Thursday, November 08, 2007


Like so many things, the stench of fear is a two sided coin. The markets have taken the US dollar to the wood shed and beaten it black and blue. IS IT TIME TO SELL?

If you bought a house and watched it fall from $147,000 dollars in value to $78,000 in three years and if the fundamentals told you that the bottom was near, would you sell in a panic? Common sense says that the lower the price goes, the better the time to buy.

The next several years will be a lot of fun for investors who hang tough right now. The situation is the same as my experience in 1984. At the time, the smell of fear was pounding the bond market. The public desperately sold out of anything of long duration. For several months, I encouraged my clients to hold on to their bonds and to buy more if they could. It took mental toughness to hold on because it seemed that the rest of the world knew that bond prices were going lower. The rest of the story is that the market turned and the bonds appreciated 60% cash on cash and 600% for my most leveraged accounts in about two years time. All the while these unwanted bonds paid 13.75% on invested principle.


The self imposed congressional deadline is 8 days away. The markets despise uncertainty. There was a time when I thought grand compromises might be made for the good of the country. It appears that the congress is not ready to do what needs to be done. The second best possible result from congress would be a big nothing. With only 8 days remaining with all 12 appropriations bills remaining, the odds are growing that none of the big democratic plans will be passed. On the other hand, powerful people are playing a huge game of chicken. Potentially disastrous threats are being made by leaders on both sides of the issues. Republicans seem to be willing to let the current AMT tax law stay in force rather than pass other significant tax increases. Since the AMT was originally passed by democrats and since a vote is not required to let the law stand as is, republicans are in essence willing to let democrats boil in their own stew. On the democratic side, some of the most powerful threats have been made by Harry Reid. By simply, forcing the congress to come back to Washington after the Thanksgiving Holiday break, Harry is threatening to leave the markets and the nation in limbo. Charlie Rangel has suggested "a train wreck" by forcing republicans to filibuster a bad AMT bill. Charlie believes the voters would penalize the republicans.


Ever so many years, a campaign gets started to throw out all the incumbents. I believe such a movement is ready to gain traction if the current congress cannot reach a budget compromise. Can you imagine the president and board of directors of your company still working on the company budget 6 weeks into the new year? Heads would roll!


The markets are being hit hard by uncertainty but the hit to the markets is adding pressure for action. Trial balloons have been floated and popped again and again. The battle is joined between those who believe government holds the answers to the nations problems and those who believe big government is oppressive. This war will be fought throughout the coming election year. The current battle is a standoff. It is time for congress to pass a middle of the road budget and get out of town.


Even the 2 and one half trillion dollar budget of the US government is small potatoes relative to the world market. Fundamental economic laws are more than 100 times more powerful than any law that congress might pass. US unions have lobbied congress like crazy to try to stop the march of free trade. The Peru trade bill is likely to pass. Folks who understand that free trade is good, such as Hillary Clinton, have found ways to be against free trade while being for free trade. Hillary has said that we need to have a strategic pause. In other words, she is not for free trade agreements during the campaign but after the campaign is over.

Republicans continue to use immigration as a battering ram. We all know that our country would be nothing without immigration. Unfortunately, it is human nature to want to keep the spoils of being the first in country. In wave after wave of immigration, the new guys have been seen as "johnny come lately low class aliens".

In all these issues, the right answer will be found in the free exercise of ones own self interest as dictated by the laws of economics. Free trade and immigration are public goods, not everyone benefits from every free transaction but the greater good is served when mandates can be kept to a minimum. It is in our best interest to pass modest and reasonable regulations so that smooth transitions can be made, if congress will avoid mandates, such as CAFE regulations, individual decisions will lead to the common good of all.

The smell of fear is an opportunity. Don Hayes just threw his last 8% of funds on the market. Company insiders are buying stocks. The smell of fear is in the air but the smart money is buying US growth.