Inflation Ahead

According to the Hulbert Financial Digest, which tracks the performance of almost 200 investment newsletters, the Forbes Special Situation Survey is the best-performing letter year to date. Hulbert has us up 28.1% through the end of May.

Obviously, we are extremely pleased with this result. However, stocks have weakened considerably in June. Indeed, one of our holdings, Coventry Health Care (CVH), took a big hit last week when management warned that earnings would fall well short of expectations. Yet CVH will report strong revenue growth for the year, and 2008 earnings will likely exceed $3.50 per share. With a forward multiple of just nine times earnings, the stock is extremely attractive. Assuming management does not unload any more surprises, CVH should stage a bit of a rebound in the near term

Of course, macroeconomic factors continue to cast a pall over the entire market. Consumer confidence fell to a 16-year low and housing prices are still falling at an accelerating rate. It is at least a little encouraging, however, to see that the rate of change of the rate of change in housing prices is finally slowing down. Nonetheless, housing prices will probably keep falling on an absolute basis throughout 2008 and possibly into 2009.

Energy prices are another major concern. The extremely high price of gasoline is one major reason why shares of General Motors have plummeted to levels not seen in three decades. But crude oil prices are not just high; they are also remarkably volatile. Intra-day swings of 2% or more now occur on a regular basis.

As for the Fed, its most recent statement mentioned rising inflationary expectations and an uncertain outlook. The FOMC chose to hold interest rates steady at 2%, but it now has a clear upward bias. One member, Richard Fisher, voted against the decision to keep rates steady. He believes the time has come to start increasing interest rates. This comes as no surprise to Fed watchers since Mr. Fisher has dissented on every decision since being appointed to the FOMC in January. He may be a party pooper, but it looks as if he is also the only FOMC member who is ahead of the curve.

Making the Rounds in Boston

I have been in Boston the past few days. No, I did not come here to root for the Celtics. I came to give a couple of talks about my book and to attend a Forbes conference.

On Wednesday morning I spoke at the UMass Club in downtown Boston, which boasts a wonderful view. On Wednesday evening, I spoke at the Armenian Library and Museum of America in Watertown. I ran into several old friends at both venues.

On Thursday afternoon I tried to drive into the City to attend the Forbes Leadership Networks Forum. Unfortunately, I got caught up in the Celtics parade. Although the parade was officially over, the police still had not opened several key streets and I could not get to the Four Seasons Hotel where the event was taking place. I had to give up and try again a few hours later. I finally made it to the Four Seasons toward the end of the program.

When I finally got settled, I noticed that oil prices had fallen more than $4 per barrel because the Chinese said they were going to ease gasoline subsidies. It's about time they did this. By keeping gasoline artificially cheap, they have been encouraging consumption. Higher fuel prices in China should take the heat off of demand. Now if we can get the dollar to strengthen a bit, oil prices should fall back down to a level that is more in line with supply and demand considerations. I expect that level is about $80 per barrel.

The Pro-American Ahmadinejad?

There has been much debate lately about high oil prices. Some say they are fully justified simply because of the forces of supply and demand. Others say they are in a bubble. Well, I came across a rather bizarre story on Bloomberg.com. It appears that President Mahmoud Ahmadinejad of Iran believes in the bubble theory. He says there is plenty of oil available and the price rise is unjustified. He blames it on efforts by some to weaken the U.S. dollar. He also called for greater use of nuclear energy, which he called "clean and cheap."

Ahmadinejad suddenly sounds like an American. In defending the U.S. dollar, he is doing a better job than our own Treasury Secretary. And by urging greater use of nuclear energy, he is encouraging us to stop relying on OPEC. Ahmadinejad is not particularly popular in Iran. Perhaps he has aspirations for a political career in America? You can read the Bloomberg story by clicking here.

The Leon Charney Report

Although I have been interviewed dozens of times on television and radio, I always enjoy appearing on the Leon Charney Report. Charney is an extremely successful investor. He also served as an advisor to Jimmy Carter during the Camp David Accords. He hosts one of the most intelligent talk shows on television. There are no sound bites on this program. No screaming, no yelling, no cutting people off. Instead, Charney takes the time to conduct interesting conversations with interesting people. I have had the honor to appear on his show four or five times. In my most recent appearance on May 18, Charney interviewed me about my new book, Even Buffett Isn't Perfect. I thank him for the plug. You can watch this May 18 interview at the Leon Charney Report website.

Avoiding Oil-Related Stocks

Today, we released the June issue of the Forbes Growth Investor. The 50 stocks on our recommended list are up 2.11% year-to-date. In comparison, all the major indexes are down more than 4% during the same period. We have been seeing quite a bit of strength in the technology sector. For example, Sohu.com (SOHU) surged 83% during the three months it spent on our recommended list.

Our Special Situation Survey investment newsletter takes a more concentrated approach. We typically have only about 15 stocks on the recommended list in this newsletter. One of our best picks this year was Trinity Industries. The stocks in this newsletter are up 26% year-to-date, making it one of the best-performing investment newsletters so far this year as well as over the past five years.

Interestingly, neither newsletter has benefited from the surge in oil prices. There are no oil-related stocks on the recommended list of the Forbes Growth Investor. Currently, there is only one in the Special Situation Survey, but it hasn’t done particularly well. In general, energy is an area I have been avoiding. In fact, as far as oil goes, I am in the bubble camp. Supply and demand factors certainly explain a good part of the rise in crude oil prices, but I believe Federal Reserve policies that have weakened the dollar also carry some blame. U.S. demand for gasoline is actually falling. Gasoline is subsidized in many other countries, but their governments are finding it increasingly difficult to continue this practice. Oil prices could plunge as subsidies are lifted and as the dollar strengthens.

Fed Minutes Forecast Recession

Yesterday's release of the minutes from the Federal Open Market Committee's April 29-30 meeting shook the markets. In particular, investors were put off by forecasts for slower economic growth and indications that no more rate cuts are in store. Just about the only good news that could be found in the minutes were references to stronger exports and slowing core inflation. At the same time, however, the Fed raised concerns about elevated overall inflation and rising expectations for future inflation. Committee members also expressed concern about slowing economies abroad, especially in Japan, the U.K., the euro zone, Canada, and Mexico.

The Fed actually expects U.S. GDP to contract during the first half of 2008, which of course is almost over. This is one way to say recession. The Fed remains hopeful, however, that the American economy will strengthen during the second half due to "accommodative monetary policy and fiscal stimulus." The former refers to the significant interest rate cuts that the Fed has already delivered. The latter refers to the tax rebate checks. Despite this expectation for a stronger second half, Fed economists reduced their projections for GDP growth for the full year. Their projections now range from just 0% to 1.5%, down significantly from the 1.0% to 2.2% range delivered just three months earlier.

Rebate checks are not likely to provide much stimulus. This money will probably be used to pay down debt or fill the family car's gas tank a few times. Real fiscal stimulus requires tax cuts. Unfortunately, there is no hope of that happening in the current political climate.

The minutes also said that "most members viewed the decision to reduce interest rates at this meeting as a close call." They don't want to cut rates again unless things really go to hell in a handbasket. The Fed said, it is "unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term."

Two FOMC members actually voted against the latest cut. Richard Fisher warned that rate cuts were hampering economic activity by reducing the value of the dollar and contributing to the rise in import and commodity prices.

So there we have it. According to the Fed, although we can expect much slower economic growth than we previously anticipated, we can no longer count on further interest rate reductions. There certainly wasn't much in the report to be optimistic about. Of course, that explains the big sell-off in stocks that took place soon after the minutes were released.

Because I recently completed a book on Warren Buffett, and because Buffett is touring Europe right now, I've been asked a number of times why he is there. In particular, Fox Business asked me today if it made sense for Buffett to be trying to purchase European companies at a time when the dollar is so weak relative to the euro.

The first thing to keep in mind about Warren Buffett is that he does not actively seek companies to buy. Instead, he waits for good companies to contact him. He is in Europe just to make it clear that he is available and ready to buy if they are ready to sell.

Second, Buffett's European tour is not a bet on the dollar. He is still bearish on the dollar for the long term because he believes U.S. economic policy is geared to make the dollar weaker, but he also says he has absolutely no idea what the dollar will do in the short term. Just two weeks ago, he told shareholders he would like to diversify Berkshire's revenue stream. He wants more revenues from foreign economies. And because he has so much money to invest, he is focusing on Europe. He prefers to buy very large established family businesses.

Stuart Varney had a difficult time with my name, but he managed to pull it off at the end. Click here to view.

Broadcom Co-Founders Snagged for Backdating Options

According to the SEC, Broadcom founders Henry Nicholas III and Henry Samueli and two other executives were involved in a scheme to backdate employee stock options. Backdating, which may have been more widespread than we know, didn't come to light until just a few years ago.

When a corporation grants stock options to an employee, it is supposed to be honest about the grant date. Backdating refers to the practice of selecting a date from the past when the stock price was at a lower and more favorable level for the employee. This is one way to recruit or retain valued employees. If the options are already in the money, the employee is less likely to leave.

About two years ago I had a conversation with former SEC chairman Harvey Pitt about this issue. Interestingly, he said the practice itself may not necessarily be illegal as long as it is fully disclosed. Microsoft, for example, routinely backdated options, but it also disclosed doing so in its SEC filings. Pitt, however, said that failing to disclose is outright fraud.

Apparently a number of other high profile companies, most notably Apple, have also engaged backdating options. However, some commentators have said the SEC is reluctant to go after Steve Jobs, Apple's founder, savior, and CEO. But these latest charges against the Broadcom executives indicate that the SEC considers backdating a serious offense. We may hear about more such cases in the future.

A Stronger Dollar and Falling Demand Should Cause Gas Prices to Retreat

According to the AAA's Daily Fuel Gauge Report, the national average price of gasoline just hit a record $3.72 per gallon, up 35 cents per gallon in just one month. Many consumers now believe the $4.00 mark will be broken very soon.

I am absolutely convinced that the run-up in oil and gasoline prices has more to do with the weak U.S. dollar than it does with supply and demand considerations. To a large extent, Federal Reserve policy decimated the dollar and caused inflation in dollar-denominated commodities. The Fed felt a need to aggressively loosen monetary policy because of the U.S. financial crisis and the slowing economy. However, it went way overboard by slashing the target fed funds rate from 5.25% in September all down to 2% where it stands today. Although the dollar had been weakening against the euro since 2002, the Fed's recent actions contributed to the dollar sell-off and the rush toward oil and other commodities.

This is not to say, however, that supply and demand played no part. Most oil producers are running close to full output and there isn't as much slack in the system as there was in the past. Furthermore, several oil-producing nations have serious problems. In Nigeria, it seems there is a new attack on production facilities almost everyday. Iraq, which has among the largest proven reserves in the world, is still mired in conflict and isn't producing anywhere near its full capability. And Venezuela has hampered its production by nationalizing assets and driving out foreign companies.

As for demand, it continues to climb in China and India. However, demand is actually falling in the U.S. We are currently consuming close to a million barrels of gasoline a day less than we were during last summer's peak. While demand is likely to climb as a new summer season dawns, it is unlikely to rise as much as it usually does if prices remain at elevated levels.

Now that it appears the Fed is through (or almost through) cutting interest rates, there is hope that the dollar will soon start to strengthen. With a stronger dollar and waning U.S. demand for gasoline, it is hard to believe that prices won't ease off a bit from current levels.

In Omaha at the Warren and Charlie Show

I’m posting this from Omaha. I arrived here yesterday for the Berkshire Hathaway shareholders’ meeting. My trip was exhausting. I got up and 3 a.m. and headed for LaGuardia Airport. I made a connection in Chicago, but due to bad weather sat on the runway for almost three hours. I finally arrived in Omaha, rented a car, and raced to Borsheim’s Fine Jewelry, a Berkshire subsidiary. I went there to do an interview about my new book, Even Buffett Isn't Perfect, with Liz Claman of the Fox Business Network. I was starving and had a splitting headache. Except for some water, I had not eaten anything all day. Fortunately, the interview went very well.

After the interview, I headed off to my hotel in Bellevue, which is about 15 miles south of Omaha. Because 30,000 Berkshire shareholders came to Omaha for the meeting, there were no more rooms available in the city. I checked into my hotel and immediately fell asleep for several hours. As soon as I awoke, I headed back to Borsheim’s for a reception. The place was packed. As I walked past displays of $20,000 watches and other kinds of expensive trinkets, I could not help but notice the diversity of people, all of whom were Berkshire shareholders. They were young, they were old, and they were from all over the world.

The actual meeting began this morning at the Qwest Center. There was a large exhibit hall with many of Berkshire’s subsidiary companies showing off their wares. Shareholders could buy everything from See’s Candies to Fruit of the Loom underwear at discounted prices. Soon, the real show began. Susan Lucci, star of the soap opera “All My Children,” took the stage and announced that Warren Buffett decided to leave the company. She said she had just been appointed the new CEO of Berkshire Hathaway and that her first decision would be to initiate a dividend payment. Suddenly, Buffett came on stage and put a stop to that. This was all in keeping with his great sense of humor.

For several hours, shareholders bombarded Buffett and Munger with questions. Many of the questions had little to do with Berkshire’s business operations. Young people asked what they should do with their lives, a teacher asked what she should teach her students, and one man wanted to know if Buffett had accepted Jesus Christ as his Lord and Savior. Others asked about nuclear proliferation and mass transit policies. One man made a plea that Buffett read the U.S. Constitution and then call Roger Pilon of the Cato Institute. It quickly became evident that for many people in the audience, Buffett and Munger were more like cult figures than great businessmen. All of these people were clearly smart to invest in Berkshire stock. Nonetheless, some were quite wacky.

Although most people in the audience revere Buffett and Munger, not everyone was enamored with the dynamic duo. Several indigenous Americans complained that PacificCorp, which is owned by MidAmerican Energy Holdings, another Berkshire subsidiary, was damaging waterways with its damns. They wanted to know what Buffett intended to do about it. They also complained that they weren’t treated very nicely at last year’s meeting. Buffett was polite, but tossed these questions to David Sokol, chairman of MidAmerican, who gave some very diplomatic answers that did not quite seem to satisfy the questioners.

I was surprised that no one asked about Joe Brandon, General Re’s former CEO who suddenly resigned just a couple of weeks ago. Buffett has frequently praised Brandon in his annual letters to shareholders. The rumor is that Brandon resigned because federal prosecutors pressured Buffett to let him go. These authorities seem to believe Brandon was closely associated with some of the fraudulent schemes involving General Re and American International Group. Four people, included General Re’s former CEO, Ron Ferguson, were recently convicted for these schemes. Brandon, however, has not even been charged with any wrongdoing. Yet his reputation has been tarnished. It would have been nice if Buffett had shed some light on Brandon’s departure.

All in all, while I am glad I attended the event, I can’t say it was particularly instructive. It certainly was fun to meet and mingle with many of Buffett’s fans and to see all of Berkshire’s products on display in one place. However, I am convinced that one can learn a whole lot more by studying Berkshire’s annual reports than by attending its shareholders’ meetings.

Still no Light at End of Housing Tunnel

This morning's release of the Standard & Poor's Case/Shiller Indices proves extremely disappointing for those who are looking for evidence that home prices are nearing a bottom. Unfortunately, prices are still falling at an accelerating rate.

S&P tracks 20 major markets. The most recent data, which are for February, show that nineteen of those markets experienced year-over-year declines that were bigger than the declines seen in January. Prices fell more than 20% in Las Vegas, Phoenix, and Miami. In Las Vegas, prices are down 25% from their all-time high set in August 2006, yet because they remain 77% higher than they were in January 2000, they could go quite a ways lower. Charlotte was the only market to see a year-over-year gain in February. Prices in Charlotte inched up 1.48%, but even this was smaller than the increases in previous months.

Home prices will likely fall throughout 2008. Before they can stop falling entirely, their declines have to slow down. Because the S&P data are almost two months old, there is hope this may already be happening. Evidence of a slowdown in price decreases is the light at the end of the tunnel that will ultimately bring confidence back into the housing market.

Housing Stocks Surge Despite Plunging Sales

New home sales continue to plummet. According to the joint release issued this morning from the Census Bureau and the Dept. of Housing and Urban Development, only 51,000 new single-family homes were sold in March in the entire country. Seasonally-adjusted and annualized, that comes out to about 526,000 new home sales, down 8.5% from February and down 36.6% from March 2007. Because the 90% confidence level is ±11.1%, it is possible that the decline was much worse. We'll find out for sure over the next two months as this figure is revised.

If that's not bad enough, it turns out that inventory is still growing. If sales stopped falling and homebuilders stopped working, there would still be enough new homes available for sale to satisfy demand for 11 months. Furthermore, the median price of a new home is down 6.8% over the past month and down 13.3% over the past year.

Despite this seemingly dismal news, almost all homebuilding stocks are up today. Although most homebuilding stocks are down by huge amounts over the past year, they are also some of the best-performing stocks year to date. At least three of them, Hovnanian Enterprises, Standard Pacific, and M/I Homes, are up more than 50% so far this year.

Many investors are obviously betting that the worst is over for the homebuilders. I doubt this is the case. Most of these companies will report huge operating losses this year. Indeed, they may report losses next year as well, assuming they survive that long. While some may consolidate, others will go out of business. At current prices, it's still too early to buy the homebuilders.

More Questions About JPMorgan/Bear Stearns Deal

A recent SEC filing from JPMorgan Chase raises more questions about the government's role in JPMorgan's pending acquisition of Bear Stearns. Steven Davidoff does an excellent job of pointing all this out in a New York Times DealBook piece. For example, he asks why the New York Fed agreed to give Bear Stearns a secured lending facility on Friday, March 14, then suddenly changed it's mind and backed out of the agreement by the end of the day. The SEC filing also notes that JPMorgan indicated a willingness to pay $8-$12 per share for Bear Stearns, but eventually offered only $2 per share following discussions with government officials. Take a look at Anatomy of a Merger for more questions prompted by the SEC filing. I thank Gary Lutin for bringing Davidoff's piece to my attention.

Buffett Loses Another General Re CEO

After a week of rumors, Joseph Brandon finally stepped down as CEO of General Re, a Berkshire Hathaway subsidiary and one of the country's largest reinsurance companies.

Brandon's resignation is big news because he was frequently praised in Buffett's annual letters to shareholders. Berkshire followers considered Brandon a leading candidate to replace the great man when he eventually retires. But Brandon is now the second General Re CEO to step down under a cloud. Ron Ferguson was the first.

Warren Buffett does not like to use stock to consummate acquisitions. He made an exception, however, when he bought General Re on Berkshire's behalf in 1998 for $22 billion using a combination of cash and stock. Things soured almost from the start.

When writing about General Re in his 1999 letter to shareholders, Buffett said, "we had a huge--and, I believe aberrational--underwriting loss." He said General Re was underpricing policies, yet he also praised CEO Ferguson. However, just a couple of years later, Ferguson was out and Brandon was in.

It turns out General Re was also plagued with other problems. It had accounting irregularities that resulted in $800 million of costs being charged against 2001 earnings. It had derivatives-related losses that amounted to about $400 million. In fact, these losses prompted Buffett to make his now famous statement calling derivatives "financial weapons of mass destruction."

Just two months ago, Ferguson and three other General Re executives were convicted of helping American International Group, formerly run by Maurice Greenberg, deceive investors by manipulating earnings with fraudulent reinsurance contracts. Although Brandon was not convicted of any crime, prosecutors considered him a co-conspirator and Buffett came under intense pressure to let him go. Today, he relented to that pressure.

Losing Brandon can not be easy for Buffett. Each year, Buffett heaps praise on several of his managers in his annual letter to shareholders. Brandon's name frequently showed up in these letters. Now that Brandon is gone, Ajit Jain is the leading candidate to become Berkshire's next CEO. If interested, you can read more about Berkshire's investment in General Re in my forthcoming book, Even Buffett Isn't Perfect.

Shiller at the BSAS

I want to thank one of my former students from Boston College, Harry Markopolos, for sending me his notes from a talk delivered last month by Robert Shiller to members of the Boston Security Analyts Society. Shiller, who is a member of the faculty at Yale University, is also the man who closely tracks housing prices. He was instrumental in developing the now famous S&P/Case-Shiller Home Price Index. I had the pleasure of interviewing him a couple of years ago shortly after he released the second edition of his prescient book, "Irrational Exuberance." I call the book prescient because the first edition correctly called the top of the stock market in 2000; and the second edition correctly called the top in housing.

As everyone knows, housing prices are still falling. Shiller expects them to keep falling for quite some time since the monthly year-over-year declines are still accelerating. Actions taken by government officials may slow these price declines, but eventually the market will have to find its equilibrium. In fact, it would probably be better for our economy if the government did not intervene and allowed this process to proceed as quickly as possible.

Shiller pointed out that the price gains seen in recent years were historically unusual. From 1890 to 1990, housing prices appreciated at about the same rate as inflation. Starting in 1990, however, prices took off as home buyers began to view a house more as an investment rather than just a place to live.

Shiller pointed out that for many home owners, their house is their most valuable asset. Unlike other assets, however, it was nearly impossible to hedge against a drop in value. But he has helped develop financial derivatives linked to the Case-Shiller indexes that allow home owners to do just that. Shiller believes the existence of such instruments make it much less likely that a housing bubble will develop again in the future.

Interestingly, Shiller said that in every market he examined, lower-priced homes exhibited the greatest price increases during the recent housing bubble. He attributes this to the widespread availability of sub-prime mortgages, which sometimes did not even require a down payment or the verification of income. This made it possible for individuals, who would not have otherwise qualified for mortgages, to buy homes. As a result, lower-priced homes saw the biggest increase in demand, and therefore, the biggest percentage increase in price. But now, this is also where most of the pain is being felt. Unfortunately, other segments of the housing market and the wider economy are not entirely immune. They, too, are feeling some pain.

Forbes Roundtable Discussion

About once every quarter, the Forbes Investors Advisory Institute hosts a roundtable discussion with some leading investment strategists and portfolio managers. Wally Forbes moderated one such discussion last night at Forbes headquarters. Panelists included Barbara Marcin of GAMCO, Mike Holland of Holland & Company, Joe Battipaglia of Stifel Nicolaus, Rich Peterson of Thomson Financial, and me. Most participants were bearish about the economy. Views on the stock market, however, were more varied with some being bullish and others expecting only mediocre returns at best for quite some time. The Forbes video department filmed the discussion and expects to post highlights on Forbes.com within a few days. We also expect to prepare a transcript for subscribers to the Forbes Growth Investor and Special Situation Survey investment newsletters. They will be notified when it is ready.

Olympic Boycotts

As a former track and field athlete, I can't help but comment on the commotion surrounding the upcoming Olympic Games in Beijing. China is coming under severe criticism for its crackdown in Tibet, as well as its cooperation with the government of Sudan, which is accused of perpetrating genocide in Darfur. The most recent developments involve protesters in France accosting a wheelchair bound athlete who was carrying the torch.

Like it or not, the Olympic Games have long been politicized. President Jimmy Carter made the Olympics a political issue for Americans when he kept our team out of the Moscow Olympics in 1980. Carter's boycott was meant to protest the Soviet Union's invasion of Afghanistan. The Russians eventually vacated Afghanistan, but not because of the boycott. Ironically, the U.S. military now finds itself mired in that very country.

As you might imagine, the Russians were not pleased with the U.S. led boycott. They felt America was trying to embarrass them. Therefore, it came as no surprise when they retaliated by boycotting the very next Olympic games, which conveniently were held in Los Angeles.

I was never an Olympic caliber runner, yet I had the opportunity to train with runners who were. In fact, one of my former track coaches was a member of the 1980 team. As you can imagine, he was not happy to see all his training go for naught. After making the Olympic team, all he got was a trip to the White House and a handshake from the man who kept him from competing in Moscow.

I am not saying that China's policies should not be protested. Indeed, they should be vigorously protested. However, an Olympic boycott is not going to do much good. It certainly is not going to convince China's leaders to change their ways. On the contrary, a boycott will probably make them close ranks and become even more belligerent than they already are. Those who are really serious about delivering a strong message to China should seek other ways. Boycotting Chinese made goods, for example, would be more effective than boycotting the Olympics. But are consumers willing to pay higher prices for goods manufactured elsewhere?

Even Buffett Isn't Perfect

I gave a talk Wednesday night in White Plains, NY about my forthcoming book, Even Buffett Isn't Perfect. I was quite pleased with the response, so I am posting a short excerpt here. The book is available for pre-order at a significant discount at Amazon.com and Barnesandnoble.com, as well as a number of other book sellers.

Buffett firmly believes the rich should pay more tax. So why would he choose to give so much of his money to these various foundations rather than allow the government to take a huge chunk from his estate after his death? The only reasonable explanation is that Buffett is convinced that these foundations will spend his money much more wisely than the government would.

Many of the megarich, including Buffett, favor the estate tax. Yet they continue to take advantage of the loophole in the law that allows them to avoid the tax by giving their money away before they die. What explains this paradox? Perhaps the answer lies somewhere between guilt and altruism. They may feel guilty about having so much money, yet they don't trust the government to spend it wisely. But as conservatives point out, we don't need the estate tax to get the same result. Those who feel guilty are free to give their money to whomever they want--even the government. But they should not force the same on others.

Grand Theft Investment Bank

J.P. Morgan's acquisition of Bear Stearns is starting to look more and more like a crime with the Federal Reserve and Treasury Department guilty of aiding and abetting. Government officials orchestrated grand theft investment bank.

As of yet, of course, there is no definitive deal. Yet Morgan almost got away with "buying" Bear for just $2 per share. The government, it seems, was desperate to close a deal and just as desperate to punish Bear's shareholders. Morgan was smart enough to realize they were the only bidder in the game. They could name any price they liked and that's exactly what they did.

But shares of Bear immediately started trading well above the offer price. And now, after only one week, Morgan decided it needed to allay some of the ill will it's initial offer created. So it decided to increase its offer--by five times! If this does not confirm that Morgan's initial offer amounted to highway robbery, I don't know what does.

With Morgan's new offer the government is still assuming most of the risk by guaranteeing Bear's toxic mortgages. But instead of doing this through Morgan, it could have done the same thing directly through Bear. Either way, the burden to taxpayers is the same. By working through Morgan, however, the government can be sure that Bear's employees and shareholders get absolutely pummeled.

One day a lot of hard questions will be asked about exactly what went on. Harvard professors are probably already working on a case study. Dozens of books will eventually be written on the subject. In the final analysis, it will become evident that, with the government's help, J.P. Morgan almost stole Bear Stearns.

On the Road in New Orleans and Austin

I was in New Orleans yesterday taking part in a market forecast panel discussion sponsored by the CFA Society of New Orleans. The event was held at the Bourbon House. Vinny Catalano, president and global investment strategist of Blue Marble Research, moderated the discussion. The audience included Don Chance, my financial derivatives professor at Virginia Tech, and Pat Mooney, a former student of mine from a CFA review course I used to teach in Boston. Both are now working in Louisiana.

The other panelists included Mark Freeman, an investment advisor, and Dek Terrell, an economist from Louisiana State University. Interestingly, Dek talked about Louisiana's strong economy. Louisiana, which is heavily dependent on the oil industry, is actually benefiting from the high oil prices that are haunting the rest of the nation. He pointed out that there are pockets of desperation in Louisiana, but for the most part, the state is doing well.

Mark warned the attendees that volatility in the stock market is likely to continue, but he had a favorable view overall.

I focused my discussion on the continuing acceleration in the drop in housing prices. Almost all of the problems we are seeing in the financial sector are related to housing. Until housing prices start falling at a decelerating rate, we will not be approaching bottom. I also warned that high energy prices are taking a big toll on consumers. We are already seeing a decline in gasoline demand due to these prices. However, I said oil prices are more likely to fall than rise. Current prices are more the result of the weak U.S. dollar and less a result of strong demand or limited supply. For more than a week I have been trying to short the USO, an oil ETF, to take advantage of the expected decline. But my brokerage firm claims they have no shares in inventory available to short.

Today I am in Austin and will take part in a similar discussion sponsored by the CFA Society of Austin. This event will take place at the Austin Club. I'm also hoping to visit Roux, a trendy restaurant owned by my cousin Dan Janjigian.