Chart Of The Year: Mortgage Packaging And Ratings

On the final day of the year, it is appropriate to reflect back on what has driven financial markets this past year. And a crazy year it has been.

The stock markets were very volatile all year and ended with modest gains for the year. The sub-prime mortgage mess has led to massive write-offs by financial institutions and a housing crash. The Federal Reserve has had to lower interest rates and inject massive amounts of liquidity into the market. Inflation has reappeared and commodity prices have jumped across the board. Consumers continue to drive the market, but there is increasing concern that they are tapped out. There has even been discussion of a possible recession on the horizon.

In attempting to summarize the year in charts, there are many candidates. Crude oil prices peaked at just under $100 a barrel. Gold prices almost broke their all-time record of $850 achieved 27 years ago. The Shanghai stock market more than doubled for the second consecutive year.

But I would not be doing justice to the 2007 market if I didn't recognize the sub-prime mortgage mess and the associated ratings that are inherent to the problem.

Source: Commercial Mortgage Securities Association

Click images to make larger

Source: WSJ

Most mortgage loans (sub-prime loans included) are immediately repackaged with other loans, split into multiple layers of risk, and then resold to other financial organizations. This can happen over and over. The original loan is no longer recognized.

Weekend Trivia: What Have These Four Banks Done In The Last Month?

Merrill Lynch, Morgan Stanley, UBS, and Citigroup:

Each of theses banks has raised money in the last month by selling part of their company to foreign sovereign wealth funds (SWF).

All four of these major banks have taken massive write-offs related to the sub-prime mortgage problems. As these financial institutions take these write-offs, they need to take drastic measures to fix their balance sheets. The government defines minimum reserve requirements which must be maintained for these banks to continue operations. To meet these reserve requirements, banks are jumping thru hoops in an effort to clean up their balance sheets.


Merrill Lynch: On 12/26/07, sold 9.9% of its company to Singapore's Temasek Holdings for $4.4 billion.

Morgan Stanley: On 12/19/07, sold 9.9% of its company to China Investment Corporation for $5.0 billion.

UBS: On 12/10/07, sold 12.4% of its company to a partnership of Singapore Investment Corporation and an unnamed Middle Eastern country (rumored to be Saudia Arabia) for $11.2 billion.

Citigroup: On 11/26/07, sold 4.9% of its company to Abu Dhabi Investment Authority for $7.5 billion.


These actions have all happened in just the last month. Other financial institutions that have sold part of their businesses to SWFs this year include: Bear Stearns, Blackstone Group, Washington Mutual, MBIA, Britain's Barclays Bank, Britain's Standard Chartered PLC, South Korea's Hana Financial Group, and California-based UCBH.

Final December Quick Hits

MARKETS
With only 2 trading days left in the year, it is interesting to see what selected markets have done during 2007:
---DJIA: Up 7%; 12463.15 to 13359.61

---NASDAQ: Up 11%; 2415.29 to 2676.79

---S&P: Up 4%; 1418.30 to 1476.37

---Shanghai: Up 98%; 2675.47 to 5288.96

---Gold: Up 30%; 638.00 to 831.80 per ounce

---Crude Oil: Up 58%; 61.05 to 96.62 per barrel

---Nationwide average gasoline price: Up 27%; $2.34 to $2.97 per gallon


REAL ESTATE
---The WSJ is reporting that "Home prices in 10 major metropolitan areas in October were down 6.7% from a year earlier, according to the S&P/Case-Shiller home-price indexes, released yesterday by credit-rating firm Standard & Poor's. That exceeded the previous record year-to-year decline of 6.3% in April 1991, when the economy was emerging from a recession."

---Adding insult to injury, an AP headline on Monday said "Foreign Buyers Snap up 2nd Homes in US....The British Are Coming! and the Nepalese and the Venezuelans - to Buy in US Housing."


INFLATION (or STAGLFATION)
---The Financial Times is reporting that "For some 10m Zimbabweans, Christmas 2007 will be the worst in memory. As if coping with inflation, estimated at more than 40,000 per cent, and shortages of food, fuel, electricity and water were not enough, they cannot draw their money from bank accounts because of a cash shortage engineered by the authorities.

For the past fortnight people have had to queue for hours – even days – at teller machines and banks to try to draw out their cash, amid repeated promises from Gideon Gono, central bank governor, the crisis would be resolved by Christmas.

On Wednesday [last week}, Mr Gono announced the issue of three new large-denomination notes, the largest of Z$750,000 ($25 at the official exchange rate or $1.50 at the more realistic parallel rate)."

See 07/06/07 posting for more detail of Zimbabwe's economic problems.

---The Financial Times is also reporting that "the industry-backed British Retail Consortium forecasts the average Christmas lunch cost will rise this season by 14 per cent."


OTHER INTERESTING ITEMS
---After a very difficult conference call with analysts, the CEO of student lender Sallie Mae ended the meeting by saying "Let's get the f**k out of here." The stock immediately sank more than 20% and is now down bout 30% since last week. And to think that the ultimate measure of a CEO is the impact that he / she has on the stock price.

---Christmas sales were below expectations and many retailing stocks are now trading at 52-week lows. According to a Mastercard report, spending from Thanksgiving to Christmas rose by 3.6% this year, but this is down from the 6.6% growth last year and the 8.7% growth the year before. And 1.2% of this year's "growth" was driven by higher gasoline prices.

Chronology Of Government Reactions To Liquidity / Mortgage Problems

Interest Rate Reductions

---09/18/07: Federal Reserve lowers federal funds rate 1/2% to 4.75%
---10/31/07: Federal Reserve lowers federal funds rate 1/4% to 4.50%
---12/11/07: Federal Reserve lowers federal funds rate 1/4% to 4.25%

---09/18/07: Federal Reserve lowers discount rate 1/2% to 5.25%
---10/31/07: Federal Reserve lowers discount rate 1/4% to 5.00%
---12/11/07: Federal Reserve lowers discount rate 1/4% to 4.75%


Liquidity Injections (or Market Manipulations)

---08/10/07 posting: "Further, this was the first time since the 9/11 attacks that these central banks had worked together in taking these actions."

---08/17/07 posting: "In a continuing effort to support the markets these last two weeks, central banks around the world have injected over $250 billion of liquidity into the market."

---08/24/07 posting: "Central banks continue to add liquidity into the market. The European Central Bank contributed $371 billion, the Federal Reserve added $25 billion, the Bank of Japan injected $16 billion, and the Bank of England joined the action this week for the first time with $1 billion."

---08/24/07 posting: "In an effort to show a leadership role for other banks, the four largest banks in the US (Citigroup, Bank of America, JPMorgan Chase and Wachovia) each borrowed $500 million from the Federal Reserve."

---09/04/07 posting: "US Treasury Secretary Paulson: 'We have reinvigorated the President's Working Group on Financial Markets.' This is code for implementing the Plunge Protection Team to assist (manipulate) the markets."

---12/12/07: Working with four other national banks (European Central Bank, Bank of England, Bank of Canada and Swiss National Bank), the Federal Reserve announced a synchronized plan to provide liquidity into the market. The plan to ease the credit crunch is the largest coordinated effort since the 9/11 attacks.

---12/21/07 posting: "The Federal Reserve completed the first of their four easy-money $20 billion loans this week. The "Term-Auction Facility" went off at 4.65%

---12/21/07 posting: "The European Central Bank offered banks an unlimited amount of cash at 4.2%. A total of 390 banks took the offer and borrowed $503 billion in two-week loans."



SIV Super Fund and Collapse

---10/15/07: As the AP reported, "the nation's three largest banks said Monday they are teaming up to create a rescue fund of sorts -- potentially as large as $100 billion -- to help bail out troubled global credit markets. Citigroup Inc., Bank of America Corp., and JPMorgan Chase & Co., at the prodding of the Treasury Department, will buy distressed debt from markets roiled during the summer's financial crisis. The joint effort is the result of more than a month of talks mediated by the government."

---11/12/07: As the Financial Times reported, "The three US banks behind the planned $75bn superfund for distressed mortgage assets have revised the proposal in a move that should allow them to start signing up other banks within the next ten days."

---12/22/07: As the WSJ reported, "Banks Abandon Effort to Set Up Big Rescue Fund...One of the federal government's signature efforts to ease financial instability caused by the subprime-mortgage crisis collapsed as the nation's three biggest banks gave up on a fund intended to rescue tens of billions of dollars in troubled investments."


Government Bailouts To The Rescue

---Over the course of the last six months, every politician has "come to the rescue" of the homeowner with a multitude of bailout proposals. Each new proposal has tried to one-up the previous proposal. Attempting to describe the various proposals would make today's lengthy posting twice as long. I will save this effort until next year.

---But to leave no doubt on my thinking, I am generally very much against government bailouts of any kind. Each mortgage is a contract between two private parties: the lender and the borrower. I feel bad that both sides may be suffering, but don't take my taxpayer money to solve their problems............Hey I lost money on Enron stock. I didn't see (nor did I ask) the government bail me out. The sub-prime mortgage problem is really no different. As I mentioned, I will have much more to say on this in a future blog posting.


Voiding Mortgage Contracts

---11/16/07: Casey Research quotes the NY Times that "Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize.

The pooling of home loans into securities has been practiced for decades and helped propel real estate prices in recent years as investors sought the higher yields that such mortgage trusts could provide...

But as foreclosures have surged, the complex structure and disparate ownership of mortgage securities have made it difficult for borrowers to work out troubled loans , in part because they cannot identify who holds the mortgage notes, consumer advocates say."


Mortgage Bankruptcy Relief

---12/12/07: As described by the WSJ, "Several House judiciary Committee have agreed on legislation that would give bankruptcy-court judges more flexibility to alter the terms of certain mortgages."

--12/13/07: As described by the WSJ, "Such is the case with the mortgage bankruptcy bill passed yesterday by John Conyer's House Judiciary Committee....this legislation would allow bankruptcy judges to treat mortgage debt the same as credit-card debt."


Revamp of Mortgage Regulations

---12/18/07: As described by the Financial Times, "The Federal Reserve proposed new rules that would sharply curtail the kinds of high-risk mortgages largely responsible for the global credit crunch. But the proposal drew a lukewarm and occasionally hostile reaction from lawmakers and other critics who called for more aggressive action...

Key points of Fed proposal:
a) Require lenders to assess subprime borrowers' ability to repay loans from sources other than rising home values.
b) Bar lenders from making high-cot loans that rely on unverified income or assets.
c) Ban lenders from paying mortgage brokers bonuses beyond what consumers have agreed in advance the brokers would receive."

California Budget Crisis

Historical Perspective
---California has a long history of moving between boom and bust. Some of this in inherent in its economy, but some of it is also structural.

---The state is one of the few states in the country that requires a two-thirds vote to approve tax increases. While this gets considerable negative press by the politicians and the press, I think this is a very good thing.

---Much of the budget is fixed by law. That leaves little room for discretionary spending. As an example, Proposition 98 mandates that 40% of the general fund goes to public schools.

---When times are good (e.g. dot-com boom days of the late 90s), the state takes in extra revenue. But instead of recognizing that this is a one-time deal, the state assumes that this is normal and the state builds this into its "normal" spending run rate.

---As Governor Arnold Schwarzenegger said, "This state has had problems with the budget since I have gotten here. And you know why nothing has changed? Because the system itself is flawed, the budget system. It's not that there's anyone in Sacramento that is making the wrong decision. There is no one in Sacramento making the wrong move or doing something bad. This has been created by itself, because the system is flawed."


2008 Crisis
---California is facing increasing budget problems attributable to the weak housing market, declining property tax revenues and increasing expenditures for such things as fighting wildfires.

---As recently as this past June, California had a $4.1 billion reserve set aside for emergencies.

---In November, Legislative Analyst Elizabeth Hill projected a budget gap of $9.8 billion over the next 18 months.

---Today, California is now projecting a $14 billion shortfall for fiscal year 2008 beginning July 1.

---Governor Arnold Schwarzenegger is asking all state agencies to prepare for across the board cuts of 10%; fierce resistance has immediately begun.

---Governor Arnold Schwarzenegger has said that he will declare a fiscal emergency in January. With this decree, lawmakers must agree on a solution within 45 days. Otherwise, they will not be allowed to consider any other bills or adjourn until the matter is resolved.

---As the economy continues to weaken, how much larger will this deficit grow? Stay tuned. 2008 should be exciting.


California Health Care Plan
---In the middle of this budget crisis, the state is trying to pass the nation's largest universal health care initiative. Governor Arnold Schwarzenegger and Assembly Speaker Fabian Nunez have worked on this all year. To meet their commitment to pass legislation this year, the Assembly passed Assembly Bill 1X last week. This bill would extend coverage to 70% of the uninsured.

---But despite the bill passing the Assembly, financing details remain very murky. The annual $14.8 billion bill will be paid by a variety of stakeholders: individual premiums, doctors, hospitals, employers, insurers, federal funds, new taxes, etc. The real fun will start now as the state tries to figure out who pays what.

---With the financing uncertainty, the Senate has not committed to the plan. As the Sacramento Bee says, "Senate President Pro Tem Don Periata has positioned himself as the linchpin here."

---With the general budget deteriorating, timing could not be worse.


My Two Cents
---Money does not grow on trees.

---Maybe the problem is too much government.

---Maybe politicians should learn to live like everyone else. The government needs to budget realistically and live within that budget.

---Maybe the system is not flawed. Requiring a two-thirds vote for tax increases is a good control.

Merry Christmas

I would like to wish everyone a happy and enjoyable holiday season. I pray that everyone is as blessed as I am.


At the risk of being a bit personal, I would like to share with you the gift that I gave each of my nieces and nephews this year:

"Merry Christmas

Your Christmas present is an American Eagle one-tenth ounce gold coin, minted in 2007.

This year’s gift is a bit different than past gifts. Although maybe not initially obvious, we hope that it will have a more long-lasting value……..not only in terms of monetary value, but hopefully in terms of educational value. More specifically, understanding how financial markets work and how gold plays a role in those markets.

You are free to do what you want with the coin. You can sell it now and get about $80 from a coin dealer. Or you could make a piece of jewelry out of it. Or you could hide it away for 20 years and see how valuable it could become. There are no guarantees, but the price of gold has more than tripled in the last several years. I think that it will triple again over the next few years.

If you want to learn more about gold and investing in general, I am more than willing to help you out. In the meantime, check out my financial blog which I update every day. The address is www.financialclues.blogspot.com

Love, TWL"

Weekly Chart: Fed and ECB Moves

Federal Reserve and the European Central Bank continue to lower interest rates and inject massive amounts of liquidity into the market. Their actions have had some success in the short term (less than 3 months), but their efforts have not had the desired impact beyond that.

As the WSJ reports:
"What's Happening: The latest moves by the Fed and ECB have calmed money markets, but haven't eliminated worries.

Concerns Remain: Financial firms could report more bad news, and prices in the U.S. housing market are likely to fall as defaults rise.

Quote: The change 'buys us more time, which is the only thing that's going to resolve this.' says Lou Crandall, chief economist at Wrightson ICAP.

Quote: The most visible indicator of persistent bank reluctance to lend to each other -- plus the reluctance of money-market mutual funds to lend to banks for more than a few days -- has been that banks are paying unusually high rates for short-term loans, compared with the target the Fed and ECB set for overnight loans.

Quote: Joshua Rosner, an analyst at the New York research firm Graham Fisher & Co., says, 'The issue is not a lack of capital. The issue is: Each bank is unsure of which of their peers will not wake up in the morning. Nobody will feel comfortable until the losses that ultimately have to be taken are taken.'"

Weekend Trivia: What Is The Laffer Curve?

Arthur Laffer is a supply side economist who became influential during the Reagan administration as a member of Reagan's Economic Policy Advisory Board. He is best known for the Laffer curve, a curve illustrating tax elasticity which asserts that in certain situations, a decrease in tax rates could result in an increase in tax revenues. (Per Wikipedia)

The chart and the following commentary were both published by the Heritage Foundation in an article titled: The Laffer Curve: Past, Present, and Future


"Theory Basics

The basic idea behind the relationship between tax rates and tax revenues is that changes in tax rates have two effects on revenues: the arithmetic effect and the economic effect. The arithmetic effect is simply that if tax rates are lowered, tax revenues (per dollar of tax base) will be lowered by the amount of the decrease in the rate. The reverse is true for an increase in tax rates. The economic effect, however, recognizes the positive impact that lower tax rates have on work, output, and employment--and thereby the tax base--by providing incentives to increase these activities. Raising tax rates has the opposite economic effect by penalizing participation in the taxed activities. The arithmetic effect always works in the opposite direction from the economic effect. Therefore, when the economic and the arithmetic effects of tax-rate changes are combined, the consequences of the change in tax rates on total tax revenues are no longer quite so obvious."


"The Historical Origins of the Laffer Curve

The Laffer Curve..... was not invented by me (Laffer). For example, Ibn Khaldun, a 14th century Muslim philosopher, wrote in his work The Muqaddimah: 'It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.'

A more recent version..... was written by John Maynard Keynes: 'Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more--and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.'"


Successful Examples

"Over the past 100 years, there have been three major periods of tax-rate cuts in the U.S.: the Harding-Coolidge cuts of the mid-1920s; the Kennedy cuts of the mid-1960s; and the Reagan cuts of the early 1980s. Each of these periods of tax cuts was remarkably successful as measured by virtually any public policy metric."

And More December Quick Hits

MARKETS
Central banks around the world continue to do whatever they can to inject liquidity into financial markets that remain very nervous. As the WSJ reports, "Central banks' action has helped bring down very short-term rates, but has had less impact on rates going into next year."

---The European Central Bank offered banks an unlimited amount of cash at 4.2%. A total of 390 banks took the offer and borrowed $503 billion in two-week loans.

---The Federal Reserve completed the first of their four easy-money $20 billion loans this week. The "Term-Auction Facility" went off at 4.65%

---Agora Financial's 5 Min. Forecast is reporting that "Three analysts at Goldman Sachs just took the prize for the most profitable trade in history....The three shorted the subprime market like no other market has been shorted before...to the tune of over $4 billion in profits. Proceeds from the trade were wiped out thanks to bad debts elsewhere in the firm, but this gamble will still go down as the most successful of all time...And good deeds don't seem to go unnoticed at Goldman Sachs...each of the three men are reportedly getting $10 million bonuses this Christmas."


FOLLOW-UP
---The latest SWF investment (see 12/11/07 posting): The sub-prime mortgage mess had forced Morgan Stanley to take a $9.4 billion write-off, resulting in the bank's first-ever quarterly loss. In response, management sold up to 9.9% of the company to the China Investment Corporation sovereign wealth fund for a price of $5 billion.

---The latest money market meltdown (see 12/13/07 posting): Columbia Management, a unit of Bank of America, is closing down its Strategic Cash Portfolio fund after experiencing major withdrawals from nervous investors. This fund was one of the largest US short-term funds catering to institutional investors.

---AP is reporting that "The government is promising $45 trillion more than it can deliver on Social Security, Medicare and other benefit programs....The $45.1 trillion shortfall has increased by nearly $1 trillion in just one year...and, it's up 67.8 percent in just the past four years."


INFLATION (or STAGFLATION)
---Spring wheat hit an all-time high of $11.0875 per bushel.
---Rice hit an all-time high of $1359.00
---Platinum hit an all-time high of $1529.50 per ounce this week.
---Soybeans hit a 34-year high of $11.7375 per bushel.

---Greenspan summed up all of this inflation news by saying "Core inflation is up. Wholesale prices had their highest increase I think in a generation. That raises the specter of STAGFLATION (emphasis added) again."


OTHER INTERESTING ITEMS
---The Financial Times is reporting that "Bentley Motors is on course to sell close to 10,000 cars in a year for the first time after the introduction of two convertibles to the luxury carmaker's range of models and in spite of concerns over the economic outlook."

---Government corruption is on the rise. The Washington Post is reporting that "A United Nations task force has uncovered a pervasive patten of corruption and mismanagement involving hundreds of millions of dollars....Procurement officials have been charged with misconduct for soliciting bribes and rigging bids...The task force has also cast a spotlight on the U.N.'s repeated failure to take action against officials long suspected of wrongdoing."

Meanwhile, a Washington D.C. tax official has been charged with embezzling $20 million over seven years. AP reports that the courthouse files look like the Christmas list of a high-society fashion maven with...mink coats, jewelry, Faberge eggs, a Mercedes Benz and more than 100 (designer) handbags." The scam was finally uncovered by a bank employee after noticing checks made out to fictitious companies like "Bilkemor LLC." Makes you wonder where the financial controls were for 7 years.

Taxes And Politics Always Seem To Collide

AMT Fixed For One More Year

In their last working hours of the year, Congress finally passed the "annual" bill to shield over 20 million taxpayers from the Alternative Minimum Tax. The bill proceeds to President Bush for his signature. Check out the 11/28/07 posting which summarized the issues associated with the AMT.

With this AMT fix, the Republicans won the latest battle over taxes. While all parties wanted the relief, the Democrats were holding out for offsetting tax increases. This would allow them to keep their 2006 campaign pledge to "pay as you go budgeting." But with the prospect of millions of taxpayers being subject to tax increases, they took the best political route and threw away their principles.

With these tax changes now agreed upon, the IRS can now update their forms. Unfortunately, the deadline has already passed and tens of millions of taxpayers will have their refunds delayed. The Republicans may have come out ahead in this battle, but truth be told, both parties look like idiots. This same battle plays out every year. Of course repealing the AMT would be too simple.


Who Is Paying All The Taxes?

If you listened to the Democrats and the media, you would think that the wealthy are getting richer and not paying their fair share of taxes. Well, IRS numbers released by the Congressional Budget Office last week for 2005 suggest otherwise.

---As the WSJ reports, the richest 1% and the richest 5% of taxpayers continue to pay an INCREASING amount of the total tax, both in terms of ABSOLUTE dollars and in terms of PERCENTAGE of total dollars collected.

---"Meanwhile, Americans with an income below the median -- half of all households -- paid a mere 3% of all income taxes in 2005."

---Fireworks should start flying next year with the upcoming elections. There is already talk of tax increases at the state level (California) and at the federal level. But at what point do the people paying the actual taxes revolt?

Extreme Christmas Shopping (Part 2)

Sacramento Real Estate Deals

It is no secret that real estate prices have been falling all year. Developers are saying that 2007 has been the toughest year that they have ever experienced. Recent forecasts are now projecting that a turnaround may not happen until 2009 at the earliest. Time will tell.

It has obviously been a buyer's market all year. Now with developers trying to clean up their books before year-end, they are offering ridiculous incentives. Potential buyers who can close on a deal this year can now negotiate additional savings of up to 20%. That is quite a Christmas present.

Recent headlines in the Sacramento Bee include:

---Sacramento Bee headlines on 12/01/07: "Elliott to drop prices by as much as $100K"..........."FOR 2 WEEKENDS ONLY, Elliott Homes celebrates the new year early with a PRCE EXPLOSION on selected new homes and lots; Save $50,000 to $100,000"

As it turns out, the Elliott headlines were only a starting point for negotiations. Very good friends of mine just closed on an Elliott model home that had been reduced from $730K to $570K. Also interesting was that they had keys to their new home in just 2 weeks after negotiations had begun.

---Sacramento Bee headline on 12/08/07: "Save as much as $150K with Cambridge"

---Sacramento Bee headline on 12/15/07: "Save more than $190K at JTS Estates"

---Sacramento Bee headline on 12/01/07: "Newland (Communities): Move in by Dec. 31"; the article highlighted the fact that different developers within the master planned community were offering $89,453 in upgrades, $44,466 in upgrades, $90,000 in incentives and $60,000 in incentives.

Extreme Christmas Shopping (Part 1)

Foreign shoppers Invade the US

With the US dollar near all-time lows against many other currencies, foreign shoppers are flocking to the US to do their Christmas shopping. They are coming by the plane-load and going directly to the malls.

The WSJ reports that "Retailers are reporting a surprise hit this holiday season: luggage. As shopping-mad tourists from overseas take advantage of the weak dollar, many are having to buy extra suitcases to cart all their purchases home."

"The influx has some retailers rolling out the red carpet for anyone with a foreign passport."

"To prepare for Chinese shoppers, the South Coast Plaza in Costa Mesa, Calif., is in the midst of printing a store directory in Mandarin."

"This December at the Holiday Inn near the Mall of America in Bloomington, Minn., more than a quarter of the 171 rooms are sometimes filled with shoppers who have come over on direct flights on Iceland Air from Reykjavik."

"Earlier this month, Taubman Centers, which owns four shopping centers in the Detroit area, started sending limousines stocked with eggnog and store coupons to chauffeur shoppers from Canada for a 'six-hour shopping spree' across the border."

"Canadians are also driving up sales at the Bass Pro Shop in Auburn Hills, Mich., buying ice-fishing and moose-hunting gear, says Doug Phillips, the store's promotions manager. He says in the past couple of months about one in 10 shoppers has been Canadian, compared with just a handful a couple years ago."

"Even in Fargo, N.D., which is a three-hour drive from the nearest major Canadian city, there's been a relative windfall of foreign shoppers this year."

"At Saks Fifth Avenue's flagship store in New York, the alterations team has noticed a rise in requests for quick-turnaround jobs from overseas tourists who want their clothing ready before they leave town. Suzanne Johnson, the general manager, says she's also changed the signage in the store to keep things simpler for foreigners."

"The Dolphin Mall in Miami says the increase in shoppers from abroad has forced it to add two more daily shuttles on some days to Miami International Airport. The mall's tourism manager, Lucia Plazas, says Germans, Italians and others have been buying so much she's had to call cabs to drive behind the buses carrying tourists who can't fit on the shuttles once they're packed with purchases. 'The amount of bags has been a challenge for the drivers,' says Ms. Plazas."

The Orlando Sentinel reports that "This holiday, planeloads of foreign visitors are expected to descend on the Orlando area. While taking in the region's theme parks and other attractions, they'll also carve out a little extra time to do something else -- shop. Thousands of British, Canadian, European and Latin American tourists are taking advantage of the weak dollar and snapping up bargains at malls and shopping outlets near the region's tourist hot spots.....

At Prime Outlets-International on the north end of International Drive, where 80 percent of the mall's customers are estimated to be tourists, visitors from Britain have been snapping up goods such as Coach handbags, Gap jeans and Tommy Hilfiger jackets, said marketing director Jackie Young.'The influx we've seen in the last three to four months . . . has been phenomenal,' Young said. 'When you come out to the center . . . it is all U.K. all the time.'"

Weekly Chart: Wholesale Prices Rise At Fastest Rate Since 1973

Click chart to make larger

Source: Casey Research, Welcome to "The Room," December 14, 2007

The sub-prime mortgage mess continues to get worse. Economic growth rates have been declining. There has even been some discussion of a recession. Could things get any worse?

Well.........yes. Now inflation has started to rear its ugly head. The wholesale rate increased last month at the fastest rate since Nixon was president. While it was driven by energy prices and food prices, price increases are starting to show up in many other areas.

Minimal growth + inflation = Stagflation.

It's starting to look like the 70s all over again. The similarities are frightening:
---Oil prices are going thru the roof.
---Gold prices are going thru the roof.
---Stock markets are struggling.
---Consumers are cutting back as they are overly extended.
---The US is in a controversial war.

Back in the late 70s and early 80s, how did the country break the stagflation grip on the economy? It took 1) tough medicine from the Federal Reserve led by Paul Volker and 2) tax cuts implemented by President Reagan.

Unfortunately, these two solutions don't seem to be in the cards today. It is just the opposite as the Federal Reserve is pursuing easy money and politicians are talking about tax increases.

Weekend Trivia: One Of The World's Greatest Inventions Was Created 60 Years Ago Today; What Is It?

Congratulations and lunch go to RTL who correctly answered the trivia question within minutes.

Per Wikipedia, "A transistor is a semiconductor device, commonly used as an amplifier or an electrically controlled switch. The transistor is the fundamental building block of the circuitry in computers, cellular phones, and all other modern electronic devices.

Because of its fast response and accuracy, the transistor is used in a wide variety of digital and analog functions, including amplification, switching, voltage regulation, signal modulation, and oscillators. Transistors may be packaged individually or as part of an integrated circuit, some with over a billion transistors in a very small area."

In an article titled "The Transistor's Birthday," Forbes describes the history of the transistor and the resulting electronic revolution.

More December Quick Hits

MARKETS
---The Federal Reserve is fighting harder and harder.....and they are losing the battle. They cut interest rate cuts this week for the third time and markets reacted very negatively. When that did not work, they developed a coordinated plan with four other countries to free up liquidity. Once again, the market reacted by going down even more. And making things even worse, the inflation fears that go with interest rate cuts are starting to materialize. The Fed is clearly in a bind and market analysts are increasingly starting to believe that there are no solutions out there.

---Further sub-prime problems were announced this week by Bank of America, Wachovia and PNC. And talk about infighting, Morgan Stanley listed Citigroup as the number one stock to short next year.

---Former Federal Reserve chief Alan Greenspan told NPR today that the odds of a recession are "clearly rising." No kidding, Sherlock.


INFLATION (or STAGFLATION?)
---The Labor Department reported yesterday that wholesale prices exploded by 3.2% in the month of November alone. This is the sharpest rise in 34 years. The increase was driven by energy prices coupled with a weak dollar; very similar to the 1970s.

---The Labor Department reported today that the consumer price index rose 0.8 percent in November amid a spike in gasoline prices. The report also found large increases in the cost of clothing, airline tickets and prescription drugs.

---The federal Agency for Health Care Research and Quality reported that the nation's hospital bills have increased by 89% since 1997. Although a bit dated, hospital care jumped by 7% in 2005, the most recent year reviewed. My guess is that the increases have been even larger in 2006 and 2007.

---China reported that their inflation rate accelerated in November to the fastest level in 11 years.


OTHER INTERESTING ITEMS
---Business Week is reporting that there are now 3.3 billion cell phone accounts in the world, or one for every two people in the world.

---AT&T announced that they will abandon its pay phone business in 2008. Total pay phones in the US have declined form 2 million in 2000, to 1 million last year, and on its way to extinction.

---The S&A Digest is reporting that Berkshire Hathaway shares passed $150,000, the highest per-share price in the history of the markets.

---The latest SWF to buy American assets is Kuwait with its $9.5 billion purchase of a 50% interest in Dow Chemical petrochemical ventures.

---Agora Financial's 5 Min. Forecast is reporting that "Luxury jewelry manufacturer and vendor Bulgari just opened its largest store in the world… in Ginza, Japan. The 10-story Bulgari Tower opened yesterday (11/28/07), featuring a glass facade, swanky rooftop lounge, top-floor panoramic restaurant, cafe, gourmet chocolate shop and 10,000 square feet of jewelry-selling decadence.
'Japan remains an enormous market,' said Bulgari CEO Francesco Trapani yesterday from the tower’s 'bridal floor' — an entire level of the building dedicated to engagement rings and wedding bands — 'the biggest market in the world. It’s very important to be a leader here.'”

Money Market Meltdowns

Money market funds were developed in 1971 as an alternative to bank deposits. Popularity of this asset class has exploded and now totals $3.1 trillion in the US.

As Casey Research explains, "The idea of a money market fund is simple. It's a no-load mutual fund - no commissions to buy or redeem shares. But it doesn't invest in stocks or bonds, it invests in Treasury bills or other very short-term IOUs. Most money market funds keep their share price fixed at $1.00 by paying shareholders a tiny dividend every day, which is automatically reinvested to buy more shares. And nearly every money market fund offers each shareholder a book of blank checks that the shareholder can fill out and deposit at any bank and that the fund will cover by redeeming the appropriate number of shares."

Since 1971, there has only been one fund which ran into liquidity problems. Business Week reported that in 1994, "Community Bankers U.S. Government Money Market Fund was liquidated and investors got 96 cents on the dollar. It was an institutional fund and no individual investors lost money."

But 2007 is different.

A variety of problems have shown that money market funds are not as safe as traditionally thought. Ask your broker about the safety of their money market funds and you may get some interesting responses. Recent problems include:

---Business Week reports that "there have been about 30 incidents this year in which a manager bought securities to prevent a fund from possibly 'breaking the buck.'" Major financial institutions which have reported problems include Bank of America, Credit Suisse, Wachovia, U.S. Bancorp

---On November 8, the GEAM Trust Enhanced Cash Trust, a short-term bond fund run by General Electric with $5 billion in assets, officially "broke the buck." This is a type of investment that is "loosely akin to a money market fund." It told non-GE investors that they could withdraw their money at 96 cents on the dollar before losses mounted. The investors were encouraged to take the money as there would be no guarantee in the future.

This is probably the most significant case thus far, as it involves a major company not stepping up to the plate and making investors whole again. The thinking is that if GE can do this, than anyone could do this. This is a 180 degree change from what was previously thought by the investment community.

---On August 14 of this year, Sentinel Management Group froze assets on its $1.5 billion fund. As management said, "We have never experienced a situation quite like this one. Liquidity has dried up all over the Street."

---As the September 19 blog explained in detail, Northern Rock in England experienced a run on the bank as people were lined up to get their money out at branches throughout the country. This was not a money market fund, but it does demonstrate the panic that can occur when "safe" assets are not safe.

---As the December 6 blog explained in detail, several states have had problems with their local investment pools. These are funds structured like money market funds that local governments have access to. The Florida State Board of Administration had to freeze the Florida Local Government Investment Pool. It has since been reopened, but with a variety of new restrictions on cash withdrawals. Montana and Maine have had runs on their local investment pools as investors became nervous about the quality of the investments held by the funds.

---The Financial Times reported last week that "California's Orange County had invested more than $419 million in structured investment vehicles that were at risk of being downgraded....Orange County has experienced difficulties linked to structured investments in the past. In 1994, the county entered the record books as the biggest-ever municipal bankruptcy."

The Latest $19 Million Basketball Payoff

BEFORE......................AFTER













BEFORE
Source: killerfrogs.com
Picture of Stacey Johnson-Klein coaching her women's basketball team at Fresno State.

AFTER
Source: Fresno Bee
Picture of Stacey Johnson-Klein after being rewarded $19 million in a sexual-discrimination lawsuit against the school.

SUMMARY
In a stunning verdict, Fresno State University lost a $19 million sexual-discrimination suit to its former women's basketball coach. The award was broken down as follows: $0.6 million for economic losses from her firing, $4.4 million for future economic losses, $3.0 million for noneconomic suffering before the trial date, and $11 million for noneconomic suffering she will endure for the rest of her life.

Unbelievably, this is the third such case that the school has lost in six months. The former women's volleyball coach was awarded $5.9 million (later reduced to $4.5 million by a judge) and the school reached an out of court settlement with the former Associate Athletic Director for $3.5 million. For anyone counting, that totals $27 million.

MY TWO CENTS
I do not support any discrimination of any kind. Stacy Johnson-Klein clearly deserves to be compensated. But $19 million? In my opinion, this is about 19x too much.

Where is the outrage?

Our legal system is out of control. There is no balance. These trends will bankrupt the country.

Who will be paying for this? You and me and all taxpayers. And probably higher tuition fees and higher insurance costs.

And why does the President Welty still have a job and why does he have the support of students and his bosses? How many lawsuits does he have to lose? Three lawsuits doesn't appear to be enough.

KEY TESTIMONY (Source Fresno Bee)
"Johnson-Klein said:

• Randy Welniak, her supervisor, sexually harassed her, saying she shouldn't dress provocatively at games and public events, and used the word "cleavage."

• Former athletic director Scott Johnson sexually harassed her when he said in public that a booster might want to "play defense" with her.

• Her former assistant coach, Drew Champagne, offered to testify on her behalf in exchange for sex.

• Fresno State had a double standard for women's and men's basketball, including a different level of tolerance on substance abuse.

Fresno State said:

• Johnson-Klein took a half-bottle of prescription painkillers from a player.

• She told several assistant coaches to give part of their bonuses to the team secretary; the coaches paid taxes on the full amount.

• She talked restaurants into feeding her for free, then pocketed the per diem.

• She bought 900 prescription painkillers from late October 2004 through late January 2005; President John Welty testified he would have fired her just for this had he known."

Sub-prime Woes = SWF Buyouts

MORE SUB-PRIME WRITE-OFFS
Every week seems to bring another round of multi-billion losses attributable to the sub-prime mortgage mess. Does anyone notice a trend here?

Yesterday, the conservative Swiss UBS wrote off an additional $10 billion, bringing the total to $13 billion. The bank had invested in the "safest" of the CDO slices that were rated AAA.

Despite all the comments to the contrary (by banks, by insurers, by the government, by economists, by Wall Street veterans.......you get the idea), nobody knows where the bottom is. UBS probably sums it up the best: The "ultimate value of our subprime holdings...remains unknowable."

Many other large financial institutions own similar CDO slices that were supposedly "safe". Expect more rounds of write-offs in the days ahead.

SHORING UP BALANCE SHEETS
As these financial institutions take these write-offs, they need to take drastic measures to fix their balance sheets. The government defines minimum reserve requirements which must be maintained for these banks to continue operations.

To meet these reserve requirements, banks are jumping thru hoops. Just this week, for instance, Washington Mutual said it would generate $3.7 billion by cutting its dividend and selling $2.5 billion of preferred stock. The bond insurer MBIA said it will receive $1 billion from a private equity deal with Warburg Pincus.

SWF BUYOUTS
And grabbing the biggest headlines, UBS has put together a deal with Singapore and an unnamed Middle Eastern investor (probably Saudia Arabia) to sell as much as 12.4% of the company for $11.5 billion. The deal involves convertible debt at rates of 9% a year.

As the following charts show, SWFs are playing an increasing role in the bailout of troubled banks around the world:


Source: WSJ

Weekly Chart: Federal Reserve Ready To Lower Rates Again

Click chart to make larger

Source: WSJ

The Federal Reserve will announce their decision Tuesday on the widely followed Federal Funds Rate. They continue to be caught between a rock and a hard place. On the one hand, financial credit markets still have not recovered from the sub-prime mortgage problems that began this past August. The Fed had thought that interest rate cuts in September and October would have been enough, but recent market action suggests otherwise. On the other hand, lowering interest rates will fuel inflation and further trash the US dollar overseas.

Although the Federal Reserve has tried to "talk down" the market from expecting future cuts, it appears that further cuts will happen.

Looking at the futures on the Chicago Board of Trade, there is a 100% chance of an interest rate reduction:

"Based upon the December 7 market close, the 30-Day Federal Funds futures contract for the December 2007 expiration is currently pricing in a 100 percent probability that the FOMC will decrease the target rate by at least 25 basis points from 4-1/2 percent to 4-1/4 percent at the FOMC meeting on December 11.

In addition, the 30-Day Federal Funds futures contract is pricing in a 41 percent probability of a further 25-basis point decreasein the target rate to 4 percent (versus a 59 percent probability of just a 25-basis point rate decrease)."

Weekend Trivia: What Is Presidential Executive Order #6102?

SUMMARY
This is an executive order signed by President Franklin D. Roosevelt on April 5, 1933 which prohibited the hoarding of gold coins, gold bullion and gold certificates in the United States. The order required that all such gold had to be tendered to the government by May 1, 1933.

HISTORY as described by Wikipedia:
Franklin D. Roosevelt was sworn in as President of the United States on March 4, 1933. The country had just suffered thru four tough years known as the Great Depression. Believing that the national emergency still existed, Roosevelt believed that hoarding of gold was a grave threat to the country and it was necessary to prohibit such practice.

"The government required holders of significant quantities of gold to sell their gold at the prevailing price of $20.67 per ounce. Shortly after this forced sale, the price of gold from the treasury for international transactions was raised to $35 an ounce. The U.S. government thereby devalued the dollars (which it had just forced citizens to accept in exchange for their gold) by 41% of its former value....

The government held the $35 per ounce price until August 15, 1971 when President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus abandoning the gold standard."

Although the gold standard was abandoned, it was still illegal for US citizens to hold gold. On the very eve when the gold standard was abandoned, the National Committee to Legalize Gold (NCLG) was founded. After more than three years of work, it finally became legal to own gold again on December 31, 1974. The act did not, however, repeal the Gold Clause Resolution of 1933, which said that contracts are unenforceable if they use gold monetarily rather than as a commodity of trade.

An interesting result of the NCLG efforts was a privately-sponsored monetary symposium entitled "Investing Towards Freedom". This became an annual investment conference which continues to this day in New Orleans.

After abandonment of the $35 price in 1971, gold skyrocketed during the rest of the decade and peaked at what is still an all-time record price of $850 on January 21, 1980.

LOOKING FOWARD
It is often said that if we don't learn from history, we will be doomed to repeat it. The sub-prime driven credit crisis today, as well as the recent increases in gold prices, may be large warning signs. I'm not advocating breaking the law, but owning some gold makes a lot of sense today for a lot of reasons.

TEXT
The complete text of Executive Order #6102 can be found at The American Presidency Project.

December Quick Hits

MARKETS
---US stock markets produced solid gains this week, partially attributable to the government mortgage relief plan. This blog will have a more sober view of these developments next week.

---OPEC ministers ignored pressures from the rest of the world and decided to freeze crude oil production levels. To the surprise of many, crude oil prices actually fell after the announcement.

---Agora Financial's 5 Min. Forecast is reporting that futures on the Chicago Board of Exchange are giving 100% odds of a Fed rate cut next week.

---Follow-up to yesterday's blog regarding the Florida LGIF: The fund was reopened on Thursday and investors promptly withdrew $1.2 billion, of 10% of the fund. The run on the fund continues.


REAL ESTATE
---The Mortgage Bankers Association is reporting that delinquency rates for all mortgages have hit a 20-year high of 5.59%. In the troubled subprime ARM market, one in five mortgages had a late payment in Q3.

---Moody's is forecasting that the US housing market will fall into deep recession next year. Before the crisis is over, home prices will haven fallen an average 13% from the 2006 peaks. Florida and California will lead the way with prices falling by as much as 30%.


OTHER INTERESTING ITEMS
---BBC News is reporting that "Panama is moving to make the teaching of Mandarin compulsory in all schools, in recognition of China's growing importance in the world economy."

---AP reports that the US national debt is growing by $1 million per minute. The interest payment implications are staggering.




















---This week saw several interesting automotive news items. First, US automotive companies are reducing output further due to weak demand. GM and Ford announced cutbacks of 11% and 7% for Q1, respectively. The three-year trend has been steadily down.

Second, the Detroit News is reporting that GM has a new plan to offset chronic absenteeism which runs at 10%, or three times higher than other industries. The company will give employees with perfect attendance a chance to win a free car.

Finally, in a look back at the good old days, Reuters is reporting that the oldest surviving Rolls-Royce was auctioned off at a record $7.22 million.

No Guarantees With Money Market Funds; Look At What Is Happening To State Funds

It has always been assumed that money market funds are extremely safe. After all, they only invest in the safest liquid short-term investments, such as US treasuries.

This traditional thinking is being put to the test. It turns out that many of these funds try to provide a little more yield by investing a small portion of their funds in riskier investments. This had been ok until the recent fallout from the recent sub-prime mortgage problems.

Don't think that this can happen to you? Just look at what is happening in states around the country:

FLORIDA'S LOCAL GOVERNMENT INVESTMENT POOL (as outlined by the Financial Times)
---Florida's LGIP is a fund which local governments in Florida can use as an investment option for their surplus cash and a current account for routine expenditures.

---The LGIP was modeled after typical money market mutual funds that are used by millions of individual investors.

---The LGIP recently had $27 billion, but has since shrunk to $15 billion as there has been a run on the fund when it was learned that the fund had invested $2 billion in structured investment vehicles and other sub-prime mortgage debt.

---About $1.5 billion of the problem securities have been downgraded and no longer meet the fund's minimum investment standards. Most of these assets were sold to the fund by Lehman Brothers.

---The Florida State Board of Administration put a freeze on the fund to prevent a further run on the fund.

---Counties, cities and schools are now jumping through hoops to make payments to employees and vendors.

---Florida has hired BlackRock to make recommendations on how to reopen the fund and get it operational again. The problem assets will probably be walled off from the "good" assets and held until maturity. Negotiations are currently centered around fees local governments will have to make to access the "good" assets.


MONTANA and MAINE (as reported by the WSJ )
---"Montana's short-term investment pool has suffered recent withdrawals from at least one county official spooked by the fund's investments.....Yellowstone County has withdrawn $72 million from Montana's $2.5 billion Short Term Investment Pool recently. 'We withdrew all our money because we have a lack of confidence in some of the investments that are currently in their portfolio,' says John Ostlund, a county commissioner."

---"In Maine, questions are being asked about a $20 million investment by a state-run portfolio in a SIV. The issue is whether the state's $750 million short-term cash pool received bad advice from a Merrill Lynch & Co. broker in early August. The broker recommended the purchase of commercial paper issued by Mainsail II LLC just before it failed capital adequacy tests and was forced into a restructuring."

US Treasury Securities And China

With the falling value of the US dollar, many countries are becoming increasingly concerned about holding US treasuries. Rather than invest in a security that is falling in value more than the interest income that is generated, these countries are looking at alternative investments. More and more SWFs (Sovereign Wealth Funds) are being created and they are beginning to ramp up their purchases of assets and companies around the world.

The US Department of the Treasury TIC (Treasury International Capital) data provides an infinite amount of data regarding capital flows between the US and the rest of the world. Review of recent months shows some interesting trends:

---Foreign ownership of US treasury securities increased by $127 billion in the first three quarters of 2007.

---The UK increased their holdings of US treasuries by $172 billion in this timeframe. That implies that there was a net drop for all remaining countries in the world.

---During Q3, Japan was the largest net seller of US treasuries as their holdings declined $39 billion.

---China has decreased their US treasury holdings from $417 billion in February to $396 billion in September. They have been net sellers in 5 of the past 6 months.


The Financial Times provides an interesting discussion of how the Chinese are turning in new directions with their massive foreign exchange cash reserves.

Middle-Eastern SWFs have grabbed headlines recently with their purchases of Citigroup, NASDAQ, AMD and MGM. It probably won't be long, however, before we start seeing similar size purchases by China.

Diamonds As Investments

Diamonds have been in a bear market for three decades. Commodity prices tend to be very volatile and diamond prices tend to be more so than other commodities. Although most commodity prices have been rising since 2000, diamonds have not participated. A comparison with several other commodities shows the following:

GOLD
---Peaked at $850 in 1980, priced at $250 in 2000, and is now about $800.
---For all practical purposes, gold is now at the peak levels seen in 1980 (unadjusted for inflation).

CRUDE OIL
---Peaked at $39 in 1980, priced at $10 in 2000, and is now approaching $100.
---Current prices are more than 2X the peak levels seen in 1980 (unadjusted for inflation).

DIAMONDS
---The RDI (Rapaport Diamond Index) peaked at 158 in 1980, priced at 83 in 2000, and was 94 at the start of 2007.
---Current prices are still off 40% from the peak levels of 1980 (unadjusted for inflation).
---If inflation is taken into account, current prices are off a whopping 75% from peak levels of 1980.

It has only been during 2007 that diamond prices have shown signs of life. This may be an excellent buying opportunity.






Click image to make larger

Weekly Chart: Diamond Prices

Click image to enlargen

Source: Rapaport Diamond Report, 01/05/07

Yesterday's posting addressed the four C's that determine the value of a diamond: Carat Weight, Color, Clarity and Cut.

This chart shows the interaction of color and clarity. A "perfect" one carat diamond (Color is D and Clarity is IF) was valued at $18,000 at the start of 2007.

In tomorrow's posting, I will show how diamonds have fared as an investment over the last 30 years. The data is quite interesting and surprising. Stay tuned.

Weekend Trivia: What Are The 4 C's With Diamonds

The following educational information is provided by Blue Nile. This is an well-known internet site for purchasing diamonds. It has taken the industry by storm and now ranks only behind Tiffany & Company in sales of diamond rings.

While I rarely endorse specific companies or products in this blog, I do recommend Blue Nile. Over the last 10 years, I have read many articles on the company and all have been very positive. Forbes magazine has rated the company the best online jeweler since 2000. Check out their site for further endorsements.

The factors which determine a diamond's value are shown below. Normally, there are four C's associated with diamond properties. The fifth C, certification, is very important for people buying diamonds. It provides a guarantee of what you are buying.

CARAT WEIGHT: "When diamonds are mined, large gems are discovered much less frequently than small ones, which makes large diamonds much more valuable. In fact, diamond prices rise exponentially with carat weight. So, a 2-carat diamond of a given quality is always worth more than two 1-carat diamonds of the same quality."


COLOR: "Acting as a prism, a diamond can divide light into a spectrum of colors and reflect this light as colorful flashes called fire. Just as when looking through colored glass, color in a diamond will act as a filter, and will diminish the spectrum of color emitted. The less color in a diamond, the more colorful the fire, and the better the color grade."


CUT: "The cut of a diamond determines its brilliance. There is no single measurement of a diamond that defines its cut, but rather a collection of measurements and observations that determine the relationship between a diamond's light performance, dimensions and finish. Most gemologists consider cut the most important diamond characteristic because even if a diamond has perfect color and clarity, a diamond with a poor cut will have dulled brilliance. The width and depth can have an effect on how light travels within the diamond, and how it exits in the form of brilliance."


CLARITY: "Diamonds that are absolutely clear are the most sought-after and therefore the most expensive. But many diamonds have inclusions — scratches, trace minerals or other tiny characteristics that can detract from the pure beauty of the diamond. The GIA and AGSL use a detailed system of rules and standards to summarize the number, location, size, and type of inclusions present in a diamond."


CERTIFICATE: "A diamond certificate, also called a diamond grading report, diamond dossier®, or diamond quality document, is a report created by a team of gemologists. The diamond is evaluated, measured, and scrutinized using trained eyes, a jeweler’s loupe, a microscope, and other industry tools. A completed certificate includes an analysis of the diamond’s dimensions, clarity, color, polish, symmetry, and other characteristics. Many round diamonds will also include a cut grade on the report."