MBA Interest Surges In Slowing Economy

What are more and more people thinking about as the economy continues to slow? You guessed it, school. The MBA is, of course, at the top of the list for many professionals who are looking to take advantage of the declining opportunities in the marketplace to prepare themselves with a business education - readying themselves for when the rebound come-around.

The MBA Tour, a worldwide tour that brings together between 20 and 25 business schools in one place, at one time, has grown in popularity; attendance was up 30% last year and Peter Von Loesecke, the founder of the Tour and MBA graduate from Cornell's Johnson School, believes that it will continue to grow even more rapidly as the economy worsens. It makes a lot of sense.

A graduate business education, like any other post-grad degree, requires that you take time away from your career and suffer the opportunity cost of that lost income in addition to the, sometimes, staggering tuition costs and related expenses. Clearly, then, the best time at which to take that on is when the opportunity costs are minimized. Whether they realize it yet or not, prospective MBAs are behaving like trained business people already; once they graduate, they'll understand the economics behind their prior motivations.

The Companies MBAs Love

It's not much of a surprise really; you could probably guess many of the companies that made the list, but there's a great little article, here, that outlines the top-25 companies for whom new MBA graduates would love to work. What I would not have guessed, however, was that Google made the top spot - it's the #1 most desirable employer according to Universum, a research firm that publishes the list for Fortune.com.

Of course, I would have listed Google on the list as well, but maybe not as #1 - ranking McKinsey, or another big consulting firm, instead. Maybe this is a sign of things to come - a greater focus on business innovation rather that resume-prestige? On the other hand, maybe it's just a normal reaction to desiring the most talked-about names - Google certainly does qualify for that.

Disconnect Between Wall Street & Main Street

I don't know about the rest of you, but I find it funny when I see two headlines, one after the other, that contradict themselves in evaluating the state of the economy. One will say something like "The stock market rallied today after news of..." and the other will read "Consumer confidence reaches all-time low." How can both be true?

Here's something to ask yourself: if unemployment is rising, people are losing their jobs. If housing prices are falling, home equity is likewise falling. Consumer debt, as everyone knows, is rising like at no other time in history. All these things point to far lower incomes, so where is the money coming from to support the stock market rallies? Wouldn't it make sense that the declining wealth of the masses would result in a withdrawal from the financial markets to help prop-up their other expenses - like food and shelter?

There's no doubt that the world, as a whole, is not suffering the same economic declines that the US has seen of late, but many indicators point to this only being a delayed. These economic woes are not exclusive to the US; in today's global marketplace, no one economy, especially one the size of the US market, stands alone in either a rally or decline. We grow and shrink together - like it or not. It could be, then, that investors in markets that have not yet seen declines in their own markets are pouring more of their money into the US as a bet on its ultimate recovery. There dollar is certainly undervalued compared to its historical average so that could be one reason, but it all just doesn't seem very clear. Any thoughts?

Bonuses & the U-Shaped Recovery - What to Expect

On the bright side, the job losses on wall street are far less than they were following the dot-com bubble burst earlier this decade. While financial institutions shed about 17% of their forces, those same institutions have only cut about 3% during this latest downturn. Unfortunately, there's a downside to this story.

The downside is that many, if not all, are expecting many more cuts to come. You may have heard people referring to a U-shaped recovery; well, were only still on the left-side, the downward side, of that 'U'. It will essentially be a very slow downward slide that will see an increasing number of jobs lost before we hit the trough of this business cycle. Worst yet, it will be an equally slow climb back up. So, who among us are the most at-risk?

You guessed it; the higher your salary and/or bonus, the more likely you are to get a pink slip. It's no secrete that wages are the #1 expense for financial institutions and they're losing money like a leaky rowboat. To hedge those losses, their first act is to cut their expenses proportionally and the story seems to be that there are many more write-downs to come - more paper losses at these firms necessarily mean more job losses for those working there.

The best thing to do is to stay focused on your long-term career goals. Your career is not your job; it's the union of your experience and education. Losing your job does not represent a loss of your career; it provides you with the opportunity to explore areas that you haven't had the time to review in the past. Use every opportunity to enhance your experience and education and your career will continue to excel.

B-School Students Anticipating Hurt After Graduation

With the up-coming graduation season, the pressure is mounting on graduates from business schools around the country (and the world, for that matter) to find the high-paying jobs that will help pay for those hefty school loans. Unfortunately, the economic turmoil of the past few months paints a hazy picture and after reading this article, it looks as though graduates are going to get an introduction to what they can expect as part of their graduation ceremonies.

I remember when I was graduating from business school and it's hard not to have lofty expectations. You've just spent a small fortune on an education that you sought purely for its ability to help boost your earnings expectations; all that, after leaving the workforce and suffering the opportunity cost of that lost income. A MBA is an expensive education, like most post-grad degrees, actually, and it's difficult to blame graduates for desiring the six-figure salaries that they've been trained to seek. The reality, however, may be a shocker and in listening to keynote speakers at their graduation ceremonies, graduates will have a window on what they can actually expect to face when they return to the real world.

The economy is hurting. Wall Street is laying-off thousands. Foreign markets are mounting pressure on almost every domestic sector. While getting a speaker who will motivate and inspire graduates may leave them with a warm and fuzzy feeling, it's unlikely to set proper expectations. Having graduated during the last economic slowdown, I personally feel that getting a realistic picture is far more valuable. These are highly educated and ambitious people; they don't need people to motivate them - they need people who will share their honest insights and it sounds as though that is exactly what they will get.

Of course it's an Oil Price Bubble!

It's almost funny how the discussion over whether oil prices are spurred by speculation or market demand forces; of course it's a speculative bubble. Those arguing against this view are quick to point to China's growing economy and similar demands from India; there's no doubt that that is the case, but it's ridiculous to think that anything changed so drastically in either of those markets within the past year to justify the rising prices we see around the world.

Need some proof, no problem. How about the total notional value of over-the-counter commodities derivatives that have risen from $1.02 trillion in 2004 to a value of approximately $8.4 trillion by the end of 2007. Yes, there no doubt that some fundamental demand must be credited for part of this rise, but numbers are simply so staggering that suggesting a speculative bubble is not the primary culprit is simply irresponsible. So, assuming that it is a speculative bubble, why is that important? Good question!

The prices are now so high that they are actually affecting demand - rather than vice versa. Drivers are driving less; airlines are cutting flights and jobs as well as authorizing new fees for customers to cover the cost of rising fuel prices. Similarly, other commodities are rising (most notably wheat prices, which have doubled in the past few months) under pressure from increased transportation costs. All these rising costs mean one thing: a slowing economy. Given that many, including the likes of Mr. Warren Buffett, have publicly stated that we are already in a recession, this does not paint a rosy picture for our economic near-future.

Yes, inflation is also a big deal. With all these rising pressures the concerns over inflation have been rising as well. The only thing that has kept those inflation rates from jumping along with commodity prices has been the Fed's ability to retain the trust of its citizenry who appear to continue to believe it has things under control; this belief has led to stable wage prices. Basically, people don't believe that it's in their interest to demand higher wages because of the rising unemployment rates. That said, this won't last. As prices continue to rise, people will eventually have to demand more money in order to pay for that expensive gasoline and bread and, when they do, the Fed will lose control. Fed Chairman Ben Bernanke has received a lot of kudos for his efforts thus far, but if inflation isn't brought under control many believe that he will be faced with an economy similar to that faced by his predecessor Volker.

When inflation grew to double-digit-levels in the late 70s and early 80s, Fed Chairman Volker was forced to move interest rates even higher; this, of course, led to one of the deepest recessions since the great depression. Many now believe that we may be heading into a similar situation if the Fed doesn't begin to raise rates sooner rather than later. The Fed is enjoying low inflation expectations, but those expectations are beginning to show signs of upward movement and the Fed really does need to take this seriously. 

Trusting the markets to manage themselves is wise, in theory, but the market won't keep itself out of a recession. The business cycle is a natural phenomenon and the only way to flatten that cycle is via fiscal and monetary policy. If the Fed doesn't do its job, the speculative bubble will lead to one of the worst economic slowdowns ever. Ask anyone who was invested in the markets during the bubble-burst of 2000 and you're likely to hear about their lessons learned. Well, this is another bubble; it's time to apply those lessons-learned and react proactively rather than reactively.

It's Not Mark-to-Market, but it's a start!

The Financial Accounting Standards Board (FASB) has just announced a new rule that will make it tougher for the likes of MBIA, and other bond insurers, to hide losses  until it's too late. Many have criticized the insurers following dramatic declines that saw MBIA, as an example, fall by more than half in less than one-quarter; the new rule will force such insurers to recognize faltering claim liabilities as soon as there is evidence of credit deterioration - not just waiting for a default.

As someone sitting on the side lines, I immediately thought that FASB issued the rule in response to the recent fallout from the CDOs and mortgage-backed securities, but ...apparently... FASB has been working on this for the past 3-years. This is particularly good news because it implies that the system works; everything takes time and the design of such rules is no different, but it's good to see the regualtory agencies adapting to the changing financial landscape.

I had mentioned before the simple power of marking-to-market and how this little task ensures that financial securities are recorded at their fair value. While the new rule doesn't go so far as requiring the bond insurers to mark their liabilities to market on an on-going basis, this is certainly a step in the right direction and will shed more light on what is actually taking place with these complex securities.

Market Efficiency, Trading Volume and Exchange Competition

If you've ever read about market efficiency and the various theories about how markets operate, then you will forgive me for having been bored by the subject lately. What's always nice, however, is when you read something that brings an otherwise boring subject to life, which is exactly what happened today when I read about the New York Stock Exchange's declining trading volume figures in light of rising competition from smaller, higher-tech, markets.

Market efficiency theories essentially discuss how markets, exchanges in our case, react to the availability of new information. Ranging from weak-form to strong-form efficiency, these theories outline the extent to which, and how quickly, markets react to information that is both public and held by insiders alone. Technical analysts, for example, who solely rely on the data that markets provide are dependent on the quality and accuracy of that data; flaws in their representativeness of what is happening in the market can mean missed opportunities, or worse. So, why should increasing competition for the NYSE trading volume worry technical analyst? Lower trading volume.

Lower trading volume at the NYSE means less data. Less data, in turn, means that technicians have a less-than-whole picture of what is taking place in the markets. When the stocks in your portfolio trade on multiple exchanges, it takes much more effort to consolidate the information from the various markets to provide you with clear insights into what is taking place. The more disparate the trading volume, the less reliable your data.

Personally, this sounds like an ideal situation for the regulators to step-in. A competitive trading landscape is certainly important because it helps to lower the transaction costs that we all pay when we trade our stocks. An efficient market, however, is no less important once you understand the implications of what may happen when it's no longer there.

Scandals, they are good for something.

Just as was the case with the bankruptcy of Enron, Worldcom and the like, the latest troubles underlying the capital markets will help to reveal some questionable behaviour that has otherwise gone unnoticed. Following the big scandals earlier this decade, newspaper headlines were jam-packed with executives on their way to jail and establishment of new laws and regulations like Sarbanes Oxley. With the spotlight now on acronyms like CDO, CDS and CMO, the next round of similar headlines is not far away.

I just read this article and it really drove-home how the big banks, in their take-no-prisoners approach to turning a buck, may have unwillingly taken those dollars straight out of the pockets of the people who could least afford to be separated from them. Jefferson County, Alabama, is the latest municipality at risk of bankruptcy and the cause are the swaps it purchased to avoid this very situation.

JPMorgan, Bank of America, Lehman Brothers and, yes, Bear Stearns, all sold interest rate swaps to Jefferson County to help them hedge their risk on loans purchased to finance the county's latest public projects. With interest rates going in just the opposite direction, it's left the County with the obligation to pay rates in the double-digits only weeks after paying as little as 3%. The county, now in dire straights, has hired its own independent analysts to review their swaps purchases and has been stunned to learn that the aforementioned banks collected as much as $100 million in excess fees by charging far and above the prevailing rates for the securities.

When our car is running well, we don't visit the mechanic. It's only when strange noises alert our attention to a possible problem, that we hire someone to figure-out what needs to be fixed. When you drive a domestic car, you can generally visit any mechanic and find the services you need at reasonable rates. When you drive an exotic, however, you need to visit specialists who will charge you far more for their expertise. The types of exotic securities being purchased these days require just such specialists and, unfortunately, these experts are taking advantage of their clients in much the same way an unscrupulous mechanic might. Fortunately, unlike mechanics, these financial institutions must answer to their regulators who will penalize them for these acts, but hopefully the buyers will learn from these experiences too. Being able to afford a Ferrari goes well beyond having the funds to pay its sticker price; don't be buy exotics, be it cars or financial instruments, unless you thoroughly understand how they work and have the funds to pay those unexpected bills.

Credit Spreads As Economic Indicator

Remember the yield curve? Well, to freshen your memory, the yield curve is just the graphical depiction of the relationship between yields (required rates of return) and maturities. So, for example, the curve would tell you the kind of return demanded for their investment dollars when committed for a specific period of time (to maturity) - all else equal. While it might sound like a boring subject, it's actually quite interesting in what it can foretell about expectations for our economy.

Before we get to the credit spreads, you have to also remember that there's not just one yield curve, but many - one for each level of risk determined by investors (and generally based on the ratings issued by the big ratings agencies). The credit spread, therefore, is the vertical distance between two curves - i.e., the difference between the required rate of return demanded by investors in securities of equal maturity, but different levels of risk. Why is this interesting? Well, this difference, referred to as the credit spread, is an indicator of what investor's believe is the relative risk associated with lower-grade investments.

Imagine, for example, that investors believe that we're heading into, or are already in, a recession (I know, I know, how could anyone think that!). If you were such an investor, then  you would likely believe that the lower-grade issuers of these securities were likely to see a slowing in their sales, cash flows and, ultimately, a weakening in their ability to satisfy their obligations to the investors in the securities they issued - yeah, that's you and me. Well, to accept that added risk, you would demand a higher rate of return and this would begin to shift-up the yield curve for securities of similar risk. As that yield curve shifts-up, the spread between it and the safer (investment grade) securities grows.

Ok, so now that you understand the mechanics at work, I'm sure that you can put one-and-one together and see how you can use the yield curve to evaluate what the economy is thinking. If you were to look at the yield curve today, however, you probably wouldn't find what you were expecting. While most people would agree that we're either in, or heading into, a recession, the yield curve doesn't reflect it. With a spread of only 46 basis points, down for a high of almost four times that just a few months ago, we're not seeing the affects of higher commodity costs, rising unemployment and record high foreclosures and bankruptcies. Does this mean that something in the mechanism is broken?

Well, possibly, but there's a silver lining to any dark cloud. Today's yield curve tells us that the average investor hasn't adjusted their expectations to what most others believe is our economic reality. As an investor, this information is golden. As an investor, you should always be looking for information about what will be, but hasn't yet been accounted for by your fellow investors. Doesn't this sound like what we're seeing today? So, the question is, then, what will you do about it? How will you position your portfolio to take advantage of what appears to be an arbitrage opportunity?

How Temporary is 'Temporary'?

Freddie Mac, the government-chartered mortgage financier has had its accountants label approximately $32.4 billion worth of losses as temporary, allowing it to keep the associated losses off its income statement. With those losses representing as much as 20% declines in the face value of the mortgages, these losses would be the biggest ever experienced by the company. One has to ask, therefore, how long is temporary and when will these write downs come, if ever?

According to generally accepted accounting principles, Freddie can get away with this for as long as the rules are changed. What's really scary about this is the magnitude of the losses that are being hidden from investors relative to the company's assets. $32.4 billion is more than double its $16 billion in shareholders' equity and almost equally outweighing its market capitalization. Compared to its net assets of NEGATIVE $5.1 billion, the comparison is just laughable. If you were in this position, you would have gone bankrupt long-ago.

Fannie Mae, Freddie's big sister, is in a similar position, albeit to a lesser extent, with $9.3 billion in such losses. Of course, both these companies are betting on a market turnaround, which would see the underlying assets appreciate and eliminate the losses that they refuse to realize. That said, anyone who's owned a home knows that this appreciation can take many years and neither Freddie or Fannie have included anything in the notes to their financial statements indicating what their own expectations are for these reversals.

It's just a loop-hole and it will be closed sooner or later - forcing these firms to face the music. The reality, however, is that facing the music earlier in the process could have prevented much of what they're now trying to hide. Marking-to-market would have forced the firms to acknowledge the losses as soon as they started to appear and would have likewise forced them to make adjustments to their practices and strategies to compensate for those losses. The capital markets are a great motivator for management to do their jobs well; if they don't, they get fired by their boards who in-turn represent the shareholders.

It Wasn't Us; It Was The Computers!

That's what Moody's appears to be saying, or at least laying the groundwork to say, in light of the many law suits that are waiting in the wings spurred by the collapse of so-called Aaa-rated securities. One of the biggest head-scratchers with the financial crisis has been how such high credit ratings could have been issued on securities that were so susceptible to default; with news that Moody's is now investigating a possible computer bug that caused the mismatched ratings, it certainly does look as though it's covering its proverbial ass.

Both Moody's and S&P only began to strip-away their previously issued triple-A ratings after some of the constant proportion debt obligations (CPDOs) defaulted. Are we to think, then, that S&P's rating system was inflicted by the same virus?

CPDOs are portfolios of index-based credit default swaps (CDSs) that include both risky and safer trenches that have, somehow, made them candidates for the highest investment grade ratings. These CPDOs represent the latest innovation in one of the largest markets - credit default swaps - allowing investors to collect even higher returns as a result of even higher leverage. From this short description alone, does it sound to you as though this would qualify as deserving a Aaa rating? When will investors learn that there's no free lunch; higher rates of return do necessarily mean higher assumed risk. Period.

Banks created at least $4 billion of CPDOs, promising annual interest of as much as 2 percentage points above money-market rates combined with the highest credit ratings -- described a ``holy grail'' for investors by Bear Stearns Cos. strategist Victor Consoli in a November conference call.

There's no holy grail; if there were, every investor, their brother, their sister and their cousin's nephew would be buying and the price of such assets would rise and thereby reduce its yield. It's a classic arbitrage opportunity that just can't exist for any extended period of time. If a broker or advisor is telling you differently, then they themselves probably don't understand the securities.

Here's a bit of a primer on CPDO's and credit default swaps from this bloomberg article:

CPDOs sell contracts on credit-default swap indexes and use the premiums to pay investors. If the perception of credit quality deteriorates, the cost of insuring the debt increases and CPDOs lose money. To make up for losses, the funds would typically increase their borrowing.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Rating a CPDO involves making assumptions about the way the indexes of credit-default swaps will move, based on a limited history of the benchmarks. The U.S. index referenced by CPDOs was created in 2003; its European counterpart started in 2004.

CDSs and the web we weave

Covering more that $62 trillion in debt, credit default swaps are a market larger than the value traded on the New York Stock Exchange, but little is known about them - even among those who invest, and worse yet, those who issue the derivative securities.

CDSs are derivatives; they are assets that are synthetically created and how's value is derived from underlying assets - the debt obligations their holders are attempting to protect against default. Unlike your home, which you do not expect to actually burn down and buy insurance against such a rare eventuality just in-case, CDSs are purchased on the worst debt securities - those rated below investment grade. Of course, these too are the very securities are most likely to default when times are bad and, if you hadn't yet noticed, times they are bad ...and getting worse.

It gets worse. The firms selling these insurance policies are not only unmonitored, but are not officially considered banks - including the likes of JPMorgan, Goldman Sachs and many hedge funds. With losses expected to be as high as $150 billion dollars on the first round of defaults, will these firms be able to survive? Moreover, as we saw with Bear Stearns, can the economy afford the collapse of even one such firm or would it spell disaster for the capital markets as a whole? Unlike Bear Stearns, however, the Fed is unlikely to bail-out a hedge fund.

It gets more complicated. To get a handle on the situation, the first step would need to be to properly value the risk that is actually assumed by these various counterparties, but even this first step is not easily accomplished. Firms resell these securities as they would others - if you're having a moment of CDO-inspired Deja Vu, you ain't alone.

Most fundamentally, the CDSs were created with a very useful purpose in mind: to distribute the risk of a default across many firms that could bear that risk. However, with so few firms actually acting as the counterparty in many of these transactions, the very opposite has happened - with much of the risk concentrated. Go figure!

CDSs & Counterparty Risk; What Every Investor Should Know

Credit Default Swaps (CDSs) are making headlines these days, and not for good reasons. CDSs are essentially insurance contracts on debts - investors buy them to protect their income streams and principal investments in debentures should the issuing party default on their obligations. Most notable of these almost-defaults, of course, has been Bear Stearns and CDSs have been in the headlines ever since.

Why do you care? Well, would you believet that CDSs are unregulated and that there's no public record of the sellers solvency should they actually have to deliver on the contracts they sell. As an investor, this should scare you to death. Think about it this way: imagine you paid into your insurance policy, for your car, your home or even  your life, and when the worst actually happened, the insurance company just disappeared; this is the situation that may very well still happen. Yes, still; we're not out of the woods by any extent.

George Soros has been one of the most outspoken investors on the subject of how "unacceptable" it is to have a market such as this develop in an unregulated fashion. Now representing as much as $62 trillion in contracts, the collapse of such a market could mean worldwide financial fallout. This is no joke folks.

How's this for a revelation. JPMorgan is not only the investor of these types of contracts, but is also one of its biggest issuing firms (i.e. counterparties). Unlike traditional insurance companies, there is no agency that monitors the sellers of swap contracts. What makes things even more interesting, you don't even have to own the asset that you want to protect when you buy the swaps. Yes, that's like buying a life insurance policy on someone else - could you imagine if that were possible and what sort of practices that would condone?

Europe Feeling the Economic Pinch

The headlines today scared me a little bit. First, I read that Germany's consumer confidence index has fallen, again, as a result of the relatively stronger dollar and fallout from the slowing the US economy. Similarly, Marks & Spencer, the premium UK retailer, has reported slowing growth and staff cuts in response to the same growth concerns. Likewise, Morgan Stanley is reporting that it's planning job cuts for its Japanese offices. If there's any doubt that the world economy is only beginning to slow down, then reports such as these should give you second thought. That, however, is not what scared me this morning.

What continues to worry me is the American investors' apparent refusal to see or believe any of it. Whether it's the report of inflationary pressures right in their own backyard or the many companies reporting lower earnings, investors are ignoring the bad news and looking only for the good stuff that confirms what they already hold to be true. Yesterday's rally and today's headline stating lower volatility is representative of growing buy-pressure only further America's case of the blind following the blind.

Lower volatility, over the period of one day, does not mean that there is less uncertainty. Any statistical change over a period that short cannot be interpreted to mean anything - it's just not relevant. It's really time for Americans to wake-up and smell the coffee; Europe is only now beginning to feel the pinch from what's been developing on this side of the bond for the better part of this year and that too will take time. This is only the beginning folks and the sooner that we realize this as a country, the sooner we can 1) save to give ourselves some recovery insurance, and 2) truly plan and prepare for a recovery.

The Cost of Trust :: The Value of Due Diligence

It's been as many as eight years, but the top execs at AOL have settled with the SEC for their part in the company's stock-inflationary financial reports for the period 2000 through 2002. It'll cost them $8 million collectively, but I have no doubt that that represents a drop in the bucket in comparison to what investors lost as a result of their fibbing.

Eight execs, including CFO Michael Kelly, conspired to overstate online advertising revenue expectations by more than $1 billion. With online ads representing a key part of AOL business at the time, this exaggeration represented a significant factor in the company's valuation at the time. With higher valuations, the stock and option-holding executives were able to collect millions of dollars at the expense of lowly investors who got stuck holding the bag when reality fell far short of the lofty expectations.

Analysts hold an incredibly powerful position in the capital markets; they hold a fiduciary responsibility to the firms they represent and, ultimately, the investors who use their advice as an input to their investment decisions. While it's hard to place blame exclusively on the analysts in a case such as this, where their sources were apparently lying, $1 billion is not a small sum. An amount as large as this must be relatively easy for a dedicated analyst to substantiate. They have access to the company's executives, who they interview regularly, and have superior access to information otherwise.

As an investor, it's important to learn from this experience. Analysts are a wonderful source of information, but they're likely more valuable in the negative direction than they are in the positive direction. Analysts, in one form or another, are rewarded for spotting winners more than they are for spotting losers. Consequently, we lowly investors must be sceptical of any positive news and seek to perform our own due diligence to whatever extent possible. Think of analysts, like your broker, as a salesperson; you wouldn't buy a $10,000 toy solely on the advice of a kid at BestBuy - you would likely do some research first. Don't treat your investment decisions any different.

Microsoft Blocking Google with Yahoo! Deal

Yahoo!'s stock is up in pre-market-trading on news that Microsoft has approached them once again with a proposal that may satisfy the needs of both firms - at the expense of Google, of course.

Following the collapse of Microsoft's buyout of Yahoo! earlier this month, analysts and media alike have been talking about the possibility of a partnership with Google wherein Yahoo would outsource it's primary business: online advertising. In today's early morning news, it now appears that Microsoft is working to keep its options open by pass-blocking such a deal by offering Yahoo!'s management an olive branch in the form of a very similar advertising partnership deal.

The deal, although no details have been disclosed, would likely see Microsoft's advertisements appear throughout the Yahoo!'s portal website - offering Yahoo! the opportunity to hang-on to some of their independence as well as forging a new cooperative relationship between the two firms. Of course, no one is fooled; the real goal here is to keep Google away and make sure that Microsoft's buyout option is not killed-off completely.

In continuing analyst talk today, there seems to be consensus that Yahoo! will be bought - the only question is by whom. This continuing saga between some of the biggest names in online advertising today is certainly a sumo match to watch closely.

Paulson: Deny, deny, deny. Ok, but it's over!

Treasury secretary, Henry Paulson, is being lambasted for his glass-is-half-full approach to reporting on the state of the economy and the role of the financial markets going forward. While Mr. Paulson has been denying any serious problems in the capital markets, he's finally admitted that there was a problem, but that it's now over ...how convenient.

I'm very much aware that politicians need to put a positive spin on even the worst scenarios in order to keep people from panicking, but Mr. Paulson's approach has worked to to make him less than credible. I've been equally critical of Fed Chairman Ben Bernanke, but at least he both acknowledged and acted to quell credit crunch. Mr. Paulson has been adamant about denying the realities faced by both business and consumer until we reached a point in this down-cycle that appears, to Mr. Paulson, to be a turning-point. The reality, of course, is likely not all that rosy, which will only work to further discredit Mr. Paulson as reliable source for information on the state of the economy.

To be fair, Mr. Paulson is not saying that the economy is rebounding, but that the capital markets will play less of a role - replaced by the forces at-play in the housing and commodities markets.

"We are seeing signs of progress as capital and credit markets stabilize,'' Paulson said. "The markets are considerably calmer now than they were in March.''

He goes on to say...

"We will continue to look for additional tools to reach and help homeowners and to make existing programs work more smoothly,'' he said, cautioning that more declines may occur in months ahead. ``We know the correction has further to go, and so we should not be surprised at headlines that note rising foreclosures and falling home prices.''

So, at least he doesn't have a problem admitting that we do, in fact, have some problems in the housing market. As per my earlier posts, the Democrats are working to introduce legislation to help homeowners in much the same way as the Fed has helped financial institutions. The question will be wether it's too little too late.

Auction-rate bonds & Sub-prime loans; Deja-Vu anyone?

I have to admit that I wasn't familiar with auction-rate securities shortly before writing this post. From the news reports now filling the pages of many online financial news sites, it would seem that I wasn't alone. Of course, as with the sub-prime loans, the lack of understanding didn't seem to stop many from buying into these products.

One can't help but recite Mr. Warren Buffett's mantra: invest in what you know.

Auction-rate securities offer borrowers seeking long-term capital the opportunity to pay only short-term rates. Sounds ideal, right? You get money for as long as 40-years, but don't have to pay the premiums that would generally go along with such a maturity. This is possible because of the 'auction' in auction-rate. Specifically, as often as every 7-days, the interest rate cost on these securities are reset in a dutch auction. So, for those buying the securities, it's very much like buying short-term debt. Of course, as you might have guessed, there is a catch.

Unlike Treasury bills or investing in short-term money market funds, investors who purchase these auction-rate securities are essentially buying long-term debt (yes, like 40-years), but with the expectation that they'll be able to hand-them-off at the next auction. You have to ask yourself, then, what happens no other buyers show-up at the next auction? You guessed it, you get to keep those bonds. For individuals and institutions that purchased these securities because they were short-term, this could spell disaster if the funds were expected to be liquid to satisfy some other obligations.

It's not all bad news, if you have some other flexibility in your portfolio. There are penalties when the auctions fail; if you happen to be one of the owners of these little-understood securities and can manage to make-do when the auction fails, your return can shoot-up to as much as 20% on an annualized basis. That ain't bad when the banks are offering you less than 1% for short-term, liquid, savings accounts.

Of course, it's hard to think about the other side of the table - the institutions that sold these securities and are now forced to pay those double-digit rates.

At the end of the day, Mr. Buffett's wisdom certainly does shine-through. It's so simple. Invest in what you know and in what you understand. As an investor you have to appreciate that your broker is a salesman; he or she makes their money by selling securities to you. When they offer you a product that is unknown to you, then take the time to quiz them on the details. If they aren't able to answer your questions, then that should tell you something. If they aren't willing to explain them, then just get a new broker.

The Media & Lying with Statistics

I'm continually amazed at how the media manipulates economic data to present whatever picture it feels will best attract viewers, listeners or readers. Today's housings statistics are a perfect example of just such manipulation.

All morning, the news has been a buzz with the jump in housing starts - everyone clamoring to talk about how this may represent the rebound for which we've all been waiting. With no more than a glance at one article on Bloomberg, however, it's easy to learn of the whole picture. This is an example of the statement to which everyone has been referring:

Total housing starts jumped 8.2 percent to a 1.032 million rate as construction of multifamily units rose 36 percent following a 35 percent drop in March.

Here's the paragraph that immediately precedes it:

... a Commerce Department report showed construction of single-family houses in April dropped to the lowest level in 17 years, even as building of condominiums and townhouses rebounded. Builders broke ground on 692,000 single units at an annual rate, the fewest since January 1991.

I know; I shouldn't be surprised. In some ways it is a positive thing that those with a voice work to rally the rest of us into a [hopefully self-fulfilling] belief that the economy is indeed OK. However, when we folks like Mr. Alan Greenspan, the former Fed Chairman, and Mr. Myron Scholes, the winner of the Nobel prize in economics for his work on option valuation, both referring to the current state of the economy as the worst since the great depression, it's time to face reality.

When news reports focus only one the one part of the housing segment that is doing well and neglect to mention that the industry as a whole is declining to almost two-decade lows, then something is amiss. With the average American saving less than ever before and average American debt at record highs, the rising unemployment figures spell doom for those who fall only hear the headlines and continue to spend themselves into future financial ruin. It's time for those with a true understanding of what is going on in the economy to help those who do not.

Forget the Soft Skills; it's All About the Numbers

An interesting study was released this week that showed, at least in the UK, that the top spot at the big companies is reserved for those of us with the number skills. Sales and marketing skills may be good for something, but if your goal is to get a capital 'c' in front of your name, it's time to master that calculator.

Out of 200 CEOs surveyed by the recruitment firm Robert Half, 32 possess a background in finance whereas only 9 have a background in marketing communications - the second most common background. Although I'm certainly biased, being a numbers guy myself, I have to agree that the findings are consistent with my own feelings about what companies need. With Sarbanes Oxley and other new demands on the executive management of our publicly traded companies, it only makes sense that the individuals responsible for singing-off on the reports their companies release to the public actually understand what it is that they're signing.

CBS to buy CNet, but why did it take so long?

CNet is one of the biggest names on the Internet you never hear about. It's one of those brands who's logo you noticed when you stumble upon one of its websites (it has many) in search of the latest technology gear or review, but otherwise forget that it even exists. The reason, quite simply, is that it's not exciting.

Like the many brick and mortar businesses we never hear about, CNet is profitable and growing. The only difference when compared to the likes of Google and MSN is that it's growing slowly and doesn't really make a lot of fan fair about the addition of a new feature or technology to its arsenal. With a price tag that had floated between $1 and $2 billion dollars, the sheer cost to acquire the giant didn't do much to attract buyers either. So, why is CBS different?

How about TV.com and News.com to start. That's right, CNet is the guy behind the domains we would all love to own. TV.com may represent an incredible opportunity for CBS to take a position in online entertainment and News.com, similarly, could represent an opportunity to revive its once-great news programming. At the end of the day, however, it's just smart business. Whereas Facebook and Digg may be a lot more sexy these days, they are smaller in the size of their actually businesses and significantly more risky. With an internal rate of return (IRR) of about 13% projected by CBS for the deal, the purchase may not mean a sky-rocketing stock price, but it's certainly not the gamble that the likes of Microsoft are making in their on-again-off-again bid for Yahoo!

Team Icahn & The Continuing MS-Yahoo! Saga

Following the collapse of the Microsoft buyout of Yahoo! there were a lot of puzzled faces walking the streets of Wall. Likely no more puzzled than the faces of the investors in Yahoo! who stood to make a pretty premium over the now deflated stock price. Some notable investors, however, aren't taking this sitting down, standing-up or any other way.

Carl Icahn, the activist investor, has brought together a powerhouse team that he's threatening to run for Yahoo! board if Jerry Yang doesn't get his act, and team, together and resume talks with the big-M. The latest name added to Mr. Icahn's roster is none other than Mark Cuban who previously sold his video start-up company to Yahoo for a cool $5.7 billion in stock - yes, stock - making him a considerable addition.

With prices, as at the writing of this post, sitting at $27.5 per share, shareholders have see more than 15% of their possible take slip through their hands when Mr. Yang walked away form Microsoft's offer of more than $31.

Mark Cuban, irrespective of his financial might as an investor, is a powerful force in bringing further attention on the apparent missed opportunity at Yahoo! With consensus now that Microsoft and Mr. Ballmer have moved-on to bigger an better things, more attention may be too late. That said, there is equally strong consensus that the deal makes as much sense today as it did weeks ago and that Microsoft could be arm-twisted to returning to the table should it be greeted by a board that is more welcoming. With any deal this large, there is little doubt that Microsoft spent months planning its strategy and ultimate attack. While certainly not weeping at the loss of that investment, I for one would feel confident in saying that its management would welcome the opportunity to feel vindicated.

Earnings & Credit Ratings

In reading this article about GE on Bloomberg, I felt the need to write about the distinction between earnings reports and concerns over credit ratings. The two are separate and one does not directly depend on the other.

Credit ratings are simply that: relative evaluations of a company's creditworthiness or its ability to repay its loans. The difficulty arises from the fact that we tend to try and relate the stories we read to our own experiences. We know, for example, that the loss of a job will directly impact our credit rating and consequently the cost of borrowing to buy a home or car - as it should. Although this is accurate, it's not wholly relevant when discussing a company such as GE.

A lower earnings report is not the same as the loss of a job; it's more akin to rising expenses. Your personal credit rating may rise if you suddenly have mounting medical bills to pay, but it's probably not going to change as a result of the higher cost of oil. The important thing to note is the magnitude of the change relative to our overall wealth. In the case of GE, that wealth is significant. When GE reports lower earnings for the quarter, its rating is certainly not going to change. The reason is that this is likely both insignificant in light of its overall market capitalization as well as likely to be a temporary glitch in its continued profitability. Should GE show similarly weak earnings on an ongoing basis, however, then there may be cause for concern as this would tend to indicate signs of trouble within the company and not necessarily as a result of general market or economic conditions.

To make a long story short, it's easy to be swayed by an article that presents the facts in a way that is designed to stir discussion and either increase page views or newspaper sales. As with any information, consider the facts in light of the other information available to you.

Housing Market Outlook

I'm still sitting on the fence, waiting for the right opportunity to buy my first home-sweet-home. With all the trouble in the housing market, I'm sure that my opportunity is not far away, but the question now becomes how low can the prices really go. As with any declining market, an investor wants the most bang for their buck and seeks to time their purchase for the absolute lowest low. With foreclosures being reported up by 65% this month compared with the same month last year, however, the supply of homes on the market is still very much on the rise. Consequently, prices are still very much on the decline.

Watching Jim Cramer's Mad Money on CNBC last night I heard the mention that the first real estate markets hit by the slow down in Florida are beginning to show signs of life. As with the recent bull runs in the stock markets, it's likely just a head-fake. The underlying problems in the economy haven't gone away. Business bankruptcies are still mounting. Unemployment is still rising. Foreclosures are, well, you get the picture. Before these underlying factors are addressed, there isn't going to be any rush to buy any homes. People certainly aren't going to be bidding against each other in this market and that's a necessary condition for prices to rise.

We will continue to hear about some homes being sold and some real estate markets around the country rebounding. I would tend to suggest that this represents localized feelings of a trough; this is unlikely to be representative of a more broad-based recovery. Too many things are just ugly right now and people are stuffing those bills into the mattresses to insure against more rainy days. I, for one, am still waiting for when I can un-tuck some of those bills.

Is the CPI a scam?

The latest consumer price index figures were released yesterday and they showed a less-than-expected rise in the prices the average consumer pays for goods ranging from food to medical expenses. Of course, with the news dominated by the high cost of fuel and food prices continuing to rise, it's difficult to believe that inflation is not still higher than what is being reported. Consequently, I'm not surprised when asked how the CPI could possibly be an accurate reflection of the changes in the prices we really pay.

The reality is that it's probably not too far off from the truth. Sure, there are likely to be some estimation errors that come from the fact that not every single product can be monitored, but - on the whole - the Department of Labour is most likely reporting the figures it actually does record from in the marketplace. So, then, what is the discrepancy? Why is it that it seems as though our prices are rising faster than what our government is telling us?

The answer, unfortunately, is unlikely to satisfy many who are pondering the question. For one, the media isn't helping matters. The fact that we hear so much about commodity prices and the cost of oil on the rise and hitting record levels tends to overwhelm the public consciousness as it relates to prices. 

Furthermore, it's important to remember what the CPI actually represents: the average price paid for a specified bundle of goods by the average consumer in America. Now, ask yourself: are you average? To answer the question, consider the goods that you buy; are they representative of what the average person buys on a regular basis?

Although unsatisfying, the reality is that the CPI does probably represent a relatively accurate estimate of how prices change for the average consumer. Maybe what we should all be complaining about is the fact that there is no price index for the middle class, middle-upper class and so-on. All our concerns over gasoline prices are warranted, but does the average consumer drive an SUV or take the bus? While the 100% rise in the price of rice is undoubtedly troubling for developing nations, the extra $5 a month for the American household is, in all likelihood, going to go unnoticed as a change in the bank account balance.

Does a AAA rating still mean what it used to?

I've written before about the growing concerns over the reliability of analyst reports on the companies in which we all invest, but there is something to be said for the information available to the analysts as well. Mood's and Standard & Poor's, the two largest ratings agencies, hold an incredibly influential place in the market; it is based on their evaluation of a company's ability to repay its loans that it assigns its ratings with a triple 'A' rating representing the least risky investment. Of course, when the companies bearing this esteemed rating begin to show signs of diminishing creditworthiness, shouldn't the ratings move in tandem?

The answer appears to be no. When the two largest bond insurers, MBIA and AMBAC - insuring more than $1 trillion dollars in debt between them, began writing down hundreds of millions of dollars in losses resulting from collateralized debt obligations and other mortgage-backed securities, neither ratings agency showed any sign of concern. Fortunately for both these insurers, that meant that they could each turn to the capital markets to raise new funds at the lowest possible rates. But what about the lowly investor relying on these same ratings to judge the risk of purchasing a bond?

Unfortunately, there is no simple answer. The un-simple answer is that investors should never rely too heavily on a single source of information. Yes, I'm afraid that needs to include even the most respected ratings agencies in the business. So far, there is nothing to indicate that they haven't acted responsibly. After all, neither MBIA or AMBAC has defaulted on its own obligations and that, ultimately, is what a lower rating would tend to indicate is more likely to occur. Then again, as the saying goes, it's better to be safe than sorry.

Democratic foreclosure-prevention package - OK'd

With all the talk about the hundreds, yes hundreds, of billions of dollars made available each month by the Federal Reserve to help financial institutions survive the worst of the continuing credit crunch, it seems that the little guy may finally get something too. The U.S. House of Representatives approved a Democrat-sponsored foreclosure-prevention package that will essentially guarantee mortgages if banks cut principals so as to lower the payments on those loans. With foreclosures consider to be one of the key catalysts for the slowing economy and financial woes on Wall Street, this should certainly help everyone involved.

No one benefits in a foreclosure.

For the little guy, that's you and me, this means that banks should be just a little more willing to work with us to avoid foreclosure. The banks don't want to foreclose; besides all the transaction costs involved, it's just a hassle. They need to come-up with the paper work (both financial and legal) and ultimately boot some family out of their home. With their expectation to see only part of their loan returned to them given the current state of the real estate market, it's a lose-lose proposition for everyone involved. This new program gives them an out.

Assuming that banks are willing to do their part and cut the principal amounts on the loans, then those loans will be guaranteed - essentially eliminating their risk of holding-on to the mortgage and giving the borrowers (i.e. homeowners) a little more slack with which to retain ownership and make their monthly payments. The key here is that everyone needs to still do their part. The banks aren't getting something for nothing; they'll first need to make their own judgements as to who's mortgages should be cut and kept vs. those that they'll foreclose regardless.

Similarly, homeowners can't run away from their responsibilities. With news of people choosing to burn their homes or drive their cars into lakes and rivers so as to collect on insurance policies and avoid further payments, there doesn't seem to be a better time than the present to offer something to us little guys. The economic slowdown will continue for some time. More businesses will close and more people will lose their jobs. At least its nice to know that it's not only Wall Street that has the attention of our government.

LIBOR - The London Interbank Offered Rate

The London Interbank Offered Rate, also known as the LIBOR for short, is a daily reference rate at which banks offer to lend unsecured funds to other banks - specifically on London's money market. The LIBOR, however, is used all over the world as the basis for many securities that return a variable rate of return. Why is all this important or interesting? Well, the way it is calculated has come under attack in recent years and that model may very well be changing as a result.

The non-governmental British Bankers Association (BBA) that sets the LIBOR does so by first collecting reports from its member banks. These banks report what their costs of borrowing are to the association which are then figured into an average for use by all banks as their reference rate - the basis on which they offer funds to business and individuals for anything from mortgages to company lines of credit. In recent years, however, there has been mounting speculation that the member banks reporting their borrowing costs have been fibbing - under-reporting so as to keep their own borrowing costs lower.

With the slowing world economy and continued concerns over credit availability for many financial institutions - not exclusively those in the United States - interest rates are expected to begin to rise. Just as this means our own cost of borrowing on car and school loans will begin to tick upward, the big banks are concerned that their own costs will rise. Having issued much of their recent loans at the presiding low rates and many still saddled with quickly depreciating assets, this does not paint a rosy picture for banks as an industry. Of course, it's hard to see how this is any justification for manipulating the system for their own benefit.

As with CDOs, default swaps and mortgage-back securities, it's important for any investor to understand exactly what it is that they're buying when they invest their savings. The LIBOR is one of those elements that many of us likely take for granted, but this too should be a factor in our investment decisions. Understanding that the LIBOR is a manufactured entity should spur our own questioning of its validity and interest in alternatives - and there are many. The Fed Funds Rate, the Treasury Bills rate (for the relevant maturity, of course) or even your own banks prime rate. Consider the alternatives; talk with your bank managers and choose a reference rate with which you feel comfortable will provide you with an accurate representation of the cost paid by banks - the cost that they will the pass along to you.

The Real Price of Oil - Forbes.com Interactive Chart

There is, no doubt, a lot of talk about oil prices these days. Maybe more surprisingly, however, is the sometimes devil's advocate-like position that some take when discussing today's real price of oil relative to that of a decade or more ago. Similarly, in comparing the oil prices faced by American today with those faced by citizens of most European countries, some critics argue that we shouldn't by arguing at all. Well, for those of you still reading, you should check-out this link to a chart prepared by Forbes.com

The fight over the difference between nominal and real prices will continue to undercut some arguments when it comes to the CPI, but given the chart prepared by Forbes, it's difficult to see anything but a staggering rise in the real (i.e true) cost we face at the pump. In the last ten years alone we have seen almost a 10-fold increase in the price of oil and a similar rise in the prices of gasoline. That's a ten-times increase; put differently, 1,000 percent. 'nough said.

REVIEW: The Audacity of Hope - Barack Obama

As many of you know, I'm an avid West Wing watcher. I've probably seen every episode a few times. The reasons are many. For one, the acting is wonderful. The writing is exceptional and plots are both realistic and fantastic. Most of all, however, I find myself continuously intrigued by the many forces that pull on politicians at the highest ranks in their effort to serve both their constituents as well as their own ambitions. Mr. Barack Obama's book, The Audacity of Hope, provides a similar view on such forces and, similarly to the fictional President Bartlet, makes one yearn for a political candidate that seems to truly represent the many feelings most of us share about politics.

The Audacity of Hope is not what I expected. When I cracked open the book I looked to find one politician's manifesto - written to advance his bid for the next office. Instead, I found a cross between a biography and window on political life ...interspersed, of course, with tidbits of political speak that refer back to Mr. Obama's platform. On the whole, however, the book is both well written and interesting; one that you will want to finish once you start. 

Just like the reasons for which many believe The West Wing was so popular, it provides the reader with hope for what our leadership could be. It provides us with hope for what government can be. I don't agree with everything for which Mr. Obama argues in his book, but I did find myself marveling at his ability to empathise and play devil's advocate on many of the issues he does address. It is this simple act that attracts me to him as a candidate for the American Presidency.

I am naive, or so I've been told. It's likely true. I always like to believe that people are good and that what they say are either true or are believed to be true when said. Mr. Obama never made me feel otherwise. Politicians, of course, are known for speaking the words and ideas that their constituents want to hear - I am not so naive to not acknowledge this. I will say, however, that I have found that Mr. Obama convincing.

When speaking on subjects in which we don't truly believe or understand, there is a tendency for anyone to speak in broad generalities and use metaphors to relate the listener or reader to the ideas presented. When we speak on subjects about which we truly believe, however, we have a tendency to use our own experiences from which we learned the lessons we hope to share with others. Mr. Obama's The Audacity of Hope comes across as the latter and if his words are only partly representative of the President he may become, then it is no wonder that he has been so successful in organizing such broad support for his campaign cost to coast.

CNBC's Million Dollar Portfolio Game - One Caveat

Ever wanted to play the stock market, but were too afraid to risk your own money? Virtual stock market games are a great way to learn the fundamentals with real data, real stocks and real news. You don't risk any money - it's like investing with monopoly money. With many of these games you can start as may portfolios as you like to try-out all your different portfolio strategies to see what works best for you. Within week (sometimes days or even hours) you'll know if this is something that interests you or not and, more importantly, you will not have risked your savings to find out.

Well, if you'd like to give this a shot, then there's no better time than the present. CNBC has started its annual Million Dollar Portfolio Challenge today. It's open to all American residents (yes, I know; that doesn't include me) and as long as you're of legal age, then you probably meet the rest of their eligibility requirements. They're giving away some great prizes to the top portfolios each week with the grand prize of $1 million dollars shared among the top portfolios as the conclusion of the challenge. Like I said, if you want to give this sort of thing a shot, then this is a great way to learn and profit.

There's an important caveat to keep in mind: you will not learn sound investment practices by playing such games. Why? Because these are short-term games ...akin to sprints, not marathons. To win this sort of game you'll need to invest in high-volatility (i.e. risky) stocks to get the greatest potential return within the few weeks of the competition. This is obviously not a strategy that anyone would advocate if you were investing with your own money. That said, you're not investing your own money; so, as long you as you keep this caveat in mind, then go for it. Play. Learn. Profit!

Hillary Clinton $11 million in the Red - Personally!

From my years of watching The West Wing I knew about the campaign finance provision that allows candidates to loan personal funds to their campaigns. What I didn't know, however, was that there was a time limit for by when the candidate can recoup those loans by raising money as a candidate. That time limit is their party's nomination. With the August democratic convention nearing, Clinton has only a few months reaming to come-up with a whopping $11 million that she has loaned to her campaign!

Why is this interesting? Well, on the surface it's interesting to hear the kinds of sums of money that are involved - even as a personal loan from a candidate. The real news, however, is what this may mean for the democratic race for the nomination. Depending on how significant $11 million is to the Clintons, Mrs. Clinton may be tempted to back-out of the race and back Mr. Obama in exchange for some financial support. This, of course, would end the inter-party bickering and allow Mr. Obama to finally set his sights on the White House. Of course, having earned over $100 million since the start of this decade, the Clinton's aren't exactly struggling - even if they do need to walk away from their loan.

The law states that Mr. Obama would not be able to help Mrs. Clinton directly, but there is nothing that prevents him from looking to his record-breaking fundraising base to do so. Of course, with his own need to raise further funds in preparation for the national campaign following the convention, he may hold his own interests in priority to those of his rival.

Money makes the world go around. The same is true for politics. The fact that Mrs. Clinton is having difficulty raising funds and has had to resort to personal loans means that she has lost support among her backers. This, of course, is an indicator of where that support may have gone. With Mr. Obama now leading in both the super delegate race as well as the popular vote, it's not difficult to put one-and-one together.

Research In Motion's Bold Tactics

Research in Motion, the company behind the Crackberry (aka Blackberry) finally announced its long-anticpated 9000-series phone, dubbed the 'Bold'. The phone, already been teased as a potential iPhone-killer, sports a touch-screen and new technology that speeds dowloading so as to even allow live tv-like streaming over wireless networks. With Apple's next-gen iPhone expected to be announced in a matter of weeks, the segment that is expected to quadruple to 400 million users worldwide in the next three years is definitely heating-up.

RIM has not been sitting idly-by as Apple's iPhone began to dominate the smartphone market. With the release of its popular Pearl and Curve phones, it went head-to-head with Apple offering business users multimedia features and simultaneously enticing non-business users to give their products a try for the first time. It worked. RIM has seen tremendous growth ever since and that growth is expected to continue with today's latest launch.

From a pure business perspective, it's an interesting company to watch; they've got some smart, entrepreneurial, minds behind those sleek devices. To help bolster their consumer appeal as well as solidify their hold on the enterprise sector, RIM introduced a $150 million venture fund to help finance businesses building applications for their phones and therein insuring that growth of the developer community that ensures their continued success. Not surprisingly, Apple's soon-to-be launched iPhone Application Store (part of the iTunes Store) is using the same logic tap into the already thriving 'blackmarket' for 3rd party applications already numbering in the thousands.

I remember my first PDA; it wasn't a Palm Pilot and it really should have been. The one that I did buy was from Texas Instruments and by all counts it was a superior device to anything that Palm had released. Its downfall, however, was that it was marginally more expensive and consequently attracted significantly fewer buyers. Fewer users, in turn, mean that there was a smaller market for applications developed by 3rd parties and those developers flocked to the Palm computing community who's application collection surged. Ultimately, of course, Palm became the de-facto PDA not because it had the best product, but because it had the best supporting community. To see both RIM and Apple working to ensure that same thriving community makes both these companies ones to watch.

Citigroup to shed $500 Billion; that 'B' for Billion!

In today's financial climate it's not particularly news to hear that a bank is writing down some assets. When its this scale, however, it tends to grab your attention.

Don't mistake my comments for criticism. I agree with other opinions on the matter that this is the right move for Citi's new chief, Vikram Pandit. A good rule of thumb for any investor is to limit their focus to only a handful of securities; you really can't properly monitor more than that and adequate portfolio management is key to long-term success. I see Mr. Pandit's actions as no different. He's consolidating. Here's a good summary of their reasoning for the move form this article:

...Citigroup executives did point out several shortcomings at the bank that need to be fixed, including organizational redundancies, a fractured corporate culture and waning market share in U.S. retail banking. And the company introduced a new slogan as part of its revamping efforts: "Citi never sleeps."

It's funny that people are actually concerned about Citi's resulting loss of its top-spot as the nation's bank; who cares! I'm not a shareholder, but if I was I wouldn't care about its ranking nationally or otherwise; I care about the bottom line. I care about what management's decisions mean for its earnings and how that will affect equity value. Period.

Unemployment Trending Upward

It's an election year and no one wants to admit it, let alone talk about it, but the reality is that the employment outlook is not pretty. Since early last year unemployment has been steadily rising and shows no signs of slowing down - regardless of what the politicians want us to believe. Oh, and if you think that unemployment can't go much higher than it is already, then look at the included graph as a comparison against what it used to be during this decade's first recession.

Unemployment, for the sake of unemployment, sucks. What makes this picture that much worse, however, are all the other factors that are still mounting an attack on the lowly consumer. Rising fuel costs; rising food costs; falling home prices... maybe worst of all, rising consumer debt. You can't really blame people for drawing on their lines of credit to make it through the tough times, but I'm sure that you too can guess what will happen when the cost of credit begins to rise as it is expected to do in the coming year. All that debt will suddenly become increasingly expensive leaving everyone scrambling with  even fewer options to cover their living expenses.

The picture is gloomy, I know. It doesn't need to be as bad as it is though. The most important thing that people can do is to recognize the true state of the economy and act accordingly. Yes, it's time to cut-back on spending and increase savings for those sure-to-come rainy days. Every business owner knows that to survive the troughs you need to lower expenses along with falling revenues; it's just too bad that not every person has the same business know-how to make similar adjustments in their personal finances.

Fooling Some of the People All of the Time

CNBC just had a great little interview with David Einhorn, the president of Greenlight Capital and author of a new book: Fooling Some of the People All of the Time: A Long Short Story. I haven't read it yet (just learned of it), but I think that it's going on my reading list. Why? In the interview, Mr. Einhorn suggested a fairly simple idea to help avoid the sorts of financial problems that he saw at Allied and that we're seeing today with CDOs and mortgage-backed securities: why not mark-to-market all securities?

Marking-to-Market is simply the idea that your portfolio should accurately reflect the value of your investments even if they are not yet realized. For example, if you sold a call option (sold the option to buy a stock/security to someone else), then you have the obligation to deliver that stock or security if that call option is ever exercised. Now, let's further assume that you sold that put right at the money and it has since declined by $10. Since options are marked-to-market, your broker may require you to place the $10 in your cash account as a security against the $10 that you will be obligated to pay upon the exercise date. Sure, the exercise date may be months away and the price may very well reverse in the meantime, but the concept of marking-to-market ensures that those investors issuing those securities have the assets to finance them. From the perspective of the big banks doing the same thing, the marking-to-market would clarify the value of their balance sheets and make retail investment in those banks that much safer.

So why isn't Marking-to-Market not done all of the time? Well, the principle reason is cost. Marking-to-Market on some securities can require a great deal of monitoring expense that would undercut the earnings investors were collecting from those investments. This is a valid point, but like most things in life, there should be some compromise. Moreover, as the digital age advances, our financial transactions are increasingly computerized. As some of you know, however, at least part of the problem with the CDOs and mortgage-backed securities is the documentation: it's a mess. Marking-to-Market of such securities would undoubtedly increase the cost of these assets, but it would also require the financial institutions both issuing and purchasing them to keep very accurate records of their value.

What I like most about this idea, as Mr. Einhorn explains, is that it doesn't require more legislation or regulation besides requiring companies to do what they already must do on other (similar) securities. Even monitoring by the government and its agencies would be simple. I'm going to have to think this idea through further, but for now... it's a very interesting idea for both its simplicity and effectiveness.

12 times $625 million equals $7.5 billion

That's the total, potential, exposure that State Street faces in light of a law suits already filed against it by several insurance companies for whom they managed retirement funds. No one believes that the verdict will be that high, of course, but that's the maximum as calculated based on the losses suffered by the funds under management as a result of the sub-prime mortgage investments. $625 million, on the other hand, is what State Street set aside late last year in anticipation of these lawsuits. See a discrepancy? Me too.

The lawsuits, under review for class action status, appear to have more than one leg to stand on. The reason is that the suits are filed under the Employee Retirement Income Securities Act (ERISA); why is that important? Well, funds registered under ERISA are designed to be relatively low-risk so as to appeal to individuals looking for retirement-oriented investments. As it turns-out, of course, sub-prime lending isn't all that safe and a lot of people are now faced with the loss of as much as half of their retirement savings. How would you feel or react if that were you? Yea, me too.

State Street, of course, isn't the only one in this position and there will be others hitting the headlines in the coming months. The issue is really the extent to which these fund managers owe a fiduciary responsibility to the individual investors whose money they are ultimately investing. Were these investors properly informed of the risks being taken? Did the fund managers even appreciate the risks themselves? If you're interested in corporate finance, then the next year will certainly be an interesting one to observe. 

Just as in we had Sorbanes Oxley come-about as a result of the scandals earlier this decade, I'm sure that we'll have new legislation and regulation written to avoid such events in the future. It's easy to view this as just a cycle - one that will repeat again, just in a different form with a different name and with different acronyms. What makes this a little more real is the thought of the millions of people whose life savings have been so detrimentally affected by the decisions of so few.

Vallejo, California's Bankruptcy 'Unrelated' to Sub-Prime Lending?

Yesterday's big economic news, as far as I'm concerned, was that a town in California would be filing for bankruptcy. As the announcers were saying it, they adamantly followed-up each and every statement clarifying that this was not the result of the wide-spread sub-prime lending problems plaguing the rest of the country. ...how is this not related? Who are they kidding?

I'm the first to support the notion that the government, via the media, should do what it can to keep confidence levels up and maintain positive future prospects among the citizenry. That said, there's a point at which doing so can be more harmful than good. This is one of those moments.

People are funny. They watch the news in segments - disconnected segments. In one segment, an economist will be warning people of rising unemployment, growing concerns over inflation and work diligently to avoid saying the R-word (recession). In the very next segment, albeit after a regularly scheduled commercial break, the well-dressed financiers will excite everyone while quoting statistics from the latest rally sparked by news of higher sales volumes. How is it that no one connects the two segments to provide people with a more complete picture of what's going on in America?

Rising sales - sure, it's possible. Of course, the question is how are those sales being financed? With interest rates at 2%, I bet that you could guess! With the decline of home values to record lows, the average person's wealth has diminished dramatically. All the while, these same people are taking-on more and more debt, forgetting that unemployment is rising and their job security may not be there a month or week later. Then, ask yourself what happens when those individuals and families with all that debt lose their jobs and have zero (or negative) home equity. What happens to those individuals and families when interest rates begin to rise again and the cost of all that debt increases on them? I bet you could guess that too...

Credit lines in the sand

It's tempting to believe that the credit crisis is nearing an end. I hear it too; many of you know that I'm an avid CNBC watcher and their stance, more often then not, is that the worst is behind us. I'm afraid that I disagree. The worst is yet to come. The reason? The tighter belts at the banks and slowing credit hasn't had enough time to really impact businesses ...yet.

I wrote a post a few days ago quoting an article wherein they stated that bankruptcies were up 49% year-over-year. I'm afraid that even that is only the beginning, but it is an indication of what is yet to come.  Businesses, especially growing businesses, rely on their credit lines to get them through the tough times. We're in one of those times now, but the credit lines won't be there to provide the businesses with the cushions that they need.

In stead, businesses will begin to see their cash reserves dwindle as their sales and revenues decline. Of course, no business, especially new businesses, can react instantly to changing market conditions. As a result, fixed costs will remain at their original levels for some time and those fixed costs will need to be covered - if not by revenues, then by what? The credit lines won't be there... Put one and one together and you begin to see the picture that's developing nationwide.

The credit crises, or at least what started it initially, may be nearing an end. Unfortunately, the effects of that crisis are only now beginning to be felt and it will take time for their full impact to reach the bottom line.

Everyone believes that they're underpaid...

I'm sure that no one is surprised by the title of this post; we all believe that we're underpaid. More precisely, we believe that others are paid better than we are. The reality, however, is likely far from the truth. This differential between what people earn and what we believe that they earn comes from the fact that no one speaks about their earnings - we infer their earnings from their spending behaviour. With personal debt levels at all-time highs, this is undoubtedly a poor indicator.

For those of you unaware, I'm a Canuck. Up here north of the border, the average salary is about $27,500 for an individual living alone (this excludes students working part time or summer jobs that would otherwise drag-down the average). Shocking, isn't it? With all the talk about six-figure salaries, the reality is that a six figure salary more than four-times the average salary.

Most people spend beyond their means. They spend more than what they earn and incur massive debts in order to live like they believe their neighbors can in-fact afford to live. In trying to keep-up with the Jones', it seems that we're all chasing a lifestyle that very, very few of us can actually afford.

What does this all mean for those currently on the job hunt? Well, for starters, it should give pause in consideration of what sort of salary is actually deserved based on your experience and abilities. Of course, we all believe that we're above average - which, of course, can't be true - so we all demand salaries that are above average. There's no harm in believing in ourselves; it's a positive thing. I suppose that I'm writing this not to suggest that anyone suppress their earnings expectations, but rather than we think twice about what it is that we're actually worth. Think about it from the perspective of your employer or potential employer. What sort of value are you going to generate for them? If you're worth six-figures, then that would imply that you can generate at least that much profit (not revenue) for the company; can you?

Money Market Funds ...Almost Risk-Free

If you've ever studied finance, then you know that the notion of the risk-free rate is critical to the valuation of many other financial instruments. U.S. Treasury Bills (T-Bills) are most often used as the de-facto risk-free rate, but what about money market funds. Since they were introduced almost four decades ago, not a single retail investor has ever lost a cent. Does that mean that they're risk-free?

No. Fortunately, that shouldn't dissuade anyone from including them as part of their well diversified portfolio. Money market funds tend to offer rates of return slightly better than T-Bills and certainly better than what your bank will offer on your savings or checking accounts. What should be considered as part of the decision, however, is that they are not guaranteed by the government in the same way as your savings and checking accounts are. There is a risk of default and there is a risk that you could lose all or part of your investment.

Money market funds, like other funds, group various types of investment assets together to offer retail investors (that you and me) the opportunity to buy an already-diversified (and presumably less-risky) asset in one go. In the case of money market funds, these include T-Bills, short-term corporate bonds and other, generally high-quality, short-term debt. The fact that they're short-term is important. The fact that they're high-quality is also important. These two facts together mean that it is highly unlikely that a debt instrument that is deemed to be high-quality is to default within one-year or less (the generally accepted short-term duration). As investors, however, we should be aware that there is a risk and like any risk, should not be ignored.

So what does this mean for your investment decisions? Probably, not much. If you're a savvy investor, then you already know that diversification is your best safety net. As long as you don't invest too much (proportionally) in any one type of asset, then you're unlikely to suffer a significant loss in even the worst of circumstances. Money market funds are a great safe bet. Just remember that safe doesn't equate with risk-free.

Bankruptcies up 49%! Yes, 49%!

Some days, when you listen to the latest equity market numbers, you wonder can't help but wonder where all the fuss about recession comes from. Sure, the markets decline some days, but for the most part we only hear about the rallies and bulls. The bears are sparse and far between. Then you come upon an article that shocks you with some numbers that bring your feet back on the ground... bankruptcies up 49% years-over-year.

We already heard about the foreclosures, but that's because of the sub-prime hoopla, right? If there was any doubt as to whether the economy was slowing, the rising number of businesses forced to closedown should shed some light on the matter.

1.1 million bankruptcy filings! Yes, that's 'm' for million. As in... if you had one dollar for each business that failed, you would be a millionaire with some change to spare. Sobering, isn't it?

Indexes as Market Indicators

An index is just a collection, usually weighted by some variable, of assets so as to provide an average that observers of that index can use to evaluate general trends in the underlying market for those assets. This implies a very important concept: an trending indicator is not an indicator of underlying value.

For some reason, people (including sophisticated investors) are tempted to view indexes as representative of the value of the assets that they represent. The credit default swaps market and indexes like ABX, CMBX (any kind of X, really) is an ideal example. According to accounting principles, companies must use such indexes to value securities, like swaps, that are traded irregularly or for which there is limited liquidity. Why is this important? Simple. Like any other market index, it is susceptible to volatility resulting from investor speculation; as investor excitement grows for the underlying assets, the value of the index can climb completely unrelated to the underlying growth of the assets that they represent. Of course, the opposite is true as well and this has proven to be a big problem in the face of the persisting troubles resulting from the sub-prime mortgages.

It became a self-fulfilling prophecy. As concerns over mortgage back securities, collateral debt obligations and other new acronyms abounded, investors began speculating the market (and its index) downward. As the index crashed, companies around the globe relying on them as representations of underlying value were forced to write-down the value of their holdings in those assets. A vicious circle emerged with more and more news of write-downs spurring greater and greater downward pressure on the market indexes and even further declines in the representative value of the assets held by financial institutions.

Suddenly, banks were losing tremendous amounts of money and reporting lower performance in their reports. To protect themselves, they started selling-off the assets that caused them problems and, more importantly on an individual basis, began to tighten their lending making it more difficult to obtain loans. As credit shrank, the economy began to slow further when companies could not borrow the funds they needed to finance their growth plans. As banks looked to cover their butts, foreclosures ramped-up driving even greater pressure on homeowners already facing higher prices and growing unemployment.

Fortunately, nothing lasts forever. The price of anything can only fall to zero and no lower; there is a lower limit. Yes, many of these sub-prime mortgages will default, but not all. Eventually the market will stabilize and banks will resume business-as-usual. As this happens, new legislation will be passed and new accounting principles written to help avoid a similarly vicious circle in the years ahead. It's all a learning process for everyone involved. The politicians and policy makers that write the laws and regulations we all follow are only human and they too learn from their mistakes... sometimes.