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8:30 AM EST Thursday, January 17, 2008:

Sad, but good news: Law firms are firing lawyers in securitization.

I dropped into San Diego for a day. I come back rejuvenated. California's enthusiasm for business, for life and for family is contagious. Everyone should drop in once a month for their "fix." The daytime portion of my trip -- from San Diego to Dallas -- was magical. I sat three hours staring out the window, transfixed by the pure white clouds, the purple sky and the thousands of homes that don't have defaulted subprime mortgages.

In California, I saw exciting products that will change our lives -- honestly. I heard of neat ways to search for new investments. I saw tired investments being rejuvenated. And surprise, surprise, the trip was painless. I went American. Yes, tired old American. New York to San Diego left on time and arrived one hour early! San Diego to Dallas arrived 30 minutes early. Dallas to New York left an hour late, but was painless. Plane travel has become painless. Well, this trip was. The key is to mooch your way into first class. The payoff: you can work; you get to meet neat people with neat stories. The credit union exec was pleased with herself. "I got heavy flack because I wouldn't loan subprime. They were just bad loans." Now she's sitting pretty in first class. A new industry is emerging: servicing subprime loans for lenders, many of whom have never talked to a borrower. Surprise. Surprise. There are many people who would actually like to keep their homes.

Everyone is sitting on cash. Everyone is trolling for new investments, fixing old ones. Everyone is super-careful. Capital markets may be seized. Billions of dollars are being lost. Some houses will be looted. Some will be burned (arson is an alternative). Some will be razed. And some will be bought by bargain hunters. But, in time, all this shall pass. And our present problems will become but a distant memory.

Is now the time to troll for "cheap" stocks? I don't believe so. Upcoming poor earnings reports are likely to further shock equity markets. But then, I'm no genius on timing. I shorted Citigroup. It released its "lack of earnings." It fell. I covered the short, figured the news I was awaiting was out. End of story. Wrong. The stock fell more. So much for my timing. Fortunately, no one (including me) went broke making a profit, albeit a small one.

And everywhere there are the entrepreneurs. My new friend Barry Rederman turned his hobby of collecting old maps into a profitable online business. Check out Antique Maps Inc. Nice web site. Nice business. Talented man.

Has the present stockmarket downturn been overdone? Perhaps yes. My favorite financial reporter, James Surowiecki, did this piece for the latest January 21 issue of New Yorker. It's really good:

Running Numbers

American investors began 2008 with a simple New Year’s resolution: sell. The result was the worst start of a year in the S. & P. 500’s history, with the index falling more than five per cent over the first five days of trading. Explaining market moves is usually a mug’s game, but it’s clear that one of the main causes of the sell-off was this month’s labor-market report, which showed job growth in December at a virtual standstill and unemployment jumping to five per cent. For many investors, that news seemed to confirm their deepest anxiety: a recession—or at least a stagnation—is at hand.

This may well be so, but the decisiveness of Wall Street’s response to the numbers was still puzzling, since employment statistics are notoriously muddy. To begin with, the two numbers that the government reports each month—one measuring the unemployment rate and the other job growth—are based on very different surveys, and they frequently offer conflicting snapshots of the economy. The employment, or household, survey looks at sixty thousand households, and last month it saw a sharp increase in the number of people without jobs. The payroll report, by contrast, surveys four hundred thousand business and government establishments, and last month it said that the economy actually added eighteen thousand new jobs. Furthermore, both estimates are significantly imprecise: the payroll report has a sampling error of as much as plus or minus a hundred thousand jobs (which means that, instead of gaining eighteen thousand jobs last month, we may have lost eighty-two thousand), while the household survey’s error margin is even bigger, at plus or minus four hundred thousand jobs. The payroll numbers are also subject to big revisions: in September, the government reported that the economy had lost four thousand jobs the previous month, but a later update said that eighty-nine thousand jobs had been created.

This uncertainty has made job numbers a favorite target of pundits, who dismiss them as “meaningless” and “irrelevant,” and accuse the Bureau of Labor Statistics of numerical flimflammery. The payroll report has also become a flash point for political arguments. A few years ago, when the report showed the creation of surprisingly few jobs despite brisk economic growth, Republicans attacked it for missing the boom in self-employment and new-business growth, insisting that the household survey, which showed very low unemployment, was a better indicator.

Flawed as they are, though, the employment numbers represent a dramatic and valuable economic innovation. The idea that the government can and should give the public a reliable picture of the economy is a surprisingly recent one. It wasn’t until the Great Depression that the government began calculating a national employment rate, and it’s only in the postwar era that employment data have been systematically and rigorously collected. And if the results are imperfect, that’s because collecting up-to-date, accurate information about the U.S. economy, where millions of jobs are created and lost every year, is remarkably difficult. Imagine that you’re expected to track every job that has been created or lost this month. The new coffee shop that opened up in Baton Rouge, the guy who just got fired from your local auto-repair shop, and that kid who left his job to go to law school—you need to account for all of them. And you have to do this without much enforcement power or surveillance ability. Most respondents aren’t obliged to get back to you in a timely fashion—a major reason for the job-number revisions is that only two-thirds of surveyed businesses answer promptly—and there’s no monthly registry for new companies or for businesses that go under. Good luck.

Faced with this task, one option is to confine yourself to the data from the surveys, without trying to make up for what you know you’re missing—new businesses, failing businesses, and so on. Another is to try to fill those gaps using statistical techniques and past data, and to create models that calculate how many new jobs you’ve missed. The payroll survey does the latter, relying on what’s called the birth/death model to estimate how many new jobs are being created (and how many old ones lost) as companies open and close their doors. This model is, by definition, an estimate, and at times when the economy is changing—moving from recession to boom, or vice versa—guesses are more likely to be off. That’s why you’ll sometimes read, from job-numbers skeptics, that half the new jobs reported this month were the result of the government’s statistical adjustments, with the clear implication that those jobs don’t really exist. Yet studies that measure the government estimates against hard data, like unemployment-insurance tax rolls, have found that the birth/death model makes those estimates more accurate.

The paradoxical truth about the jobs numbers is that they are much better than their critics say they are but nowhere near as good as investors believe them to be. As many studies have shown, people don’t have an intuitive understanding of things like margins of error and random sampling; they prefer to focus on a single number, even if it’s falsely precise, and so end up overemphasizing the report’s headline number. Investors are also subject to the so-called “salience bias”—high-profile information is weighted heavily even if it’s flawed. That’s why market moves in response to government reports are often surprisingly big—especially when, as now, they seem to substantiate investors’ worst fears. At this point, the market is locked in a hard-to-break feedback loop: the fact that traders act as if the jobs report were definitive makes it so. A little information can be a dangerous thing.

Something to do while you wait.
Only 40% of adults between 50 and 64 have had a colonoscopy These things will save your life. Please have one. Bonus: You can practice your one liners. My favorite: "Doc, can you please write a note to my wife affirming that you didn't find my head up there."

Luck has its charm.
Little Bruce and Jenny are only 10 years old, but they know they are in love. One day they decide that they want to get married, so Bruce goes to Jenny's father to ask him for her hand.

Bruce bravely walks up to him and says, "Mr. Smith, me and Jenny are in love and I want to ask you for her hand in marriage."

Thinking that this was just the cutest thing, Mr. Smith replies, "Well Bruce, you are only 10. Where will you two live?"

Without even taking a moment to think about it, Bruce replies, "In Jenny's room. It's bigger than mine and we can both fit there nicely."

Still thinking this is just adorable, Mr. Smith says with a huge grin, "Okay then how will you live? You're not old enough to get a job. You'll need to support Jenny."

Again, Bruce instantly replies, "Our allowance. Jenny makes five bucks a week and I make 10 bucks a week. That's about 60 bucks a month and that should do us just fine."

Mr. Smith is impressed Bruce has put so much thought into this. 'Well Bruce, it seems like you have everything figured out. I just have one more question. What will you do if the two of you should have little ones of your own?"

Bruce just shrugs his shoulders and says, "Well, we've been lucky so far."

Mr. Smith no longer thinks the little shit is adorable.

The Australian Tennis Open is on. And the matches are wonderful.

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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