Happy Holidays

You knew this was coming...

http://economix.blogs.nytimes.com/2008/12/08/the-12-days-of-bailouts/

Funny Money

Hedge Fund Manager: Goodbye

Andrew Lahde, manager of a small California hedge fund, Lahde Capital, burst into the spotlight last year after his one-year-old fund returned 866 percent betting against the subprime collapse.

Last month, he did the unthinkable -- he shut things down, claiming dealing with his bank counterparties had become too risky. Today, Lahde passed along his "goodbye" letter, a rollicking missive on everything from greed to economic philosophy. Enjoy:

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, "What I have learned about the hedge fund business is that I hate it." I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.
I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don't worry about my employees, they were always employed by Mr. Springer's company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life -- where I had to compete for spaces in universities and graduate schools, jobs and assets under management -- with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government.

Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man's interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft's near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won't see it included in BP's, "Feel good. We are working on sustainable solutions," television commercials, nor is it mentioned in ADM's similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country?

Ah, the female. The evil female plant -- marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let's stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best,

Andrew Lahde

More from Warren Buffet

Warren Buffet explains why he’s overweighting US stocks in his PA. Anyone that has watched hockey can relate to his (Gretsky’s) advice to “skate to where the puck is going to be, not to where it has been.” This from the New York Times.


THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Everybody is panic selling except Warren B.

Warren Buffet is famous for saying:

Be fearful when everybody is greedy and greedy when everybody is fearful.

Everybody is fearful right now.


It is intriguing when the greatest investor of our times has been on a buying spree and yet the markets have just had the worst week in 7 years per CNBC. The herd mentality in the financial markets continues to live strong. After all, we're just now coming off commodity and real estate bubbles. Why not have an overdone stock market sell-off?
Below are the highlights of the recent Buffett purchases:

* 9/19: MidAmerican Energy and Constellation Energy (CEG) reached a definitive merger agreement in which MidAmerican will purchase all of the outstanding shares of Constellation Energy for a cash consideration of approximately $4.7 billion, or $26.50 per share. Berkshire Hathaway (BRK.A) owns 87.4% of MidAmerican.

* 9/23: Berkshire Hathaway is paying $5 billion for Goldman Sachs (GS) preferred shares that pay a 10% dividend. Berkshire also gets the right to pay $5 billion more in Goldman common shares at $115 each.

* 9/29: MidAmerican Energy today announced it has agreed to purchase 225 million shares, representing approximately a 10 percent interest, in BYD Company Limited (1211.hk). The investment is valued at 1.8 billion HK dollars, or approximately $230 million U.S. dollars.

* 10/1: Berkshire Hathaway agreed to buy $3 billion of preferred General Electric (GE) stock. This stock pays a generous dividend of 10%. On top of that, Berkshire gets the option to buy $3 billion of GE common stock at $22.25 per share, well under the current trading price of around $25 a share.

* 10/3: Wells Fargo (WFC) said early Friday that it would pay 0.1991 of a share of common stock in exchange for each common share of Wachovia Bank (WB) in a deal worth $15B. Berkshire Hathaway is the largest shareholder of WFC.

That's a potential for over $30B in deals with up to $16B in cash.

News by Bloomberg of the worst month ever for hedge funds in September might be a big reason for such a negative market this last week. As those redemptions come in the market might have faced a lot of forced selling this week. After all, we know the rescue plan passed on Friday should have been net positive to the market. Friday's action after the passage in the House smelled of desperate hedge funds attempting to sell at the best valuation they could get prior to redemption payments.

Warren Buffett may have been early in the market, but anyone would be surprised to see him down much on any of his investments. Of course, his cash deals with GE and GS were clearly better deals than any small investor could get, but it's hard to see why anybody would be a net seller when Buffett has gone on a widespread buying spree. Buffett has even come out on more than one occasion and stated that the rescue bill approved on Friday would likely be profitable to the government. Yet, most taxpayers are overwhelmingly negative on the bill.

This pretty much sums up the mood of the moment...

Things can change pretty quickly...

"It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions."

Joseph J. Cassano, a former A.I.G. executive back in August 2007

Ben's testimony before the U.S. Senate

Testimony
Chairman Ben S. Bernanke
U.S. financial markets
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
September 23, 2008

Chairman Bernanke presented identical testimony before the Committee on Financial Services, U.S. House of Representatives, on September 24, 2008

Chairman Dodd, Senator Shelby, and members of the Committee, I appreciate this opportunity to discuss recent developments in financial markets and the economy. As you know, the U.S. economy continues to confront substantial challenges, including a weakening labor market and elevated inflation. Notably, stresses in financial markets have been high and have recently intensified significantly. If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.

The downturn in the housing market has been a key factor underlying both the strained condition of financial markets and the slowdown of the broader economy. In the financial sphere, falling home prices and rising mortgage delinquencies have led to major losses at many financial institutions, losses only partially replaced by the raising of new capital. Investor concerns about financial institutions increased over the summer, as mortgage-related assets deteriorated further and economic activity weakened. Among the firms under the greatest pressure were Fannie Mae and Freddie Mac, Lehman Brothers, and, more recently, American International Group (AIG). As investors lost confidence in them, these companies saw their access to liquidity and capital markets increasingly impaired and their stock prices drop sharply.

The Federal Reserve believes that, whenever possible, such difficulties should be addressed through private-sector arrangements--for example, by raising new equity capital, by negotiations leading to a merger or acquisition, or by an orderly wind-down. Government assistance should be given with the greatest of reluctance and only when the stability of the financial system, and, consequently, the health of the broader economy, is at risk. In the cases of Fannie Mae and Freddie Mac, however, capital raises of sufficient size appeared infeasible and the size and government-sponsored status of the two companies precluded a merger with or acquisition by another company. To avoid unacceptably large dislocations in the financial sector, the housing market, and the economy as a whole, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, and the Treasury used its authority, granted by the Congress in July, to make available financial support to the two firms. The Federal Reserve, with which FHFA consulted on the conservatorship decision as specified in the July legislation, supported these steps as necessary and appropriate. We have seen benefits of this action in the form of lower mortgage rates, which should help the housing market.

The Federal Reserve and the Treasury attempted to identify private-sector approaches to avoid the imminent failures of AIG and Lehman Brothers, but none was forthcoming. In the case of AIG, the Federal Reserve, with the support of the Treasury, provided an emergency credit line to facilitate an orderly resolution. The Federal Reserve took this action because it judged that, in light of the prevailing market conditions and the size and composition of AIG's obligations, a disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the U.S. economy. To mitigate concerns that this action would exacerbate moral hazard and encourage inappropriate risk-taking in the future, the Federal Reserve ensured that the terms of the credit extended to AIG imposed significant costs and constraints on the firm's owners, managers, and creditors. The chief executive officer has been replaced. The collateral for the loan is the company itself, together with its subsidiaries.1 (Insurance policyholders and holders of AIG investment products are, however, fully protected.) Interest will accrue on the outstanding balance of the loan at a rate of three-month Libor plus 850 basis points, implying a current interest rate over 11 percent. In addition, the U.S. government will receive equity participation rights corresponding to a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders, among other things.

In the case of Lehman Brothers, a major investment bank, the Federal Reserve and the Treasury declined to commit public funds to support the institution. The failure of Lehman posed risks. But the troubles at Lehman had been well known for some time, and investors clearly recognized--as evidenced, for example, by the high cost of insuring Lehman's debt in the market for credit default swaps--that the failure of the firm was a significant possibility. Thus, we judged that investors and counterparties had had time to take precautionary measures.

While perhaps manageable in itself, Lehman's default was combined with the unexpectedly rapid collapse of AIG, which together contributed to the development last week of extraordinarily turbulent conditions in global financial markets. These conditions caused equity prices to fall sharply, the cost of short-term credit--where available--to spike upward, and liquidity to dry up in many markets. Losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds. A marked increase in the demand for safe assets--a flight to quality--sent the yield on Treasury bills down to a few hundredths of a percent. By further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth.

The Federal Reserve took a number of actions to increase liquidity and stabilize markets. Notably, to address dollar funding pressures worldwide, we announced a significant expansion of reciprocal currency arrangements with foreign central banks, including an approximate doubling of the existing swap lines with the European Central Bank and the Swiss National Bank and the authorization of new swap facilities with the Bank of Japan, the Bank of England, and the Bank of Canada. We will continue to work closely with colleagues at other central banks to address ongoing liquidity pressures. The Federal Reserve also announced initiatives to assist money market mutual funds facing heavy redemptions and to increase liquidity in short-term credit markets.

Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.

At this juncture, in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand. Certainly, the shortcomings and weaknesses of our financial markets and regulatory system must be addressed if we are to avoid a repetition of what has transpired in our financial markets over the past year. However, the development of a comprehensive proposal for reform would require careful and extensive analysis that would be difficult to compress into a short legislative timeframe now available. Looking forward, the Federal Reserve is committed to working closely with the Congress, the Administration, other federal regulators, and other stakeholders in developing a stronger, more resilient, and better regulated financial system.

Footnotes

1. Specifically, the loan is collateralized by all of the assets of the company and its primary non-regulated subsidiaries. These assets include the equity of substantially all of AIG's regulated subsidiaries.

To Our Clients

Dear Clients,

In view of the tumultuous developments in the U.S. and foreign financial markets, we felt it appropriate to give you our overview of the current situation and an explanation of what we think will be the ultimate outcome.

While the Federal Reserve has taken significant steps to provide liquidity to the financial institutions (commercial banks, investment banks, insurance companies, etc.) which hold mortgage-backed assets of questionable value, there is a high degree of unwillingness for investors to make capital commitments to these institutions. This has resulted in a crisis of confidence which, in turn, has wreaked havoc on the prices of the equities of those financial institutions.

Before the financial markets begin to recover, the weaker participants--who had contributed to the excess lending capacity in the mortgage market--will be either absorbed or eliminated. This process will require sacrifice, ingenuity, patience and perseverance. Then, at some point in the not-too-distant future, expectations of a return to financial stability will take hold and markets should recover.

At the foundation of our belief in the ultimate resolution of the financial market problems are the facts that central banks are taking the correct steps and that the economies of the world will continue to grow, albeit at a slower rate than had been experienced in recent years. The recent decline in energy and related commodity prices, as well as the stabilization of the Dollar, coupled with reduced inflationary expectations, afford the opportunity to correct the malaise.

Finally, we want to assure you that we continue to monitor the developments impacting the markets, as well as the securities in your portfolio(s) and will be certain to make any adjustments deemed necessary as conditions continue to evolve. Please feel free to contact us with any questions.

Very truly yours,

Gofen and Glossberg, LLC

How bad is the bank crises?

If you read the common buzz concerning the current financial crisis you would get the impression that this is the worst crisis ever to hit the economy. Yet, on Friday the FDIC announced only the 10th bank failure for 2008. With over 8,000 banking institutions in the U.S., 10 failures seem a long ways away from a crisis. Here is some of the data to see how “big” the banking crisis has become. Here are a few points of interest:

- The 10 banks taken over by the FDIC had just under $40 billion of assets in total.
- The total assets of the 10 largest banks in the U.S. is a combined $6 trillion.
- Total assets of all 8,451 FDIC insured institutions is $13.3 trillion.
- Percentage of failed assets, year to date, of total: 0.3%. Or written as a decimal: 0.003 of all banking assets were in failed banks so far this year.

In comparison, during the Savings and Loan debacle of the 1980s and early 1990s there were over 1,000 federally insured S&L’s dissolved. The Resolution Trust Corp. took down 747 institutions over 6 years, or a rate of 125 per year. The current situation is showing no signs of getting anywhere near those levels.

The current situation has most banks taking severe write downs on any asset that has any chance of being impaired. If these assets under-perform less than anticipated, many banks could be recouping the write downs as outsized profits in the next few years.

Many believe we are just at the beginning of a major financial crisis in the U.S. This is a financial system where home prices peaked almost 3 years ago and the mortgage meltdown started in earnest over a year ago and we still have only 10 bank failures and less than 1/3 of 1% of banking assets taken over by the feds. Bank failures are not accelerating this late in the game as the economy starts to recover and the housing market is showing signs of a pending bottom.

Is this a glass half full or half empty? Do we include Fannie and Fredie in this collection of "banks?" And what about Bear Stearns? Is there fear out there...rescuing Fannie and Freddie will put the bail-out numbers into the trillions. Just a thought.

Wall Street Troubles - The Spiral

Downfall is a terrific movie about the end of Hitler's reign in 1945. There have been countless spoofs done with the movie. Here are three that tell the current Wall Street woes.


Part I - Those Vultures



Part II - Managing Directors Everywhere


Part III - On Stag

Hmmmm...What would Warren say?

There is an alleged ancient Chinese curse, “May you live in interesting times.”

While there is no historical proof of the origin of that curse, there is ample current proof in the securities markets that we are living in interesting times. It’s simply nasty out there — or at least it feels that way.

That made us think about advice from Warren Buffet for difficult times. Here are some of his comments that may be relevant as investors watch wilting portfolios:

Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.

Our favorite holding period is forever.

If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time.

We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.

The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’

Clearly, Warren Buffet did not mean that if you hold a poorly designed portfolio you should hold forever. He means that if you used good judgement and had conviction when you invested, you should not be troubled by storms, which are always followed by sunshine.

The Coming Charity Crisis

The economy is tumbling. Will philanthropic donations follow?

The latest victims of the sagging economy: charities. In May, the annual gala of the Robin Hood Foundation, an event at which a few thousand hedge-fund magnates and leveraged buyout titans conspicuously display their wealth and commitment to social justice while rocking out to A-list musical guests (Shakira, John Legend, Sheryl Crow), raised $56.5 million, down 21.5 percent from $72 million the year before. No surprise here. Many of the regulars have seen their net worths crushed in the past year.

But it's not just the charities of the swank that are suffering. The Salvation Army caters to a somewhat different crowd, tens of millions of middle-class Americans. And while it had a good Christmas—"since the first of the year, we've seen some slippage," said Major George Hood, a Salvation Army spokesman—overall donations are down compared with 2007, and donations of used clothing and furniture to thrift shops have fallen by 20 percent. While natural disasters typically inspire a spike in donations, Hood says the earthquakes in China, the cyclones in Burma, and the floods in the Midwest have yet to generate such an outpouring.

It would be unfair to say that Americans—whether they are accountants in Kansas City, Mo., or bond traders in Greenwich, Conn.—are becoming stingier. Rather, philanthropy is a pretty large industry. Charitable giving in 2006 was $295.2 billion, according to Giving USA 2006, about 2.2 percent of gross domestic product. For comparison's sake, Wal-Mart has annual sales of about $350 billion. And like every other industry, philanthropy is tethered directly to the health of the overall economy, and in particular to the health of the upper-middle-class consumer. If the past is any guide, it's likely to be a lean year for nonprofits.

Happy Father's Day

Finally, this weekend is father's day and I want to take a moment to wish all of the fathers out there a happy weekend.

So, whether you're a father, son, or daughter - enjoy the weekend and relish the time you share with each as much as you can. Life is short and, in the end, that is all that truly matters. Happy Father's Day!

Need some inspiration?

KID CAN DO IT ALL ON ONE LEG
Baseball, football, soccer -- nothing slows him down

Adam Bender slips a chest protector over his Astros jersey, buckles a shinguard to his right leg, positions a mask atop his head, grabs his catcher's mitt and hops out of the dugout.

Adam has his game face on. Or at least what passes as a game face for an 8-year-old. His eyes are serious. His freckled nose is crinkled with determination.

It is a cool, breezy Saturday morning at Veterans Park, which is already buzzing with activity. Baseball games are being played on three diamonds within a pop-up of each other. Parents are clustered in and around the stands, chatting and cheering. Players of all ages, wearing uniforms or team T-shirts, swarm the place.

Hardly anybody gives a second glance to the catcher in the Southeastern rookie league deftly playing on one leg.

Adam Bender is just another kid playing ball, which is exactly how his parents, Michelle and Chris, want it.

"I was a little hesitant when we first brought him up here for baseball," Michelle said. "I thought his spirit might be crushed if he got out every time. Then I thought, who am I to micromanage his feelings? He's going to have to learn how to deal with this stuff.

"The more I shelter him, the more he'll think, 'I'm fragile.' I don't think I'll ever tell him he can't do something."

Adam is amazing to watch. He takes his position behind the plate, resting on his right knee.

When a runner rounds third looking to score, Adam jumps up and holds his ground.

He suffered a mild concussion on one collision and missed a practice or two. But he recovered and was ready for action in the next game. At one point this season he led the rookie league in put-outs at home.

At bat, his athletic skill and balance allow him to take a full swing, and he usually makes contact. He hops to first base as quickly as he can. If he's safe, he uses crutches to run the bases. When he gets thrown out, he hops dejectedly back to the dugout.

He's a competitor, and not just in baseball.

Adam, who lost his left leg to cancer when he was 1, has played soccer for a couple of years. He uses crutches, and is a whirlwind on the field in Centenary United Methodist's "I Am Third" league.

He played YMCA flag football last fall for Bruce Rector, who has coached against Adam's baseball team.

At first, Rector wasn't sure if Adam could play football. "Then I slept on it. Having seen him play baseball, I knew he'd find a way to make it work," Rector said. "Sure enough, we put him at quarterback (using no crutches) and used a shotgun snap. He threw a lot of touchdown passes."

Adam lobbied to line up at receiver at least once so he could have a chance to score. On a conversion play, Adam hopped 5 yards down the field and made a diving catch in the end zone despite being double-covered.

"That's what I mean when I say if you turn him loose, he'll find a way," Rector said.

Adam shyly deflects question about himself. He admits that he "loves baseball" and "loves catching," but he doesn't think he's doing anything out of the ordinary.

Astros coach Dan Wyse said he went out of his way to get Adam on his team "because he's a good kid, a good catcher, and what he brings attitude-wise, he's an inspiration to everybody."

Michelle Bender appreciates the effect her son has on people young and old.

"Adam has helped other kids see that a person with a disability can be fun to hang out with, and play with, and they can still be a part of a community or part of a team. It's developed the kids' compassion.

"And if he can inspire even one family to allow their kid to try something they normally might not try, that's great."

Adam tried using a prosthesis but didn't like it because he felt it slowed him down. He is adamant about not using a wheelchair.

"He wants to play ball like everybody else," Michelle said. "He's always had that 'nobody's going to stop me' attitude."

Chris Bender thinks his son's "attitude and energy" channel naturally into sports. "He pops out of bed at 60 miles an hour and doesn't quit until he collapses at the end of the day. He's always wanted to do everything."

Doing everything that his older brother Steven and younger sister Morgan do is what pleases Adam's dad the most.

"The best thing about it is the normalcy," Chris said. "There will come a day when Adam will no longer be able to keep up. But he's had some measure of childhood where he's just like everybody else.

"He doesn't have to sit and watch his brother and sister play. He's out there playing with them."

And teaching a life lesson to everybody who's watching.

Rector does motivational speaking and leadership training, and he regularly relates Adam's inspirational story to adults.

"The lesson he teaches is that you need to let talented people with great heart get out there and do their thing," Rector said. "There's no such thing as an insurmountable obstacle for Adam. He's a winner."See video of Adam hitting and playing catcher in a baseball game.

Five Things You Need to Know About the U.S. Dollar

The greenback just can't catch a break.

Despite recent positive comments (or, at least, less negative comments) from George Soros and a reasonable rebound off the March lows, the dollar is still doomed, according to conventional wisdom.

So what's really going on with the dollar? And why do we care whether it goes up or down in value? Isn't the dollar I'm holding today the same as it was yesterday? Why can't the Fed just print more of them? Let's take these questions one by one and see if we can reach an investment thesis that runs contrary to conventional wisdom.

1. Q: What is a dollar anyway? What does it mean?

A: The dollar is simply a banknote issued by the U.S. government that is mandated by law to be used as legal tender for all transactions. Although the dollar was once backed by gold, today it is backed simply by the government's promise that it will be convertible in an exchange. Got faith? Good, you'll need it, because faith is the only thing that separates a blank sheet of paper from a dollar bill that is exchangeable for, say, a banana.

2. Q: OK, I've got faith aplenty. So where do all our dollars come from, and why can't the Federal Reserve just print more?

A: The Fed can print money. And it does quite often. But every dollar created dilutes the value of a dollar already in circulation, causing it to weaken. Of course, we don't notice this dilution immediately unless we travel outside the country, and if everything we consumed was produced in America, we probably wouldn't even notice a weak dollar at all. But the reality is we still buy many goods from overseas producers and spend more dollars on those goods than we receive for goods produced in the U.S. That's called a trade deficit.

3. Q: So, we're spending more than we're making, and the Fed is printing money to make up the difference. How does the Fed do it?

A: The Fed "prints" money through three mechanisms. The easiest way is through the Fed's open market operations, through which the Fed literally buys and sells Treasurys that are trading in the "open market." If the Fed buys Treasurys, then the dollars it uses to buy them become available to banks to lend. If it sells Treasurys, the dollars get taken back.

The second mechanism is lowering the percent of deposits banks are required to have on hand, thereby increasing the pool of available money to lend.

The third is through its "discount policy." The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility. The Fed can grow money by reducing the discount rate.

Dollars are literally printed by the Bureau of Engraving and Printing.

4. Q: Trade deficit, weaker dollar -- I kind of get it -- the Fed has to print more money. But the more money it prints, the weaker the dollar gets, right? So who is paying for all of this and what's the connection with foreign central banks?

A: As a group, we Americans spend more than we save, both individually and collectively as a government, so that money has to come from somewhere. This raises a serious question. Because the more money the Fed creates, the weaker the dollar gets, how do we get all these dollars to spend without collapsing the currency?

One way is through the purchases by central banks of countries like China and Japan. We have to "sell" our Treasury bonds to countries willing to buy our debt, paying them interest for financing our spending. Foreign governments all over the world also use the dollar as a foreign exchange reserve, allowing them to control their own currency, increasing or decreasing it compared to other currencies, and to maintain the stability of their currency in the event of an economic shock.

Because the dollar is perceived as the most stable currency in the world (note: the key word here is "perceived"), countries are willing to finance our spending by purchasing dollars and bonds. But, if they begin to perceive they are not being adequately compensated for the risk of holding our debt, or if their dollars are depreciating faster than they like, these countries will demand a higher interest rate to buy our bonds. So, a weak dollar can actually lead to higher interest rates! That affects you, Mr. or Ms. Homeowner-Credit Card Spender-Business Professional-Student!

5. Q: Here's the bottom line: In the simplest terms, what are the advantages or disadvantages of a stronger or weaker dollar, and how do I play it?

A: Here's a summary:

Weak Dollar: Advantages


It's easier for U.S. companies to export goods because foreign currencies can buy "more" against the weaker dollar.
Tourism increases because foreign visitors find it less expensive to visit.
To an extent, foreigners will view U.S. investment opportunities more favorably because they can buy more for their yuan/yen/euro/pound, etc.

Weak Dollar: Disadvantages



Consumers see higher prices. We don't notice this because the Chinese yuan is tied to the dollar in a tight range. And most of our imports come from China.
There are higher interest rates, i.e., higher cost of money to consumers.
It's more expensive to travel abroad.

Strong Dollar: Advantages



The prices for imported goods are lower.
U.S. investors can buy foreign assets and investments at lower prices.

Strong Dollar: Disadvantages



It's harder for U.S. companies to compete abroad.
It's more expensive for foreigners to visit the U.S.

So how do you play a strengthening dollar? It used to be that unless you were a currency speculator, dollar strength and weakness involved an indirect play via companies with strong international sales.

Now there are many more alternatives. Two exchange-traded funds that allow investors to make short-term bets on the dollar's direction are available through PowerShares. The DB U.S. Dollar Bullish Fund (UUP) , as the name suggests, allows you to bet on the dollar appreciating, while the DB U.S. Dollar Bearish Fund (UDN) allows you to bet against the dollar.

Why the US Markets will go....Up or Down

Two sides to every story (at least two sides), these articles both appeared the same day from two analysts at different investment firms.

This past week was a difficult period for market optimists. As we approached the Memorial Weekend, the Dow had fallen by around 500 Points and the jobless figures were the only highlight of an otherwise gloomy week. Here are the reasons to expect the market to continue to drift lower over the coming weeks,

1. The FED will only cut rates further if an absolute disaster hits the market, such as a Bank or Monoline folding.
The FED economic outlook has been downgraded (again) with growth in the range of 0.3%to 1.2%.
2. Housing inventories are rising, now over 11 months.
3. Oil prices are expected to rise. (To somewhere between $160 and $200 per Barrel.)
4. Retailers are continuing to retrench from planned expansion, others are closing stores, and the worst affected face chapter 11.
5. The long awaited Commercial Real Estate Value depreciation appears to have started. (Two months of negative growth.)
6. Financials are still undercapitalized to deal with Alt-A, Etc.
7. The CPI Inflation figure, is a bad joke. (It has been underrated for years.)
8. Bearing in mind the CPI figure, it is likely that with a proper inflation estimate, the US economy is already in recession, as growth assumptions are also affected.

The only sectors that appear to be rising are Commodities, such as Oil and Metals. During this coming year it will be extremely difficult for corporations to pass on the full inflation costs to their customers, so margins will tighten considerably. Therefore, if margins drop by 33%, the P/E figure will rise by 50%. This indicates the current market values are overvalued by a considerable margin.

I expect the Dow to continue to drift lower, shedding between 10% and 20% of its current value, over the coming 15 months.

And then this;

Ten reasons to expect higher rally highs

10. Seasonal factors are constructive. Over the past 10 years the July-September period has had a bearish bias, but May-August has had a bullish bias.
9. The market is awash in liquidity. A "money mountain."
8. The patterns for most global markets are similar to that for one day gains in excess of 3% have signaled a long term rally.
7. In the past, 90% up days, combined with one day gains in excess of 3% have signaled a long term rally as occured earlier this year.
6. The number of NYSE stocks making 52-week highs has been expanding and confirmed the May recovery highs.
5. Common stock breadth is broadly positive and confirmed the May rally highs. Over 80% of the current S&P 500 components have gained ground since March.
4. Consolidated tape volume is confirming th erally off th emarch low.
3. Sentiment indicators are still neutral to oversold - euphoria does not exist.
2. Medium term momentum for the major indexes and for all 10 S&P sectors is still contructive.
1. Leadership (transportation, energy, materials) confirmed by hitting all time highs. The uptrends in both the DJ Industrials and the DJ Transports signaled a Dow Theory bull market, suggesting that the primary trend is up.

It usually does go up or down or sideways...

How to save $1 million

If you're 30 years old, you need to set aside $448 per month for next 35 years to become a millionaire -- if you earn an 8% annualized return in a retirement account. Don’t have $448 to spare -- or even $248? Maybe you do and don't realize it. Let's take a look at how you can come up with the cash.

Save $219 Per Month on Taxes

Here’s How: The average refund for the 2008 filing season so far is about $2,500. If you received an average refund and you are in the 25% federal tax bracket, you could be entitled to three extra exemptions worth $3,500 each. That would boost your take-home pay by $219 a month. A couple of reasons you might be eligible for more exemptions: becoming a new parent or buying a house.

Here’s How: Bring your lunch and snacks to work. Considering that the average meal at McDonald’s costs $5 and Dunkin’ Donuts charges $2 for a large cup of coffee, the brown-bag windfall can be substantial.

Save $80 Per Month on Entertainment - Here’s How: We're talking about one fewer dinner-and-a-movie night every month. That assumes you and your significant other pay the average $33 per person for a restaurant meal (according to a recent Zagat survey) and that you spend $7 per ticket, the average price at the movies (according to the Motion Picture Association of America).

Save $28 Per Month on Health Care - Here’s How: The typical family spends $1,321 on out-of-pocket health expenses each year, says the U.S. Department of Health and Human Serv­ices. You can pay those costs with a flexible spending account, which lets you set aside pretax dollars.

Save $10 Per Month on Auto Insurance - Here’s How: The average consumer pays $829 annually for car insurance, according to the National Association of Insurance Commissioners. Raising your deductible from $250 to $1,000 can save you 15% or more.

Save $8 Per Month on a Well Maintained Car - Here’s How: Keep your car’s engine tuned and tires inflated to the proper air pressure. Those minor improvements can save you up to $100 on gas each year.

Save $6 Per Month on Generic Non-Prescription Medicines - Here’s How: The average American spends $185 annually on over-the-counter medications. Generics cost up to 40% less than their brand-name counterparts and work just as well.

$451 Saved in Total!

Invest the found money every month in a retirement account that earns an average of 8% return over the next 35 years, and you'll have $1 million. That wasn't too hard, right?

Or as Steve Martin used to preach "how to make a million dollars and not pay taxes"..."first, make a million dollars and then when the judge asks why you didn't pay any taxes just tell him two simple words in the English language...if forgot."

Another Picture - maybe not 1,000 words...

Princeton Protégés of Fed Chief Study the Economics of Manias

First came the tech-stock bubble. Then there were bubbles in housing and credit. Chinese stocks took off like a rocket. Now, as prices soar on every material from oil to corn, some suggest there's a bubble in commodities.

But how and why do bubbles form? Economists traditionally haven't offered much insight. From World War II till the mid-1990s, there weren't many U.S. investing manias for them to look at. The study of bubbles was left to economic historians sifting through musty records of 17th-century Dutch tulip-bulb prices and the like.

The dot-com boom began to change that. "You were seeing live, in action, the unfolding of lots of examples of valuations disconnecting from fundamentals," says Princeton economist Harrison Hong. Now, the study of financial bubbles is hot.

Its hub is Princeton, 40 miles south of Wall Street, home to a band of young scholars hired by former professor Ben Bernanke, now the nation's chief bubble watcher as Federal Reserve chairman. The group includes Mr. Hong, a Vietnam native raised in Silicon Valley; a Chinese wunderkind who started as a physicist; and a German who'd been groomed to take over the family carpentry business. Among their conclusions:

Bubbles emerge at times when investors profoundly disagree about the significance of a big economic development, such as the birth of the Internet. Because it's so much harder to bet on prices going down than up, the bullish investors dominate.

Once they get going, financial bubbles are marked by huge increases in trading, making them easier to identify.

Manias can persist even though many smart people suspect a bubble, because no one of them has the firepower to successfully attack it. Only when skeptical investors act simultaneously -- a moment impossible to predict -- does the bubble pop.

As a result of all that and more, the Princeton squad argues that the Fed can and should try to restrain bubbles, rather than following former Chairman Alan Greenspan's approach: watchful waiting while prices rise and then cleaning up the mess after a bubble bursts.

If the tech-stock collapse didn't make that clear, the damage done by the housing and credit bubbles should, argues José Scheinkman, 60 years old, a theorist Mr. Bernanke recruited in 1999 from the University of Chicago. "Advanced economies are very dependent on the health of the financial system. What this bubble did was destroy the capacity of the financial system to finance the U.S. economy," Mr. Scheinkman says.

The Fed is giving the activist approach some thought. In a speech scheduled for delivery Thursday night, Fed Governor Frederic Mishkin suggested that while it was inappropriate to use the blunt instrument of interest-rate increases to prick bubbles, if too-easy credit appeared to be fueling a mania, policy makers might craft a regulatory response that could "help reduce the magnitude of the bubble."

Yet the very concept of bubbles is at odds with the view of some that market prices reflect the collective knowledge of multitudes. There are economists who dispute the existence of bubbles -- arguing, for instance, that what happened to prices in the dot-com boom was a rational response to the possibility that nascent Internet firms might turn into Microsofts. But these economists' numbers are thinning.

When Mr. Bernanke became head of Princeton's economics department in 1996, he saw finance as a fertile field for economic research. Princeton was weak in it. Mr. Bernanke raised $10 million from the Leon Lowenstein Foundation to create the Bendheim Center for Finance, named for the foundation's president, Robert Bendheim, an alumnus.

Mr. Bernanke hired finance experts who had broad interests and were eager to work with the university's deepening bench of theorists. He lured Dilip Abreu, known for work in game theory, back from Yale, to which he had earlier defected. Making a virtue of an institutional weakness, the absence of a business school, Princeton assimilated the finance scholars into the economics department and freed them to pursue research.

They are building on work done by the late Hyman Minsky, whose once-ignored ideas about investing manias are now in vogue, and the late economic historian Charles Kindleberger, whose 1978 "Manias, Panics and Crashes" is a classic. But compared with Mr. Minsky or another student of bubbles, Yale's Robert Shiller, the Princeton trio focuses less on mass psychology than on mathematical models. These they use to show how bubbles can be created even in markets that include rational, calculating investors.

Hard to Short

Bubbles don't spring from nowhere. They're usually tied to a development with far-reaching effects: electricity and autos in the 1920s, the Internet in the 1990s, the growth of China and India. At the outset, a surge in the values of related businesses and goods is often justified. But then it detaches from reality.

Mr. Hong, growing up in Sunnyvale, Calif., and teaching at Stanford, had a front-row seat to the technology boom. Recognizing a mania, he resisted investing in tech stocks himself -- until they were about to crest.

He recalls his thought process: "My sister's getting rich. My friends are getting rich....I think this is all crazy, but I feel so horrible about missing out, about being left out of the party." In 2000, "I finally caved in," he says. "I put in some money just as a hedge against other people getting richer than me and feeling better than me." But 2000, of course, was the year the bubble burst.

Mr. Hong, who came to Princeton two years later, and now is 37, argues that big innovations lead to big differences of opinion between bullish and bearish investors. But the deck is stacked in favor of the optimists.

One who believes a stock is too high can short it, borrowing shares and selling them in hopes of replacing them when they're cheaper. But this can be costly, both in the fees and in the risk of huge losses if the stock keeps rising. Many big investors rarely short stocks. When differences between bullish investors and bearish ones are extreme, many of the bears simply move to the sidelines. Then, with only optimists playing, prices go higher and higher.

In housing and the credit markets, the innovation was slicing and dicing loans in novel ways. As investors bought the resulting mortgage securities, they provided abundant capital for home buyers; buoyed by this and falling interest rates, house prices surged.

Betting against house prices is hard; only a few sophisticated investors found roundabout ways to do it, in derivatives markets. Most skeptics about the housing boom just sat it out; the optimists were unchecked.

At some point in a bubble, optimists' enthusiasm runs its course. Prices turn down. There's an expectation that at this point, investors who were skeptical may see prices as more reasonable and start buying. If they don't, that's a signal that prices had gotten way too high -- and then they tumble.

The insights of bearish investors "are more likely to be flushed out through the trading process when the market is falling, as opposed to when it's rising," Mr. Hong and Harvard's Jeremy Stein write. They say this explains why prices fall more rapidly than they go up. Over 60 years, nine of the 10 biggest one-day percentage moves in the S&P 500 were down.

When a lot of borrowed money is involved -- as it often is in a bubble -- once prices peak, the speed of their fall is intensified as investors sell urgently to pay down debt. That pattern offers a strong argument, in Mr. Hong's view, for government to restrain bubbles and the borrowing that fuels them.

The Trading Signal

At the height of the tech bubble, Internet stocks changed hands three times as frequently as other shares. "The two most important characteristics of a bubble," says Wei Xiong, are: "People pay a crazy price and people trade like crazy."

After finishing undergraduate studies in China at age 18, Mr. Xiong came to the U.S. intent on becoming a particle physicist. He earned a master's from Columbia but decided physics was too mature for him to make a mark. He switched to economics and earned a Ph.D. from Duke University. He was just 24 when Mr. Bernanke hired him in 2000.

According to a model he developed with Mr. Scheinkman, investors dogmatically believe they are right and those who differ are wrong. And as one set of investors becomes less optimistic, another takes its place. Investors figure they can always sell at a higher price. That view leads to even more trading, and, at the extreme, stock prices can go beyond any individual investor's fundamental valuation.

China's stock market gave Mr. Xiong, Mr. Scheinkman and New York University's Jianping Mei a laboratorylike setting to study. Chinese companies issued two classes of shares, representing identical stakes. Only Chinese could buy Class A shares, and, until 2001, only foreign investors could buy Class B shares.

When other countries have used such setups, the foreign-owned shares have traded at higher prices. But in China between 1993 to 2000, the economists found, Class A shares averaged more than five times the price of Class B shares and were traded five times as frequently -- a hint they were infected with bubble virus.

Companies with fewer A shares outstanding tended to see both higher trading volume and higher prices. That was consistent with a theory Mr. Xiong developed with Messrs. Scheinkman and Hong: In markets with lots of disagreement about values, the optimists are better able to dominate when there are fewer shares available.

Today, there's disagreement over commodity prices: to what extent do they reflect fundamentals like Chinese demand, and to what extent investment mania? Trading points toward a bubble: Daily volume on crude-oil contracts is running 50% above last year. Yet the initial findings of work Mr. Hong has done with Motohiro Yogo of the Wharton School -- comparing cash prices and futures prices -- suggest that "prices for commodities are expensive," but not a bubble, Mr. Hong says.

Mr. Xiong's father-in-law and brother trade stocks in China. At the start of 2007, he cautioned his brother to get out, to no avail. But Chinese stocks are higher today, despite falling since November. "If he actually followed my advice I'm not sure what he would think of me," Mr. Xiong says.

Why Bubbles Persist

Bubbles often keep inflating despite cautions such as Mr. Greenspan's famous warning of "irrational exuberance." Tech stocks rose for more than three years after he said that, in late 1996. Markus Brunnermeier, 39, thinks he understands why this happens.

Growing up near Munich, Germany, he expected to become a carpenter like his father. A building slump dissuaded him, and after stints in a tax office and the army he enrolled at the University of Regensburg.

He had struggled to understand why West Germany, where he lived, was so much more prosperous than East Germany. At Regensburg, he came across the work of Friedrich Hayek, the Nobel prize-winning Austrian economist known for a spirited defense of free-market capitalism. Mr. Hayek noted that while East Germany's government set prices, in the west the market set them -- and provided information about supply and demand that helped the economy adjust.

Inspired by Mr. Hayek's work, Mr. Brunnermeier studied economics. But in the 1990s, soaring tech stocks made him skeptical of the quality of information that prices convey. As a graduate student at the London School of Economics, he wrote a survey of research on bubbles and crashes that turned into a book.

Under the Hayek view, bubbles don't make sense. As soon as some group of traders irrationally pushes prices way up, more-rational traders should take advantage of the mispricing by selling -- bringing prices back down. But the tech boom reinforced an oft-quoted warning from John Maynard Keynes: "The market can stay irrational longer than you can stay solvent."

So investors who spot the bubble attack only if each is confident that other skeptics are on board. In work done with Mr. Abreu, Mr. Brunnermeier concluded that if all the rational investors could agree to bet against the bubble, they could make big profits. But if they can't coordinate, it's risky for any one of them to bet against a bubble. So it makes sense to ride it up and then get out quickly as soon as the bubble's existence becomes common knowledge.

That's what Pequot Capital Management did. The hedge-fund company boarded the Internet bandwagon early, investing in America Online in 1994. It was heavily invested in tech stocks through the late 1990s. When they started falling in March 2000, Pequot got hurt. But it was agile enough to take bearish positions on the stocks, and its funds posted strong performances for the year.

Looking through security filings, Mr. Brunnermeier and Stanford's Stefan Nagel found that hedge funds on the whole "skillfully anticipated price peaks" in individual tech stocks, cutting back before prices collapsed and shifting into other tech stocks that were still rising. Hedge funds' overall exposure to tech stocks peaked in September 1999, six months before the stocks peaked. They rode the bubble higher and got out close to the right time.

Mr. Brunnermeier saw the bubble, too. He thought people were crazy for buying tech stocks. But as both the hedge funds' gains and his theoretical work suggest, even if you know there's a bubble, it might be smart to go along.

"I was always convinced that there was an Internet bubble going on and never invested in Internet stocks," he says. "My brother-in-law did. My wife always complained that I studied finance and her brother was making a lot of money on Internet stocks."

Sales Report Shows Big Drops in California Real Estate

The NAR metropolitan home sales report for Q1 came out this morning, and showed some nasty declines. For the most part, falling home prices accelerated sharply in the first quarter, with California getting hit particularly hard.

Overall, for the U.S. as a whole, Q1 home prices fell -7.7% from year ago levels. But as California had held up better than most markets for a while, those cities now look like they are playing catch-up on the downside.

Here are some of the cities showing the largest declines:

* -29.2%: Sacramento, CA
* -27.7%: Riverside/San Bernadino, CA
* -22.9%: San Diego, CA
* -22.2%: Sarasota, FL
* -21.3%: Los Angeles, CA
* -20.7%: Grand Rapids, MI
* -20.2%: Las Vegas
* -18.5%: Memphis, TN
* -17.2%: Miami, FL
* -17.0%: Ft. Myers, FL
* -16.9%: Cleveland, OH (Go Cavs!)
* -15.4: Phoenix, AZ

There were few cities showing big increases, but here are a few showing gains:

* +11.8%: Binghamton, NY
* +10.4%: Peoria, IL
* +10.1%: Spartanburg, SC
* +9.0%: Yakima, WA
* +6.3%: Farmington, NM
* +3.5%: Salt Lake City, UT

And here are how some other notable large cities are faring:

* -13.1%: Washington, DC
* -9.6%: Atlanta, GA
* -7.8%: Boston, MA
* -6.6%: Chicago, IL
* -6.1%: San Francisco, CA
* -3.9%: New York, NY
* -2.1%: Dallas, TX

While we think that the pace of the declines has seen its worst levels, we still do not have the sense that real estate markets overall have bottomed. I think the fact that credit remains hard to obtain has made the pool of buyers permanently lower. We also think there are many sellers that remain unwilling to lower their prices.

Unlike stock markets, real estate markets often form long and shallow bottoms that take years to take shape. As such, we think it will be many years before we see the highs in residential real estate values that peaked around 2006.

Sick Humor

A picture is worth 1,000 words...

We find it interesting that amidst all of the ill news regarding housing that the housing stocks are turning higher, with volume rising. Too, we find it interesting that lumber prices are suddenly beginning to hold, rather than plunge to new and lower lows. Something is happening in the housing market...even as "news" on the front pages of the newspapers and in the lead televeision reports is of foreclosures, bankruptcies and builder's demise.

One Guy Who Has Seen It All...

One Guy Who Has Seen It All
Doesn't Like What He Sees Now

April 26, 2008; Page B1 of the Wall Street Journal


Peter Bernstein has witnessed just about every financial crisis of the past century.

As a boy, he watched his father, a money manager, navigate the Depression. As a financial manager, consultant and financial historian, he personally dealt with the recession of 1958, the bear markets of the 1970s, the 1987 crash, the savings-and-loan crisis of the late 1980s and the 2000-2002 bear market that followed the tech-stock bubble.
[Peter Bernstein]
One of Peter Bernstein's worries: 'If China goes into a recession, God knows.'

Today's trouble, the 89-year-old Mr. Bernstein says, is worse than he has seen since the Depression and threatens to roil markets into 2009 and beyond -- longer than many people expect.

Mr. Bernstein, whose books include "Against the Gods: The Remarkable Story of Risk," sees two culprits. One is the abuse of securitization -- the trend for banks to hold fewer loans on their books and instead turn them into securities that were sold to other investors. The other is simply years of overborrowing by financial institutions and consumers alike.

Mr. Bernstein is hopeful that Federal Reserve intervention will prevent deflation and depression, but he says there is no guarantee.

Excerpts of a recent interview:

WSJ: Aside from securitization, what were the main causes of the problem?

Mr. Bernstein: You don't get into a mess without too much borrowing. It was sparked primarily by the hedge funds, which were both unregulated by government and in many ways unregulated by their owners, who gave their managers a very broad set of marching orders. It was a real delusion. It was like [former New York Gov. Eliot] Spitzer: "I am doing something dangerous, but because of who I am, and how smart I am, it is not going to come back to haunt me."

When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time. The lesson has painfully been learned. That's part of the problem going forward. You don't have a high-growth exit from this, as you've had from other kinds of crises. We won't have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn't turn up. Or like a U, a flat U. The reason for that is that people aren't going to get caught in this bind again. They will tell themselves, "I'm too smart to do that again." And everyone else is going to be saying the same thing. It is, in fact, going to be a wonderful environment in which to take risk, because there aren't going to be any excesses.

I'm a child of the Depression, and I am thinking about what the early years were like after World War II. It took a very long time to get the memory of the Depression out of business decisions, and certainly banking decisions. I think this is going to be the same. The Fed, too, is going to be less decisive and is going to feel that what it should do is less clear. One of the things that gave people a sense that they could afford to take risks was the sense that the central bankers more or less know what they are doing. But I don't think we are going to feel that way going forward.

WSJ: You said that it could turn out that the smart thing to do is to take more risk, because everyone will be so risk-averse. What kinds of investments do you see as the big winners coming out of this?

Mr. Bernstein: You could say: the things that have been beaten down the most, which would be real estate. But I think real estate is going to be under a cloud for so long, and you can't buy real estate with cash, it is too much money. I think you should go with the stock market. If things are better, the stock market will go up, and if things are awful, the stock market is going to be way down. But it is a place where, if you want to take risks, you've got a wide range of choices. This is why I own stocks [in addition to other investments], because I don't know where the bottom is going to come, and I want to be exposed to every kind of possibility I can think of. And, at least, if you pick the stock market and you are wrong, you can change your mind. There is some liquidity there. Stocks never became cheap, but they didn't become crazy, the way other assets were.

WSJ: How long do you think this whole process will take, before we get back to normal?

Mr. Bernstein: Longer than people think. The people who think we will have turned in 2009 are wrong. There has to be a respite along the way. Nothing goes in one direction forever. But it will take longer than people think. If that weren't the case, I would be talking entirely differently. I would be saying, "What an opportunity we have got." And I just can't believe that the opportunity is here yet. There is too much to unwind.


WSJ: Can you explain the reason you think it will take a long time?

Mr. Bernstein: We have to go back to a moment when people have the courage to borrow and lenders have the courage to lend. Until credit is going up instead of down, you can't have growth. Housing has got to be a very important part of that; it always has been. You have to reach a point where somebody says, "This house is cheap, I am going to buy it," or where some businessman says, "This is a great opportunity for us to expand our business. Everything is available to us."

If China goes into a recession, God knows. The Iraq war and the whole situation with terrorism, we really don't know where that is going to come out. There are so many things that have got to get buttoned down before you say that the future looks good enough to take a risk.

WSJ: What kind of indications are you looking for as signs that the economy is about to get better and that the stock market and the investment world are about to turn the corner?

Mr. Bernstein: Somehow, the housing trouble has to at least flatten out. As long as that is going on, I think the pressure on the credit system is going to persist. It is kind of the leading indicator. It is where the trouble started. We have to underpin the consumer. That is why this is different. That is why this is like nothing we have had before.

Before, it was investment that made the V at the bottom of the business cycle. I don't see real investment turning enough without some sign from the consumer side. Maybe the foreign countries will do it for us. That is a substitute for consumption here. Maybe. But I think that they won't do enough for us, and maybe will be too infected by us to do it. But maybe growth in Asia will help us. The Asian thing is tremendously exciting.

What Warren thinks...

Warren Buffett talks about the economy, the credit crisis, Bear Stearns, and more.

If Berkshire Hathaway's annual meeting, scheduled for May 3 this year, is known as the Woodstock of Capitalism, then perhaps this is the equivalent of Bob Dylan playing a private show in his own house: Some 15 times a year Berkshire CEO Warren Buffett invites a group of business students for an intensive day of learning. The students tour one or two of the company's businesses and then proceed to Berkshire headquarters in downtown Omaha, where Buffett opens the floor to two hours of questions and answers. Later everyone repairs to one of his favorite restaurants, where he treats them to lunch and root beer floats. Finally, each student gets the chance to pose for a photo with Buffett.

In early April the megabillionaire hosted 150 students from the University of Pennsylvania's Wharton School (which Buffett attended) and offered Fortune the rare opportunity to sit in as he expounded on everything from the Bear Stearns bailout to the prognosis for the economy to whether he'd rather be CEO of GE - or a paperboy. What follows are edited excerpts from his question-and-answer session with the students, his lunchtime chat with the Whartonites over chicken parmigiana at Piccolo Pete's, and an interview with Fortune in his office.

Buffett began by welcoming the students with an array of Coca-Cola products. ("Berkshire owns a little over 8% of Coke, so we get the profit on one out of 12 cans. I don't care whether you drink it, but just open the cans, if you will.") He then plunged into weightier matters:

Before we start in on questions, I would like to tell you about one thing going on recently. It may have some meaning to you if you're still being taught efficient-market theory, which was standard procedure 25 years ago. But we've had a recent illustration of why the theory is misguided. In the past seven or eight or nine weeks, Berkshire has built up a position in auction-rate securities [bonds whose interest rates are periodically reset at auction; for more, see box on page 74] of about $4 billion. And what we have seen there is really quite phenomenal. Every day we get bid lists. The fascinating thing is that on these bid lists, frequently the same credit will appear more than once.

Here's one from yesterday. We bid on this particular issue - this happens to be Citizens Insurance, which is a creature of the state of Florida. It was set up to take care of hurricane insurance, and it's backed by premium taxes, and if they have a big hurricane and the fund becomes inadequate, they raise the premium taxes. There's nothing wrong with the credit. So we bid on three different Citizens securities that day. We got one bid at an 11.33% interest rate. One that we didn't buy went for 9.87%, and one went for 6.0%. It's the same bond, the same time, the same dealer. And a big issue. This is not some little anomaly, as they like to say in academic circles every time they find something that disagrees with their theory.

So wild things happen in the markets. And the markets have not gotten more rational over the years. They've become more followed. But when people panic, when fear takes over, or when greed takes over, people react just as irrationally as they have in the past.

Do you think the U.S. financial markets are losing their competitive edge? And what's the right balance between confidence-inspiring standards and ...

... between regulation and the Wild West? Well, I don't think we're losing our edge. I mean, there are costs to Sarbanes-Oxley, some of which are wasted. But they're not huge relative to the $20 trillion in total market value. I think we've got fabulous capital markets in this country, and they get screwed up often enough to make them even more fabulous. I mean, you don't want a capital market that functions perfectly if you're in my business. People continue to do foolish things no matter what the regulation is, and they always will. There are significant limits to what regulation can accomplish. As a dramatic illustration, take two of the biggest accounting disasters in the past ten years: Freddie Mac and Fannie Mae. We're talking billions and billions of dollars of misstatements at both places.

Now, these are two incredibly important institutions. I mean, they accounted for over 40% of the mortgage flow a few years back. Right now I think they're up to 70%. They're quasi-governmental in nature. So the government set up an organization called OFHEO. I'm not sure what all the letters stand for. [Note to Warren: They stand for Office of Federal Housing Enterprise Oversight.] But if you go to OFHEO's website, you'll find that its purpose was to just watch over these two companies. OFHEO had 200 employees. Their job was simply to look at two companies and say, "Are these guys behaving like they're supposed to?" And of course what happened were two of the greatest accounting misstatements in history while these 200 people had their jobs. It's incredible. I mean, two for two!

It's very, very, very hard to regulate people. If I were appointed a new regulator - if you gave me 100 of the smartest people you can imagine to work for me, and every day I got the positions from the biggest institutions, all their derivative positions, all their stock positions and currency positions, I wouldn't be able to tell you how they were doing. It's very, very hard to regulate when you get into very complex instruments where you've got hundreds of counterparties. The counterparty behavior and risk was a big part of why the Treasury and the Fed felt that they had to move in over a weekend at Bear Stearns. And I think they were right to do it, incidentally. Nobody knew what would be unleashed when you had thousands of counterparties with, I read someplace, contracts with a $14 trillion notional value. Those people would have tried to unwind all those contracts if there had been a bankruptcy. What that would have done to the markets, what that would have done to other counterparties in turn - it gets very, very complicated. So regulating is an important part of the system. The efficacy of it is really tough.

At Piccolo Pete's, where he has dined with everyone from Microsoft's Bill Gates to the New York Yankees' Alex Rodriguez, Buffett sat at a table with 12 Whartonites and bantered over many topics.

How do you feel about the election?

Way before they both filed, I told Hillary that I would support her if she ran, and I told Barack I would support him if he ran. So I am now a political bigamist. But I feel either would be great. And actually, I feel that if a Republican wins, John McCain would be the one I would prefer. I think we've got three unusually good candidates this time.

They're all moderate in their approach.

Well, the one we don't know for sure about is Barack. On the other hand, he has the chance to be the most transformational too.

I know you had a paper route. Was that your first job?

Well, I worked for my grandfather, which was really tough, in the [family] grocery store. But if you gave me the choice of being CEO of General Electric or IBM or General Motors, you name it, or delivering papers, I would deliver papers. I would. I enjoyed doing that. I can think about what I want to think. I don't have to do anything I don't want to do. It might be wonderful to be head of GE, and Jeff Immelt is a friend of mine. And he's a great guy. But think of all the things he has to do whether he wants to do them or not.

How do you get your ideas?

I just read. I read all day. I mean, we put $500 million in PetroChina. All I did was read the annual report. [Editor's note: Berkshire purchased the shares five years ago and sold them in 2007 for $4 billion.]

What advice would you give to someone who is not a professional investor? Where should they put their money?

Well, if they're not going to be an active investor - and very few should try to do that - then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They're not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don't buy all at one time.

When Buffett said he was ready to pose for photographs, all 150 students stampeded out of the room within seconds and formed a massive line. For the next half hour, each one took his or her turn with Buffett, often in hammy poses (wrestling for his wallet was a favorite). Then, as he started to leave, a 77-year-old's version of A Hard Day's Night ensued, with a pack of 30 students trailing him to his gold Cadillac. Once free, he drove this Fortune writer back to his office and continued fielding questions.

How does the current turmoil stack up against past crises?

Well, that's hard to say. Every one has so many variables in it. But there's no question that this time there's extreme leveraging and in some cases the extreme prices of residential housing or buyouts. You've got $20 trillion of residential real estate and you've got $11 trillion of mortgages, and a lot of that does not have a problem, but a lot of it does. In 2006 you had $330 billion of cash taken out in mortgage refinancings in the United States. That's a hell of a lot - I mean, we talk about having $150 billion of stimulus now, but that was $330 billion of stimulus. And that's just from prime mortgages. That's not from subprime mortgages. So leveraging up was one hell of a stimulus for the economy.

If that was one hell of a stimulus, do you think the $150 billion government stimulus plan will make an impact?

Well, it's $150 billion more than we'd have otherwise. But it's not like we haven't had stimulus. And then the simultaneous, more or less, LBO boom, which was called private equity this time. The abuses keep coming back - and the terms got terrible and all that. You've got a banking system that's hung up with lots of that. You've got a mortgage industry that's deleveraging, and it's going to be painful.

The scenario you're describing suggests we're a long way from turning a corner.

I think so. I mean, it seems everybody says it'll be short and shallow, but it looks like it's just the opposite. You know, deleveraging by its nature takes a lot of time, a lot of pain. And the consequences kind of roll through in different ways. Now, I don't invest a dime based on macro forecasts, so I don't think people should sell stocks because of that. I also don't think they should buy stocks because of that.

Your OFHEO example implies you're not too optimistic about regulation.

Finance has gotten so complex, with so much interdependency. I argued with Alan Greenspan some about this at [Washington Post chairman] Don Graham's dinner. He would say that you've spread risk throughout the world by all these instruments, and now you didn't have it all concentrated in your banks. But what you've done is you've interconnected the solvency of institutions to a degree that probably nobody anticipated. And it's very hard to evaluate. If Bear Stearns had not had a derivatives book, my guess is the Fed wouldn't have had to do what it did.

Do you find it striking that banks keep looking into their investments and not knowing what they have?

I read a few prospectuses for residential-mortgage-backed securities - mortgages, thousands of mortgages backing them, and then those all tranched into maybe 30 slices. You create a CDO by taking one of the lower tranches of that one and 50 others like it. Now if you're going to understand that CDO, you've got 50-times-300 pages to read, it's 15,000. If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you're now up to 750,000 pages to read to understand one security. I mean, it can't be done. When you start buying tranches of other instruments, nobody knows what the hell they're doing. It's ridiculous. And of course, you took a lower tranche of a mortgage-backed security and did 100 of those and thought you were diversifying risk. Hell, they're all subject to the same thing. I mean, it may be a little different whether they're in California or Nebraska, but the idea that this is uncorrelated risk and therefore you can take the CDO and call the top 50% of it super-senior - it isn't super-senior or anything. It's a bunch of juniors all put together. And the juniors all correlate.

If big financial institutions don't seem to know what's in their portfolios, how will investors ever know when it's safe?

They can't, they can't. They've got to, in effect, try to read the DNA of the people running the companies. But I say that in any large financial organization, the CEO has to be the chief risk officer. I'm the chief risk officer at Berkshire. I think I know my limits in terms of how much I can sort of process. And the worst thing you can have is models and spreadsheets. I mean, at Salomon, they had all these models, and you know, they fell apart.

What should we say to investors now?

The answer is you don't want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn't necessarily know what was going to happen in the stock market. And (b) they can't pick stocks that are better than average. Stocks are a good thing to own over time. There's only two things you can do wrong: You can buy the wrong ones, and you can buy or sell them at the wrong time. And the truth is you never need to sell them, basically. But they could buy a cross section of American industry, and if a cross section of American industry doesn't work, certainly trying to pick the little beauties here and there isn't going to work either. Then they just have to worry about getting greedy. You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that's too much to expect. Of course, you shouldn't get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that.

By your rule, now seems like a good time to be greedy. People are pretty fearful.

You're right. They are going in that direction. That's why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago.

But you're still bullish about the U.S. for the long term?

The American economy is going to do fine. But it won't do fine every year and every week and every month. I mean, if you don't believe that, forget about buying stocks anyway. But it stands to reason. I mean, we get more productive every year, you know. It's a positive-sum game, long term. And the only way an investor can get killed is by high fees or by trying to outsmart the market.

What to do with your tax records?

When it comes to tax paperwork, many people are adamant about keeping every scrap of paper, often believing those documents will save them if the Internal Revenue Service comes knocking. But that's not necessarily the case. Bankrate.com tax writer Kay Bell has these tips on how to sift through piles of tax-related documents and keep only the ones you really need.

When it comes to tax records, says Bell, you should hang on only to those that help you identify sources of income, keep track of expenses, determine the value of property, prepare tax returns or support claims made on those returns. This means 1040 forms and any accompanying tax schedules, along with the documents supporting the return, such as W-2s, 1099 miscellaneous income statements and receipts or canceled checks verifying tax-deductible expenses.

But don't go overboard. If you used something to claim a deduction, keep it -- if not, shred it. For example, hoarding medical bills is useless if you didn't accumulate enough to meet the deduction threshold. Let common sense, as well as storage space, be your guide.

To be sure, some items do have a longer shelf life. These generally are assets that a taxpayer will eventually sell, triggering a tax bill. So if you have a pension plan, own a home or invest in the stock market, tax pros recommend keeping these records indefinitely. At the very least, you should keep them until three years after you dispose of the asset.

As far as how long you should hold onto tax papers, the rule of thumb is until the chance of audit passes. Usually, this is three years after filing. But if the IRS suspects you underreported your income by 25% or more, it gets six years to check into your tax life. That's why most accountants advise taxpayers -- even those who are meticulous filers -- to keep tax documents for six to 10 years.

Since for most taxpayers the biggest asset it their home, it's important to understand the rules governing profits from home sales. While the tax rules have changed in recent years, meaning sale profits don't automatically face IRS charges, any paperwork relating to a residence should be kept for as long as the home is owned.
Single home sellers now can net capital gains of $250,000 (double that for married couples) before owing the IRS. To determine whether sale profits fall within the tax-free limits, the seller must accurately establish a residence's basis. That means that records related to a home's value -- settlement papers and receipts for improvements and additions -- are critical.

If you sold a house before May 7, 1997, that could affect your current home's basis. With home sales back then, taxpayers were able to defer tax on any gain by using the profit to purchase another home and filing IRS form 2119. If the home you're now selling is the one your pre-1997 sale proceeds were rolled into, you'll need those old forms to figure your current property's basis and any potential tax bill.

Virginia Tech - One Year Later

This a post from our friend Rob Fraim...


Today marks the one-year anniversary of the shooting rampage at Virginia Tech – as various news broadcasts have no doubt reminded you. I have received some requests for the piece that I wrote last year, so I’m just going to rerun it today – as we all think back on that horrible day.

Some of you have contacted me over the last 24 hours or so, remembering my proximity to Virginia Tech – my town of Roanoke, Virginia and Blacksburg, Virginia being just about 35 miles apart. Folks were kind enough to ask if I had any family at Tech.

I appreciate the concern. No, my two older kids are out of school now and my youngest is still in high school. So we are all well - as well as any of us who live in this area can be that is. Roanoke and Blacksburg are closely intertwined, with Virginia Tech being the major university in the area and the alma mater of many people here. More important, there are many young people from Roanoke who are Tech students. So while the whole nation was horrified by what was taking place, here in Roanoke it was very personal – since virtually everybody knows someone there.

Yesterday as the news started hitting I called several parents here to see if they had heard from their children. With each call I felt better, as folks told me that they had spoken with their kids and that they were safe.

Then I called my friend Mike, since I knew that his son was an engineering student – a senior – at Tech. He said, “No, I haven’t reached Brian yet. He didn’t pick up his cell phone, but that’s not unusual. I’m sure he’s ok though.” Of course he wasn’t sure. He wasn’t at all sure, and we both knew that.

We watched and read the news together over the phone as more and more details came out. He noted that the first shootings took place in Ambler Johnston Hall and mentioned that he knew where that was – he himself having gone to Virginia Tech back when we were young, back before young people routinely killed each other in random mass attacks. I asked where Brian would likely be and Mike said “Most of the time in Norris Hall. That’s a long way from Ambler Johnston.”

Then, within just a minute or so we both read that it wasn’t just confined to the two shootings at Ambler Johnston. Soon, the words “Norris Hall” and “engineering” started popping up with frequency as the details began to emerge.

Mike got quiet, as did I. Then he said, “I guess I’d better go and try to reach him some more.” He promised to call me as soon as he heard anything.

I only felt a fraction of his fear. A smidgen of his panic. I only got a glimmer, a glimpse of what Mike and many other parents were experiencing yesterday. And it terrified me nonetheless.

Any parent who has ever worried about a child driving home and being later than he should, or watched as she almost toddled into traffic, or felt helpless as he was wheeled away to the operating room, can imagine what Mike and others were enduring yesterday.

I wanted to call somebody. I wanted to watch the news. I knew I should get some work done. But I left the office and walked the two blocks to my home. What I actually wanted was to see my son.

I remembered that he was at home, studying for an afternoon test at the community college where he also takes courses, and it seemed important for me to talk to him. But he wasn’t at the house after all, having decided to study at the college. Now I knew that his school wasn’t Virginia Tech and I knew that he was ok, but I still felt compelled to reach him. I made up an excuse and called him to talk about something that could have easily waited until later – knowing that if I told him that I really just wanted to hold him and hug him and hide him, he’d think the old man had gone nuts.

On my way back to work I stopped in to two little family stores in this quiet neighborhood of ours – Lipes Pharmacy to pick up a prescription and Tinnell’s Grocery for a Diet Coke. While I was in the grocery my cell phone rang and it was my office. My heart froze when they told me that Mike had called and left word for me. He had news of his son.

Brian was fine.

And his dad was fine. And my son was fine. And all’s right with the world.

Well, no. Not really.

Our quiet little neighborhood somehow didn’t seem so quiet, and Tinnell’s and Lipes didn’t feel like Mayberry anymore. Blacksburg and Roanoke are just a half an hour apart, and Blacksburg and Roanoke are forever changed.

I know I’ll never pass a Luby’s restaurant again without being reminded of Killeen, Texas. And now, let’s do a quick word association. I say “Columbine.” Do you say “pretty little purple flower” or does your mind immediately flash to the senseless and evil violence at that school?

Oh, and someone reading this is certain to question my use of the word “evil.” Let me be clear:

E-V-I-L. Or perhaps “wicked” makes my point more plainly to you. Please, please spare me the diatribes about poor little bullied and socially disenfranchised young people acting out in the only way they know how. Evil, wicked, senseless, cowardly, hurtful, despicable, and once again evil I say.

And now, Virginia Tech and Blacksburg will always be known, not as a fine school and a nice town, but instead as the place where evil once again robbed life and hope and promise. 32 people were lost, and another 22,000 or so young people lost their youth, as something wicked their way came.

And here in Roanoke, I’m not sure that things will ever be exactly the same either. You see, even if you don’t know somebody who was hurt or killed, or know their families, this is a small enough community and the degrees of separation close enough that inevitably you will know someone who knows someone who was impacted.

Classes will resume, and life will go on, and kids will learn and study and graduate. People and towns and even schools have remarkable resilience. But let’s not think for even a moment that things haven’t changed.

I’m kind of afraid that people watched the news for a moment yesterday and thought “Oh, another school shooting - what a shame” and then switched to the sports channel or MTV.

We get used to evil and violence and it doesn’t shock us the way it once did. We get hardened to it, and accustomed to it and inured to it, and we come to accept it as routine. And that’s a change that bodes poorly for us all.

“Mother, mother, there's too many of you crying

Brother, brother, brother, there's far too many of you dying

You know we've got to find a way

To bring some lovin' here today …”

Marvin Gaye – “What’s Goin’ On?”

Rob Fraim