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8:30 AM EST, Thursday, November 29, 2007: Two days of extraordinary stockmarket gains do not mark the return of a bull market. As I have nagged before:

Do not be fooled by bear market bounces, which are often violent, and short-lived. Having cash -- as I've advocated before -- is a good thing. It will allow us to pounce on bargains. Just know: they're aren't yet here.

Yesterday's gigantic bounce is ascribed to (blamed on) the Fed’s vice chairman, Donald L. Kohn, who seemed to hint that the Fed might lower interest rates when it meets next on December 11. I read his remarks. I think the market was grasping at straws.

There are two "facts." First, stockmarkets are irrational. Always have been. Today's markets are even more irrational and the swings even more violent. Reasons: they're easier to trade -- better computers, no uptick rule on selling short. There's huge monies around. The hedge funds can sell short and do. In the old days, mutual funds and pension funds had all the money They didn't sell short and they didn't trade the market for ultra-short, minuscule gains. In fact, you couldn't in the old days because commissions were too high. These days there are countless daytraders who watch the opening and early trades and dive in, hoping the trend will continue for a few hours, before they exit at the end of the day. You think I'm kidding, call your favorite hedge fund or even a broker and ask them if this isn't the hardest market ever to trade?

Second, to the extent that stockmarkets are rational -- they tend to like growth in corporate sales and earnings -- you have to expect that they will come back as the economy comes back, viz.:

Slowdown has arrived, according to latest Fed Beige Book

WASHINGTON (MarketWatch) -- The economic slowdown has begun, according to the Federal Reserve's latest report on conditions across the country released Wednesday. The economy continued to grow, but at a reduced pace, according to the report, known informally as the Beige Book. The glut of available homes for sale is keeping downward pressure on house prices and construction activity. No turnaround is on the horizon until well into 2008, contacts said. Two of the few bright spots were manufacturing and tourism which benefit from the weaker dollar. The report found soft retail sales, pessimism about the holiday season and concern that goods are piling up on shelves. The financial market turmoil is impacting the market for credit. Business loans are down and standards for consumer loans are up. Not wanting to dwell on the weak bank sector, the report separated out "nonfinancial services" as an area of strength. Demand for legal services increased.

Now I'm going to bore you by reproducing today's New York Times piece on yesterday's market. (Oil is up today.)

Dow Surges on Hints of a Cut in Interest Rates

Capping a series of wild swings, the Dow Jones industrial average soared to its biggest one-day percentage gain in more than four years yesterday after a top Federal Reserve official hinted at another interest rate cut and oil fell below $91 a barrel.

Still, few analysts were willing to call an end to the upheaval, and the rally came amid new indications that problems in the credit market are taking a toll on businesses and consumers. Analysts described the volatility as a symptom of the uncertainty that has racked Wall Street for weeks.

But it was a wave of relief that moved the markets yesterday. The comeback began on Tuesday, after a $7.5 billion foreign investment in Citigroup helped restore investors’ confidence in the ailing credit market.

The Fed’s vice chairman, Donald L. Kohn, further reassured investors yesterday by pledging to follow “flexible and pragmatic policy making” as the bank decides how to cope with the financial upheaval. The unusually candid remarks were taken as a sign that the Fed policy panel was considering a rate cut at its Dec. 11 meeting. A steep drop in oil prices and bargain-hunting added to the rally.

The Dow has gained 546 points over two days, a leap of nearly 4.3 percent. It gained 331 points yesterday to close at 13,289.45. The Standard & Poor’s 500-stock index moved up 2.86 percent, or 40.79 points, to 1,469.02. The index, which was down for the year Monday, has risen 4.4 percent in two days and is now up 3.5 percent for the year.

Even as Mr. Kohn suggested that market turbulence could tighten credit lines, there were other signs that the economy was slowing. Orders for durable goods fell more sharply than expected in October, and a Fed survey found business conditions gradually deteriorating across the country. Housing inventories rose last month as existing-home sales continued to decline.

On Monday, both major stock indexes were down 10 percent from their record highs. The Dow’s gain yesterday was the fifth consecutive day of triple-digit moves in the blue-chip index.

“This is a soap opera,” said Howard Silverblatt, senior index analyst at Standard & Poor’s, noting that the market has exhibited a touch of melodrama.

But he warned that the market’s erratic behavior, where triple-digit gains or losses are caused by news from a single event, speech or company, reflected the knee-jerk mentality of investors who simply do not know where the economy is headed.

“We see a light at the end of the tunnel,” he said, “and it could be another train.”

Many analysts echoed the sense of uncertainty. “We’re flying blind,” said Brian Gendreau, an investment strategist at ING Investment Management. In this environment, “you can talk yourself into any kind of position.”

Investors chose bullishness yesterday, in large part because of Mr. Kohn’s remarks that the Fed “will act as needed” to address the current volatility. Anxiety in the credit markets has made banks and mortgage companies less eager to lend, leading many investors to call for another cut in interest rates.

Treasury yields ticked up for a second day, a sign that investors were confident enough to move away from the safe quarters of government bonds. The yield on the 10-year note was 4.03 percent, up from 3.95 percent, on Tuesday.

Crude oil futures settled at $90.62 a barrel in New York trading, down more than $7 from its noninflation-adjusted record high set on Friday.

Mr. Kohn, in his speech at the Council on Foreign Relations in New York, acknowledged that “uncertainties about the economic outlook are unusually high right now.”

He noted that “the increased turbulence of recent weeks partly reversed some of the improvement in market functioning over the late part of September and in October.” And pointing to “heightened concerns about larger losses at financial institutions now reflected in various markets,” he said the results could be “a more defensive posture in granting credit, not only for house purchases, but for other uses as well.”

Mr. Kohn, who will vote at the bank’s policy meeting on Dec. 11, acknowledged the “moral hazard” debate that has hung over recent discussions of Fed policy, referring to the reluctance to reinforce investors’ poor decisions by lowering interest rates. But he said that “when the decisions do go poorly, innocent bystanders should not have to bear the cost.”

“We should not hold the economy hostage to teach a small segment of the population a lesson,” he said, suggesting that a rate cut would be justified.

His remarks were strongly worded, but Fed officials still seem deeply divided. The bank issued a statement last month that suggested it would be reluctant to lower rates again before next year. Less than two weeks ago, a Fed governor, Randall S. Kroszner, said that “the current stance of monetary policy should help the economy get through the rough patch during the next year.”

The Fed chairman, Ben S. Bernanke, has also hinted that he is skeptical of an additional rate cut, citing underlying strength in the economy. He is scheduled to speak tonight in Charlotte, N.C.

But yesterday’s economic data suggested that strength may be abating. Spending at retail outlets is softening, and businesses are pessimistic about holiday sales, according to the beige book, a regular survey of national economic conditions conducted by the Fed.

Foreign money appears to be keeping many domestic businesses in the black, as tourists and export buyers are attracted to American goods by a record-low dollar, the survey showed.

“The beige book reflected what we already know, that we are seeing the economy broadly decelerating,” said Joseph Brusuelas, chief United States economist at IdeaGlobal.

Businesses also appeared more cautious about spending as they anticipate a drop in demand. New orders for durable goods — major products like airplanes and appliances — declined in October by 0.4 percent, the Commerce Department said.

A major indicator of spending — orders for nonmilitary capital goods, excluding aircraft — fell 2.3 percent, suggesting that consumers are reluctant to make bigger discretionary purchases. It was the first drop in the category since June; orders were down 1.2 percent from last October.

Inventories at businesses in October ticked up 0.2 percent, after a September rise of 0.3 percent. The increase could suggest declining demand and a gloomier outlook for business activity.

Existing-home sales dropped for the eighth consecutive month. Sales fell 1.2 percent in October to a 4.97 million annual pace, down from 5.03 million in September, the National Association of Realtors said yesterday. Inventories of homes also rose last month, by 1.9 percent.

And, for your final piece of boredom, before you get to the good (useful) stuff on photography and today's joke, here's an important (and ultra-depressing) piece from Tuesday's Financial Times (the pink paper):

Draining away: four problems that could beset debt markets for years

Bill Gross, chief investment officer of Pimco, the world’s largest bond fund, has in recent years become famous for issuing downbeat warnings about the credit world. This month, however, his tone has turned positively apocalyptic.

“We haven’t faced a downturn like this since the Depression,” he observed to reporters when talking about the US housing sector and its impact. The debt market’s “effect on consumption, its effect on future lending attitudes, could bring [America] close to the zero line in terms of economic growth”, he said. “It does keep me up at night.”

By Wall Street standards, such sentiments still sound extreme: in public, at least, most financiers are still anxious to avoid any comparisons with the terrible 1930s. Nevertheless, behind the scenes a mood of gloom is spreading across Wall Street and other parts of the financial world.

Until quite recently, many bankers and policymakers hoped that this summer’s credit squeeze would prove short-lived. But as winter draws in, bankers and regulators are coming to recognise that the shock that arrived in August could be merely the first chapter in a saga of pain that could last years.

As a result, investor confidence is slipping and, with banks wary of lending to each other, borrowing costs in the money markets are on the rise (see chart). While these price swings may be exaggerated by the looming turn of the year – a period when banks typically hoard cash to flatter their annual accounts – the underlying trend is clearly alarming the authorities. In recent days the European Central Bank, the Bank of Canada and the US Federal Reserve have all acted to pump liquidity into the interbank market in an effort to keep that crucial corner of the financial system from seizing up.

“The liquidity stresses in global money markets are palpable,” says Donal O’Mahony, analyst at Davy, the Irish stockbroker. Or as John Hurley, a member of the ECB’s governing council, observed on Tuesday: “Recent developments have not been favourable and increase the risk of a more significant spillover from financial markets to broader economic activity.” Markets may therefore “continue to remain fragile” for some time.

This climate of fear reflects four inter-related problems. First, projected losses from this year’s credit turmoil are continuing to rise. When it first became clear that US homeowners were defaulting on their mortgages, particularly in the so-called subprime category of borrowers with a poor credit history, Ben Bernanke, the Fed chairman, suggested this would create $50bn (£24.1bn, €33.6bn) in losses. But this month he raised the projected loss to $150bn – and many investment banks fear it will be at least twice this size.

That is partly because house prices are falling faster than economists expected but also because lending standards had been far more lax than previously thought. Indeed, standards were so loose that Goldman Sachs analysts now think that total losses on US subprime mortgages issued in 2006 and early 2007 will be as high as 22 cents in the dollar.

If that projection is bad, however, there is worse. As defaults rise on subprime mortgages, other types of debt, such as on credit cards and in car loans, also begin to face defaults. “Investors are now starting to worry that the subprime crisis will broaden out into other forms of consumer and real estate lending,” notes Goldman Sachs in a recent research report, which estimates that in a worst-case scenario non-subprime losses could eventually rise as high as $445bn.

If so, this would imply America could be heading for a total credit hit of $700bn or so – and that is without taking account of any losses that might occur if risky corporate loans turn sour too. This is a dramatically bigger shock than investors expected back in August and much larger than the losses in America’s last banking shock, the savings and loans crisis of the 1980s. The Goldman team’s worst case is not far from the scale of losses produced by Japan’s 1990s banking crisis, where bad loans were estimated at $800bn-$1,000bn.

A blow of this scale could take years to absorb. But aside from its size, there is a second feature of the credit crisis now spooking investors: uncertainty about how the credit pain will affect the financial system as a whole. In previous crises, credit losses were usually relatively well contained: in the S&L debacle, for example, bad loans were held by a limited group of US banks, which were well known to regulators.

But the feverish financial innovation seen this decade has enabled banks to turn corporate and consumer loans into securities that have then been sold all over the world. Until recently it was presumed that this innovation had made banks stronger than before, because they had passed credit risk on to others. Consequently, regulators and investors tended to presume that the main threats to stability in the modern financial world came not from banks but risk-loving players such as hedge funds. Recent events have, however, turned these assumptions on their head. Although some hedge funds have run into problems, their losses have generally not posed any wider systemic threat. Instead, share prices of the banking groups have slid as it became clear that banks had offloaded less risk from their books as investors and regulators had presumed. Indeed, the interbank market is gripped by fears that more banks could soon tumble into crisis, as they run out of capital with which to write off loans.

Sectors that had been widely ignored in recent years because they seemed utterly safe and dull – such as bond insurers, money market funds and structured investment vehicles – are also beset by a loss of confidence.

The revelations are making investors fearful about the potential for unexpected chain reactions to develop as complex interlinkages break down in poorly understood corners of the financial world. “Grenades keep going off in the system and nobody quite knows what to think or expect,” says one policymaker. “There is a fear of the unknown [risks].”

Aside from this abstract fear, there is also a very tangible concern about which institutions are suffering subprime pain. In recent weeks, large western banks and other financial institutions have written off about $50bn of credit losses. But analysts fear that the coming year-end statements from US banks – and future reports from European banks – could reveal more bad news. Many also suspect that non-bank institutions, such as insurance companies and asset managers, are also holding large losses that have yet to appear. “If mortgage-related losses are $400bn-plus, then banks probably only have a portion,” says Geraud Charpin at UBS.

These financial interlinkages, in turn, are fuelling a third concern: the knock-on impact of the credit turmoil on the “real” economy. When the credit crisis first emerged this summer, many economists initially thought it would have limited impact on US growth. Some cited parallels with the events of 1998 surrounding Long Term Capital Management, a hedge fund that imploded: that an event shocked Wall Street but barely affected the wider American economy, let alone that of the world.

But it is now clear that the 2007 credit shock has implications that extend well beyond hedge funds or Wall Street. As the credit losses pile up, the banks’ capital resources are being squeezed – and that is forcing them to cut lending, particularly to riskier companies and consumers.

If the process intensifies – and many analysts fear it will – that would undermine economic growth. In turn, this could unleash a second, more pernicious phase of the credit shock: defaults in the corporate arena of the type that have not been seen in the credit squeeze so far. That could, moreover, generate a further round of losses on credit instruments and thus more pain for banks and other investors.

“Three months ago it was reasonable to expect that the subprime credit crisis would be a financially significant event but not one that would threaten the overall pattern of economic growth,” Lawrence Summers, former US Treasury secretary, wrote in the Financial Times this week. However, “the odds now favour a US recession that slows growth significantly on a global basis”.

Not everybody accepts this downbeat scenario. After all, one mitigating feature of the current market turmoil is that it is occurring after a period of strong global growth – and, in particular, at a time when regions outside the US, such as the emerging economies, continue to boom.

Corporate earnings in the US and Europe remain strong and American consumers do not appear to be panicking: though housing activity is weak, retail sales last Friday – the bellwether post-Thanksgiving shopping day – were relatively strong. For October they were up 5.2 per cent year-on-year.

Many investors also take comfort from a hope that the Fed will slash interest rates to offset any risk of a serious economic downturn. The US bond market, for example, is trading at levels that assume several more rate cuts – totalling at least a full percentage point – before next autumn. “We expect the US and global economy to slow but avoid a serious downturn,” say economists at Lehman Brothers, who argue that a recession will be avoided “by central banks changing course”.

Nevertheless, the longer the credit squeeze lasts, the greater the risk that the pain will spread from Wall Street to Main Street. If such contagion does occur, there is a fourth problem increasingly alarming investors: a dawning realisation that western authorities have few policy tools with which to resist this spreading financial shock.

Indeed, in the current environment the Fed appears distinctly reluctant to cut rates to the degree that the bond market expects, because inflation pressures are rising. Data on Wednesday are expected to show that inflationary pressures are rising in Europe too, which could also stay the ECB’s hand on rates. Even if central banks do eventually throw caution to the winds and slash rates, this may not be enough to ease the problems of the markets. “Rate cuts are part of the solution but probably only just a part of it,” observes UBS’s Mr Charpin.

That is because this year’s shock has, in essence, shattered investor faith in the innovative techniques that have enabled the global banking system to create a wave of cheap credit in recent years.

Investor trust is likely to return only once there is real transparency about existing problems – and when a rethink has taken place of the way that 21st-century finance is done.

At the best of times, these would appear to be difficult tasks; in the current, panicky climate they seem doubly hard – and the steps needed to rebuild investor faith cannot be implemented quickly, however desperately the market might be clamouring for comfort.

“I think we are going to go through next year, certainly the first half of next year, with considerable traumas,” Peter Sutherland, chairman of both Goldman Sachs International and BP, said this week. “It is a dangerous period for the world.”

Recent lessons on digital photography: No matter how good you were with film, digital is a very different kettle of fish, with different skills. Digital is not easy to learn. Differences:

1. Film cameras take the photo the moment you hit the button. Digital has a "shutter lag." That lag will cause you to miss the photo -- the smile, the pole vault, etc.. The more money you pay for a digital camera, the less likely you will have shutter lag. But you need to test it.

2. Shutter lag is exacerbated by how long it takes your digital camera to focus. In bright light, there's no problem. IN low light you might never get focused and the camera will not allow you to shoot, unless you switch to manual focus. Spectacular lenses -- like this $700 -- 18-200 mm zoom are great outdoors, but totally suck indoors. Their aperture (in this case f5.6) is so small that the lens allows insufficient light to focus. This happened to me at Claire's wedding. There are three solutions: You can focus manually if you can see through the lens (or guess). You can switch to a fixed lens (like my 85 mm f.1.8). Or you can switch to the baby camera I love, the Canon SD850, which does a spectacular job of focusing in low light.

The Nikon 18-200 mm ultra-wide angle to ultra-zoom is a stunning engineering, but its small aperture has drawbacks.

3. I'll take a photo outdoors with a Nikon D100 plus this lens (cost $2000) and my baby $230 Canon SD 850. I show you both photos. You won't be able to tell the difference. You may actually prefer the Canon one. But come inside, attach a big strobe to the Nikon D100, bounce that strobe off the ceiling and bingo, no red eye, no tell-tale black shadows around the subject. You won't even know I shot with flash. But use the Canon, you'll get red eye nd black shadows. The external bounce strobe (the Nikon SB-800) will cost you another $310, or $740 if you buy it with a Quantum turbo battery.

4. Film will still produce sharper pictures for big enlargements. Many professional photographers will shoot in film, then digitize their shots.

5. Image stabilization (as Canon calls it) or vibration reduction (VR as Nikon calls it) works well and adds a little more sharpness -- but it is not a panacea. It will not produce perfectly sharp pictures in low light at slow shutter speeds. Don't be fooled.

6. Digital photography produces zillions of useless photos and consumes countless hours of "editing." Good idea: pretend each photo costs money -- like in the old days.

7. There are only three intelligent ways to display your photos: The great ones go on the wall. The occasions go in photo books. All the online processors have them. And the semi-great photos belong in a digital photo frame, which cycles randomly through your skiing and beach vacations.

I'm going to shoot today's ceremony (see below) with the Canon SD850. It's easier and lighter to schlepp.

Don't you just love radical religion? Two recent items:
+ Sudan charged a British teacher Wednesday with inciting religious hatred after she allowed her students to name a teddy bear Muhammad, an offense that could subject her to 40 lashes, the Justice Ministry said.

+ The government of Saudi Arabia has affirmed the sentence of 200 lashes for a 19-year-old Shiite girl who was sitting in a car with a male acquaintance last year when they were attacked by seven men who gang-raped both of them. The Saudi Justice Ministry said the young woman deserved 200 lashes and six months in prison, even though she had been raped, because she was guilty of “illegal mingling” — sitting in a car with a man who was not related to her.

My daughter becomes a real lawyer today: Claire graduated from law school in May, sat for the bar exams in July, heard that she'd passed them in November and now is officially being admitted to the Massachusetts bar today. Her mother and I are rushing to Boston to attend the swearing-in ceremony today. Happy parents, living their lives through their children. What's new? In celebration of Claire's Day, I run this old, but wonderful joke. Claire hasn't decided on a specialty yet (though she's really good at constitutional law). I know it won't be this one. This joke's for you, Claire, our family's new, real lawyer. We're proud of you.:

A father walks into a bookstore with his young son. The boy is holding a nickel. Suddenly, the boy starts choking, going blue in the face. The father realizes the boy has swallowed the nickel and starts panicking, shouting for help.

A well dressed, attractive and serious looking woman, in a blue business suit is sitting at a coffee bar reading a newspaper and sipping a cup of coffee. At the sound of the commotion, she looks up, puts her coffee cup down, neatly folds the newspaper and places it on the counter, gets up from her seat and makes her way, unhurried, across the book store.

Reaching the boy, the woman carefully drops his pants; takes hold of the boy's testicles and starts to squeeze and twist, gently at first and then ever so firmly. After a few seconds the boy convulses violently and coughs up the nickel, which the woman deftly catches in her free hand.

Releasing the boy's testicles, the woman hands the nickel to the father and walks back to her seat in the coffee bar without saying a word.

As soon as he is sure that his son has suffered no ill effects, the father rushes over to the woman and starts thanking her saying, "I've never seen anybody do anything like that before. It was fantastic! Are you a doctor?"

"No," the woman replies, "divorce attorney."

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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