because the free market works. As the economy expands, companies start earning above-average profits. The competition reacts to fat margins like bees sensing sugar water. They want some, too, so they fly in and start cutting into these above-average margins. This always has happened in the past, and it will happen again and again in the future.

BusinessWeek, which of late has been into "meltdowns", ran this cover:

It predicts, like many others, a continuing drop in housing prices -- another 25% over the next 2-3 years -- based on housing prices reverting to their historical mean.

Personally I had a totally lovely weekend, playing tennis and figuring solutions to the "Punch List" on our new house.

Who's on Mars
Two astronauts land on Mars. Their mission: to check whether there is oxygen on the planet.

"Give me the box of matches," says one. "Either it burns and there is oxygen, or nothing happens."

He takes the box, and is ready to strike a match when, out of the blue, a Martian appears waving all his arms... "No, no, don't!"

The two guys look at each other, worried. Could there be an unknown explosive gas on Mars?

Still, he takes another match... and... A crowd of hysterical Martians is coming, all waving their a arms: "No, no, don't do that!"

One of the astronauts says, "This looks serious. What are they afraid of?

Nonetheless, we're here for Science, to know if man can breathe on Mars.

So he strikes a match -- which flames up, burns down, and.... NOTHING HAPPENS!!

So he turns to the Martians and asks, "Why did you want to prevent us from striking a match?"

The leader of the Martians says, "Today is Shabbos!"


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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