Groundhog's Day. Again.

September 13, 2011

Last week's market action felt like night golf. You know the rules. But, something feels awkward.
President Obama has begun to campaign in earnest for the 2012 presidential contest. Last week he implored Congress to pass a $447 billion package of spending initiatives and tax cuts. Obama called for cuts in payroll taxes, as well as an extension of jobless benefits.
Yet, his announcement failed to buoy markets. Why?
Because it feels like the political remake of the movie Groundhog Day. We have seen this before.
How come everyone but Washington policy makers seem to know the definition of insanity? What's next, Cash for Clunkers II?
Can't I just build a fire in which I can burn my own tax dollars? I'll send a photo to D.C. as proof of meeting my responsibilities. At least I'd feel like I'm accomplishing something. Even if it is just roasting s 'mores.
Speaking of Deja Vu, Fed Chairman Bernanke did nothing to dispel last week's rumors of further monetary easing. Additionally, there was increased speculation that the Fed is likely to announce a change in its balance sheet allocation. The change would involve selling short-term Treasuries and buying long-term Treasuries.
This maneuver has come to be known as Operation Twist. How about naming it Operation Pissed? Because that's what tax payers have increasingly become.
Our government will likely end up bailing out the Postal Service these next few months. Why? Because the government-run post office has run up a $10 billion deficit. In other words, the government organization responsible for delivering the mail cannot balance their budget. Yet, D.C. is desperate to enter the businesses of healthcare, banking, finance, automobiles and education.
If the post office cannot deliver mail without figuring a means to provide health care coverage to employees, how does the government propose to do it for the rest of us? Let alone educate our children?
Just this week it was announced that Fannie Mae and Freddie Mac (the mortgage versions of the Postal Service) will escape without penalty as part of a deal they are forging with the SEC over whether they properly disclosed exposure to subprime loans. Nor will the government-sponsored mortgage messes have to admit to fraud.
This just one week after Fannie's and Freddie's government overseer sued 17 financial firms for misleading them into buying troubled loans.
Add to that the news that Greece can't stand its austerity measures and Germany can't stand Greece, and you have an unnerving volatility cocktail. One that's certain to make markets jump like a mechanical bull.
Your strategy better entail more than just hanging on.
If you take nothing else from today's missive, make it the following:
1) Make sure your money market funds are allocated to U.S. Treasuries. Not money markets with bank debt. Not Government Funds, as these can be invested in European sovereign debt, and that could be trouble.
2) Make sure your bond funds have not taken on massive amounts of counterparty risk, such as credit default swaps and other derivatives. If these funds are taking on what could be extraordinarily risky investments and the fund holders are not getting paid extraordinarily large amounts to hold that risk, then what's the value?
Bottom line? The global debt problems are bad. The global economy appears to be worsening. Our leadership has failed to lead. And with a U.S. presidential election on next year's docket, it's unlikely that we'll see any strong initiatives to do so.
Investor objectives should focus on preserving capital, utilizing some "rough water" investment vehicles, and keeping powder dry for those opportunities that will inevitably appear. Stay tuned.

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