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!

“Reality is merely an illusion, albeit a very persistent one” Albert Einstein

I tell ya, in today’s bipolar world, you just don’t know what to think – or that’s what we say anyway.

The fact is, we’re going to think whatever suits our personal or political fancies, all the while fooling ourselves into believing we’re being objective. For what it’s worth, the following is yours’ truly’s foolish attempt at objectivity.

Of course you’ll agree or disagree to suit your fancy…

SPIN: The only jobs growth we’ve seen of late is the result of census workers and other temporary and government employment.
REALITY: Companies by and large managed their affairs exceptionally well during and coming out of the recession. Demand is indeed picking up as evidenced by the ISM’s Manufacturing and Service Sector Indexes. Current readings of these indicators point to continued growth for the balance of the year – the double-dip recession threat is almost off the table.

The recent jobs numbers, while they were indeed impacted by census hires, reflect substantial growth in private sector employment as well.

That said, the uncertainty over higher taxes, healthcare reform and new regs will no doubt mute the rate of job growth going forward.

SPIN: All this government “stimulus” is having no positive impact on the economy.
REALITY: Of course it’s having a positive (albeit slight) impact. You give a trillion dollars to a bunch of winos and you’re going to see some trickle up.

SPIN: All this government “stimulus” is having a sustainably positive impact on the economy.
REALITY: Wrong kind of stimulus… Permanent tax cuts and other business incentives are the only kind of government stimulus that has sustainable positive ramifications. Not that the expansion isn’t sustainable, but it’s soon going to have to survive on its own as the Fed withdraws (which they’re subtly beginning to as we speak).

It’s also going to have to face 2011 and beyond (higher taxes, higher interest rates and new regs) …

SPIN: Washington wants to own the banking system.
REALITY: When the Treasury converted $25 billion of the Citigroup preferred shares (it purchased as part of the bail out) to common, you all screamed “see they’ve tricked us, now they own Citigroup”. The Treasury said they converted to ease Citi of the burden of paying the preferred dividend. But now that Citi has paid back the remaining $20 billion in loans, it’s time for the government to divest of its equity stake. And that’s precisely what it’s doing.

Sorry to disappoint you conspiracy theorists, but, unlike the politicians and the spinners themselves, shouldn’t we be intellectually honest and give credit where credit is due? At today’s share price the “taxpayer” will make around $7 bill on the Citi deal.

Now, that said, let’s see what they do to the banks on the legislative front…

SPIN: We have to raise taxes to lower the deficits.
REALITY: Hogwash! Raising taxes won’t do squat (they’ll – both sides mind you – just spend more). We have to cut government spending to cut the deficits.

SPIN: Capitalism is in danger of extinction!
REALITY: Baloney! Capitalism is popping up all over the world. You may suppress it every now and then, but it’s (to steal a line from Dennis Hopper in Water World) “that turd that just won’t flush”.

Bottom line; if you’re patient and have the stomach (volatility’s a comin), opportunities abound…

SPIN: Generations to come are in dire straits as we spend them into oblivion.
REALITY: Balderdash! Things will change before oblivion comes. It may (will) get painful at times, but hey, no pain no gain, right?

It always feels like whatever’s happening at this moment will last forever. But haven’t you noticed, it never does.

The beauty is that our awareness (concern, fear, worry, panic, etc.) of the “dire” trend virtually assures that the feared outcome (at the extreme) won’t come to fruition. As the “pain” intensifies, we’ll change the trend. If policy indeed takes us down the wrong path, we’ll change policy. Haven’t you noticed that policymakers always get blamed (some more deserved than others) for inflation, deflation, or whatever the economy dishes.

The good news my friends is the bad news. I.e., there may just be enough global pessimism, spun and legitimate, to keep the market moving north for the time being. But please remember, nothing lasts forever…

“When you argue with reality, you lose” Byron Katie Mitchell

Have a nice day!
Marty

So your seventh-grader comes home from school today and tells you how much she loved playing cross-fire (dodgeball to you/me) in P.E. because she hit Tyler smack in the face. Shocked at the sadistic nature of your little angel’s act, you sternly inquire as to why on earth she would enjoy hurting another child. She explains that Tyler is the meanest boy in school and he always aims for the other kids’ faces, so she likes to see him get his, so to speak. You then, being an enlightened Oprah-inspired 21st Century parent, tenderly explain to your dear-one (mindful not to damage her self-esteem) that when we do unto others in a manner that we don’t like done unto us, we done lowered ourselves to the doers level. And worse yet, we’ll probably end up in deep-doodoo ourselves.

By the way, if your reply would have been “way-to-go Tiger”, please, read no further…

I have found that when we keep our minds open, life offers endless metaphors. The thing is, most of us only take note of the similes that support our individual ideology. In essence, we tend to only find what we’re looking for.

I must beg your pardon here, as I’m going to use my middle-school metaphor to advance a widely unpopular notion, one not fitting with the ideology of your average patriot. The notion that a nation who retaliates against its trading partner(s) protectionist acts with similar acts of its own is not only stooping to the others’ anti-free trade posture, it’s essentially screwing its own citizens in the process.

Now, like you, when I think about the countries who subsidize their exports to gain an unfair price advantage over their U.S. competition, whilst I rest my feet on a desk that no doubt weathered the Pacific Ocean to reach my home-office (not considering that, were it made in the USA, I’d easily be out another five hundred bucks), my bottom gets more than a bit frosted. In true seventh-grader fashion, I want to nail those friggin Tyler-bastards in their faces (slap tariffs on their exports) just as hard as I can.

The (seeming) logic (and desire) of retaliation notwithstanding, volumes can be written to support the forthcoming (unpopular) lesson herein. But as it has been my effort of late to keep these epistles as brief as possible, I will attempt to make my point in a most concise manner. And I will do so by simply expanding upon the parenthetical comment above (“not considering that, were it made in the USA, I’d easily be out another five hundred bucks”)…

Think about it; if left with no option of buying the less expensive foreign-made desk I’m out five hundred extra dollars, the American desk manufacturer is indeed made healthier by the same. However, my neighborhood OSH, Edwards Cinema, United Airlines, Taco Bell, Nike, Target, Goodyear, The Vitamin Shoppe, etc., etc., etc. will never see the revenue they would have, had my desk been priced to reflect a labor rate of say $1.06 per hour. Inarguably, while the U.S. office furniture industry (seemingly) gains, I, and my local merchants, lose…

“Yes”, you say, “but what about the American jobs lost (ala the furniture industry) when we export labor in such a manner?” I say, “what about the jobs lost with respect to the above referenced merchants when we “protect” in such a manner? Not to mention the jobs never created as our no-longer discretionary income is redirected to our politicians’ latest special interest – jobs that would have surely materialized were we able to purchase the product(s) we desire at the cheapest possible price.”

“Yes”, you rebut, “but what about the additional jobs not created in, and ancillary to, the U.S. furniture industry – wages never earned that would have been spent in the Target’s and Taco Bell’s of other neighborhoods.” And I conclude; “but what then, my worthy debatee, would more support our country’s competitiveness on the global stage of the future; allowing our citizens unfettered access to the markets of the world – therefore benefiting from the inherent cost savings therein – while creating jobs and inspiring capital investment precisely where a true free-market economy would demand, or, allowing the government to manipulate the direction of our personal spending to pander to the lobbying efforts of a particular industry and/or its union?

History has proven, time and again, that protectionism is very bad policy for the protagonist as well as its target.”

There is no question that the U.S.’s Smoot-Hawly Tariff Act of 1930, which resulted in a 50% reduction of U.S. exports and imports, contributed mightily to the severity of the Great Depression.

Ladies and gentlemen, it is absolutely critical that we, as voters, commit ourselves to a better understanding of what free-market capitalism is all about (without regard to what the rest of the world does), and begin educating our politicians accordingly.

The late-great economist Frank Hyneman Wright, when illustrating different forms of leadership, would use a metaphor of a flock of ducks flying in a V. Today’s politician would be the flock-leader who looks back to see that the ducks behind had veered off course, he would then desperately alter his own direction so as to get out in front of the V once again. His primary concern being his position, as opposed to the direction the flock is headed.

It’s time you and I begin leading our politicians (both sides of the aisle mind you) in the proper direction.

Like our boy Tyler, they either care not (devoted only to their position in the flock) or know not (utter ignorance) the ultimate consequences of their actions….

Have a great day!
Marty

Frustrated that your portfolio’s not back to its October 2007 peak? Doubting the old conventional buy and hold wisdom? Well folks, I’ve discovered the answer (you can now forget about all that asset allocation and rebalancing garbage I’ve been preaching for so long). I literally spent every afternoon last week watching CNBC and I’ve come up with THE strategy for making money in the market.

Here’s what you do. Beginning this week, set your DVR to CNBC from 2 to 4pm Monday through Friday and spend just two hours every evening after work (the spouse and kids won’t mind – after all, you’re gonna be rich) watching your replays of the Mad Money and Fast Money programs – I promise you’ll learn everything you need to know about making crazy-fast money.

That’s right, just listen to the Mad Money guy and not only will you get some can’t-miss stock tips, you’ll find out where the market’s headed near-term. Or listen to the panel of expert traders on Fast Money and you’ll know what “tomorrow’s trade” is going to be. Sometimes you’ll even get advice on what to do in the morning versus the afternoon.

Then, armed with all that info, you’ll simply log onto your trading account right at 6:30am every day to make the “morning trade”. Put in your limits and your stops, then check your positions from work every few minutes. Or if you want to get insanely rich even faster, you can trade puts and calls like the options guy on Fast Money…

Now if for some strange reason this doesn’t work, I have a backup plan. There’s this radio commercial I keep hearing for a new program called “Hindsight Trading”, this could be even better yet. In the ad, one guy tells his buddy that with this program he only has to spend like a half hour every morning on the computer placing a few trades. The dude’s making big money every single day!

I wish I knew all this twenty-five years ago!

ApRiL FoOls!!!

Don’t laugh; people really do buy this stuff…

Interest Rates on The Rise?
Those of you I work with know I’ve been concerned about the bond market of late, due to the fact that interest rates are the lowest they’ve been in the history of our planet. And I can give you a half-dozen reasons why rates are (ultimately) going up. For starters, the Fed stops buying mortgage backed securities this Wednesday. Then there’s the growing (albeit tepid) economy and the fact that stocks are looking a whole lot more attractive than bonds these days. But the three most obvious reasons rates can’t help but move higher would be government deficits, government deficits and government deficits. And when the ten-year treasury goes from 3.8 to 4.something, other bond prices are gonna fall right along with them (prices (principal values) move inversely to yields).

Now I’ve always been painfully aware of my own simplemindedness, but lately I’ve been wondering if I’m not worse off than I thought. I keep hearing these bond gurus offer up chapter and verse on how to make money in bonds in a rising rate environment. In fact, I just signed up for a conference call later this week sponsored by a premier bond fund manager. It’s titled something like “how to make money in bonds in a rising rate environment”.

While I’m afraid, quite certain in fact, that I’ll not emerge from the session with any great epiphany, I’m interested nonetheless in hearing what folks way smarter than me have to say about things I think I know a little something about, particularly when we disagree… I promise I’ll keep an open, albeit simple, mind.

Now my open (yet simple) mind notwithstanding, do not (as implied) expect to hear from me with a recommendation to buy the XYZ Floating Rate Fund, or the “This Ain’t No Junk” Junk Bond Fund. You see, while these brainiacs may indeed have a creative strategy that might not lose, if the stars align just right, I ain’t going there for one simple reason – the fixed income portion of your portfolio is supposed to be the safe portion. And in my humble opinion, it’s perfectly okay to make 0.00001% in money market funds when rates are at 0.00001%. In fact that’s really the only time to be substantially in money market funds. If they were paying say 5%, we’d be owning bonds at say 8% instead – probably expecting rates to drop and bond prices to rise.

Seriously, you don’t want to buy something that goes down when interest rates go up, at a time when interest rates can’t go anywhere but up.

Have a great day!
Marty