Wednesday, June 18, 2008

The 27% Bank Account

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The 27% Bank Account

by Tom Dyson, editor,
The 12% letterfor DailyWealth January 2008

In his professional life, Thomas Lewis has one goal... producing dividends every single month.
Some companies produce shoes. Some companies produce golf balls. Some companies build houses. Lewis' company produces monthly dividends. It operates under the trademark "The Monthly Dividend Company." No joke. Every breath, flinch, twitch, or blink management makes is geared toward paying bigger dividends to shareholders.

And Lewis' single-minded obsession is paying off: Since the company listed on the New York Stock Exchange in 1994, shareholders have made an average total return of 27% a year.

There isn't another stock in America – or even the world – like this. As I'll show you, this investment is safer than a bank account, a CD, or a Treasury bond, yet it pays out magnificent returns. This is the best risk-reward income play I have ever found…

Some companies pay dividends because they have to. Others pay dividends when they can. There are high dividends, low dividends, special dividends, dividends that fluctuate, and dividends that grow...

But no company has ever approached its dividend payments the way Thomas Lewis' company does.

Take its annual reports, for example. The company releases the most investor-friendly reports around. The CEO writes his letters to shareholders in plain English. The reports present statistics with simple graphics. And the business? It's so easy to understand, analyzing this company felt like an afternoon with the Sunday paper.

The theme of the 2006 report is "Monthly Dividend Land." Each section takes you through an imaginary world where you "accumulate shares at every twist and turn on the road that leads to monthly dividends for life."

In his summary of 2006 results, Lewis writes: "Our most important accomplishment is that we were able to pay 12 monthly dividends and increase the dividend five times during 2006."

This company's corporate quest is to provide dividend income for its owners. "This philosophy colors every decision the company makes, dollar it spends, management discussions, and all of the employees' activities undertaken each day," says the COO.

I've never seen a company with such total dedication to its dividend. But do these guys walk the walk? You bet they do...

The Monthly Dividend Company is in its 38th year of business. As of January 1, 2008, the Monthly Dividend Company had paid 448 consecutive monthly dividends and 40 consecutive quarterly dividend increases. The annual dividend has grown from $0.90 in 1994 to $1.64 last month.

Here's what some current shareholders had to say about their company:
"I'm retired and I live off SS. It is my largest holding... and has been for years now. It makes up 30% of my portfolio. This is one stock I will never sell."
"I have been reinvesting my divvies for the last 3 years. It's amazing how fast my monthly payments have grown... I just wish I'd bought more."
"I've owned this stock since 1998. I can't imagine selling it. My original shares pay a 15% dividend and have risen 175%. That's better than 20% per year."

The Monthly Dividend Company's official name is Realty Income Corp. (NYSE: O). From here on, I'll refer to it as "the MDC."Why Retail Businesses Want a Landlord

In December 2006, 12% Letter readers bought McDonald's Corporation. Most people think McDonald's is a burger-flipping company. The reality is, the franchisees flip the burgers and manage the restaurants. McDonald's owns the properties and collects 9% royalties. In other words, McDonald's is just a glorified landlord.

The MDC uses a similar model. It buys property from convenience stores, gas stations, and fast-food restaurants. It then leases it back to store operators through long-term contracts. The retail chains get a cash-injection to grow their businesses. The MDC gets the property and a 9% rental yield.

That's it. It's a very simple model. In the industry, this arrangement is called a "sale-leaseback."

But you and I can think of the MDC as a retail landlord.

Unlike McDonald's, the MDC is set up as a REIT, so it pays no corporate tax as long as it distributes all of its profits back to shareholders each year in dividends.

Sale-leasebacks release valuable capital from unproductive, volatile assets, like property, and allow business owners to focus capital on their core business. The stock market rewards companies that grow earnings with much higher multiples than asset-rich companies, so sale-leasebacks push up share prices.

And private-equity groups and corporate raiders use sale-leasebacks to raise money for their takeovers. Conversely, asset-rich companies use sale-leasebacks to make themselves less attractive to the raiders.

Right now, the sale-leaseback business is hot. The financial world has figured out that retail companies have hidden treasure in their balance sheets.

Over the last 10 years, the MDC has averaged $220 million per year in new property acquisitions. In 2006, using exactly the same strategies and underwriting standards it has always used, it acquired $770 million... that's 3.5 times its regular volume. The Highest Occupancy Rates in the Business

This business is simple. Generating 27% annual returns for shareholders year after year is NOT. It's extraordinary. Let me show you how the MDC works:

The company opened for business in 1970. It currently owns 1,929 properties in 48 different states. Convenience stores and fast-food restaurants combined make its largest holding. But it also leases property to theaters, day-care centers, gasoline stations, and auto shops. Here's the breakdown:

Auto-related 18.9% Restaurants 17.8% Misc. Retailers 17.3% Convenience Stores 14.1%
Theaters 9.4% Child Care 8.9% Other 13.6%



Occupancy is the single-greatest concern for a landlord. An empty building is like a dairy cow that doesn't produce milk. A few vacant buildings will rip holes in your monthly dividend payouts.

The MDC achieves long-term occupancy rates of 98.5%. Through inflation, including the hyperinflation of the 1970s, recessions, wars, long bond rates from 18% to 4%… the MDC has never had more than 2.5% of its property vacant. Right now, 98.7% of its properties are occupied. These rates are the best in the industry – by far – and the chief reason the MDC is such a successful company.

So what's the secret to high occupancy?

This isn't the Cape Cod vacation-rental business. The MDC seeks retailers to occupy its properties and pay rent for 15 to 20 years at a clip. Selecting the right retail chain is the first step... and definitely the most important.

The MDC invests primarily in retailers that provide basic human needs... like cheap food, gas, or auto repairs. These businesses are the last to suffer in a recession. The MDC does not put more than 20% of its portfolio in any one industry or more than 10% of its portfolio in a single retail chain.

The industry divides retailers into three classes: venture, middle, and upper market. Venture-market retailers are the smallest chains, with fewer than 50 outlets. Typically, they sell a new retail concept. They don't have geographic diversity or experience in softer markets.

Middle-market retailers have between 50 and 500 locations in more than one geographic area. They have a proven, reliable concept and experience trading in different economic conditions. Credit ratings may border on junk. Middle-market retailers tend to be more recognizable.

Depending on where you live, you've probably heard of National Tire & Battery (car parts and service), Children's World (day-care), Wawa (convenience stores), and Zaxby's (restaurants).
The upper market is made of national chains with mature products and more than 500 outlets. They have investment-grade credit ratings and long trading histories.

The MDC likes middle-market retailers. Here's why:

Middle-market retailers need cash to fund growth. But unlike the national chains, poor credit ratings make other financing options expensive.

They have experience overcoming the managerial and operational obstacles that often trip up the venture retailers.

They can spread corporate expenses across a large number of stores.

They have the critical mass to survive even if some locations close.

Middle-market retailers grow stronger financially as their businesses mature. That means, given the risks, middle-market retailers offer the best investment returns of any market class, the MDC believes.

Even if the worst happens and a retail chain falls on hard times, the MDC still has little to worry about. It hasn't loaned any money to its tenants... just leased land. Worst-case scenario, the tenant is unable to pay the rent. Even this is unlikely. The company only invests in the best locations. These will be the last properties a retail chain shuts down in a reorganization or downsizing. The banks and bondholders may not be so lucky.Ivy League Appraisal Standards
The MDC's investment process makes MIT admissions look slapdash.

The company provides fantastic service to cash-strapped retailers. Retailers know it closes big, complex deals in a hurry. No one else can handle these deals.

Everyday, the MDC receives dozens of offers from retailers looking to enter sale-leaseback transactions. Like MIT applications, most of them get turned away.

The MDC has a fully staffed research team. It trawls the country looking for properties that meet the company's strict investment criteria. When it makes a match, it will grill the management team, tear apart the audited financial statements, and study its competitors. Then it studies the industry's history and outlook. Finally, the team will visit every location in the chain, shooting film clips of the property and preparing the key statistics to take back to the MDC's investment committee in California.

The MDC's CEO, president, CFO, and general council sit on the investment committee. These four executives spend every Friday watching hundreds and hundreds and hundreds of videos of the properties under consideration.

During 2006, the committee reviewed more than $5 billion worth of potential transactions, but acquired only $770 million in new properties. In other words, it bought about 15% of the properties presented by the research team. (MIT accepted 16% of its 2007 applications.)More Competitive Advantage

Let's pretend you have $200 million to invest in property and two weeks to close a deal. You could buy an office building. You could buy a warehouse. You could buy a stadium. You could buy a hospital. Or you could buy a portfolio of 100 small retail locations.

I don't know which one you would choose, but I'm pretty sure you wouldn't choose the retail portfolio. For one thing, you'd need to deal with 100 different tenants and administer 100 different properties. The deal would be more complicated. Your investment appraisal would be more costly, and your return would be less certain. That's why big institutional property investors steer clear of this niche. It's a hassle.

But they're the reasons this space offers higher rental yields than most other sectors. You could say that the MDC's ability to manage a large portfolio of small companies is its true competitive advantage.

So how does it pull off this tricky business so well?

Firstly, the MDC can close large deals quickly. It has the staff to analyze opportunities, advanced IT systems to deal with the sudden influx of new properties, and immediate access to a large pool of capital.

Second, the MDC has strong control over its portfolio. Sometimes an attractive deal contains a few undesirable properties, or the MDC portfolio may become overly concentrated on one industry. The company owns a specialist resale business that sells the properties the MDC doesn't want, using tax-deferred (IRS form 1031) exchanges.

Third, the MDC uses triple-net leases. Under a triple-net lease, the tenant pays the utility bills, insurance costs, maintenance, and property taxes. The MDC owns 1,929 properties in 48 states. That's a lot to manage. Triple-net leases make it easier to be a landlord. The majority, 98.4%, of the company's leases are triple net.Own 1,929 Properties with no Mortgage Debt

In 2006, the MDC added 378 new properties, 100% leased, with an average lease length of 16.7 years and an average lease yield of 8.6%.

The company uses a $300 million revolving credit facility to purchase properties. Once the properties are secure, it issues new stock or bonds to finance the investment over the long term. As a REIT, it can't retain earnings, so it has to finance new properties this way. In 2006, it issued five common stock, preferred stock, and unsecured-bond offerings.

The MDC has an excellent credit rating... as you'd expect from a company with a 37-year history of raising dividends with minimal debt on its balance sheet. This allows it to borrow money at virtually the same rates available to banks, local governments, and the largest American corporations.

Here's another way of thinking about the MDC's business: The sale-leaseback is a loan. The MDC borrows money at investment-grade rates near 6% and lends it at 9% junk rates to its middle-market retailers.

As an aside, the MDC never uses mortgages to finance its property investments. It never has. Nor does it use secured debt. In other words, it uses its excellent credit rating to borrow money, not its property portfolio. This means no one else has a claim on its property. And it frees up more rental revenue to pay monthly dividends. It also allows the MDC to keep a super-conservative, unleveraged balance sheet.

15% Returns with Less Risk than a Bank Account

I said this investment was safer than a bank account or a CD. That's a big claim.

But first consider, your principal is safe. The MDC has a $2.4 billion market cap.

And your money is invested in debt-free property. The company doesn't hold Miami condos or Manhattan lofts... we're buying properties that provide basic human needs. Through wars, inflation, recessions, and weak property markets, your principal stays intact.

Inflation is the reason this investment is much safer than bank accounts, CDs, and Treasury bonds. With these fixed-income investments, your return does not adjust, so over time, inflation undermines your annual receipts.

On the other hand, dividend payouts from the MDC rise about 4.5% a year.

Besides, a bank account may pay interest once a year. A bond pays out twice a year. But the MDC mails you a check every month... a check that got bigger four times in 2007.

Over the last 14 years, shareholders have made almost 30% a year in this stock. I think it's fair to expect total returns around 15% a year going forward.

For one thing, inflation makes property prices rise. That's good for 2% a year.

Second, consumers of basic products, such as cheeseburgers and cigarettes, are not price-sensitive... They don't care if prices rise by a nickel here and a dime there. In other words, the MDC's tenants have pricing power. So, the MDC can bump its rents 1%-2% every year.

Finally, the company's gradual expansion – buying properties that yield 9% with money that costs 6% – should be good for 11% a year.

Property Inflation 2% Rent Increases 2% Reinvesting Earnings 2%
Property Acquisitions 9% Annual Returns 15%

The MDC produces dividends. So we have only one sensible way to value this company: its dividend yield. The dividend yield is a barometer that tells you if a company is expensive or cheap. When the dividend yield is low, you're paying more money per dollar of dividend. When the yield is high, you get more dividend for your money.

The MDC is a transparent company and it never changes its strategy, so frankly, its valuation remains pretty constant. You could have bought the MDC with a 9% yield in 2000, but since 2003, its yield has traded in a narrow band between 4.5% and 6%. Right now, it's about 6.7%. That's cheap.

Action to take: Buy Realty Income Trust (NYSE: O) as long as you can earn a 4.5% yield or higher.

Good investing,

Tom Dyson

P.S. For the past six months, I've been researching a unique way to collect more income in retirement. You probably won't hear about 801(k) plans anywhere else, but they can generate twice as much as typical IRAs, and you can get started with as little as $25. Click here to read my report.


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Friday, June 13, 2008

Making Information Technology Available to All

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Making Information Technology Available to All

Lawrence Gasman
PresidentNanoMarkets, LC

Nanotech and the Next Wave: Pervasive Computing


http://www.nanomarkets.net/

Since the 19th Century, electronic information technology has spread in waves. The first wave was the telegraph, then the telephone and eventually PCs, the Internet, fiber optic networks and mobile phones. Each wave has made powerful new information technology available to new groups and regions. Each has met a genuine need, but has been made possible only by novel enabling technologies. The idea for cell phones dates back to the 1940s, by which time the potential market for ubiquitous "radio telephony" was well understood. It took the advent of computerized switching to make mobile telephony possible. Alexander Graham Bell dabbled with optical communications, intuitively understanding its power. It took the discovery of the laser, optical fiber and optical amplification to make optical communications a practical reality.

The next wave of information technology development -- "pervasive computing" -- will be enabled by nano-technologies. Pervasive computing implies an environment in which the dominant communications device is a descendant of today's smartphone, capable of serving as phone, broadband Internet device, video entertainment product, and accessing diverse sensor networks and databases. Like the current generation of broadband-connected desktops, the pervasive computing device will always be turned on; always hooked in to cyberspace. It will bring the power of the broadband communications to the shopper, traveler, road warrior businessman and others on the go.

Pervasive computing will only become real when we find much better ways of powering mobile devices. The Lithium batteries that are used in cell phones, PDAs and notebook computers increase in power density at a rate of 5 to 10 percent annually, but this is considerably outstripped by the power demands of mobile devices as they are forced to perform more functions. New nanomaterials may be able to boost the power density of Lithium batteries. But if mobile devices, originally designed for brief chats, are to become always-on, general purpose information devices, new types of power sources are going to have to be devised and this is where nanotechnology comes in. Several firms including General Electric, STMicroelectronics and Siemens, as we well as start-ups, are examining the potential for printable photovoltaic cell arrays that could be laminated on mobile communications devices and constantly recharged using artificial or natural light. Both Siemens and STMicroelectronics' solutions use buckyballs, while start-ups Konarka and Nanosys are using semiconducting nanoparticles.

Printable photovoltaics are close to commercialization, as is an alternative approach to mobile power involving miniature fuel cells. These could boost the time-between-recharge of mobile devices from a few hours to tens of hours. Some of this work has a distinctly nano aspect to it. Finish researchers are, for example, developing a disposable fuel cell that can be manufactured using a low cost printing process and which is based on and organic molecule chemistry. It would be low-cost enough to power an RFID tag cost effectively for a very long period of time. Nanomaterials may also be used for catalysts in fuel cells.

Nanoengineering may help to reduce the power requirements of mobile devices. But not all nano-enabling of pervasive computing is concerned with power. Technology based on conductive organic polymers is already being used in prototypes of displays that can be rolled up and unfurled when needed. In some cases nanotubes may provide the means for bringing the electrical current to each pixel in the display. Users of PDA-like mobile devices can finally have screens that are more than a just few inches square, increasing the effectiveness of mobile computing and video applications. These flexible screens will gradually take on the look and feel of paper spawning a whole generation of new information products; Sony has already been selling a book reader with such an electronic paper screen in Japan. This reader can store approximately 500 books of about 250 pages each and retails for $370.

Nanotechnology can also improve the memory of mobile devices. Today a choice of memory chips must be made between DRAM and SRAM chips which are fast, but volatile (i.e., information disappears when the current is turned off) and Flash chips that are non-volatile, but slow. "Nanomemory" alternatives to Flash are being developed. Nantero will soon begin sampling a memory chip based on carbon nanotubes and several important electronics firms; Honeywell and Freescale among them – are already shipping magnetic memories (MRAM) based on spintronics. These new nanomemories will vastly increase the storage capabilities of mobile devices enabling them to handle storage hungry database and video applications.
Beyond Mobility: Nanotech and the Next Bandwidth Revolution

As pervasive computing takes off, the extra traffic is going to clog up the networks, requiring a new wave of technology deployment to create new bandwidth. This may not happen for a decade. The last wave of bandwidth creation technology -- fiber optics --way overshot the need for bandwidth, but eventually the overcapacity is going to get used up. It is impossible to be sure what the cure will be. But ways of lowering the cost of fiber optics will certainly be welcome and, since the laser is the most expensive part of any fiber optic link, this mean lowering the cost of lasers. Quantum dot lasers have already been built and offer some potential in this regard. Another way of lowering the cost of photonics may be through building lasers using standard silicon CMOS processes. Such lasers have already been built in prototype, but are too big to count as a nano-products. However, as the semiconductor industry continues to follow Moore’s Law, we can expect to see the appearance of silicon nano-lasers. The inevitable march of electronics into the "nanocosm," will also make it possible to economically fit all the signal processing and sophisticated traffic management that high speed fiber optics requires onto a single chip. We can already see the hints of this will happen in the latest network processors from Intel. These are being manufactured at the 90 nm node and incorporate such sophisticated features as firewalls and traffic management, at very low price.

When the semiconductor industry reaches the 20 nm node and is truly being built around nanotechnology, even more will be possible. However, don't expect these developments to come too quickly. In assessing what nanotechnology can do to make powerful information technologies widely available, it is vital to remember or tendency to overestimate the impact of new technology in the short term and significantly underestimate it in the long term.

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Saturday, June 7, 2008

This Is How Millionaires Really Trade

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This Is How Millionaires Really Trade
By Jeff Clark, editor, S&A Short ReportJoe is the financial version of a suicide bomber.

He's a veteran trader with great instincts and a sharp, analytical mind. And he'd be worth millions today if he'd just stop blowing himself up.

I hadn't seen Joe for a few months until I ran into him yesterday. He didn't look good. His face was pale and drawn, and sported the remnants of a three-day beard. His eyes were bloodshot. And his breath reeked of alcohol.

It was 10:00 a.m.

"I just got rolled by the market," he said. "Everything was going so well. I was having a great year scalping profits on small trades. I mean, I was really making some money. Then I bet big on this one trade and – BOOM – it blows up on me."

"I always make money," Joe continued, "when I bet small – ALWAYS. But whenever I bet big, I get killed. What am I supposed to do?"

It was a rhetorical question, and Joe didn't seem to be quite in the right frame of mind for a constructive answer, so I just nodded sympathetically. But the answer seemed obvious... and it's a lesson you can use immediately to become a better speculator: Bet small.

Big trades are emotionally difficult to handle. When a trader has the rent money on the line, he's more likely to second-guess his strategy. He'll watch over every tick on the stock and wonder if he should get out, add more, cut back, or whatever. That's when emotion takes over. Trading on emotion is never a good thing.

The thing of it is... every trader has blown up. Pain is part of the learning process. It's like how a toddler learns not to touch a hot stove. A big loss teaches a trader to minimize risk.

Some traders learn their lesson after one blow-up trade. Others, like Joe, turn explosions into a habit.

Personally, I've blown up three times. The last time was about 15 years ago. I took such a spectacular loss, and suffered so much pain, I swore it would never happen again.



Since then, I've adhered to three simple rules that minimize my risk, yet still allow the potential for spectacular gains...

1. Take 90% of your investable assets and lock them up in safe, low-risk investments with the objective of earning 8%-10% per year.

Of course, 8%-10% returns in today's market environment might seem difficult to do. But really, it isn't. Several strategies work well in a volatile market. In fact, against low-risk value stocks is hugely profitable right now.

2. Take the remaining 10% of your account and speculate with call and put options.

Understand, I'm not talking about gambling here. I'm talking about speculating.Proper speculating involves only taking on trades where the potential reward far outweighs the potential risk... and where the odds of success favor the trade.

The combination of 90% conservative investment and 10% speculation makes it hard to actually lose money. Think about it... If you can earn a 10% return on 90% of your money, then you can just about lose everything on the speculative side and still break even at the end of the year.
The real benefit happens, though, when you earn 10% on the conservative account and then knock the cover off the ball with your speculative trades.

3. Never, ever overleverage a trade. Keep your "bet sizes" small.

Remember, the real purpose of options is to reduce risk. Options allow you to put up less money and still control the same number of shares. So, if you normally buy 1,000 shares of stock, then you can buy 10 option contracts and maintain the same exposure with just a fraction of the funds.

This is where most people make mistakes. They look at options as a tool for leverage. Instead of buying 1,000 shares of stock, they buy 100 option contracts, thereby gaining exposure to 10,000 shares – 10 times their normal position size.

The hope is they'll get more bang for their buck. Inevitably, leverage does create a bang. But it's usually an unwelcome explosion, like Joe's. For a rule of thumb here, remember that most of the greatest traders of all time won't put more than 1% of their investable funds into any one trade.

I've been trading stock and options for a living for more than two decades.

So I know if you

1) keep the bulk of your money in safe, long-term investments,
2) use the rest to make intelligent speculations, and
3) keep your trades small, you'll always avoid the catastrophic loss that wipes out most investors.
And I'm sure these rules will keep you off the booze at least until happy hour.

Best regards and good trading,
Jeff Clark
P.S. As you can tell, succeeding in the market is mostly playing defense so you're around for the inevitable huge winning trade. My S&A Short Report subscribers have been able to do just that this year, booking four triple-digit winners and nearly a dozen double-digit profits in an average holding period of less than eight days. If you're interested in joining our next big trade,
click here. Email a Friend Del.icio.us Digg RSS

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Saturday, April 5, 2008

IMF cuts global growth forecast to 3.7 per cent

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Washington, April 4
The International Monetary Fund (IMF) has lowered its outlook for 2008 world economic growth for the second time this year, cutting it to 3.7 per cent from a January forecast of 4.1 per cent. The revision puts world growth at its lowest since 2002, when growth was 3.1 per cent.

''I can confirm the IMF's current aggregate world growth forecast for 2008 is 3.7 per cent,'' an IMF spokesman said, confirming reports about the IMF's World Economic Outlook due on April 9.

The further revision acknowledges the US-led housing downturn and subsequent credit contraction have exacted a heavy toll on the world economy. Earlier on Thursday, IMF chief economist Simon Johnson said the US economy has come to ''a virtual standstill'' and will remain weak in coming quarters due to deepening problems in housing and credit markets.

''Notwithstanding the strong response from US policy-makers, tighter financial conditions, higher energy prices, softer labor markets, and the weak housing market all conspire to weigh heavily on the (US) economy in the near term,'' Johnson told reporters. — Reuters

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Wednesday, February 20, 2008

HOMEOWNER FACES DIFFICULTIES, PUTTING A ROOF OVER HEAD !

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By Nancy Keates

Editor's Note:
This is the 25th installment of "Teardown Diary," a feature by Wall Street Journal correspondent Nancy Keates. The column details her decision to demolish the Portland, Ore., home where she lives with her family and build anew. In the months ahead, she will chronicle what led to the decision, the financial costs, hiring an architect, knocking down her house, choosing the features of her new home and the final product.

The Good News: There is a mind-boggling array of new roofing options available.

The Bad News: Good luck getting enough information to pick one.

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In recent years, roofing manufacturers have used new technologies, engineering techniques and designs to come up with solutions to old problems. Love the look of slate but don't want the weight? Want wood shake but don't like the high price? Consumers can now choose between faux slates and shake shingles made from plastic, rubber or metal -- or even real stone and wood that are manufactured to weigh and cost less.

But it isn't so easy deciding which roof to put over your head. Because of the difficulty finding pricing and other details, my husband and I have found this task to be more difficult than other choices we've faced during our teardown project.

We decided early on that a metal roof -- specifically one we'd seen on a house we almost bought -- had the look and function we wanted. It was black and looked like slate; the owners told us leaves slid easily off the roof. Since we live in the woods, we also liked the idea that metal is fireproof.

We found the name of the manufacturer -- Interlock Roofing Ltd., a company based in Vancouver, British Columbia -- and gave it to the architect. When it came time for pricing out our project, the contractor came back with a bid that included a fiberglass asphalt roof with the alternate option of going with the Interlock metal roof we'd specified. The metal would cost us $49,800, he said, while asphalt would be $11,860 -- a difference of $37,940.

The cost included materials and labor, he said. The metal tile roof would have to be installed by the company itself, while he could use one of his long-standing subs to put up the asphalt roof. He looked into other metal roofs and found that they also required special installers and were expensive. Besides, we really didn't want a metal roof. It would be hard to repair because it was slippery when wet, we would hear every drop of rain that fell, and pine needles would get caught in the tiles, he said.

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Our architect suggested going with cheaper asphalt instead, since given the roof's height and the low uphill approach to the house, the visual impact of the roof wasn't critical, he said.

Despite the architect's reassurance, my husband and I remain unconvinced -- the way the roof looks is still important to us. So we asked to see other possibilities.

First up: A product made by TAMKO Building Products, Inc., called Lamarite Slate Composite Shingles, made of composite materials that the company says is fire-resistant, enduring, requires little maintenance and is easy to apply. Our contractor estimated it would cost $42,000 -- too much for something we thought looked too fake.

A few days latter, reading a building magazine, I came across an ad for a recycled rubber and plastic roofing material called EcoStar Majestic Slate that promised "class, elegance and durability" at "half the weight of slate." Since the material is more eco-friendly than asphalt (it is made from recycled materials and can be recycled again) it has the added benefit of making homeowners feel environmentally responsible.

My architect said he'd used the Majestic before and it was a "good product." So I called the company and they emailed me two addresses of local houses roofed with the material. But when my husband saw the roofs, he said they looked "too chunky." The estimated cost for us to put on the Majestic was also $42,000.

Surfing the Internet, my husband came across a company called Davinci Roofscapes. "A synthetic shingle shouldn't look like a 'fake.' It shouldn't just look 'similar' to rough-hewn cedar shake or quarried slate. It should be an authentic replica to all those who view the home," says the Web site.

In my own Internet search, I found a product called TruSlate, "The first slate upgrade in 500,000,000 years" the company says. In old fashioned slate, half of each piece of slate is never seen, tucked under the piece above it. This manufacturer replaces the part you don't see with a material called high-density polyethylene or HDPE -- commonly used for landfill liners and pond liners. By removing half the slate, the product is lighter and costs less. According to the company, TruSlate comes with a 75-year limited transferable warranty and any roofer can install it. The cost for our home: $42,930.

Both the DaVinci and the TruSlate looked beautiful. But since we are scheduled to tear down our house in less than three weeks, we need to decide soon.

Join a reader discussion on the Teardown Diary discussion board.

-- Nancy Keates is a correspondent for The Wall Street Journal and lives in Portland, Ore.

Email your comments to teardowndiary@dowjones.com.

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Monday, February 18, 2008

PETTY THEFT ?

Your Rights for Petty Theft Prosecution


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People facing charges for petty theft (aka petty larceny) have special rights under U.S. law.

Petty theft is generally a misdemeanor charge involving the theft of property valued under a certain set price range.

If you are suspected of petty theft, your criminal rights begin the moment you are detained by police and extend right up until a verdict is delivered in your case.

It's very important that you know your rights and use your them to your benefit in the event you are charged and prosecuted for petty theft.


Things You’ll Need:


Computer with Internet access


Criminal lawyer


Step 1:


Know your Miranda rights. They guarantee your right to remain silent, to refuse to answer questions and to consult an attorney before talking with police.

They will be explained to you in the event you are charged for petty theft.
Use them to your advantage.

Step 2:


Hire the services of a qualified, experienced criminal defense attorney.

This should be the first thing you do if you are charged with petty theft.
A lawyer can give you explicit instructions and information on your rights as you face prosecution.

Step 3:


Be aware that the U.S. Constitution guarantees your right to a speedy and fair trial.

The judge should be impartial, and the jury should be equitable, selected at random and know nothing of your case.
Learn more by visiting the American Civil Liberties Union Web site.

Step 4:


Visit your local legal aid clinic to discuss your continuing rights as you face prosecution for petty theft.

Though legal aid services are not considered an acceptable substitution for proper legal representation, they can help you answer questions and direct you to community resources where you can find more information on your rights.

Step 5:


Understand that you have the right to appeal your conviction if your petty theft prosecution resulted in a guilty verdict. This is particularly important if you feel there has been a miscarriage of justice.


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Sunday, February 17, 2008

WHY EXPUNGEMENT ?

30 Remarkable Reasons

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Many states allow employers to terminate employment of employees found to have had a prior conviction.

Most states allow employers to deny jobs to people who were arrested but never convicted.

Most states allow employers to deny jobs to anyone with a criminal record, regardless of how long ago or the individual's work history and personal circumstances.

Most states ban some or all people with convictions from being eligible for federally funded public assistance and food stamps.

Most states make criminal history information accessible to the general public through the internet, making it extremely easy for employers and others to discriminate against people on the basis of old or minor convictions to deny employment or housing.

Many public housing authorities deny eligibility for federally assisted housing based on an arrest that never led to a conviction.

All but two states restrict the right to vote in some way for people with a criminal conviction.
Gun ownership is widely restricted with any conviction.

Private landlords can lawfully deny persons with convictions housing.

37 States have laws permitting all employers and occupational licensing agencies to ask about and consider arrests that never led to a conviction in making employment decisions.

Employers in most states can deny jobs to - or fire - anyone with a criminal record, regardless of individual history, circumstance or business necessity.

29 states have no standards governing the relevance of conviction records of applicants for occupational licenses.

36 states have no standards governing public employer's consideration of applicant's criminal record.

45 states have no standards governing private employers.

12 states have lifetime bans on voting for persons convicted of a crime.

Virtually anyone with an internet connection can find information about someone's conviction history online without his or her consent or any guidance on how to interpret or use the information.

28 states allow internet access to criminal records or post records on the internet.

27 housing authorities surveyed make decisions about eligibility for public housing based on arrests that never led to a conviction.

35 states consider the relevance of an applicant's criminal record in making a determination about an applicant's suitability to be an adoptive or foster parent.

15 states bar people with criminal records becoming adoptive or foster parents.

Higher Education Act of 1998 makes students convicted of drug related offenses ineligible for any grant, loan or work assistance.

Most professional certifications require a criminal history check prior to issuance.

Many landlords now demand a criminal history background check prior to leasing or renting.

Almost all youth volunteer positions (i.e.: coaching & teaching) require a clean criminal history.

Insurance and loan rates could be affected by your criminal history in certain cases.

Most people don't realize that if you were arrested and never formally charged or even if your case was dismissed or you were found not guilty, the record of your arrest and court case still exists.
This is your non-judicial and judicial criminal record.
This is a PUBLIC RECORD.
Contrary to popular belief, a criminal record is not automatically sealed or removed over time.
It remains public and permanent until ordered sealed or expunged by a judge.

Expungement keeps the record of your arrest and/or court case out of the public record.

Expungement allows you to LEGALLY deny or fail to acknowledge that you were arrested for the incident which you sealed or expunged.

Protects your privacy and may allow you to take advantage of job, school, and other opportunities once closed because of your arrest being a part of the public record.

Once you have your record expunged it can never be used against you again!

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Tuesday, February 5, 2008

SUPER TUESDAY: WHAT TO MAKE OF TONIGHT'S RESULTS !

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RePrintPrint Email

Super Tuesday: What to make of tonight's results

By Adam NagourneyNew York Times
Article Launched: 02/05/2008 01:30:37 AM PST

Brace yourself.

Forty-three presidential nominating contests in 24 states. Channel upon channel of the commentators talking about exit polls.

The biggest prize of the night - California - being decided after many of the nation's viewers have headed for bed.

A total of 3,156 delegates allocated under arcane rules on what could be the most significant night of the 2008 campaign to date.

This is a guide of things to look for tonight - key states, trends, interesting demographic developments, campaign-ending or -extending developments - starting from when the first polls close (Georgia at 4 p.m. PST) to when the voting is completed in California at 8 p.m.

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The big picture

There are two ways to approach the results. The first is old-fashioned: which candidates rack up the most states. But this is about more than popular vote totals; the point of these contests is to allocate delegates to the national conventions.

Thus, the big question is how much attention to pay to the results map on TV - lighted up with, say, states that have swung to Sen. John McCain's column - and how much attention to pay to the delegate counter.

The answer is pay attention to both, though put somewhat more focus on states for the Republicans and put somewhat more attention on delegates for the Democrats.

The delegate count might matter more officially, but the state results could count more politically - and that will be the centraltension of the night.

Democrats allocate most of their delegates proportionally; candidates are awarded a cut of the delegate pie based on their percentage of the vote.

It is likely that the losing candidate still will get a substantial share of the delegates.

Sen. Barack Obama and Sen. Hillary Clinton will no doubt start claiming state victories as soon they can, with the goal of trying to get on TV and grab the front-runner spotlight - but those results probably will remain largely symbolic.

Assuming the race remains close, what matters going forward is who gets the most pledged delegates.

Delegate selection rules are different for Republicans.

In eight of the 21 Republican contests, the winner gets the delegates - no dividing up the spoils.

What that means is that it is going to be easy for a candidate to build up a big delegate lead tonight and, combined with winning some big states, credibly declare himself the party's presumptive nominee.

That is precisely what McCain is looking to do.

Keep in mind that the winner of the states probably is going to become known well before the delegate counts are finished, and that is going to color the way the results are reported on TV and in newspapers.

The outcome in California, the biggest prize of the night and a major factor in either way of judging the night, is not going to be known until the wee hours.

"Don't be rushed into making an early judgment without California," said Robert Shrum, a Democratic political analyst.

"You have to resist the pre-California spin unless someone is winning, like, 16 of the 22 states."


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The states


For Republicans, two states could end up determining whether the race goes on from here:

California and Massachusetts, and this has nothing to do with delegates.

Mitt Romney headed to California on a last-minute trip Monday, drawn by polls suggesting the race was narrowing, despite McCain's collection of high-profile endorsements, including from Gov. Arnold Schwarzenegger.

If Romney pulls out a win in the nation's largest state, no matter what happens anyplace else, he is unlikely to leave the stage soon.

By contrast, McCain - in a poke-in-the-eye moment - campaigned in Massachusetts, Romney's home state.

Should McCain win in Massachusetts and hold on to California, that probably would be the lights-out moment at the Romney headquarters.

No wonder that McCain sneaked a last-minute trip to San Diego onto his schedule for this morning.

For Democrats, watch California, Massachusetts, New York, Missouri, Arizona and New Mexico.

If Obama wins California, that is a real momentum-blocker for Clinton.

There are few states in the country that are more identified with the Clinton presidency than this one.

But Obama has suffered one of those external political problems that often madden campaigns:

A last-minute California poll showed him closing in on Clinton - and in the process, raised expectations that he will win. No wonder Obama's advisers suddenly are talking about the big surge of early voting in California before Obama began to break through.

If Obama wins Massachusetts, that will be testimony to the power of Sen. Ted Kennedy, and a real sting for Clinton, who once thought she had a comfortable lead there.

If Obama comes close in New York, or in neighboring New Jersey, watch for a tough round of questions about Clinton's electability.

Finally, think of Missouri, Arizona and New Mexico as the swing states in this contest - Obama and Clinton are pretty evenly matched there. Missouri is a swing state in the general election, and might be one in this one as well.


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Voting groups

Obama has been trying, with the use of surrogates such as Oprah Winfrey, to cut into the advantage Clinton enjoys among women.

The vote also should offer a test of whether Obama has succeeded in cementing what has appeared to be an exodus of black voters from the Clinton camp to Obama's campaign, as began happening in South Carolina two weeks ago.

Georgia, which has an electorate with a heavy black representation, and New York should offer a good and relatively early measure of that.

The final big question for Democrats:

Will Clinton maintain the edge among Latino voters that she showed in Florida and Nevada?

New York and California should offer an interesting test, as well as a test of whether blacks and Latinos, uneasy political allies in many circumstances, break for different candidates.

The extent to which Republicans are coalescing around McCain will be measured by how well he does in contests open only to members of his party, depriving him of the support of independents, who helped him so much in New Hampshire, where they could vote in party primaries.

Again, California is the place to watch. To judge his potential strength as a general election nominee, watch to see if conservatives put aside their qualms about him and vote for him.

Among McCain's Republican rivals, one key is evangelical voters.

Romney is not going to be very happy should they continue to rally behind the campaign of Mike Huckabee, the former Baptist minister.


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The issues

With the economy having emerged in the past few months as the dominant issue, and with the race moving to a national stage, one issue to watch is whether Republican voters will continue to focus as much on a subject that has divided their party, illegal immigration.

The answer could be of particular importance to McCain, who was unable to compete in Iowa in part because many Republicans there saw him as too soft on the issue.

On the Democratic side, Obama has again started criticizing Clinton for voting to authorize the war in Iraq.

After her apparent success earlier in this campaign in putting the war vote behind her among Democratic voters, it would be problematic for her now to be forced back on the defensive.

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Monday, February 4, 2008

YAHOO, GOOGLE TALKING DEAL ?

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Yahoo, Google talking deal?
MICROSOFT BID SPARKS PARTNERSHIP CHATTER


By Elise Ackerman
Mercury News
Article Launched: 02/04/2008 01:30:39 AM PST


Just hours after Microsoft announced its $44.6 billion unfriendly bid for his company, Yahoo Chief Executive Officer Jerry Yang sent a confidential e-mail to employees knocking down rumors that it was a done deal, and said Microsoft's proposal was "one of many options that we're evaluating."

One of those options is reportedly a business arrangement with Google. Wall Street analysts have been calling for Yahoo to outsource its search-advertising business to Google, which makes more money for each ad it sells than Yahoo.

Google publicly weighed in on the bid Sunday. While not commenting on possible business ties with Yahoo, David Drummond, Google's chief lawyer, said Microsoft's offer raises troubling questions, including whether the combined companies would exert the same "inappropriate and illegal influence over the Internet that (Microsoft) did with the PC."

"This is about more than simply a financial transaction," Drummond wrote on the Official Google Blog. "It's about preserving the underlying principles of the Internet: openness and innovation."

In his e-mail, Yang noted that the process was in its early stages. "We want to emphasize that absolutely no decisions have been made - and, despite what some people have tried to suggest, there's certainly no integration process under way. This proposal is just that - a proposal. And it was only made in the last 24 hours," Yang wrote.

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Microsoft quickly responded to Google with a statement from its top lawyer, Brad Smith: "The combination of Microsoft and Yahoo! will create a more competitive marketplace by establishing a compelling number two competitor for Internet search and online advertising," Smith said.

"The alternative scenarios only lead to less competition on the Internet."

According to comScore, Google currently handles 58 percent of all Internet searches in the United States, while Microsoft and Yahoo together handle 33 percent. Smith said Google's share is even greater in Europe, where he said it handles 85 percent of searches compared to 10 percent for Microsoft and Yahoo.

"Microsoft is committed to openness, innovation and the protection of privacy on the Internet," Smith said. "We believe that the combination of Microsoft and Yahoo! will advance these goals."

But in his blog post, Drummond noted that Microsoft and Yahoo together provide the majority of Internet users with e-mail and instant messaging services and urged policy makers to examine whether that would amount to too much influence over the Internet.

Microsoft and Google have increasingly used antitrust law as a competitive weapon against each other, requesting the support of regulators in the United States, Europe and around the world. Last year, Microsoft joined public interest groups in calling for antitrust scrutiny of Google's $3.1 billion bid to acquire DoubleClick.

Meanwhile, in 2006, Google complained to U.S. regulators that the default search settings on Microsoft's new Internet Explorer 7 browser put Google at a disadvantage.

Antitrust regulators have so far appeared reluctant to crack down on Google. In December the U.S. Federal Trade Commission voted 4-1 to allow the DoubleClick deal to proceed, though two commissioners expressed concerns about its potential effect on privacy and competition. A decision by the European Commission is expected by April 2.

In contrast, both European and U.S. regulators have been much tougher on Microsoft. Most famously the Justice Department waged a long battle with Microsoft over allegations the software maker abused its operating system monopoly to restrict the market for Web browsers; Microsoft settled that case.

More recently Microsoft has faced a series of probes from European regulators, again over antitrust issues.


--------------------------------------------------------------------------------
Contact Elise Ackerman at eackerman@mercurynews.com or (408) 271-3774.

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Saturday, February 2, 2008

KNOWING !

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Do not believe what you have heard.

Do not believe in tradition because it is handed down many generations.

Do not believe in any thing that has been spoken of many times.

Do not believe because the written statements come from old sage.

Do not believe in conjecture.

Do not beleive in authority or teachers or elders.

But after careful observation and analysis,when it agrees with reason and will benefit one and

all ,then accept it and live by it.


BHUDDA
(563 B.C.-483 B.C.)

Founder of Bhuddisms, one of the worlds major religions, the Bhudda was born Prince Siddhartha Gautama in Northeast India, near the border of Nepal.Seeing the unhappiness,sickness, and death That even the Wealthiest and the most powerful
are subject to in this life,at age twenty-nine he abandoned the life he was living in search of a higher truth.



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Thursday, January 31, 2008

INTERNET FAILURE HITS TWO CONTINENTS !

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DUBAI, United Arab Emirates (CNN) -- High-technology services across large tracts of Asia, the Middle East and North Africa were crippled Thursday following a widespread Internet failure which brought many businesses to a standstill and left others struggling to cope.

Hi-tech Dubai has been hit hard by an Internet outage apparently caused by a cut undersea cable.

Industry experts are blaming damage to two undersea cables but it is not known what caused the damage.

Reports say that Egypt, Saudi Arabia, Qatar, the United Arab Emirates, Kuwait, Bahrain Pakistan and India, are all experiencing severe problems.

Nations that have been spared the chaos include Israel -- whose traffic uses a different route -- and Lebanon and Iraq. Many Middle East governments have backup satellite systems in case of cable failure.

Stephan Beckert, an analyst with TeleGeography, a research company that consults on global Internet issues, said the damaged cables collectively account for the majority of international communications between Europe and the Middle East.

Du, a state-owned Dubai telecom provider, attributed the outage to an undersea cable cut between Alexandria, Egypt and Palermo, Italy, according to an internal memo obtained by CNN.

In India, Spectranet and Telecomasia.net, two large Internet service providers were experiencing problems. Reliance, a third major Indian Internet provider, said it was not affected.

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An official at Egypt's Ministry of Communications and Information Technology, speaking on condition of anonymity told AP it was believed that a boat's anchor may have caused the problems, although this was unconfirmed. Beckert agreed that was a likely cause.

The head of an Egyptian Internet service provider called the situation a "wake-up call" for the region, which he said is too dependent on underground lines and does not have a strong enough back-up system. Mohammed Amir, head of Quantum, an ISP in Cairo, described the situation as "a major problem," but expressed hope that the worst of it is over.

The two cables damaged are FLAG Telecom's FLAG Europe-Asia cable and SeaMeWe-4, a cable owned by a consortium of more than a dozen telecommunications companies, Beckert said.

He added the options while those cables are repaired were re-routing traffic around the globe or using an older undamaged cable that has less capacity -- both of which would cause usage delays.

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Kuwait's Ministry of Communications said the problem could take two weeks to solve, according to a statement carried by the state news agency, KUNA.

There were concerns in India that an Internet slowdown could affect trading patterns at the country's two major exchanges, the National Stock Exchange (NSE) in Delhi and the SENSEX exchange in Bombay.

Rajesh Chharia, president of India's Internet Service Providers' Association, explained that some firms were trying to reroute via Pacific cables and that companies serving the eastern US and the UK were worst affected, AP added.

Besides the Internet, the outage caused major disruption to television and phone services, creating chaos for the UAE's public and private sectors.

The Du internal memo called the situation in Dubai "critical" and stated that the cable's operators did not know when services would be restored.

"This will have a major impact on our voice and Internet service for all the customers," the memo stated. "The network operation team are working with our suppliers overseas to resolve this as soon as possible."

The outage led to a rapid collapse of a wide range of public services in a country which proudly promotes itself as a technological pioneer.

Sources from Emirates Airlines confirmed to CNN Arabic that the outage did not affect its flight schedules -- a statement which assured hundreds of travelers worried after rumors about the possibility of rescheduled flights due to the faults.

However, Dnata, a government group in charge of providing air travel services in the Middle East and ground handling services at Dubai International Airport, acknowledged facing problems because of the outage, sources from its technical department confirmed to CNN Arabic.

The outage heavily crippled Dubai's business section, which is heavily reliant on electronic means for billions of dollars' worth of transactions daily.

Wadah Tahah, the business strategies and development manager for state-owned construction company EMAAR, told CNN Arabic that it was fortunate the outage started Wednesday, when there had been only moderate activity in the UAE markets. He said that softened the blow to business interests.

But Tahah warned that if the outage continued, "such a situation could create problems between brokers, companies, and investors due to loss of control." E-mail to a friend

CNN's Elham Nakhlawi, Mustafa Al Arab,

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Wednesday, January 30, 2008

LIARS' LOANS !

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Liars’ loans !

Robert Peston
20 Aug 07, 08:00 AM

The underlying cause of the current global financial crisis is a system in which there’s little personal responsibility for lending decisions.Here’s how it all works (or, as we now see, how it doesn’t work).

In the US, some half a million mortgage brokers have been incentivised to “sell” mortgages to potential homebuyers.They don’t work for the providers of the loans. They are paid commissions for the volume of mortgages they arrange. So, of course, they try to arrange as many mortgages as they can, not minding the consequences.

If the customer wants to borrow more than he or she can really afford, then that’s no problem, thanks to a wonderful innovation called “stated income, stated assets” loans.

These allow US homebuyers to give a personal undertaking that their income is a certain level, even if they don’t provide any proof.

Such loans have been taken out by hundreds of thousands of US citizens who are pay-as-you-earn tax-payers and could therefore have easily provided proof of earnings, had they wanted to do so.

Surprise, surprise: studies have shown “discrepancies” between what such borrowers say they earn and what they actually earn, in 95 per cent of these loans.

These mortgages are now colloquially known as “liars’ loans”.But liars’ loans are just the extreme manifestation of a US system for generating home loans which is predicated on turning a blind eye to economic reality.

When a borrower has difficulty making repayments on a loan, a mortgage broker would typically encourage them to pay off that loan by taking out a new one for an even greater amount! These are the infamous “rolling loans” which “gather no losses”.When a loan is rolled over, no one need know that defaults loom – at least not for a while.

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Wall Street’s sausage machine !

What happens to all these hundreds of billions of dollars in home loans?

Well the paperwork and administration is usually done by specialist home loans companies, such as New Century Financial (which went into bankruptcy protection in the spring).

Then the debt itself goes into a giant mincing and mixing machine on Wall Street operated by the biggest US investment banks, led by Goldman Sachs, Morgan Stanley, Merrill Lynch and the like.They take all this debt and they process it into asset-backed securities, or bonds.

Note that Goldman, Morgan et al have NO CONNECTION with the borrowers and NO IDEA whether an individual borrower is a good risk or a bad risk.But they have historic data on default rates.And this data allows them – or so they claim – to assess whether a bond is a good risk or a poor risk, and therefore to price it for consumption by international investors.

What’s more, verification of the riskiness of a bond is provided, for a fee, by the specialist credit-rating agencies, led by Moody’s and Standard & Poor’s (let’s for now ignore the obvious conflict-of-interest that as the market for these bonds expands, the rating agencies make bigger profits).

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There’s a conspicuous problem here !

An important part of the US home loans market, the sub-prime mortgages provided to those with poor credit histories, is a young market which has grown like topsy.

Or to put it another way, data gathered from past performance of loans in a small market may not be much of a guide to the future performance of a trillion dollar plus market.

But that hasn’t stopped the big investment banks citing this questionable data to convert sub-prime loans into bonds that they claim are risk-free and which have a so-called triple-A credit rating.

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Here’s how they do the clever engineering !

For argument's sake, let’s say that they estimate that as many as one in two home loans will default and that on average there will be a 40 per cent loss on those defaulting loans. That, in turn, gives a maximum risk of 20 per cent losses on a portfolio of these loans.Bad news? Not for creative investment bankers.

Out of this portfolio of low-quality loans, they can create supposedly high quality bonds by putting in place covenants which stipulate that the first 20 per cent of losses would be attributed to one bunch of really poisonous bonds, usually called toxic waste, leaving the rest of the bonds almost as safe as US Treasury bonds (in theory).

Before we move on, it’s probably worth recapping the phoney assumptions made by the investment banks as they create these bonds:

1) That historic data on default rates is useful even though the market has exploded in size
2) That data of any sort is useful even though the system for originating the loans, with mortgage brokers paid by the volume of loans they make, actually encourages fraud.So far, so disturbing.
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But it gets worse!

Because the demand for toxic waste isn’t as huge as all that (some purchasers of this poison have suffered horrendous losses), investment banks have looked for ways to slice and dice the toxic waste, to create something almost edible.

They’ve mixed it up with other securities in collateralised debt obligations, which are bonds created out of other bonds – or sometimes they are bonds created out of bonds, that are in turn created out of other bonds (collateralised debt obligations squared, as if you wanted to know).

Even these bonds made of bonds rely to a worrying extent on all that dodgy historic data to determine their risk of default – the credit risk – or the risk that they’ll be vulnerable to interest-rate changes.

But notice too that once the original sub-prime loan is in a collateralised debt obligation, that loan could be one of perhaps a million different loans all mashed together to form this new bond.

What that means is that the eventual purchaser of the collateralised debt obligation has no more idea what’s in that bond than a sap eating a Turkey Twizzler knows what he or she is eating.

Little wonder that when there’s a global scare about what may actually be in these bonds, no one wants to touch them.

That said, the investment banker will argue, on the basis of portfolio theory, if you put one load of toxic waste with another seemingly independent load of toxic waste, then the risk of holding them will fall.

But for that to be true, each bunch of toxic waste would have to be uncorrelated to the other bunch – and that ain’t necessarily so.

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Here’s the bottom line:

For the past few years, Wall Street has operated a giant machine for turning mind-boggling amounts of US home loans – which are hugely vulnerable to losses from fraud and the inescapable cycles in interest rates and housing prices – into supposedly risk-free investments for risk-averse investors in Asia, the Middle East and (as it turns out) for Europe’s big banks.

Now if I worked for Goldman Sachs, Morgan Stanley, Merrill Lynch or the other big US investment banks, I might be considering my career options at the moment.

It is inconceivable that they will escape unscathed from this debacle. Whatever the financial cost to these banks, which will not be trivial, there will also be significant damage to their reputations.

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Europe’s shame !

But Europe’s banks are hardly blameless either. If the underlying cause of the global financial crisis is fraud and greed in the US home loans system – from mortgage broker to investment bank – the trigger of the crisis was chronic folly by big international lending banks, notably some in Europe.

I am talking about banks’ use of “conduits” and “structured investment vehicles” (SIVs).

These are special off-balance sheet companies set up by banks for borrowing cheap short-term funds from the money markets in the form of securities known as asset-backed commercial paper.

Now, as their name implies, the commercial paper is secured against asset-backed securities, such as mortgage-backed securities and collateralised debt obligations.

According to Citigroup, European conduits held more than $500bn of assets to back commercial paper at the end of March.

But there’s an intrinsic weakness to this funding: commercial paper of short duration has been sold by banks to finance their purchases of long-dated bonds whose assets include those dodgy sub-prime loans to US homeowners.

It’s a classic liquidity mismatch, except when there’s a reliable, active market for such bonds. To reiterate, European banks have been borrowing money that has to be repaid or rolled-over every 90 days to fund their ownership – direct or indirect – of 30-year US home loans.

They did this because they received more from the holdings of asset-backed bonds and collateralised debt obligations than they paid out in interest on the commercial paper.

In theory, they made an attractive return.Here’s the Catch 22: such funding schemes only work while the market has confidence in the value of the collateral backing the commercial paper.

When investors start to have qualms about asset-backed bonds and collateralised debt obligations, banks are squeezed in a vice: short-term funding disappears and there is a collapse in the value of the assets they hold.

So what happened over the past fortnight was a highly predictable – except by the big banks – double whammy.

Lenders to banks refused to repurchase commercial paper when it matured. And the banks that issued that paper faced a funding crisis, because they were unable to sell the collateral or raise new money against it.

Everyone had suddenly woken up to the idea that this allegedly safe collateral of mortgage-backed securities and collateralised debt obligations was the equivalent of a palace built on paper foundations.

That inability of major banks to raise short term finance is why the European Central Bank – and the US Federal Reserve and other central banks – recently pumped tens of billions of pounds of additional liquidity into the banking market at interest rates well below the new market rates (that had risen sharply).

This was subsidised lending by the ECB and the Fed. They have been bailing out silly behaviour by banks that should have known better.

State-insured banks had no business engaging in such short-sighted financial engineering, which is a million miles from their core banking operations on behalf of Europe’s consumers and companies.

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There is – contra the !

Economist – a serious moral hazard problem here.

The Bank of England, by contrast, would only lend emergency funds to banks at a punitive interest rate, which seems a more prudent way to be the lender of last resort.What horrors await

On Friday, in an attempt to shore up the US housing market, and by extension the value of all those crappy mortgage-backed bonds, the Fed signalled that interest rates would come down for all of us sooner rather than later.

But that’s to treat the symptoms rather than the disease itself.

To avoid a repeat of this kind of crisis, there needs to be a return to lenders taking some responsibility for the loans they make.

Most bankers now think it’s quaint and absurd that once-upon-a time a bank manager actually managed a loan book and even talked to the individuals to whom he or she lent.

Our brave new world – in which a Parisian or Frankfurt bank doesn’t even know whether it’s exposed to the US housing market through its Turkey Twizzler collateralised debt obligations – is neither healthy or sustainable.


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