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9:00 AM EST Wednesday, May 28, 2008: Some things are working. First Solar is falling. Apple is rising. Commodities are up. But oil is falling. Syngenta has tumbled. And my small re-entry into Vanguard index funds has been a total disaster. I'm mulling. My inviolate stop loss is 15%. Maybe it should be 10%, or even 8% in this weak, unpredictable market? Mulling. Mulling. Today's reading includes an intelligent piece from Pascal Costantini of Deutsche Bank:

The tentative recovery of global equity markets over the past quarter has done much to fuel speculation that the worst of the financial crisis is over. Although in recent days there has been some vacillation by investors, the MSCI World index is up over five per cent since the beginning of April. It has become clear that central banks and certain institutions are prepared to recapitalise weak banks, allaying one set of fears. We agree that a balmy sense of relief is partly appropriate, but that other economic woes are also slowly coming to the boil --even if they are more easily predictable than the almost random path of the financial crisis, the effects on global equities of both the much discussed credit crisis and the hovering threat of recession should be far from benign.

In this, we re-emphasise the risk to the cash return foundations upon which the whole global valuation edifice is resting: it is almost axiomatic that the combination of a credit crunch and a consumer recession must dampen somewhat the current peak level of returns. We note that simply taking a trailing three-year average return-instead of a spot number -- results in a global economic PE of 21x (c.f. roughly 17x 2009E economic PE, based on consensus estimates). Furthermore, we have also split out the commodities driven section of the market (Energy & Materials) from the other sectors. Investors seem to have decoupled one from the other in their minds, in our opinion. We believe that the returns of the latter are much more vulnerable to the prevailing economic winds, but despite that it is trading on a much higher asset multiple (for a lower return).

In our factor analysis, we also note that year-to-date the leading market performer is valuation-based, namely economic PE. It has outstripped both mean-reversion and other technical measures this year, cementing that performance with a strong run over the past month. This stands in sharp contrast to the previous couple of years where value factors had not been at all prominent on the radar screen. The combination of the performance of value factors and the potential headwinds to corporate cash returns in coming months suggests to us that the opportunities in the market should come from estimating which stocks and sectors have unrealistic or optimistic levels of cash return priced in by the current asset multiple.

I don't know exactly what he's driving at -- except that he seems to agree with my three key thoughts:

When in doubt, stay out,

When losing, get out fast, and

Cash is king. Be extra careful where you put the cash. If we've learned anything in recent months, it's that all "cash equivalents" ought to be checked out as carefully as we check out everything else. A cash equivalent is not cash.

All my friends in real estate are obsessed with Libor, the London Interbank Offered Rate. The interest rate they pay on real estate loans is determined by Libor. They will not be pleased to read how Libor is manipulated (surprise, surprise). Libor also determines interest rates paid on frozen ARPS. From last Friday's New York Times..

LONDON — Each morning in London, a handful of banks quietly decide how much it costs to borrow money all over the world.

But now a troubling question is swirling around this elite banking club: Have some of its members been lying about one of the world’s most important interest rates?

That concern is prompting the 89-year-old British Bankers’ Association to examine the way it sets the rate at which banks borrow money from each other. The rate, known as the London interbank offered rate, or Libor, in turn affects the rates banks charge on things like home mortgages, student loans and corporate I.O.U.’s.

The association is trying to determine whether some of the 16 banks that it polls each day to set Libor provided false or misleading rates. If that is the case, the repercussions could be enormous. Libor is currently used to price more than $360 trillion of financial products globally.

“It’s a real cornerstone of the financial markets,” Jason Simpson, a strategist at ABN Amro in London, said of Libor.

The association’s system for setting Libor has worked for the last 22 years. But when the credit market seized up last August, many banks, concerned about their own financial positions, were no longer willing to lend money to one another. As a result, Libor shot up, even as central banks like the Federal Reserve tried to drive borrowing costs lower.

Some now worry that system may have enabled banks to manipulate Libor to their advantage. Analysts and industry professionals said some banks quoted lower rates to allay concern about their finances or reduce their borrowing costs during a time of financial stress. Quotes from all banks are published on the association’s Web site.

“There are definitely incentives for banks to push the rate lower,” said Sean Maloney, a bond analyst at Nomura in London. “They would get the rate down while still charging their customers more.”

If the banks did manipulate Libor, that would mean that rates subsequently charged on thousands of financial contracts were artificially low.

The British Bankers’ Association, which is set to report the findings of its Libor review on May 30, denied there was a problem with Libor.

“The money markets are stressed at the moment, and Libor reflects this,” said John Ewan, the association’s director responsible for Libor.

Even so, the association brought forward its annual review of the rate-setting process by a month to deal with the unusual uncertainty about Libor. The group is talking to regulators, central banks, brokerage firms, hedge funds, stock exchanges, derivative exchanges and fund managers about possible changes.

“Naturally we wish to ensure that the rates are as accurate a reflection of prevailing market conditions as possible,” Mr. Ewan said.

Libor is going through its worst credibility crisis since its creation in 1986, when British banks asked the association to come up with a benchmark rate to price syndicated loans and derivatives.

Rates are quoted by 16 banks from seven countries, including the United States, Switzerland and Germany, for 15 different borrowing periods ranging from a day to a year in 10 different currencies. The banks are asked at which rate each could borrow a “reasonable amount.” The association then eliminates the four highest and lowest rates and averages the remaining ones to determine various Libor rates.

A change under consideration is widening the circle of banks that the association polls, from 16 to 20.

Adding more American banks might provide a better reading for the cost of borrowing in dollars, Terry Belton, an analyst at JPMorgan Chase, said. Right now, the group that determines dollar rates is skewed toward European banks.

And some bankers have urged the industry to create a New York equivalent of Libor, called Nybor.

Angry shareholders say Société Générale ran like a casino. From the International Herald Tribune:

PARIS: They had been saving up their anger ever since the trading scandal at the French bank Société Générale broke in January. On Tuesday, shareholders were given their first chance to challenge management directly on the €4.9 billion loss - and there was no more holding back.

At the bank's annual meeting, several investors called for the resignation of the chairman, Daniel Bouton, and asked why the head of the investment banking division, Jean-Pierre Mustier, was still in his job. They accused management of transforming the bank into a casino. And, in a sign that class-action lawsuits in New York and France might be gathering pace, they sought restitution for their losses.

The mini-rebellion Tuesday suggests that shareholders are feeling emboldened by a report last week citing management failures and lax internal controls as two reasons why a trader, Jérôme Kerviel, got away with making unauthorized bets worth nearly €50 billion, or $79 billion, for over two years.

The first question from the floor of a packed auditorium set the tone.

"I say you are twice guilty," said the representative of one small shareholder association who did not give his name. "You're putting the employee into prison when it was the bosses who should have left," he said to bursts of applause. "And your second failure was to turn our bank into a casino."

Next was a private shareholder, Jean Richard, who emphasized that he had been a client at the same Société Générale branch for 36 years. "Mr. Chairman, who do you take us for?" Richard said. "Have responsibilities been established at all levels of management?"

A third did not let up. "We have lost a lot without saying very much," he said, "Today we are going for it."

After the 10th question -- this one asking Bouton personally how he, the author of a 2002 report on corporate governance, could remain chairman after the scandal -- a nervous-looking Bouton said amid boos and heckles that he would only take one more question on the fraud.

Bouton, who relinquished the position of chief executive in April but has not indicated that he would step down as chairman, did not address his future or that of Mustier, once his presumed successor. Their positions were not up for vote at the meeting.

Bouton sought to reassure shareholders with slides showing that over an eight-year period Société Générale shares were still among the best performing in the sector. And he argued that the fraud was an "isolated" event.

"The bank is not a casino," he said.

Société Générale shares have fallen 28 percent this year, more than twice the decline of the European banking sector over all.

The bank did not discover Kerviel's unauthorized trades until January 18, even though an internal audit, published Friday, showed that his activities had raised red flags at the derivatives exchange Eurex and also led to 75 internal alerts in the bank. The report said Kerviel's two immediate bosses, Eric Cordelle and Martial Rouyère, had failed in their responsibility of supervising the trader. Both men have been fired, Bouton said Tuesday, without naming them directly.

Kerviel, who was released from custody in March, is under formal investigation for breach of trust, computer abuse and falsification. He has never denied making fictitious trades, but said his managers turned a blind eye to his activities.

The French Tennis Open started this weekend. Watch it in high definition (HD). The quality is mind-blowing. HD is the only way to watch sports. The Tennis Channel is 455 on Time Warner Manhattan and 217 on DirecTV. ESPN is 209 on DirecTV and 29 and 729 (HD) on Time Warner. Your channels will be different.

Why Mitt Romney dropped out:
At a recent press dinner in Washington, Mitt Romney shared his "Top 10 Reasons for Dropping Out of the Race."

10. There weren't as many Osmonds as I thought.

9. I got tired of corkscrew landings under sniper fire.

8. As a lifelong hunter, I didn't want to miss the start of varmint season.

7. There wasn't room for two Christian leaders.

6. I was upset that no one had bothered to search my passport files.

5. I needed an excuse to get fat, grow a beard, and win the Nobel prize.

4. I took a bad fall at a campaign rally and broke my hair.

3. I want to finally take off that dark suit and tie, and kick back in a light-colored suit and tie.

2. Once my wife Ann realized I couldn't win, my fundraising dried up.

1. There was a miscalculation in our theory, "As Utah goes, so goes the nation."

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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