March 25, 2011

We are already hearing a lot about the mistakes being made by the new members of Congress.  But let’s keep in mind that these freshman legislators are amateurs, and that this is not a bad thing. Most are civilians who have never been in politics before. Intellectuals and professionals had their chance, now men and women of different walks of life are taking over.

Many of these new legislators are real estate agents, small business owners, there's a pizza guy, there are farmers, and blue collar workers.  They are the kinds of people the Founding Fathers envisioned when setting up a representative government.  Amateurs will stumble and embarrass themselves at times.  They will misspeak and act incorrectly. But I will take them any day of the week over typical professional smooth politicians.

 

I give you no less than, Republican Majority Leader Eric Cantor of the House, as a perfect example of a smooth professional. This conservative politician who claims to be leading his party toward fiscal responsibility is about as slippery a politician as you will find.  He is incapable of answering a question straight on.  He is your typical establishment type politician; he evades, shifts, and dances around any issue he fears might antagonize a potential voter.

 

While appearing on Meet the Press recently, Representative Cantor was asked what he would cut in the budget, specifically.  He was asked this question three or four times.  I have not seen such bobbing and weaving since Ali fought Frazier.  The answer to the question is simple, "EVERYTHING!" Yet we had to squirm in our seats for three minutes while he attempted to evade the question. 

 

Ask a typical politician if we should cut social security and if we need to change its terms to fix it and you will not get a straight answer.  Ask a Tea Party Congressman the same question and the answer will simply be "yes.”  When Rand Paul was asked that question he said that adding a monthly extension to the social security retirement age every year until we hit the age of 70, together with means testing and fraud reduction, would pretty much fix the system. He did not turn red at the thought of having to state his opinion. 

 

That is the difference between a politician who fears his constituency and one who respects them. Someone who is there to help his country, and when finished move back home to resume his original career, thinks a lot differently than one whose ambition is to make politics the source of his life-long pay check. Not since the voters sent Davey Crockett to Congress have we seen anything like the new civilian freshmen sent to Congress this year.

 

By the end of March the recent three week continuing resolution expires.  We will either have a plan put forward for a new budget taking us through September, or a new continuing resolution with more spending cuts will be proposed.  At two billion per week we would cut over 100 billion a year at this rate.  Not a bad strategy by the Republicans.  We have in the last five weeks cut as much as the Obama Administration proposed to cut for the rest of the year.  The cuts happen slowly and inexorably on a weekly basis and so far, the US has not fallen of the face of the earth. 

 

Paul Ryan of the House will submit his budget by April.  It will be controversial and will propose huge cuts in both discretionary spending and entitlements for the 2012 fiscal year.  At the same time Rand Paul of the Senate will propose a bill to deal with Social Security.  By the end of April--if these bills pass to the satisfaction of Congress--we will be well on our way to tackling our fiscal crisis.  If they do not pass, there will be a bill asking to increase the ceiling on the national debt.  The vote on this issue will probably force action, even if just a compromise. But whatever happens more government spending will be cut. By May, the smoke will have cleared and we should be able to see what Congress actually accomplished, where we really are, where we are going, and to what degree.

 

Keep in mind that cutting discretionary spending is only one battle on one front.  Cutting Medicare and Medicaid is where the real war will be fought and won--or lost.  This will be the main issue confronting America in the years to come, especially in the elections next year as politicians from both parties take their positions and go to the voters with their proposals.  Some states, like Texas, are paying out almost half their state budget on Medicaid!  Time has run out for the states and the time to fix the problem has come for them. Most likely it won’t be until 2013 that The Federal government will be able to really address Medicare and the health care mess.

 

The government health system is about to overwhelm this country, creating huge new costs and shortages of doctors and services. A thousand waivers have been given to escape from the system and just today it is reported that Congressman Weiner, from New York, a staunch supporter of the new system, has also asked for a waiver to avoid the costs it imposes.

 

What sounds good in theory is not always good in fact. Perhaps the new freshmen Congressmen and Senators can teach the old dogs of politics the difference.

 

 

Market Update:

 

The market is approaching recent highs despite a dozen reasons why it should not.  It’s being called “the nothing matters market” by traders as the market works its way higher in spite of the news stories that should force it down. This kind of action is usually called irrational by the bears, but there could be something else going on.  The market is acting as if some factor -- not yet visible to us – yet extremely powerful, is pushing us to new highs despite the negatives we see. 

 

One possibility for this strength could be the fact that corporate profits are running at historic highs while multiples are below average.  Another could be that companies are buying back their stock at a breakneck pace--up 117% to date. Some claim it is pure speculation, but volume is very low. Others claim it is a world growth and reconstruction story.

 

The market on Monday was up 200 points despite the housing report showing that home sales have plummeted and that the medium price of homes fell to 2002 levels. And on Thursday, durable goods were reported to be down rather than up as expected. Yet, the market hardly took notice and continued to climb.  Either most markets are about to turn down soon with the economy as gravity reasserts itself--or something else we don’t yet know is going on.

 

Personally, I expect the market to hit the headwinds of world-wide higher inflation, higher interest rates, and imminent austerity measures, and either stagnate or fall.  I expect most commodities to roll over soon as world growth momentum wanes and demand for commodities subside. Taking profits at these highs simply seems prudent. 

 

When to sell a stock is a personal matter.  It depends on the investor's outlook and comfort level.  I believe that all the stocks I hold will be higher in the long term.  Yet, I am comfortable selling into this run-up and raising cash regardless of the possibility for further gains.  After being 100% invested for a long time, it feels good to increase cash and lock in levels that have reached, or are much higher than, my initial objective.

 

Let me say something about gold.  Gold has been acting in line with most other commodities for the last couple of years.  As an investment gold is no better or worse than other commodities.  But as a way of storing wealth, it has no equal.  I have a percentage of my cash in gold coins.  Since my portfolio has increased dramatically recently, I will be trading dollars for gold to re-establish a balance.

 

People wonder if I feel comfortable buying at these highs.  It's a mistake to look at price.  It isn't a matter of price.  It's a matter of possession. In my situation, I will be making an exchange--dollars that I've accumulated in gold related investments -- for gold itself.  In most cases the stocks I have sold, will bring me more gold coins than what I could have purchased before the investment.  So in real terms, my wealth has increased in terms of gold. In the end, it is a transfer of one form of gold holdings to another.

 

But for diversity purposes, I want to be in dollars and silver coins too.  Actual cash balances of one third dollars, one third gold, and one third silver, would not be a bad end game. I intend to take more off the table as stocks continue to rise, or to be stopped out quickly if stocks fall. Either way I intend to increase cash and lower stock exposure going forward.

 

Portfolio By Weight:

 

Unchanged from last week.