Had a conversation the other day with a bright, young, passionate Central Valley California conservative. A person who would all-day-long profess himself a capitalist, who, with table-pounding zeal argues for smaller government and lower taxes, who tea-partys like it’s 1999.

There happened to be a TV in the room channeled to a cable news station, its regular schedule preempted in favor of the Goldman Sachs hearing. I of course have my own observation regarding the happenings on Cannibal Hill, but I’ll reserve that for another day. For now I’ll finish my thought regarding my fanatically (and proud of it) far-to-the-right young friend, for I believe he embodies the hyperbole-induced confusion afflicting many an American today…

In some cases words clearly speak louder than actions – like when we’re talking government policy. In the case of my self-professed right-winger, he’ll pledge his allegiance to a capitalist, business-friendly ideal in one breath (and no doubt vote his party line) – then scream for more government regulation in the next. Oh my, the paradox…

I’ll quote (virtually verbatim) my young thinks-he’s-a-Reaganite as he nearly hyper-extended his right elbow while thrusting his index finger toward the television: “We need to clean house, we need to get rid of everyone in Washington and start over, we need smaller government, lower taxes – and those Wall Street bastards need to fry. We’re in this mess because we got rid of regulation. We just let them run free and do whatever the hell they wanted.”

Now I was right with my friend until he got to the “we’re in this mess because” part. Absolutely, if Uncle Sam can prove that Goldman’s execs acted in an unethical and unlawful manner, while the electric chair (“fry”) might be a tad extreme, I’d say they should be prosecuted to the fullest extent of the law (the scary thing however is that the politicians, desperate to repair their own ailing reputations, are dying to toss a witch or two (deserving or otherwise) into the Potomac to see if they float).

But here’s my point: You and I must understand that when we ask Government to (attempt to) prevent future crises by gaining control (tighter regs) over industry, we are circumventing the free-market. And make no mistake my friends, they can regulate till the cows come home and we will still experience future crises. I for one would rather they be caused by excessive capitalism (if that’s even possible), as opposed to excessive government intervention (crises inevitabilis).

On a final note; to the extent the Goldman hearing contributed to last Friday’s downward move, it wasn’t nearly as much about the alleged wrong-doings (if they’re guilty, we’ll all [even Wall Street] benefit from a house-cleaning) as it was – to my point – about Washington’s case-building for a slew of new regs. And while no one likes 150 point down days, the fact that the market is so quick to voice its displeasure is a wonderful, send-a-signal, free-market sort of thing… So don’t sweat it…

Have a great day!
Marty

Last week I received an email invitation to an on-line conference where, among other things, the presenter will divulge “the exact path the economy is going to take as predicted by centuries of studying patterns.” I’m assuming, unless the dude’s a vampire, that he meant to say “studying centuries of patterns.” Yet even that would take an awfully long time, don’t you think? Oh, and he added; “this is scary accurate and I wish it were better news”.

Now I’ll sometimes (rarely actually) overlook the I-can-predict-the-future line (even credible characters have egos). But when he threw in you-need-me-cause-it’s-bad-news, my left pinky found the shift key, while my right synchronistically tapped delete.

You see folks, whether it was Ravi Batra, author of the bazillion-selling late ‘80s book “The Great Depression of 1990” (you know what the economy did during the ‘90s); Harry Dent, author of the then hugely popular ‘90s book “The Roaring 2000s” and the follow up “The Next Great Bubble Boom” (he had the Dow at something like 40,000 by 2009); NYU prof Nouriel Roubini (I have a video of him predicting near-term doom for the market 5,000 Dow points ago), the Amway Emerald (really rich guy) (name escapes me) turned financial guru, or the above referenced business consultant, the market makes absolute fools out of the prognosticators time and time again.

Now understand, these guys aren’t your modern-day Nostradamuses, Edgar Cayces, or Jimmy the Greeks, nor (as far as I know) do they consult the Mayan Calendar (although at least one of these geniuses is currently predicting the end of the financial world as we know it). Nope, these prognosticative pied pipers make their cases statistically and methodically – and they sound so dang smart doing it! But PhDs, penmanship, multi-level marketing success and public speaking prowess aside, while they may indeed guess right on (rare) occasion, I’ll bet ya a buck that your neighborhood Madam Sophia sports every bit the accuracy rating.

The way I see it, people are, by and large, desperately uncomfortable with uncertainty. And therefore the siren song of the soothsayer can be extremely difficult to resist. But here’s the thing folks, uncertainty, when it comes to investing, is a beautiful, in fact essential thing – for every buyer there has to be a seller. And the ones who get it, the ones who embrace uncertainty, always invest accordingly. I.e., the enlightened youngster loads up on equities, for she understands that owning businesses offers the greatest opportunity – and her time horizon offers her the luxury of riding out the volatility. The erudite elder underweights equities in favor of fixed income, for he understands that he may not have enough time on his horizon to weather the inevitable storms to come. The storms that tomorrow’s fortune-tellers will no doubt parlay into personal fortunes.

Knowing (per last week’s commentary) that emotion-inspired investment decisions typically undermine your long-term objectives, my advice would be that the moment you hear (or read) someone make a global market or economic prediction (I have no problem with assumptions related to given sectors) be the moment you change the channel, turn the page, or click the X. I’m telling you folks, he’s either attempting to sway the market, market his wares, or, scariest of all, profoundly diluted and believes he can foretell the future.

In the immortal words of Lao Tsu:

“Those who have knowledge, don’t predict. Those who predict, don’t have knowledge”

Have a great day!
Marty

Per my experiences with clients during the “worst recession since the Great Depression”, the tech-bubble bear market of ’00 – ‘03, the brief yet dramatic 20% decline in the fall of ’98, the market setbacks of ’94 and ’90, the October 1987 crash, the too many to remember 10% corrections, as well as the rallies/bull markets that have occupied my now 26-year tenure as an investment consultant, I have come to the conclusion (slow learner) that one of the supposed tenets of successful long-term investing is so obviously unrealistic and so embarrassingly contrary to what I’ve been sermonizing for so many years, that I must here beg your forgiveness.

And I must ask you to please cease any feeble attempts toward achieving what I have erroneously (albeit innocently) presented as an essential key to reaching your investment goals. For you stand not a snowball’s chance in hell of ever “taking the emotion out of investing”. Yes, this is my epiphany; that virtually everyone (save for the rare enlightened soul) will forever find in themselves an emotional attachment to their portfolios.

Thus, going forward, when on the topic of investing psychology, rather than wasting space on the faulty notion that you must emulate Mr. Spock if you hope to succeed, we’ll address the emotions of investing in the context of approaching your money in a way that supports your ultimate objectives.

Oh and by the way, if you’re thinking you may in fact be one of those “rare enlightened souls” (and assuming you don’t hail from the planet Vulcan), simply ask yourself the following:

On days the Dow is up triple digits (like last Wednesday) do I feel good, secure, etc. And when the index takes a triple-digit hit (like last Friday) do I feel the least bit anxious, insecure, etc?

Yes my friend, you indeed possess an emotional attachment to your money… And alas, your future will abound with triple-digit moves in both directions…

In setting the stage for future investing-psychology homilies, I’ll make the following observation:

Be it fear; resulting in the sale of stocks (or the refusal to buy back to the target allocation) when a bear is too much to bear – or be it greed; resulting in the buying of stocks (or the refusal to sell back to the target allocation) when the market’s on the rise; investing mistakes are generally, if not entirely, the results of emotionally-driven investment decisions.

A year ago, when the world was coming to an end, we were net buyers of stocks – not because we knew the market had bottomed, but because many of our clients were underweight relative to their targets. Today, after (during) an epic rebound, we’re net sellers – not because we think the rally’s over, but because many of our clients are now overweight relative to their targets. As you might imagine, those who allowed their emotions to do their bidding a year ago, and refused to rebalance, underperformed those who followed their plan…

A Quick Q and A
The following are a few questions I’ve been asked recently, along with my answers. I’m guessing some or all of these have crossed your mind as well.

Q: What do you think about all these predictions that gold is going to 2,000 per ounce?
A: I think the predictors own gold and are praying like crazy.

Q: Some experts say we’re experiencing nothing more than a bear market rally and that we’re doomed to re-visit last year’s lows. What do you think?
A: I think they missed the rally (or are short the market) and are praying like crazy.

Q: Some experts say we’re in a new bull market and that we’ll be back to the old highs and beyond in the not-too-distant future. What do you think?
A: I think they’re fully invested and praying like crazy.

Q: What do you think of the notion that interest rates will be on the rise in the near future?
A: They’re lower than they’ve ever been, the economy’s growing and Uncle Sam’s a spending. I would therefore agree that rates will rise. The nearness however would be the question. Also, those promoting this notion are largely out of the bond market and plan to get back in when rates are higher, and are praying like crazy.

Q: What should I do with my money in light of higher taxes, higher interest rates and the effects of healthcare reform just around the corner?
A: Uh, well, make sure you have sufficient cash on hand for near-term expenses and emergencies. Make sure your long-term portfolio’s exposure to stocks is globally diversified and consistent with your age and personality. Then, when the market rises (it’s inevitable), allow your advisor to sell the amount above your target allocation at prescribed intervals (sell high), and when the market falls (it’s inevitable), allow your advisor to buy enough to get back to your target allocation (buy low)… And pray like crazy (just kidding)…

Q: Where do you think the market will end this year?
A: Hmm… let me think, I’d say it’ll either be higher, lower or about where it is right now.

Have a nice day!
Marty

P.s. The Dow closed at 1,134.61 on August 1, 1984, the day I began my career. That’s 10,000 points ago, in spite of all that stuff I mentioned in the first paragraph. Amazing!

Is this seven month stock market rally the real deal? Does Dow 10,000 reflect improved corporate earnings, a rebounding economy, record low interest rates and trillions of sideline cash? Or, is it no more legitimate than the current homerun record?

The doubters tell us that the market’s recent gains result from nothing more than some misplaced exuberance (in the wake of the Fed injecting the financial sector with what amounted to a record dose of monetary steroids). They argue that corporate earnings have thus far come entirely from cost cutting, that the consumer’s over-leveraged, that the current administration is hell-bent on punishing corporate America, and if you’re naïve enough to believe a new bull market is under way, you probably believe a grown man can “naturally” gain thirty pounds of pure muscle and jump two hat sizes in a year (I know, he’s been working out really hard).

While the believers agree that corporate earnings to this point are indeed the result of heavy cost cutting, and that the Fed’s been very accommodative, they say “well duh – we’re in a recession stupid”. They argue that when the economy comes back (in spite of Washington) these leaner companies will continue to blow away earnings expectations, keeping this rally alive well into 2010. And granted, there is a $400 billion “stimulus” injection coming next year – but you should think of it as a healthy energizer, like a B12 shot, not a steroid.

So whom do you believe, the pessimists or the pollyannas? I’d say either, neither or both. It ultimately doesn’t matter because the money you and I have in the market is our long-term money, right? A couple weeks ago I tapped the archives and sent you an excerpt that listed 1.2 crises per year for the 24 years ending July 2008. What I didn’t share was that when I started my career back on August 1, 1984, the day after my 12th birthday (give or take), the Dow was at 1,135. Need I say more?

Well yes, I need say more. Why? Because what the market does today and tomorrow (now let’s be honest) has a direct impact on your mood. I can type till I’m blue in the fingers and you’re still going to feel good when your portfolio’s up and not so good when it’s down. Therefore, only because I care, I get to spend a little time (happily by the way) each week helping you keep things in their proper perspective.

And today’s hullabaloo that needs perspectifying is the declining U.S. Dollar. After rising briefly last fall, the good old greenback has been under intense pressure ever since. And according to more than a few “experts”, if the dollar doesn’t receive some serious attention soon, the U.S. will see the end of its economic dominance on the planet earth.

The funny thing is, while the dollar sports a rep worse than a batting champ with a dirty specimen, the U.S. stock market’s been getting more love than Tiger Woods. In fact there clearly exists a negative correlation between the two (at this moment) – on days when the dollar declines, stocks rally – on days when the dollar rallies, stocks decline.

So if a weak dollar is so bad, why are stocks doing so good?

To keep it brief, I’ll set the stage for my answer by bullet-pointing the pros and cons of a falling dollar…

Pros
• A weak dollar makes U.S. goods cheaper for foreign customers. I.e., it’s great for U.S. exporters and their stock prices. Something like 40% of the average S&P 500 company’s business (66% for the average tech company) comes from overseas. It’s therefore good news for our trade deficit as well.
• A weak dollar means foreigners flock to the U.S., since their foreign buck goes further when the dollar’s down. This bodes very well for our travel destinations (theme parks, national parks, etc.) as well as our hotel, restaurant and rental car businesses.
• A weak dollar means higher commodity prices – which under normal conditions is called inflation (usually a bad thing), but it’s called reflation (a good thing) when it immediately follows a period of deflation (like now). Got it?
• A weak dollar increases the at-home value of foreign securities. I.e., if one Euro was worth a buck twenty when you originally bought your Euro-focused mutual fund, and one Euro now fetches a buck fifty, you’ve just made a handsome profit without the fund’s holdings moving a dime.

Cons
• A weak dollar is inflation by definition (everything priced in dollars, like gold and oil, goes up). When the dollar weakens, the things we buy from foreigners (what don’t we buy from foreigners?) become more expensive.
• Since a weak dollar means higher prices for foreign goods, it spells trouble for foreign exporters who do their business in the U.S. (offsetting the aforementioned advantage of your “Euro-focused” mutual fund).
• Since a weak dollar means trouble for foreign exporters (as their revenues decline), if it goes too far or lasts too long, it can mean bad news for U.S. exporters (like chip makers for example) who supply those foreign exporters. Got it?
• Our government’s huge appetite for spending, and huge consequent deficits, requires that it/we borrow (big time) to stay afloat – we’ll sell our treasury debt to anyone from anywhere at any time. And when the dollar weakens, the value of our foreign lenders’ U.S. holdings diminishes. Some “experts” fear that if this continues, our over-seas benefactors will stop lending to us, which would force the dollar even lower and interest rates (and inflation) through the proverbial roof.

So now that we understand the pros and cons of a weak dollar, the question remains, is our currency’s current state a good or a bad thing overall? I’ll say, for the moment anyway, that the falling dollar clearly represents a glass-half-full scenario (just ask the stock market). And as much as the Federal Reserve and Uncle Sam would have us believe otherwise, their actions suggest that they believe a weak dollar is in our best interest (for now) as well.

In the long-run however, if we can’t overcome our addiction to government spending, and if our dollar continues to shrink faster than a bodybuilder’s testicles, we’ll have some real hell to pay. Trust me, while a shriveling dollar may be fine for now, we absolutely do not want to end up sounding like Minnie Mouse as we negotiate our position on the global stage of the future.

Have a great week,
Marty

It’s amazing, the economy hasn’t even (officially) stopped receding and we’re already hearing that familiar chorus; “where are all the jobs?” And, as usual, the choir consists primarily of those who would gain politically from a less than stellar recovery (that very same refrain was sung from the opposite side of the aisle as we came out of the 2001 recession).

The bad news for today’s cynical sopranos is that all (make that most) indicators are pointing to positive GDP growth for the third quarter. They will find their support however in the fact that, while the economy is about to move into expansion mode, we have about as much chance of seeing a near-term improvement in employment as Linus has of seeing the Great Pumpkin this Halloween.

But here’s the thing, job growth rarely occurs in the early stages of an economic recovery. I mean good grief!; half the country’s companies have just laid off half their workforce – do you suppose they’ll be hiring anytime soon? And besides, the Microsofts, Ciscos and Apples of the world have been hard at work, inventing all kinds of new technology designed to make companies more efficient. I.e., if the new computer application makes XYZ, Inc. more productive and doesn’t require health insurance and a pension, it’s going to be awhile before they even glance at a new employment application.

So while the critics play the “no jobs” tune like Schroeder plays Beethoven, don’t fret over the (near-term) continued weak employment stats. Again, that’s pretty much the norm. But what’s not the norm, and what honestly concerns me, is the fact that recent fiscal policy hasn’t been entirely consistent with what you might expect given the depth of this recession. One would think that we’d be looking forward to things like capital gains tax cuts and aggressive business tax credits/cuts – things that would inspire the private sector to expand and create jobs where real demand would dictate (and, ironically, increase tax revenue as we grow the economy) – as opposed to things like healthcare reform, raising tax rates on businesses, cap and trade, and the like.

I understand the talking point – “it’s an embarrassment that the greatest country in the world has so many uninsured citizens”. Not to discount that by any means, but isn’t it just a little embarrassing that the greatest country in the world is running monster deficits and piling up debt faster than a 19 year old with a MasterCard and an internet connection? I know, I digress (and I know you’ve heard this from me before).

Getting back to job growth: To be fair, there are government programs afoot designed specifically to produce new jobs – as we pave some roads and build a bridge or two. But when employment is created for the sake of employment itself, the jobs we get will in no way reflect free-market demand. Sure, we’ll see the construction projects and think “ah that’s great, our tax dollars are getting people back to work”, but we won’t see the legitimate, longer lasting jobs that weren’t created (or worse yet, lost) because those dollars were extracted from the real economy.

Short-term, all this spending will show positively in the economic stats… Longer-term, we’ll see.

Bottom line; we’ll survive any and all of it. If policy begins screwing things up, policy will change, just you watch.

As for 2009, it has clearly under-promised and over-delivered (thus far). Corporate earnings have consistently exceeded analysts’ expectations, the market has exceeded most pundits’ expectations, and while October may indeed drop a rock in your trick-or-treat bag Charlie Brown (by delivering the long-awaited correction (not a prediction)), don’t be surprised if the coming retail season (like earnings and stock prices) happens to manage a little unexpected merriment of its own (not a prediction).

Have a great week,
Marty