Here Today, Gone Tomorrow Here today and gone tomorrow is every retailer's dream, but not if you're an investor exposed to the S&P500. The S&P500 fought its way up from a close of 1,385.59 at the end of April, 2008, to a high of 1,426.63 by mid-month, only to retrace its steps to 1,400.28 by the end of May 2008; up +1.07% for the month. Unfortunately, the next day it was back to 1,385.67, a mere 8 basis-points above its April 2008 close. Thanks mainly to a stellar +4.75% rise in April, the S&P500 slide for the year to date has been contained to -4.63%. The first quarter's decline of -9.9% was a hard pill to swallow.

Fund Performance Mirzam [MIRZX] was up +3.33% for the month. Year-to-date, the fund is up +8.82%. Since the inception of the fund, August 20, 2007, to the end of May 2008, the S&P500 declined -3.12%. The fund, on the other hand, shows a positive +14.80% return. We had some decent inflows of cash during the month, but we were able to allocate capital at a rate that made inroads into our cash balances. The fund was 46% in cash at the beginning of the month, a ratio that was brought down to 35% by the end of May. Our investment strategy is not to sit on cash, nor to time the market, nor to trade in and out of the market. Instead, we allocate capital slowly and deliberately. This approach entails an enormous amount of due diligence before we invest in a particular business. The investment process is not driven by the size of our cash holdings. Our somewhat larger than normal cash holdings are a function of the size and short lifespan of the fund. Favorable investment returns are also attracting healthy inflows of cash. However, we will not make hasty investment decisions that would force us to short circuit an investment approach that has served investors so well in the past. The reason we believe so strongly in this is not because we are the fund managers, but because we are shareholders. A substantial portion of our wealth is invested in Mirzam Capital Appreciation Fund.

Portfolio We increased our equity holdings by 35% in May. At the end of May 2008, the fund's equity holdings were split 65%:35% between foreign and domestic stocks, respectively. The average dividend yield on the equity portion of the fund's portfolio is currently 3.08%. This compares well against the 1.94% yield of the S&P500. All things being equal, a decline of 37% in the value of the S&P500 would raise the dividend yield to 3.08%.

The Transparency of Cash Compensation

On May 28, 2008, MSN Money, in an article under the title "Make Buck by Shunning Fat Cats," featured our investment strategy. Here is the link for those who haven't seen it:

http://articles.moneycentral.msn.com/Investing/CompanyFocus/MakeABuckByShunningFatCats.aspx

In the same vein, everybody knows Mark Cuban as the owner of the Dallas Mavericks, but there is much more to Mark than his love for basketball. He is also a very astute observer of the stock market. This is evident from a guest column that he wrote for the Dallas Morning News (May 11, 2008), under the title "With CEO Lottery Ticket, Workers Lose." It was also published on the newspaper's website under the title "My 2 Cents on CEO Pay." Here is the link to this insightful piece that mirrors our longstanding tirade against the excessive compensation of US executives and the use of stock options, or lottery tickets as Cuban calls them:

http://www.dallasnews.com/sharedcontent/dws/bus/stories/DN-cubancol_11bus.ART.State.Edition1.4618495.html

To whet your appetite, here is a quote from Mark Cuban's column:

"...put CEOs in the cash zone. Make companies generate 100 percent of their compensation in cash that will be 100 percent expensed in the quarter paid.

"That's not to say the CEOs can't own stock. Hell, yes, they can own stock. But make them buy it on the open market or as part of a program that's available to every company employee on the same terms. They are getting paid enough, and if they believe in their ability to run the company, they can put their money where their mouth is.

"Shareholders tend to ignore how much stock goes to management, but they don't ignore cash..."

Mark-to-Market: Part 3 In part 1 of this series, we noted the "doomsday device" label that some pundits assign to mark-to-market accounting. Many experts and especially CEO's of companies that have been hit by the sub-prime mortgage meltdown, use less flattering language when asked in private. Those in favor of mark-to-market accounting are mainly found in the world of academia and among those who make the rules. The "defenders of the faith" argue along these lines: "Reports must be informative and truthful... financial information is favorable if it unveils truth more completely and faithfully instead of representing an illusory better appearance... Accountants must forego misbegotten efforts [like SFAS123 and SFAS123R perhaps?] to coax capital markets to overprice securities, especially by withholding truth from them... failing to provide value-based information forces markets to manufacture their own estimates." (Paul Miller, Journal of Accountancy, May 2008)

First, CPA's don't certify that financial statements are "truthful." They don't even care if the information is unreliable and irrelevant (case in point, look no further than stock based compensation information). This is because these sentiments are embodied in FASB's Conceptual Framework, which is not part of Generally Accepted Accounting Practice (GAAP) - go figure. Second, these ideals of transparency over obfuscation are being applied selectively. Stock-based compensation has avoided fair value accounting for decades in the financial statements, although the true economic cost (marked-to-market) is still meticulously deducted for tax purposes. Third, when considering whether the accountants should decide on fair value, Peter Wallison (the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute) remarked that it is too important an issue to be left to the devices of accountants, reminding us of Clemenceau's remark that war is too important to be left to the generals. "Fair value accounting also has a one-size-fits-all quality that mimics the inflexibility of over-regulation... Given its impact on institution and whole economies, common sense suggest that we consider whether one means of measurement is the only one we should be looking at. The world view of accountants at a particular time should not determine the answers to these questions." (Financial Times, May 1, 2008). It is absurd for accountants to believe that they can devise rules that will produce fair values for assets for which there is essentially no market.

Of course criticism of fair value accounting must not be seen as a campaign to keep investors in the dark. We just don't think the rule makers foresaw the impact of the rules in the context of the current credit crunch - to some extent fanned by fair value accounting - when they drafted the rules.

We'll have to let the matter rest, but we'll give Christopher Whalen, co-founder of Institutional Risk Analytics, the last word. "Fair Value accounting is a utopian concept that traces its intellectual roots back to the same origins as efficient market theory, the wellspring for most of the discredited quantitative models employed by the global banks to create the sub-prime mess. Unfortunately, the proponents of fair value accounting ignored the invocations of classical theorists who stated that liquid markets are a necessary condition for using market prices, either as a surrogate for measuring risk or for valuation.

"Fair value accounting is a good idea in theory, but like most good ideas it is difficult to implement. Sylvain Raines, a lecturer at Baruch College in New York, told a meeting of the Professional Risk Managers International Association last September: 'The Chicago School of Economics has been telling us for a century that price and value are identical... If we do not recognize the fundamental difference that exists between price and value, then we are doomed.'

"While it may be reasonable to apply fair-value rules to actively traded securities, for the vast majority of assets that are illiquid, historical cost remains the only reasonable and consistent way to report the value of financial assets." (Financial Times, March 6, 2008)