S&P Downgrade of the U.S. 4 days after debt ceiling deadline. Really? Are you dumb or cowardly?

Standard and Poor's - they of the eponymous 500 - downgraded U.S. debt from AAA to AA+ on Friday. That means that U.S. borrowing could need to pay higher interest to offset the new risk.

S&P has been criticized for this, probably by many who have seen the move as 'unpatriotic.' Let's forget that and ask two simple questions:

1. Why did it take until Friday?

The debt ceiling deadline was Tuesday. The deal got done Tuesday. S&P claims it is concerned about the politicization of the debt ceiling process. Fair enough. I have concerns too. But those concerns were, if nothing else, lessened by Friday. If S&P really believed that the process created risk, why did it leave investors to twist in the roiling winds of the market this week before making its assessment?

2. Did S&P pay any attention to the market this week?

The DJIA (Dow Jones Industrial Average) gave away all the value it gained this year, tanking 500 points Wednesday and barely bouncing back by Friday. Where did investors go as stocks (equity) dove? They went to bonds, specifically Treasuries. So the market players are still saying that U.S. Treasuries are the low-risk investment of choice. They clearly don't see the risk S&P sees.

And, again, if S&P throughout this months-long process thought the U.S. was riskier, didn't it have an obligation to speak up before the market tanked and investors would predictably head to Treasuries?

Instead, S&P downgraded Friday, after the market reaction to the resolution of the debt ceiling fight played out. That way, their downgrade would have little to no effect on the market. If so, what is the point of the rating at all now that market participants have shown their preferences? S&P, if you are to have any value at all, how about a rating when it matters?

LinkedIn earned $16M last year. It's valued at $8.9B. You crazy enough to ride that train?

Joe Nocera asked whether LinkedIn was scammed by Morgan Stanley during it's IPO. The bank priced the IPO at around $45-48, paying the company a percentage of that valuation. The stock opened north of $90, which is where the bank sold it, netting the bank 100% profit immediately, plus filing fees, etc.

Likely true. Thing is, is LinkedIn (LNKD) worth $93 (where it stands right now)? Let me put it in perspective for you: it's price to earnings ratio (PE or the stick price * total shares / what you earned) is 561. The company earned $16M last year. The valuation has it at over $8.9B. Yahoo has those earnings even lower, putting the P/E at 1412.

Other prominent companies' P/E ratios:

AAPL - Apple - 15.95

GSK - GlaxoSmithKline - 37.48

Other brand new IPOs' P/E ratios:

WIFI - Boingo Wireless - 19.68 (Nice ticker symbol btw)

GNC - GNC Stores - 21.55

(ZIP - ZipCar had an IPO, but has not yet reported any earnings so P/E is not available.)

Microfinance in the U.S.

www.Kiva.org just opened operations in the U.S. The microfinance site has focused on the working poor in the third world until now. It turns out that Americans, too, could use loans of $0-$10,000, interest free. That last detail is critical. By not charging interest, Kiva maintains it is a charitable organization - not a bank or a securities issuer subject to U.S. regulation. Regulation would render the operation too onerous to continue.

GM Bondholder Angry ... Because She Didn't Diversify

CNN ran a story this morning about a schoolteacher who invested and lost $70K as a GM bondholder. This must be sensationalist journalism. I mean, John King never asked the 700 pound gorilla question: You are a schoolteacher, what are you doing putting such a large portion of your investments in one company?

Yes, the government involvement here alters the picture, but that occurs at the aggregate level. The huge impact Debra (that's her name) is feeling as a result of the bankruptcy is her own doing. If she were properly diversified, this would have sucked, but it would not have been devastating.

Magic Johnson in a Tough Spot

Magic? You mean Magic Johson? He hasn't been in the news for who only knows how long. That was my reaction too when I saw Magic in Jackson Hewitt's new ads for payday loans. JH is one of the largest providers of the service, which charges customers a few percentage points in interest for a loan to cover the few days between when they get paid and when the money becomes available in their account.



There is a long argument we could have about whether such operations should be legally permitted. It is the ultimate free enterprise on the one hand; on the other hand, you're lending to the people who can least afford it money at rates well above (like 1000% above) the norm.

I was disappointed to see Magic in these ads because his other work, the Magic Johnson Foundation, Magic Johnson Theaters, and investments in local food service restaurants, etc., were all efforts to bring quality goods and services to black and other minority communities. This does the opposite - taking a money out of those communities. If there is any ideology to Johnson's business, I thought this would conflict with it. Magic isn't commenting...but I sure hope he does. The rest of his brands rely on that sterling image.

Layman's Dow

The DJIA (Dow Jones Industrial Average) moved almost 400 points yesterday on news that Citibank reported profits in January and February. The company's own stock rose over $.40 on the news. This is big news, but most people have glossed over it because we're still stuck in the past, when the DJIA was near 14,000.

At the previous high - or even at the more reasonable 12,000 level - we saw moves of 500-600 points on occassion, prompting cries that the market was hopelessly volatile. (See the beginning of 2008 here) Those moves represented 5% of the market. Now we're in less than half that market, so 400 points represents a move of over 6%. The volatility hasn't gone down at all. If anything, it has scaled down somewhat, but is still higher than it was 6 months ago.

This could be a Dead Cat Bounce - market jargon for a rise after a steep drop that is followed by another drop...an indication that some investors thought we'd hit bottom when, in reality, we still had a way to go.

Oh, and Citi's move was from $0.90 - $1.40, over 50%. I know some other stocks that were hard to value because extraordinary level of government support. The Maes anyone?

At the Pump

Prices at the pump are creeping back up a cent or two while oil continues to decline. That's worrisome by itself, so I decided to look at the cost of gas last time oil cost below $40. http://gasbuddy.com/gb_retail_price_chart.aspx. Turns out you have to go back to 2002 and that the news is good. Prices at the pump now actually appear to be lower than they were then.

I also decided to check how oil prices fared compared to the market. Oil has hit a 5 year low - that, after rising steadily and falling off a precipice. The Dow is different. It rose to 14 from a monthly low of 7,800 in 2003. Before that, there was a hump up to 10,000 from a monthly low of about 7,500 in 1998. (http://finance.yahoo.com/q/hp?s=%5EDJI&a=09&b=1&c=1928&d=01&e=23&f=2009&g=m&z=66&y=66)

Mortgage Reform - One Tooth Removed

Mortgage regulation was set to have teeth when first proposed. Among the changes was a proposal to requre the closing agent to read a script to the buyer, including the payment terms, the type of mortgage, etc. The exercise would slow down closings and, in theory, force the buyer to focus on the relevant terms and hear them in plain English. The mortgage industry's lobbyists recently announced that HUD had backed off the script requirement. The mortgage lending industry didn't like the scripts because, well, they would slow down closings. Apparently, even in a down RE market, time is still money.

Perhaps a cleaner loan summary sheet would do equally well to convey the terms to a buyer. In my mind, though, this already exists in the form a HUD-1. While not "clear" in the "apple product packaging" sense, the HUD-1 is one legal-sized page that lays out exactly what you are borrowing, what type of mortgage you are taking on, and what your monthly payment will be. It could be edited to include more detail on the date of adjustable rate resets and to cut out many of the other items that clutter the page, but it is not all that complex. That said, I understand that I am - to my chagrin - considered a sophisticated buyer.

It is for that last reason that I thought a script would be a bold change. I admit that a purchase as large as a house requires a certain level of sophistication and, thus, permits a certain level of "caveat emptor;" however, realpolitik requires that we admit to ourselves that all types of people buy homes and that they don't have the sophistication or attention to read through their loan documents. Their inability to understand the terms is now hurting all of us, and if you are going to hurt me, I support regulation that protects us all from you (including yourself.) That is an instance in which regulation lowers the overall cost to society, regardless of the increased closing costs incurred by realtors and title companies. If they charge us another $1000, that still only represents at most about .5-.7% the price of the property. Consider it the cost of insuring against living through this again.

In Money as in Life, No Skin, No Win.

Chuck Jaffe of Marketwatch points out an unsuprising fact - Find a fund whose money manager has some of his or her own money at stake and you'll find better returns. The SEC requires managers to disclose the amount of their personal stake in the fund. The two lowest brackets: $0 and $1-10,000.

Overall: 40% of funds contain not a cent of the manager's money.
Among Morngingstar's Top Picks: managers averaged over $300,000 of their own money invested in the fund.

There's one disclosure you should consider looking up before you invest.