Previous Columns
9:00 AM EST, Thursday, November 13, 2008: This is not pretty.

But the chart shows some sort of floor. If it breaks my little red line (which I think it will), we're in trouble.

We have made money on our Google shorts of the last few days. I'm tempted to say, "Take your profits." No one went broke taking a profit. I am convinced Google is on its way to $200. But the path will be volatile. Hence my advice. Take some money home. Money is as good as cash. And you can spend it -- but not at Best Buy.

Please short Best Buy. They are the absolute worst for customer service. I spent an hour last night trying to buy a generic power cable. They had, I'm guessing, at least 250 in the store, some connected to devices and some in the Geek Squad's drawers, but none in plastic for sale. Despite my begging, they could not see selling me one out of the drawer.

Their argument? It was not for sale. They could not guarantee it would work. Moreover it might burn down my apartment building. (I don't make this stuff up.) I floated across the road to Circuit City. They were equally unhelpful. But they're in Chapter 11. So I expected less. Best Buy is heading towards bankruptcy. Neither Circuit City nor Best Buy had any customers of note. Best Buy actually had fewer customers than Circuit, if that's possible. I hate to think what the lights and the rent cost. Both stores were within 500 yards of Lincoln Center, New York City. That's the ultra-high rent.

Muni bonds revisited. I've been pushing muni bonds because rates are high and local taxes are going up. I've been inundated with emails: "Be ultra careful." Some jurisdictions had done dumb things, like mess with C.D.O.s, derivatives and other bad investments. Some planned on spending into the ionosphere, way beyond their ability to ever repay. Some will default. Pick only those bonds that have a predictable revenue stream and a good chance of making their interest payments. BusinessWeek has a scare piece:

Municipal Bonds Freeze Up
Interest payments soar for cities and counties, some of which loaded up on complex derivative deals similar to ones that swamped many banks

Like other credit markets, municipal bonds are nearly frozen. During the week of Sept. 22, three significant bond deals were done. Normally the tally would be about 100. Those that are getting done—like New York City's Sept. 29 deal—are high-priced.

What's worse, untold dangers may lurk just beneath the forbidding surface of the muni market. Some locales set up complicated derivatives deals with the now-defunct Lehman Brothers and other troubled New York banks. Shedding those investments can be costly and complicated.

Even before the tumultuous past few weeks, many municipalities were facing fundamental problems: quickly rising pension costs, aging roads, and large drop-offs in income and real estate tax revenue. A lot of governments had moved away from safer, fixed-rate bond issues, leaving them vulnerable to a sharp rise in those rates over the past two weeks. These factors could add up to serious trouble for scores of communities.

An ominous potential harbinger is the case of Jefferson County, Ala. (BusinessWeek.com, 9/28/08), which includes the city of Birmingham. Jefferson borrowed more to build a sewer system than it could repay and entered into damaging derivatives contracts with JP­Morgan Chase (JPM). The derivatives, known as swaps, were private contracts designed to allow the municipality to tap into then-lower variable rates, but give them a predictable payment more like a fixed-rate bond.

Instead, Jefferson has seen its interest payments soar and now seems poised to declare bankruptcy before the end of this week unless it can come to some resolution with creditors. It would be the largest U.S. municipal bankruptcy ever—a development that's likely to make investors even more skittish.

"Unsettling" is how Lasana Mack, treasurer of the District of Columbia, describes the muni-bond landscape. Like many places, Washington borrows to pay its long-term bills, and sometimes its short-term ones. A climb in short-term rates, from 2% two weeks ago to over 7% this week, has already cost the capital hundreds of thousands of dollars (though Mack estimates that prior to the current problems, the district was saving about $15 million a year using the strategy).

Mack's biggest worry: close to $1 billion in new borrowings scheduled for sale in November and December. He has no idea how much interest he will have to pay, or whether he'll find any buyers. "Nothing," he say, "is really functioning normally."

Like residents who took outsize mortgages on risky terms, local governments have greatly increased both the amount they borrow and their exposure to rate increases. According to ThomsonReuters, total municipal borrowing has more than doubled this decade, from $195 billion in 2000 to $425 billion last year. (Next year, Thomas Doe, CEO of Municipal Market Advisors, a research firm in Concord, Mass., says that could fall to $300 billion to $350 billion.) So far this year, one in three borrowed dollars came with a fluctuating rate, compared with one in five in 2000.

Variable borrowing was fine when short-term rates were low. But in the past few weeks rates have soared as investors backed away.

At the same time, problems have emerged in the swaps used to minimize municipal vulnerability to just this sort of volatility. The counterparties to the local governments in many of these contracts are the investment banks so quickly going down, leaving some municipalities to hunt for new partners to take over the deals.

So far, most have been able to do so without extreme difficulty, but the pool of eligible replacements may be shrinking. When Lehman went bankrupt on Sept. 15, Gary Breaux, finance director of the East Bay Municipal Utility District in Oakland, Calif., found several bidders interested in two swaps he had with that bank. He chose Bank of New York for a $44 million contract. The bigger one, $69 million, he placed with Belgian-French lender Dexia. Just two weeks later several European governments had to put $9 billion into Dexia after its shares fell 30% and its CEO stepped down. If Dexia falters again, the fear is that Breaux might have to find yet another replacement with fewer options to choose from.

In the municipal market, warns Richard Ciccarone, chief research officer at McDonnell Investment Management in Oak Brook, Ill., "major risks are usually the convergence of multiple smaller risks."

The end of Wall Street. The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in the book Liar’s Poker, returned to his old haunt to figure out what went wrong. And boy, did he find some juicy stuff.

He has a written a long brilliant piece in CondéNast's increasingly excellent Portfolio magazine. Frankly, I recommend you drop everything and read this piece immediately. Click here. I'm not going to destroy your pleasure at reading Michael Lewis' piece, but here are some choice excerpts:

+ Now, obviously, Meredith Whitney didn’t sink Wall Street. She just expressed most clearly and loudly a view that was, in retrospect, far more seditious to the financial order than, say, Eliot Spitzer’s campaign against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they’d have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn’t even know how to manage their own.

+ (Steve) Eisman stuck to his sell rating on Lomas Financial, even after the company announced that investors needn’t worry about its financial condition, as it had hedged its market risk. “The single greatest line I ever wrote as an analyst,” says Eisman, “was after Lomas said they were hedged.” He recited the line from memory: “ ‘The Lomas Financial Corp. is a perfectly hedged financial institution: It loses money in every conceivable interest-rate environment.’ I enjoyed writing that sentence more than any sentence I ever wrote.” A few months after he’d delivered that line in his report, Lomas Financial returned to bankruptcy.

+ Eisman says in his defense, “I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a shit what it sold.”

+ ...He couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

+ The models don’t have any idea of what this world has become…. For the first time in their lives, people in the asset-backed-securitization world are actually having to think.” He explained that the rating agencies were morally bankrupt and living in fear of becoming actually bankrupt. “The rating agencies are scared to death,” he said. “They’re scared to death about doing nothing because they’ll look like fools if they do nothing.”

+ Now I asked (John) Gutfreund (Salomon Brothers' ex-CEO) about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

It was now all someone else’s fault.

He watched me curiously as I scribbled down his words. “What’s this for?” he asked.

I told him I thought it might be worth revisiting the world I’d described in Liar’s Poker, now that it was finally dying. Maybe bring out a 20th-anniversary edition.

“That’s nauseating,” he said.

Technology continues, despite the recession. I'm seeing new breakthroughs every day. My recent favorite is from Hyperion Power Generation. They make a backyard nuclear power reactor. (I don't make this stuff up.)

You bury this thing in concrete in your backyard. Bingo you have enough hot water or gas to drive a turbine to make 30 megawatts of electricity, enough for 20,000 homes. Here are the facts:

1. $25 million installed for the nuke. Another $5 to $10 million for electricity generator.

2. No maintenance for eight to ten years. Then Hyperion takes your old one and replaces it with a new one.

3. Designed for remote places -- tar sands fields, military bases, islands, remote cities, etc.

4. First units to be shipped in four years. You won't believe the regulatory issues still to be solved.

5. If you steal it, you can't make a bomb out of it. You can't even open it. It runs at a thousand degree fahrenheit. Turn it off. It takes several months to cool down.

6. You have to bury it in concrete and protect it with 24/7 armed guards. Them's are the regulations. But you can gang units and spread your guards over multiple nukes.

7. Allegedly, the thing will produce electricity at 5 cents a KWH. That's about a third what I'm paying Con Edison.

I don't know if this nuke actually works, since Hyperion hasn't sent me one to test. All this is based on an interview I did yesterday with their CEO, John Grizz.

Booming professions. I don't make this up.

1. Divorce lawyers. "I married you because you were rich and civil. Now you're no longer rich and your new poverty has made you a pain to live with. I'm outta here. "

2. Life insurance salesmen. "My assets are suddenly illiquid. If I croak tomorrow, my estate will be devastated by the taxes. Time to buy insurance to pay the estate taxes and leave something for the kids."

3. Three types of lawyers: bankruptcy, mergers and acquisitions (for all the bank buys as a result of TARP) and lawyers who understand banking regulation.

2. Online psychics. From Wired:

Katrina Spears, a self-described internet medium, was running errands Sept. 30, the day the Dow plummeted 770 points. "When I got home that day, I had messages from 30 clients," Spears says.

While it doesn't take a psychic to see that tough times lay ahead for the economy, online practitioners of the divination arts say they're seeing a marked sift in the questions posed by their clientele, with anxious consumers increasingly asking what's in store for them financially in the months ahead. Believers who normally seek psychics for advice on a cheating spouse are now asking whether a pink slip is in their future, and internet psychics across the board saw a spike in traffic in the days following the initial market crash.

Joe The Plumber strikes: My plumber came yesterday to fix a small problem. He accidentally broke a big pipe. That made his job bigger and his hours longer. My plumber reminds of our Washington's financial bailout (also called TARP). AIG comes in, begs for $75 billion, messes up. Now we hear it will cost us taxpayers $150 billion, or more. As if you couldn't predict that.

If Joe the Plumber hadn't existed, we would have had to invent him. It's easier to beg Washington than to invent new products and services.

Have no fear, Barack is here. I voted and campaigned for him. But this is funny.

This cartoon is not racist. It's funny.

Do not be offended. These cartoons are funny. At least to my sick brain. I won at tennis yesterday.

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.