CHICKEN LITTLE SAYS, "THE DOLLAR IS FALLING, THE DOLLAR IS FALLING, THE DOLLAR IS FALLING"

While Chicken Little is crying about the falling dollar, the news media is playing the part of the Little Boy Who Cried Wolf. While the Chicken is squawking and the media is crying, the real Big Bad Wolf is about to eat Little Red Riding Hood. What is moving this market? Fear is the answer. Fear of a confrontation with Iran -- Fear of a democratically controlled House, Senate and Executive Branch.

One of the false beliefs held by many is that the falling dollar is making the price of oil go up. The price of oil is going up because the demand for oil is strong. It has nothing to do with the price of the dollar. The price of oil has gone up in every country. A major factor in the demand for oil is geopolitical risk. The "Iran situation" is coming to a head. Bush is determined to "solve" the Iranian problem during his term of office. Bush is threatening to put the "big squeeze" on the Iranian economy. If he successfully cuts off the Iranian central bank from the rest of the world, the pressure for a response from Iran will be great. The leaders will be forced to meet at the negotiating table, suffer a serious economic depression or strike back with "whatever". The option of cutting off oil is not a good option for Iran but I do not believe Iran should count on Russian or China or any other nation to force the USA to back off.

Another false belief is that the falling dollar is making the price of stocks fall. The truth is that there is no strong correlation between stock prices and the price of the dollar. To the extent that there is a connection, the fact that the dollar is below the bottom made during the mid 90's mid cycle correction means that the low dollar supports higher future prices as it did in that cycle. The factual relevant correlation is that the weak dollar has made US goods and services very attractively priced to the countries that have strong currencies. US exports are growing by leaps and bounds and foreign buyers are coming to America. While Chicken Little squawks, there is world wide economic strength mixed in with the weakness in the US housing market. Here again, the housing market gets a lot of exaggerated news coverage while the pending confrontation in Iran gets little notice. There is the potential for a lot of trouble ahead but the falling dollar is a symptom of the problem not the cause.

WHY HAVE STOCKS FALLEN?

Since the price stocks is nothing but the discounted future value, what has happened that makes the future less bright? The democratic enthusiasm for the most liberal of candidates and the bill passed by the democratic congress yesterday tells much of the the story. The congress passed a bill that would increase the taxes paid by the oil companies by 18 Billion Dollars. This industry paid 27.5 Billion in taxes last year but tax collectors always want more, more, more. The congress knows that more than half the American people will fall for the ruse that these taxes would be paid by the oil companies. You and I know that these taxes would, in the long run, be paid by consumers, and in the short run by the share holders, but we are in the minority.

If we were only talking about oil, the problem would not be big, however, the democrats (presidential nominees and current congress) propose tax increases and hidden tax increases on the great majority of the productive assets of the USA. It is a fundamental law of economics that the more you tax something the less of you have. The increases in taxes on production and profits will mean there will be less production and less profits. The current value of assets must fall if the net profit is to be reduced by higher taxes. Finally, if there is less production, you get back into another classic fundamental economic problem which is too much money chasing fewer goods; inflation. I said in the short run, the taxes would be paid by the shareholders. In the longer term, the companies would cut back on production just enough to raise prices just enough to get the companies back to a fair rate of return. Again, the consumer would ultimately pay the higher taxes.

HAS THE ELECTORATE REALLY MOVED THREE STEPS TO THE LEFT? FOR A LONG TIME LIBERALS HAVE FAILED TO TAKE THE WHITE HOUSE!

The partial record of liberals running for President follows:

1952 Adlai Stevenson
1956 Adlai Stevenson
1968 Hubert Humphrey
1972 George McGovern
1980 Ted Kennedy
1984 George McGovern
1988 Michael Dukakis
2000 Al Gore
2004 John Kerry

The democrats who won:

1960 John Kennedy
1964 Lyndon Johnson
1976 Jimmy Carter
1992 Bill Clinton
1996 Bill Clinton

The brief Kennedy-Johnson story is that unlike today's democrats Kennedy was a strong defense, low tax democrat who had the support of southern segregationist. Johnson was one of the most liberal senders of all time but he was elected only after serving the remainder of the Kennedy term. The point of this story is that the only democrats to have won the presidency in more than 30 years have been or have run as "southern centrist". Gore, a southern centrist who was gradually pulled over to the liberal side, won elections to the Senate and to the Vice-Presidency but lost when he ran for president as a liberal.

On the republican side, the winners were:

1952 Dwight Eisenhower
1956 Dwight Eisenhower
1968 Richard Nixon
1972 Richard Nixon
1980 Ronald Reagan
1984 Ronald Reagan
1988 George Bush
2000 George Bush 43
2004 George Bush 43

While the only democrat to win two terms was Bill Clinton, who ran to the right of Bob Dole in 1996, republicans had 4 presidents to serve two terms. Reagan was the only one to run and govern as a true conservative.

WHERE IS THE CENTER OF THE BELL CURVE OF THE ELECTORATE?

The center of the curve has moved one step to the left. George Bush barely won his campaign as a compassionate conservative against Gore, the southern centrist who had moved to the left. George Bush governed like a left wing democrat by passing big spending bills for education and prescription drugs, by offering a middle of the road proposal in regard to immigration, while still protecting his "rich" friends on Wall Street. Still, he only narrowly beat John Kerry who ran about half way between where Obama is and the center. The closeness of the last several elections shows that the parties have been putting up candidates that attract "middle voters". Again, this indicates that the middle has shifted to the left as we all know that candidates Gore and Kerry were lefties who came close against a right hander who swerved left.

Since Obama is far to the left, the question, will Obama win?, is a question of just how skewed the bell curve is. We know that McCain is to the left of all the other republican candidates and we know that Obama has the most liberal voting record in the Senate, so, it would seem that McCain will win the greater share of the "middle" voters. The problem for McCain is that there is not much middle left. There are always a certain percentage of voters who will vote democratic no matter and another percentage that will always vote republican.

The Iraq war and the big mistake of republicans in regard to immigration has energized the left to the point that there is not a lot of "middle" to fight over. George Bush won 40% of Hispanic voters when he ran for governor of Texas and his percentage went up in each succeeding election, but in 2006, Republicans were soundly defeated after cutting off "one arm of the body of the republican party". Yes, both the republican and democratic parties look like ugly reincarnations of Frankenstein. The democrats have a union arm, a trial lawyer arm, an atheist leg, a black leg, etc. Neither democrats or republicans can win as "purest". To quote William F. Buckley Jr., "I believe that compromise is genuinely necessary to sustain social relationships..."

McCAIN WALKED INTO THE ELEVATOR AND TURNED AROUND!

A few post ago, I wrote about "crowd psychology". We have all seen the western movie lynch mob. Good people often get caught living their lives based on "group dynamics". We know that the psychology of the crowd pushes stocks too low and too high. The psychology of crowds is a huge factor in politics, people desperately want to be among the "in-crowd".

If you remember the old elevator gage on Candid Camera, you know a lot about "group dynamics". Put a bunch of people on an elevator and have them all face the back, the elevator stops at the next floor and no one gets off but a new person steps on. The new person almost always can not stand to be the lone guy facing the "wrong" direction. If he starts out facing the front and if at the next stop the next person also faces the back, the odd man is psychologically compelled to turn around. It is very difficult to go against the crowd.

On both sides of the political isle each candidate is pushed very hard to say, "me too". During this campaign, all the democrats faced the back of the liberal elevator and all the republicans faced the back of the conservative elevator, with the one exception of McCain. Obama, for example, has frustrated the heck out of Hillary by being quick to say "me too". Obama and Hillary are for and against all the same stuff. The democratic race came down to a personality contest because the differences on policies were sliced very thin.

After McCain was shot down over Vietnam, he survived 5 years of Hell. It does not matter if Vietnam was the right war or the wrong war, McCain is owed a debt of gratitude by all Americans. While his service is to be honored, it is not a ticket to the Presidency even though it does show his resolve to do what is right.

The amazing thing that happened recently is that McCain survived the republican nomination process. A lot of things had to fall into place and he had to be lucky but he survived, despite the fact that in a number of incidences he refused to face the back of the elevator. McCain has gone against the crowd time and time again. He was a member of the gang of 14 who forced the vote on supreme court justices, he was a partner with Ted Kennedy on education and immigration reforms, he fought and voted against the "Bush Tax Cuts", he joined with Lieberman to propose a cap and trade environmental law, and, he joined with Senator Fiengold to pass campaign finance restrictions. While I generally disagree with him on the bulk of these matters, I respect his willingness to turn around to face the front, to do what he thinks is right no matter what the crowd thinks. Regardless of McCain's position on the issues mentioned, he is far, far to the right of Obama.

The key point is that "pure" liberals will vote for Obama and "pure" conservatives for McCain with the fight being for those in the ambivalent middle. The middle includes animals of all stripes, including economic conservatives who are very concerned about the war and Hispanic economic conservatives who feel betrayed by republicans. In McCain, republicans will nominate the candidate that has the best chance of winning the "terror-war" debate and he will regain some of the Hispanic support lost in 2006.

I have to run. But the market wants an answer to the Iranian question and to the political question. I believe the odds of a win by McCain are better than 55%. I am in the great minority on that belief. The success or failure in Iran and Iraq will influence the success or failure of McCain. The push of the FOMC to lower short rates at least one more time will also benefit McCain. A strong economy and foreign policy success will lead to a solution to the markets concern about "tax and spend, tax and spend.

The time to add money to stock accounts is when prices are low. Now is the time to dig deep!