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9:00 AM EST, Monday, November 17, 2008: My friend had $10+ million in muni bonds. It was his "safe" money. It was ultra-safe. It was managed by the best muni bond managers in the universe. Yet my friend has recently sold some of his bonds. He's afraid. Afraid of what? A meltdown? He's not certain.

I have muni bonds also. They've been the "safest" part of my portfolio. I have recently bought more. The long ones are yielding 5.5+%. That's a lot. Am I chasing yield and abandoning safety? (Yieldhog is my middle name.) Muni bonds have the lowest default rate of all fixed income securities. Historically. But history is bunk in today's world. The man making the most money (or at least he's right up there) is Nicholas Taleb, author of "The Black Swan". This book says the worst happens. And the "worst" is far more than you ever imagined. Look what's happened in recent months. It's the "worst."

Now that I know the worst can and does happen, what bothers me is answering the question, "Is anything safe?" And where do I find it? I now have major doubts about muni bonds.

Today's New York Times doesn't make me, as a muni bond holder, happy.

Facing Deficits, States Get Out Sharper Knives

LOS ANGELES — Two short months ago lawmakers in California struggled to close a $15 billion hole in the state budget. It was among the biggest deficits in state history. Now the state faces an additional $11 billion shortfall and may be unable to pay its bills this spring.

The astonishing decline in revenues is without modern precedent here, but California is hardly alone. A majority of states — many with budgets already full of deep cuts and dependent on raiding rainy-day funds or tax increases — are scrambling to find ways to get through the rest of the year without hacking apart vital services or raising taxes. ...

The plunging revenues — the result of an unusual assemblage of personal, sales, capital gains and corporate taxes falling significantly — have poked holes in budgets that are just weeks and months old and that came about only after difficult legislative sessions.

“The fiscal landscape,” said H. D. Palmer, a spokesman for the California Department of Finance, “is fundamentally altered from where it was six weeks ago.”

In Michigan, to reduce overtime costs, fewer streets will be salted this winter. In Ohio, where the unemployment rate is above 7 percent, the state may need a federal loan for the first time in 26 years to cover unemployment costs. In Nevada, which is almost totally dependent on sales taxes and gambling revenues, a health administrator said the state may be unable to pay claims in a few months.

In California, Mr. Schwarzenegger, a Republican, and state legislators are preparing to do battle over a proposed 1.5-cent sales tax increase, while in New York, Mr. Paterson, a Democrat, has proposed $5.2 billion worth of savings, principally cuts to Medicaid and education.

Even states where until recent months natural resource production has provided a buffer — and fat surpluses — are experiencing a sudden reversal of fortunes as oil prices have declined.

“Frankly, I thought 2001 was really awful,” said Scott D. Pattison, the executive director of the National Association of State Budget Officers, referring to the last big economic downturn. “It is even worse now.”

He added, “This fiscal year will be really bad, and what is unfortunate is that I can’t see how 2010 won’t be bad too.”

In keeping with recent economic trends, the states with the worst problems are those where housing booms morphed into a large-scale mortgage crisis over the last two years.

The current-year budget gap in Rhode Island represents over 11 percent of the state’s entire general fund, in large part because of the high number of subprime loans. The story is similar in Arizona, California, Florida and Nevada.

In addition, the crisis in the financial markets had immediate and widespread impact on state budgets. States have lost revenues from capital gains taxes and bonuses that have evaporated, and growing job losses have reduced state income taxes while draining unemployment funds.

“What we are seeing is when fewer people are working there is less income tax and less spending,” said Keith Dailey, a spokesman for Gov. Ted Strickland of Ohio, a Democrat.

Americans have also stopped shopping, which has hurt states that are heavily reliant on sales taxes, like Florida and Arizona. States that rely on tourism, like Nevada and Hawaii, have also been hurt by less consumer spending.

Further, the national credit crunch makes it harder for businesses to get loans, which trickles back into losses to states. When California was temporarily unable to gain access to the credit markets in the days leading up to the federal bailout package, state budget directors across the country noted the moment with horror.

The state’s brief inability to pay bills because it could not get credit — California, like many states, regularly borrows money when it is short of cash in anticipation of revenue flowing in later — has since been largely interpreted as an outgrowth of the much larger national and international credit crisis. Still, some budget experts said the problem could be a harbinger: cities and counties with poor credit ratings could be cut off in the coming year, and there could be higher costs for issuing bonds.

“Just the fact that this was an issue at all is a big concern for every state,” Mr. Pattison said. “Long-term bonds may be at risk. And I think states are going to have to accept that cost of debt is going to be higher.” ...

Fewer than a dozen states have remained in the black this fiscal year, according to the Center on Budget and Policy Priorities, a liberal-leaning economic research group in Washington that tracks state budgets, and they are largely those in the West with oil and mineral resources at the ready.

“The oil-producing states were doing very well with oil at $120 a barrel,” said Iris Lav, the deputy director of the center. “They may not do as well now.”

More generally, Ms. Lav said, state budgets are “moving from the damaged to the devastated.”

Worrying about life insurance companies. I worry about them too. Can anyone guarantee they'll be around in 17 years when I plan to die?

Are blue chips cheap? The Wall Street Journal writes this morning,

"The news for investors remains uniformly grim, but among individual stocks, a growing number of long-term opportunities may be beckoning. The selloff of the past two months has sent prices of some big-name stocks far lower than they were a decade ago."

The Journal has a huge chart. It shows prices 10 years ago versus today. The biggest losers? Ford Motor (down 97%), General Motors (down 96%), Sprint (down 94%), JDS Uniphase (down 94%), Tenet Healthcare (down 90%), Eastman Kodak (down 90%).

The biggest gainers? Celgene (up 8089%), Southwestern Energy (up 3239%), Gilead Sciences (up 2500%), Cognizant Technology (up 2017%), Laboratory Corp. of America (up 1554%), XTO Energy (up 1418%), Quest Diagnostics (up 1013%) and Apple (up 962%).

My takeaways from this Wall Street Journal chart?

Stocks aren't "cheap." Some go up. Some go down. Stocks are worth what Mr. Market says. The world of business is constantly changing. Management makes the difference. Compare the miserable management at Ford and GM with the brilliance of Apple's Steve Jobs. Personally I can't get enough of Steve's products and I can't distance myself far enough from what Ford and GM, sadly, offer for sale today.

The latest Fortune magazine quotes Richard Branson, a brilliant entrepreneur:

F: How does the state of the economy change your overall business strategy?

B: There are enormous opportunities in recessions. Some of our companies will tighten their belts and not do a lot right now. Others will expand in this recession.

F: What are some of the opportunities?

B: The price of planes will come down dramatically. So we're looking at setting up airlines in Brazil and Russia. ... If you can afford it, expanding in a recession is a very good use of your resources.

How companies save on IT.
+ Free or very cheap software delivered over the Internet, such as Google apps.

+ Virtualization. This lets many applications run on a single server computer.

+ Open-source software, especially Linux.

+ Staying with older operating systems, especially Windows XP.

BusinessWeek writes, vulnerable to these trends are Microsoft and SAP. Gainers include Google, Salesforce.com and VMware, maker of virtualization software.

Quoted from Bloomberg:

"There's the feeling that next to financial services, automotive execs are the dumbest people in the world,'' said Thomas Stallkamp, a former Chrysler president .

The best tennis balls. They're Gamma ProTour. They're available from The Sports Authority.

Consequences of our present mess: From a semi-depressing essay in December's Harper's Magazine:

A massive expansion of government is the only means whereby an economic catastrophe can be averted. As a consequence, America will be even more dependent on the world's new rising powers. The federal government is racking up ever larger borrowings, which its creditors may rightly fear will never be repaid. It may well be tempted to inflate these debts away, leaving foreign investors with hefty losses. In these circumstances, will the governments of countries that buy large quantities of American bonds-China, Japan, the Gulf States, and Russia, for example- continue supporting the dollar's role as the world's reserve currency? Or will these countries see an opportunity to tilt the balance of power further in their favor? Either way, the control of events is no longer in American hands.

The fate of empires is often sealed by the interaction of war and debt. That was true of the British Empire, whose finances deteriorated from the First World War onward, and of the Soviet Union. Defeat in Afghanistan and the economic burden of trying to respond to Reagan's technically flawed but politically effective Star Wars program were vital factors in triggering the Soviet collapse. Despite its insistent exceptionalism, America is no different. The Iraq War and the credit bubble have fatally undermined America's economic primacy. The United States will continue to be the world's largest economy for a while longer, but it will be other countries that, once the crisis is over, buy up what remains intact in the wreckage of America's financial system.

The end of Wall Street. In case you missed last week's columns, 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.

Jokes get sicker:
+ "Due to the economy, the light at the end of the tunnel has been switched off."

+ At the dinner table: "Due to the economy, your mother and I have decided that we need to let one of you go.'

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.