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9:00 AM EST, Friday, January 9, 2009: Wow. The value of my muni bonds has recently skyrocketed. And should rise further. Obama hinted very specifically yesterday he wasn't letting any responsible municipalities fail. Nice tax-free yields are still available.

The muni bond market is murky. Bonds are not traded on an exchange with prices public for all to see. A friend recently called five brokers asking them for quotes on selling a certain bond he owned. He got five enormously different bids. He was shocked at the range. Meantime, today's New York Times talks of

"a long-simmering investigation of possible bid-rigging, tax evasion and other wrongdoing throughout the municipal bond business. Three federal agencies and a loose consortium of state attorneys general have for several years been gathering evidence of what appears to be collusion among the banks and other companies that have helped state and local governments take approximately $400 billion worth of municipal notes and bonds to market each year."

Which shares to sell short? Those companies which rely on bank borrowing and especially on short-term borrowing. Banks have severely cut their lending. This is hurting companies which need the monies to live. Look at this chart.

Now read this story from BusinessWeek:

Why Banks Still Won't Lend
Despite more than $1 trillion in federal largesse, they still may not have the capital cushions to bear the risks of making fresh loans

By Mara Der Hovanesian and Christopher Palmeri

American Apparel (APP) executives should have been focused on the sales of their leggings and T-shirts this holiday season. Instead, management spent most of the critical shopping period worrying about $125 million of debt due on Dec. 19. After weeks of intense meetings with major banks, the trendy retailer landed a last-minute extension on a loan. The onerous strings: a $2.3 million fee and limits on capital spending. "The credit markets are still frozen," says Chief Financial Officer Adrian Kowalewski. "Even companies that are performing well can't get loans at reasonable terms."

The financial challenges facing Kowalewski and other corporate executives pose a major quandary for the incoming Obama Administration and Washington policymakers, who are trying to kick-start the economy. Despite all the government's best efforts in recent months, big banks still aren't lending money freely. One sign of the crunch: New loans to large companies slumped 37% in the three months ending Nov. 30 from the preceding three months. "Banks are being extremely cautious," says Edward Wedbush, chairman of the Los Angeles brokerage Wedbush Morgan Securities.

The industry is getting flak for hunkering down. After all, the Treasury has injected $187.5 billion into the nation's largest banks, including Citigroup (C), Bank of America (BAC), and JPMorgan Chase (JPM). The recipients of taxpayer money, say critics, should be required to open up their coffers. "The bad news [is] Treasury has no way to measure whether taxpayer funds are being used to increase lending," Representative Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said in December. "The much worse news [is that Treasury] does not even have the intention of doing so."

Banking chiefs defend their position. They argue that the government funds are designed to shore up capital and support lending, but that they have no obligation to make new loans. "It's not a one-to-one relationship," says BofA CEO Kenneth D. Lewis. "We don't write $15 billion in loans because we got $15 billion from the government."

Right now there's little financial incentive to make fresh loans. In the current unease, new corporate loans are immediately marked down to between 60¢ and 80¢ on the dollar, forcing banks to take a hit on the debt. It's more lucrative, then, for them to buy old loans that are discounted already.

At the same time, some banks no longer have the appetite to use leverage, borrowing money to amplify returns. Others say they would like to use leverage but can't easily find willing lenders who offer attractive terms. Leverage has long been a critical factor in profitable lending.

Whether the industry's stance is justifiable or not doesn't really matter. Either way, companies are having a tough time getting credit. And without additional intervention, the lending climate could remain cloudy for a while, threatening companies' prospects and weighing on the economy.

Consider El Paso Corp. (EP). As commodities prices have cratered, the nation's largest natural gas pipeline operator has slashed capital spending by 16%, which means its overall production will remain flat this year. El Paso's higher debt costs will further crimp profits. Anxious to lock down financing amid lenders' woes, the energy company sold $500 million of junk bonds in December at an interest rate of 15%—more than twice its overall borrowing costs. "It was expensive," says Chief Financial Officer D. Mark Leland. "We weren't confident [about] when things would get better."

Banks don't seem to know, either. They also are hoarding capital out of fear. Under federal rules, banks are required to maintain a certain level of capital based on their assets. When they incur losses, they either have to raise more capital or sell assets to keep those ratios in check. After raising money from outside investors and receiving bailout money in recent months, most big banks comfortably meet the federal capital standards.

But those calculations don't necessarily take into account all the problematic assets on banks' balance sheets. For example, they don't include securities whose losses seem to be temporary. In this environment, those losses can quickly become permanent, notes Stuart Plesser, an equity analyst with Standard & Poor's (MHP).

Meanwhile, big banks face another wave of losses, which may only further erode their capital. Companies have already taken huge hits from subprime mortgages and other risky debt. But other problems loom in credit cards, commercial real estate, and traditional home mortgages. In an interview with Maria Bartiromo, economics professor Nouriel Roubini of New York University's Stern School of Business said that credit losses will top $2 trillion, up from around $1 trillion today.

Even if the government forks over the remaining $350 billion of its Troubled Asset Relief Program to banks, the capital will still be a drop in the bucket compared with the industry's total losses. Given that, Roubini and others figure it's only a matter of time before the government creates another bailout fund. "Banks don't have enough money to bear the risk," says Anil Kashyap, a University of Chicago Booth School of Business professor. "We're going to need Tarp II and Tarp III."

The Madoff scandal. No phone conversation, no dinner, no chance encounter in New York (where I live) goes by without hearing stories of the devastation the Madoff fraud has wreaked on people's lives. I heard yesterday of a close personal friend of Madoff who lost $200 million -- his entire investments. The man knew Madoff for 40 years. Their families were close. He never suspected anything.

One friend sent his son to investigate Madoff for a potential family investment. "Go find out how Madoff produces those consistent year-to-year returns, no matter the economy. The son returned, "Dad, the only way Madoff is making his money is by front running their customers. We don't want to be involved."

Front running is illegal. It works like this. You're a broker. Your client calls up and says buy me 100,000 Apple. You figure that order will drive the price of Apple up. You buy some Apple first for yourself. Then you buy the 100,000 for your client. Apple's price goes up. You sell your shares. Bingo, you've made a few shekels. It's 100% illegal. But it still happens every day.

"I couldn't be more scared." I heard this yesterday from a very successful businessman. I hear comments like it all the time. My friends, like me, are hoarding cash.

Bubbles are forming, as we speak. I see four areas: discount debt, infrastructure, alternative energy and precious metals (gold, silver, platinum).

Bubbles are fun to be on -- if you have the discipline and skills to get out in time. Michael Lewis made his reputation with the brilliant Liar's Poker. His latest is Panic.

The book deals with four major episodes: the 1987 United States stock market crash, the 1997-98 emerging-market bust-ups (called “Foreigners Gone Wild”), the dot-com meltdown and the current housing/credit/stock market collapse. The book is a compilation of essays, some you've already read. Daniel Gross reviewed the book recently in the New York Times Book Review. He wrote:

Some of the best entries are Lewis’s own, including his January 1999 New York Times Magazine article on the failed hedge fund Long-Term Capital Management. The quantitative geniuses who designed this vehicle had a tough time grappling with the fact that their model had failed. “It is interesting to see how people respond when the assumptions that get them out of bed in the morning are declared ridiculous by the wider world,” Lewis writes. In each of the episodes, the bottom fell out because a bedrock belief held by many participants — smart professionals, not the perennially stupid individual investor — suddenly evaporated. “Panic” is to a large degree a chronicle of the capacity of highly paid professionals for self-delusion.

This volume could just as easily have been titled “Complacency.” As Lewis shows, there’s something distinctly American in our propensity to blow bubbles until they pop, spend a few months licking our wounds and then hit replay. “Yuppies’ Last Rites Readied,” declared the headline on a New York Times article of Oct. 21, 1987, which documented how the stock market crash was causing materialist, money-soaked urban dwellers to reduce conspicuous consumption and focus more on human relationships. Of course, that moral awakening lasted only as long as the downturn. And the same business publications that do such a great job of dissecting the bubbles once they’ve popped are the same ones that help promote and sustain the next one. What drives this? It’s not simply greed, or stupidity, but a kind of learned naïveté. We convince ourselves, over and over again, that nothing can go wrong, and that even if it does the smart ones among us will be insulated from any ill effects. Despite Suze Orman’s pleas, as financial beings we lack self-awareness and irony. In October 2000, Jerry Useem of Fortune called prominent players and asked what they had learned from the dot-com bust. James Cramer, hedge fund manager, media personality and founder of TheStreet.com, declared the Internet over and spoke of spending his time coaching soccer. “I’m done with the material stuff.” Riiight.

In these times, $27.95 may seem a steep price to pay for a collection of articles, many of which can be found online. But there are good reasons to splurge. The book’s profits are going to charity. And as of mid-December, used copies were trading hands on the secondary market (Amazon) for $13. In other words, after a few weeks of ownership, this book still retains about half its value. Which is more than can be said for Citigroup stock.

Latest thoughts on backing up. Businesses have gone out of business because they lost all their data. My entire life is on my computer. There are five reasons to back up:

1. Your computer's hard drive crashes. It's not "IF" they crash. They all crash. It's just a matter of when. They spin thousands of time per minute. They're mechanical. They will die.

2. A disgruntled employee deliberately destroys your stuff. You fire the guy. His last act is malicious. He erases your server, or, worse, your web site. It happened to me once. Fortunately we quickly shut off his access to the server and he only destroyed his machine.

3. Your computer gets a virus or other horrors. Many new ones are not caught by your virus checker. And many cannot be removed. I can show you long recent emails with a University computer whiz. He tells me the only way to remove some of the nasty nasty is to re-image your hard drive. That means starting from scratch. That's a waste of time. Keep reading.

4. Your computer is getting very s-l-o-w. All Windows PCs get slower as they get older.

5. You want to test new software, but you're reluctant to mess up your main machine.

Harry's Backup Strategy has two parts. First, backup all my working files. They're all in one folder called "AllHarry." Easy to backup. I use a free program called FileSync, version 2.18. It works like a charm. I have three external USB hard disks that I use exclusively for backing up. Walt Mossberg of the Wall Street Journal recently recommended something called Clickfree. He wrote Clickfree Backs Up Your Files Easily, So You're Not Toast. Read his piece here.

I clone my hard drive to three other hard drives. The first one is the image of the drive as it came out of the factory. The second is the image of my drive as I added my key software, like Microsoft Office, Dreamweaver, Photoshop, etc. The third is a weekly copy of my working hard drive. I never load any new software without first cloning my drive. This way if the software is a disaster, I can revert back easily -- by popping the old drive out and popping the backup in. All Windows laptops let you switch out hard drives easily. My cloning software is from Apricorn.

Late night humor on today's finances.

+ "Earlier this week the Senate voted 97-to-0 for tougher regulations. For example, when corporations buy a senator, they must now get a receipt." — Jay Leno

+ "The economy is in big trouble. Yesterday in a big speech, President Bush said the economy was still getting over the hangover from the 90's. And then, the president admitted he was still getting over his hangover from the 80's." —Conan O'Brien

+ "This might be getting serious. The Security and Exchanges Commission is going to be investigating Vice President Dick Cheney. They'll begin that investigation as soon as Congress finishes investigating the Security and Exchanges Commission." —David Letterman

+ "President Bush was on Wall Street giving a speech on corporate responsibility. He called for the doubling of punishment for corporate crime. That means they will slap you on both wrists apparently." —Jay Leno

+ "President Bush said today that he is ready to send corporate CEOs to prison and to the tough ones. You know, the ones that only have nine golf holes and not the full eighteen." —Jay Leno

+ "Playgirl magazine is planning a pictorial spread for the men of Enron. You thought they were hiding massive deficits before." —Dennis Miller

Not funny.
An armed hooded robber bursts into the Bank and forces the tellers to load a sack full of cash.

On his way out the door with the loot, one brave customer grabs the hood and pulls it off revealing the robber's face. The robber shoots the guy without hesitation! He then looks around the bank to see if anyone else has seen him.

One of the tellers is looking straight at him and the robber walks over and calmly shoots him also.

Everyone by now is very scared and looking down at the floor.

"Did anyone else see my face?" calls the robber.

There are a few moments of silence...then Yoni, an elderly jeweler there to deposit his daily profits, looking down, tentatively raises his hand and says: "I think my wife may have caught a glimpse ...."

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.