The laws of capitalism — even today’s highly impure version of it — are unyielding.

The strongest companies survive. The weak and infirm die. And the economy moves forward.

When times are tough, like today, capitalism’s “creative destruction” accelerates. Rather than decades, industry restructurings take just years.

For workers, this unfortunately means job losses by the millions. But think of restructuring as a heavy dose of economic chemotherapy. Awful and painful. But there’s no real choice for getting healthy again.

Look around. America’s banks, insurers and retailers are dropping like flies. The lucky ones are bought. The unlucky file for bankruptcy. By the end of next year, the results of all this will be clear enough: duopolies and oligopolies will rule the U.S. economy.

This week, DHL, the overnight delivery division of Deutsche Post, threw in the towel. It announced it would shutter its domestic U.S. operations and lay off 9,500 people.

DHL’s failed attempt to compete with UPS and FedEx, who together control 80% of the U.S. market, will end up costing Deutsche Post almost $10 billion by the end of next year.

But when the choice is throw good money after bad or concede defeat, Deutsche Post did the right thing. Deutsche Post’s shares rose 7% on the news.

The U.S. Postal Service, another competitor to UPS and FedEx, just announced a $2.8 billion loss for its 2008 fiscal year. If the post office wasn’t funded directly by the U.S. taxpayer, it too would be gone soon enough.

Which is what happens when capital is scarce. Unprofitable companies disappear. The strong survive and thrive.

Look at the ascendancy of AT&T and Verizon Wireless. The nation’s number one and two wireless operators are busy buying up their competition.

Meanwhile, Sprint Nextel, the nation’s number three wireless operator, struggles to survive. Last quarter, it lost 1.3 million subscribers.

To stem the tide, Sprint needs a deep and stable capital base. But Sprint has a junk rating of BB and carries almost $23 billion in debt. As for the prospect of raising equity, good luck. In the past year, Sprint’s shares have fallen from over $16 a share to about $2.

By further cutting prices, Verizon and AT&T could probably push Sprint to the brink. After all, AT&T and Verizon still have access to capital. Last week, AT&T sold $1.5 billion in five year notes.

But duopolies like the regulatory cover of a third player. So it’s probably in Verizon and AT&T’s interest for Sprint to stay afloat.

The sorting of the winners and losers is the brutal process by which “capital” is allocated in “capitalism.” Eventually, a healthier economy will emerge, as risk capital flows once again to new and smaller companies to challenge the stronger firms.

That’s why the formation of the U.S. banking oligopoly now underway will be a good thing — at least for some period of time. The U.S. financial system will come to be dominated by J.P. Morgan, Bank of America and Wells Fargo plus maybe one or two other banks.

And yes, soon enough, the banks will be charging $35 for an overdraft versus today’s average of about $30. Or maybe $4.50 to use another bank’s ATM versus the current average of just under $3.50.

But is that too steep a price for a simple, stable banking system that Washington can properly regulate? And that will actually allow the nation’s capital to flow?

Economic chemotherapy works. Lawmakers in Washington might want to consider this as they turn their attention to bailing out Detroit.

Capitalism wants only three or four global car companies. And what capitalism wants, it eventually gets.

Why fix something if you don’t think it is broken?

Goldman Sachs CEO Lloyd Blankfein reiterated Tuesday that he would keep his bank’s core strategy and culture intact.

But something is surely broken when Goldman’s stock is trading at $69 a share, down almost 50% since Warren Buffett put $5 billion into the bank in late September and down 71% from its 52-week high.

Blankfein may point to the credit crunch and some fourth-quarter write-downs as an explanation for the stock declines. But investors are focused on Goldman’s business model. In a world of shrinking leverage, it just doesn’t work.

Of course, Blankfein may hunker down–hoping that time and a bull market may prove otherwise. But Bear Stearns and Lehman Brothers have amply demonstrated the folly of that strategy.

So here is an approach for Blankfein to consider: quickly restructure Goldman’s compensation system–and show his investors that he understands the old model won’t fly anymore.

Now, revamping comp won’t totally resolve the questions around Goldman’s strategy in an overhauled U.S. financial system. Still, the profit boost would be big, and it can help get the government off Goldman’s back.

Of course, the people inside Goldman would hate it. Tinkering with compensation probably would disrupt the culture that has made it the most successful investment bank in the world.

But how does Blankfein explain to shareholders that since Goldman’s initial public offering in 1999 the $60 billion-plus paid out in employee bonuses exceeds the company’s cumulative net income? And how does he justify past bonuses with the stock trading at levels seen at Goldman’s IPO?

Sandler O’Neill estimates that even in this dismal year Goldman will pay out more than $12.4 billion, or 47% of net revenue, as compensation and benefits. That puts Goldman’s projected 2008 payroll down 40% from $20.2 billion in 2007.

A reasonable haircut? That depends on your point of view. A banker with a bonus half that of last year may see it as a steep cut. But comp and benefits at Goldman accounted for 43% to 48% of net revenue in the previous six years. So a $12.4 billion comp pool is in line with history and still works out to a little less than $420,000 for each employee on the year-end Goldman payroll.

The current crisis gives Blankfein an opportunity to send a strong message to his investors, his employees and the government: it won’t be business as usual at Goldman Sachs.

The best way to do that may be to make a dramatic announcement: Capping the bonus pool and compensation to no more than 35% of net revenue in 2008.

That slashes the per-employee compensation to $308,000. And Goldman’s estimated per-share earnings soar to more than $13 from the $7.70 now projected.

Blankfein could go even further. How about a promise that for the next three years, Goldman will seek to cap comp as a percentage of net revenue at no more than 40%?

Sure, 40% is an arbitrary number, but it probably is a number Goldman can impose on its workers without a revolt.
 
Using Sandler O’Neill’s 2009 projections, that still would allow for a comp pool of almost $13 billion, which works out to $435,000 per employee. And again, all the incremental profitability of $2 billion (pretax) flows to the shareholders.

Of course, these are just games with numbers. Nobody yet knows how bad Goldman’s loss will be in the fourth quarter. And Blankfein’s plans for bonuses remain under wraps.

You can safely bet that many senior Wall Street executives–even after the debacle that has been 2008–will howl and yell at such radical reductions. “Our most important assets go up and down in the elevator every day.” ”People will just leave the business.” “The headhunters will pick off our best people.”

But a pledge to fix compensation for good should make Goldman’s investors happy–as well as Goldman’s employees. That is because happy public shareholders may be the only thing that saves the Goldman “partnership” from the fate of its now extinct brethren.

There is no way around it. The news from Friday was bad. Real bad.

The October jobs report showed rocketing unemployment. General Motors confessed it was on the verge of bankruptcy. And President-elect Obama admitted there was no quick economic fix.  

On CNBC, an assembled jobs panel disintegrated into an orgy of pessimism. “We’re not halfway done.” “There’s really no place to go.” “It’s an accelerator.…The economy is deteriorating beneath our feet.”

This is how the “bunker” mentality takes hold. Fear feeds on itself until investors convince themselves a global recession will last the next five years.

If you are a contrarian, this is exactly the time to consider buying shares. If you are a supercontrarian, you consider buying shares in a company like FedEx.

The shippers like UPS and FedEx are the “canary in the coal mine” for the U.S. economy. The shippers no doubt will suffer from lower volume and pricing pressures as the economy weakens. The only question is how bad will it get?

Here is the good news for the long-term investor. There is so much bad news priced into FedEx shares that they are worth a wager.

On Friday, FedEx closed at $64.58, off 37% from the 52-week high. FedEx trades at about 13 times expected May 2009 earnings, an inexpensive but not dirt-cheap multiple. The broader Standard & Poor’s 500 index trades at about this level.
 
In classic Wall Street jargon, Merrill Lynch explains its “underperform” rating and a $69 price target on FedEx shares. “Our $69 price objective is based on 14x forward P/E multiple on our F2009 EPS estimate of $4.90. We target a 14x multiple, which is within one standard deviation of its 15 year historical average of forward P/E.”

Seems reasonable. But this is Wall Street “recession math.” Conservative, focused on simple P/Es and short-term earnings forecasts.

This is exactly the kind of stuff a long-term investor needs to see beyond. It basically ignores FedEx’s book value–the value of its assets less liabilities. Today, that value stands at almost $49 a share–not too far below where the shares trade.

When a company’s share price approaches its book value, investors are saying they either don’t trust the company’s balance sheet or that they expect no real earnings growth.
 
Unsurprisingly, Goldman Sachs Group and Morgan Stanley trade well below book value. Apple trades at four times book value.

But FedEx is no broker-dealer. It has a rock solid balance sheet–negligible debt and hard assets underneath. And it has enormous earnings potential.

In the U.S., the company basically operates a duopoly with UPS — especially now that DHL is cutting its U.S. operation. Prices for fuel–a huge cost component for FedEx — have plummeted. And FedEx can shrink or expand its operations as well as any company in the world.

A pessimist can paint a scenario where earnings for FedEx don’t increase for many years. But look at the history of FedEx. The company is a survivor.

It was born in the stagflation of the 1970s.

In the October 1987 crash, the shares fell by a third and bounced around, doing little through the recession of 1990-91 until 1992.  Then the shares marched higher, rising more than 10-fold by 2007.

Many investors may not have the patience to wait five years for the stock to come around. And the shares could certainly flatline for a couple of years.

But the smart long-term investor looks at the downside. And even though horrible economic data will pour forth in the next few months, it is hard to see FedEx shares dropping well below book value–global recession or not.

Across America, there was jubilation and dancing in the streets. We have a new prophet. We are set free and ready to follow.

But soon enough we will learn that President-elect Barack Obama himself doesn’t make a new nation. He cannot right every social wrong or work economic miracles.

And he certainly can’t give you everything you want. Even if you wore an “Obama for President” button for the past 15 months.

So it is time to get back to work. And face reality: Without sacrifices from all Americans, Obama won’t matter.

It was an Obama supporter, Warren Buffett, who famously said that “when a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

And so it will probably be for Obama–a charismatic, transcendent leader. The U.S. government is just like a business with very bad economics. And lately, those economics have gone from bad to worse.

Name a crisis and we are in the middle of it. A housing crisis, a banking crisis, a retail crisis, an auto crisis.
 
The word “crisis” is overplayed in our lexicon. But there is no denying GDP contraction or national unemployment that approaches 10 million workers.

This has harsh consequences. Government tax receipts will fall and budget deficits will rise. And Obama will be hard-pressed to come up with the money to finance the change he has promised.

Of course, the U.S. Treasury will continue to print money to hand out to the Chinese and Saudis, but that can only go so far. Otherwise we will have debts we just can’t pay, and inflation we just can’t control.

The money to pay for our way of life must come from the sacrifices of the American people. Like the sacrifice of paying higher gas taxes or working a second job. How about the sacrifice of just living within our means?

Lately, we haven’t been too good at sacrificing anything. For most of this decade, household debt has exceeded GDP. Only $4-a-gallon gas seems to get our blood up. Of course, as soon as the price drops, we forget our addiction.
    
No, sacrifice means that many of the people who put Obama into power–like the labor unions and tort lawyers–may have to renounce large parts of their economic claims. Or at least delay them.

That could mean state and city unions accepting less-generous pensions. Or the UAW making substantial concessions in any Detroit bailout. Or keeping the tort lawyers away from any health-care overhaul.
 
A pipedream?

Perhaps. But the U.S. economy–and by extension–the Obama presidency really can’t afford the price of many of his campaign promises. At least not now.

Sacrifice also means that the folks who didn’t support Obama will have to chip in, too.

Heavy regulation of the banking industry? Sorry, Wall Street. It is inevitable that you will have to pay a price for the failure of self-regulation. Limits on executive pay could be part of the bargain.

Higher taxes for the well-off also will come into the equation. It is undoubtedly bad policy to raise income or capital-gains taxes in a lousy economy, but politics is about trade-offs.

The easy part was electing Obama. The hard part is making him matter.

Which job would you rather have?

That of an information-technology executive developing trading systems for a prestigious Wall Street firm, earning $200,000 a year?

Or a guidance counselor hunting down truants at a rundown New York City public school, earning $60,000 a school year?

Before this year, most of you probably would have chosen the Wall Street job. Not anymore. It is getting harder and harder to have a stable career and healthy retirement in corporate America.

That is why jobs in the public sector–policeman, postman, politician, schoolteacher–and the “defined benefit” pensions that go along with them are looking better and better.

It shouldn’t come as a surprise, but tens of millions of Americans care little for the classic American dream of rising from rags to riches. Above all, they yearn for “economic security.” And for such folks, a federal, state or municipal job or an old-style union job in which 25 or 30 years invested, produces a guaranteed “defined benefit” pension in return is about as good it gets.

Work 9 to 5. Retire at age 50 on a pension. Social Security kicks in at 62. Live comfortably until you die at 85. In effect, you receive 35 years of a government-secured income stream for 30 years of labor.

A New York City police officer can retire on full pension after 20 years. For many officers, that means retirement at age 43.

There is only one problem. We can’t really afford these pensions anymore.

Let’s go to our guidance counselor. Here are the rough economics for his pension:

Let’s assume the pension pays out $50,000 a year. With the 10-year Treasury yielding 4%, that is the equivalent of $1.25 million in savings. Throw in another $20,000 in annual social security payments and that is another $500,000 of equivalent savings.

So, $70,000 a year for the guidance counselor is equivalent to $1.75 million in total savings. Throw in free health care for him and his family and other benefits and that figure is north of $2 million.

Back to our IT executive. Could he put away a couple of million dollars in savings over a 30-year career? Maybe.

But in New York City, he is dealing with a 49% marginal tax rate. And even with a 401(k) match from his employer, it is tough to build even a million bucks in the 401(k), especially if the stock market isn’t rising.

Plus on Wall Street, he could easily get fired. So who gets the better deal? Mr. Wall Street or Mr. Guidance Counselor?

In corporate America, the “defined benefit” plan is a relic. Only 5% of private-sector workers have them today, compared with 60% in 1980. Workers wanted them, but American companies couldn’t afford them.

Apparently, only the government can afford them today.

According to the Bureau of Labor Statistics, 89% of the 20 million state and local government workers had access to retirement plans. And 83% of those were offered a defined-benefit plan.

Where else are defined-benefit plans the rule? Washington, of course. On Capitol Hill, 20 years of office gets you full “defined benefit” pension benefits beginning at age 50.

Many in government may welcome Wall Street’s comeuppance in the Crash of 2008. But that very event now threatens the viability of the entire fat public-sector pension system.

Remember that 4% Treasury yield in the example up top? Use an 8% or 10% assumed return and the pension payouts are almost affordable. But the U.S. stock market has effectively produced a zero return for the past 10 years.

And without decent returns in shares, the large public pension funds like Calpers, the California Public Employee Retirement System, will face big troubles in meeting their obligations.

It all comes full circle. The public-sector employees need a healthy Wall Street. The American dream of “economic security” needs the American dream of going from rags to riches. And our guidance counselor needs the IT executive more than he knows.

Hunter Thompson, “Fear and Loathing in Las Vegas.”
 
10:25 a.m.: On Wall Street, the wave rolls back. My editor summons me to his office. He pesters me to attend the Ackman presentation on Target in midtown. Won’t these activists give up? It’s too cold outside, I mumble. I’ve never actually stepped into a Target. Isn’t it like Costco? Editor appears concerned.
 
11:45 a.m.: Numb from dull Target research reports. Now desperate for any colleague to join me to visit Ackman. No Samoan attorney in sight.
 
12:20 p.m.: Leave WSJ offices. It is cold out. Walk past Century 21. Note absence of usual panhandler. Someone had the good sense to stay home today.
 
12:56 p.m.: CNBC satellite van is on 7th Avenue outside AXA building. Ackman rates a live feed? Maybe GE isn’t that well run, after all.
 
1:01 p.m.: Notice four dozen press badges at registration table. Women’s Wear Daily? Does Target sell clothes?
 
1:11 p.m.: Now this is a cozy auditorium. Soft jazz Muzak. Velour seats. Blue velvet stage curtains.
Lots of starched Wall Street suits milling about. Forced smiles. There must be 300 people here. Is Ackman the only game in town? Guffaws from some lawyers–”I’m doing terrific. Just tuh-riff-ic.” Go ahead, Clarence Darrow, furiously check that BlackBerry all you want–you can’t fool me. There’s Bill Ackman’s father. There’s Ackman himself. Tall. Great hair.
 
1:28 p.m.: Lights dim. Ackman comes on stage. “A TIP for Target Shareholders.” Clever title, plus it’s so warm and cozy in our cabaret.
 
1:30 p.m.: Ackman launches into preamble about how everything is great about Target except that share price–the management, the stores, those great parking lots–and he’s just a regular old 10% shareholder trying to make a great company even greater. Then straight into the detail–and boy, there’s a lot of that. Page after page after page. Give Ackman credit. The guy does his homework.
 
1:40 p.m.: Oh, I see, it’s the old opco/propco soft shoe. You simply take Target’s retail business–the “operating company” that trades at 6 times Ebitda and then spin off its land as a REIT–the “property company” that will trade at 16 times Ebitda. And Target’s share price goes from $40 to $70. Easy peasy.
 
1:45 p.m.-onward: I fade in and out for the next 90 minutes, but Ackman goes on strong. A sip of water here and there. This is no Carl Icahn ramble. Here’s the transaction plan, the E&P purge, the master lease term sheets, store level ROIC calculations, comps with Triple Net Lease REITs. If my eyes were open, they would water.
 
2:03 p.m.: Ackman takes a pot-shot at the U.S. government. Is he saying the Target Land REIT would actually be a better credit than Uncle Sam? I think he is. His arrogance is endearing.
 
2:44 p.m.: He blows his nose straight into the microphone. Some 27-year-old M.B.A. on the phone just lost an eardrum. Ackman is all too human. Apparently, he even shops at Target.
 
2:53 p.m.: Glance at my notes. Clever tax scam. IRS???? Will S&C actually sign off on this? Why would Target want 75-year leases? Aren’t land values falling? Pesky credit issues. Bull market math. Target must hate this guy. But here’s my last scribble–”Very convincing.” Am I convinced or do I just want this to end?
 
3:00 p.m.: Question time. Ackman bats away the concerns. Maybe a bit too eager to show this is no Wall Street hocus pocus like all the CMOs and CDOs that have put our nation into the crapper.
 
3:14 p.m.: Was sold on proposal, but am now reconsidering. He’s going on too long. Didn’t he pile into Borders and follow Eddie Lampert into the Sears real-estate trade? And where did that get him? I silently beg him to leave the stage.
 
3:18 p.m.: Journalist question time. My coat is on. Thumb through the 163-page handout. It’s a beauty. Ackman’s bankers and lawyers clearly have too much time on their hands. Puzzled by page 68. Target REIT is 62nd largest company in the S&P 500 ranked by market cap? Hey, isn’t that where all of Target is ranked today?
 
3:30 p.m.: Outside, sun is shining. Cold is bracing. I call the office. Target stock up 11%. Bill Ackman should be happy. If only that great Target management team would listen to him–there would be finally something for everybody on Wall Street to do.

Is there any doubt the federal government will end up funding a huge Motor City bailout?

There shouldn’t be.

General Motors is reportedly asking for $10 billion in taxpayer money to grease a merger with Chrysler. That is on top of $25 billion in cheap loans just promised by Congress for “technology development.”

Of course there will be some tinkering. A few impassioned speeches on the Senate floor. Some hush money to Ford Motor. But give it a name: General Motors is about to become Government Motors.

The whole package will be promoted as a “winning” deal for America. And certainly, there will be plenty of winners: GM, Chrysler and Ford executives and workers, the UAW, the Big Three’s lenders, dealers, suppliers and customers. Even Cerberus Capital Management, the private-equity shop that stupidly plowed money into Chrysler will end up okay.

There will be only one big loser–and that’s you, the U.S. taxpayer. You will pick up the multibillion-dollar tab for the consolidation of a failed industry that should have consolidated on its own long ago.

Now you may shrug your shoulders, thinking, “We bailed out Wall Street. Why shouldn’t we bail out Detroit?” And, such tit-for-tat logic will be repeated endlessly by politicians and pundits in the coming weeks.

But there are big differences between saving the U.S. banking system and saving Detroit.

The global credit meltdown was a cataclysmic event that spanned months. It threatened to bring down everything.

Detroit’s decline has been a slow-motion car wreck spanning four decades. GM, Ford and Chrysler have been losing domestic market share for years to Toyota Motors, Honda Motors and BMW. Who actually admires Detroit for its car-making prowess?

So, bail out Wall Street and save the global economy. Bail out Detroit and save–well, Detroit.

But a bailout won’t even accomplish that. It will only further delay Detroit’s day of reckoning–and make it more expensive.

In the coming weeks, there will be a barrage of statistics from Washington and Detroit to prove that the Big Three are just “too big to fail.” Here are a couple: A combined GM and Chrysler account for 1% of national GDP. More than two million or 4.5 million (pick your number, I’ve seen both) workers directly or indirectly rely on the U.S. auto industry.

Big companies. Big numbers. It is hard for any politician to say, “So what, let them go bankrupt.”

But the sad reality is that to save Detroit, Washington will have to destroy Detroit.

A merger of GM and Chrysler won’t do away with Detroit’s ever-expanding pension and health-care liabilities or its onerous UAW contracts. And it won’t fix the Big Three’s issues with poor product design or quality control.

The Big Three needs a radical restructuring dictated by the bankruptcy process–or some variation on it–and not a government plan that tinkers with the status quo. So here is a proposal:

Let each of the Big Three do what is in the interest of its shareholders and creditors. Let them try and merge with each other–if they can. Let them each file for bankruptcy-law protection–when or if necessary.

When Chrysler goes bankrupt, let GM or Ford or a foreign rival pick up Chrysler’s assets on the cheap. If GM or Ford head into bankruptcy, let the government step in–but only on punitive terms.

Punitive terms? Reduce all management, worker and retiree pension and health-care benefits. Remove all union contracts. Replace senior management and the boards. Haircut the creditors and recapitalize the companies.

This is the radical direction Detroit has to go in if it ever hopes to compete with Toyota or Honda.

Unrealistic? Perhaps. It is an awfully unfair fight when the armies of politicians and business and union lobbyists stand against the lone taxpayer.

Dear Wall Street CEOs,

The Wall Street 2008 bonus season will soon be upon you. And as the lucky few CEOs left, you will face a historic choice. Do you pay your people as if 2008 were just another crummy year, expecting Wall Street compensation to eventually recover?

Or do you pay them as if the Panic of 2008 has irretrievably damaged the industry? That would mean paying your people as little as you have to, and sticking to it.

It isn’t an easy choice. And whichever you decide may define the future of your firm and of Wall Street itself.

Let us start with the obvious. Forget about paying yourself anything this year. Hank Paulson effectively set your 2008 bonus to zero when he offered you government money you couldn’t refuse. Sure, you could go ahead and pay yourself $5 million, but that is spare change in your world and hardly worth five years of various Senate and House committee subpoenas.

Your COO, CFO and other named executives also should accept the bonus goose egg. In fact, they should have already volunteered that as their fate. They threw their lot in with you and prospered mightily. It is only right that they too take a little pain. So, yes, zeroes all around. You can handle it.

Now to your people.

Here is a question: Whose interests are best served by the Wall Street bonus system? Your staff or your shareholders?

For years you may have thought both groups were well served. Share prices of the brokerage houses soared as did banker compensation. But do you still believe that today? Even after billions of dollars in risky credit bets wiped out most of Wall Street’s shareholder capital and nearly the entire U.S. financial system?

Not that the bonus system was necessarily a bad idea. It enabled Wall Street to attract and retain talent. But like most good ideas involving money, it got out of control. The lure of gambling for bonuses won out over prudent risk-taking. And bonuses became a spoils system, where the kings of Wall Street–that would be you–divvied up money to loyal minions and serfs.

It was a convenient arrangement–as each king told his shareholders that “we need to pay up to retain talent” to justify the bonuses.

Didn’t it strike you as odd that all the Wall Street firms targeted a compensation ratio at 50% of revenue? Or that the 50% target didn’t change even with the staggering growth in revenue and trading capital at risk? In hindsight it all seems so clear.

So let’s look forward and not back. This year you could keep the bonus system intact and simply pay much-reduced bonuses. This is essentially a trade with shareholders: Pay your people the last marginal dollar before your shareholders revolt.

That means bonuses in the ballpark of those paid out in the market doldrums of 2002 or 2003. Or a bit lower. Then you get more bang for the buck by firing anyone and everyone you can–as Goldman is in the process of doing.

Subtract out guaranteed payments and a few super-size bonuses to retain “franchise” players. And then take 50% off last year’s bonuses. And you probably have pulled it off.

A managing director who last year earned $2.5 million in total compensation would this year get $1 million to $1.2 million. The message for your people? Nobody’s happy. Be thankful you have a job. Better times ahead.

Or you can go with a more radical alternative–recognize that Wall Street has changed for good and pay your people as little as you have to.

Here it is a similar dynamic to the first approach but turned on its head: You figure out how little bonus money you can pay before employees revolt and walk out the door. That would mean about $600,000 to $750,000 in compensation for a managing director.

Of course, you also must fire anyone and everyone you can. Then you focus on your “franchise” players and buy them off with promises of better compensation in better times.

Finally, you assure the rank and file of your steadfast commitment to the “investment banking business.” With the employees relieved by job security, you can then hack away mercilessly at their bonuses.

The message for your people? Nobody’s happy. Times have changed. A company run first and foremost for its shareholders will be best for its employees in the long run.

This choice, of course, may be painful. It forces you to accept that the old ways of Wall Street, like the old bonus system, are gone for good. And it forces you to articulate to your people how the new Wall Street will mean a lot less money for them. But hey, you and they now work at banks, not broker-dealers.

It is scary stuff. That is why most of you probably will go for some variation on “crummy bonus year” theme.

But before making a decision ask yourself one final question: As CEO, who do you actually serve? Your staff or your shareholders?

Welcome to the Big Apple Earnings Circus! Here Apple shareholders can enjoy a heart-stopping performance fraught with wild share-price swings, death-defying rumors and lots of speculator clowns.

Of course, it shouldn’t be so frenetic under the Big Top. By nearly any metric, Apple remains an exemplary business and solid investment. The company repeatedly has underpromised and overdelivered. By Apple’s historic measures, it trades at a very low price.

But Apple’s stock is, and will remain, a speculator’s delight. That is because today’s stock market has become an emotional, irrational sideshow. Its crowd is traders, not investors.

Just look at Apple’s volatility in the past 24 months. It traded for $80 a share at the end of 2006.  By December 2007, $200 a share. Two months later, back down to $120. By May, back up to $190. Tuesday, back down to $90. Today, it is at about $97.

Apple management is responsible for some of this volatility. The company is notorious for sandbagging its financial forecasts–and for shrouding its strategy and product launches in secrecy.

Creating even more volatility is the company’s unrevealing disclosure about the health of CEO Steve Jobs. His surprise appearance on Tuesday’s earnings call was enough to produce a frisson of excitement among investors.

But management games don’t fully explain the stock action. There is more at work.

Like lots of day traders and hedge funds. Apple’s stock is a big, liquid stock that combines heavy volume and high volatility. The fast money crowd loves a super-growth technology stock with highly volatile prospects. Just like Apple–and Research in Motion. They rise and fall like kites in a hurricane.

And good trading vehicles make for higher potential profits. Consider that about 40 million shares, or roughly 5% of its share float, trade each day. By contrast, about 1% of Microsoft’s float and 2.5% of Google’s float trade each day. Before results Tuesday, almost 10% of Apple’s shares traded.

That is why Apple’s earnings announcements are such crazy affairs. Apple’s share price is built on analyst models, fine-tuned to dozens and dozens of assumptions about the future, be it number of iTunes downloads or iPhone market share in 2012.

Beat expectations and an Apple investor can justify a $200 or $250 share price. Miss them badly and $75 seems a full price.
 
It is that uncertainty over outcomes that feeds investor anxiousness. It drove Apple’s share price down 7% during the day, then reversed 14% higher in after hours trading.
 
But why should there be such enormous anxiety? Going into earnings, Apple was an $80 billion global technology giant with a killer product portfolio. It has no debt, $25 billion of cash and trades at about 10 times expected earnings.

In the end, Apple’s results were mostly a blowout. Its shipments of  iPhones actually surpassed those of industry leader RIM, maker of the BlackBerry.

But traders were quick to focus on uncertainties–like Apple’s typically tepid forecast. They also fretted about the apocalyptic global recession. But was that new news?

Which is exactly the problem–with Apple shares and the stock market today. There seems to be lots of emotion and day-to-day speculation, but very little thoughtful long-term investing.

Tuesday, Jim Cramer threw in the investing towel, pronouncing, “To buy and hold is an irresponsible strategy.”

Isn’t Apple a refutation of that short-termist credo? If you bought Apple stock five years ago, you are up tenfold on your money.
 
But most market mavens today have a time horizon of five hours, not five years. And they are too busy running for the hills to form sound judgments on good companies with good businesses that produce good profits.

That’s okay. It leaves more ripe fruit like Apple for the rest of us.

You would think we would learn. But we don’t.

We tirelessly follow Wall Street prophets such as talk-show host Jim Cramer, Internet analyst Mary Meeker and investor Bill Miller. At least until we discover that they, too, get lost in the wilderness.

And we learn nothing.

The latest of these prophets is Arjun N. Murti, an influential Goldman Sachs oil analyst, who has marched his bullish oil followers straight off a cliff.

You may not have heard much of Murti, a publicity-shy 39-year-old from New Jersey. He leads the Goldman Sachs Americas Energy Research Team and has been researching energy stocks since he was 23.

Along with OPEC, T. Boone Pickens and some pipeline-destroying Nigerian rebels, Murti moves the oil markets. “Even if you disagree with their views, the problem is that Goldman does carry such credibility,” said one energy trader to the New York Times in May. “There are a lot of traders who are going to buy based on their reports.”

In 2004, Murti offered up his “Super-Spike” theory–saying future price spikes in oil are inevitable. Murti’s argument was simple: The world is running out of oil, and its expanding economy would continue to push prices higher. Unpredictable geopolitical forces, meanwhile, would create the “super” in the Super-Spike.

On March 30, 2005, with oil trading at $54, he laid down a controversial call. A barrel of oil could fetch $105 by 2009.

As prices rose over the ensuing three years, Murti’s reputation grew in kind. Barron’s dubbed him “Mr. Crude Oil.”

Then came the next big shocker. On May 6, 2008, Murti predicted $150 to $200 oil within six to 24 months. Prices dutifully jumped. Then they rose even higher, peaking at more than $147 on July 11.

Later that month, of course, it all came apart. The prospects for strong global economic growth were fading. Speculators and leveraged traders turned tail. Fast. “Super Dips” replaced “Super Spikes.”

By mid-September, Murti was in full retreat. He cut his 2009 oil price target to $110 from $140. A week ago, he was back at it. Goldman cut its 2009 oil price target to $75 from $110.

Apparently, it might go even lower. Goldman’s “worst case” scenario is $50 a barrel. That is roughly the price at which oil was trading on March 30, 2005, when Murti made his $105 prediction.

In a phone interview, Murti was reluctant to carry the badge of the prophet. He viewed himself as just a regular analyst serving sophisticated hedge fund and pension fund clients.

Indeed, Murti’s reports are full of the complex math and cautionary language typical of post-Spitzer Wall Street. There are “bands” and “ranges” for prices, “multiple economic scenarios” and “cyclical” vs. “secular” trends. Lots of details.

But whether Murti likes it or not, much of Wall Street–traders, retail investors and the media–has had little interest in the details. They only want the predictions.

In fact, Murti continues to predict higher oil prices for the long term, even if his earlier 2009 predictions look off. “My core clients never viewed me as a great market seer but as someone who is willing to stand by his convictions,” he says. “They respect the fact that I can be wrong.”

Right or wrong, Wall Street needs its prophets. They perpetuate the myth that there is some way–or some one–who can beat the market.

Perhaps Voltaire put it best: “If God did not exist, it would be necessary to invent him.”