Saturday, March 21, 2009

Wag the Dog Redeux


One of my favorite, thought provoking films from the past, is "Wag The Dog," featuring Dustin Hoffman and Robert DeNiro as the master of political subversion. The then current president, up for reelection, was caught in a sexual misdeed. In an effort to minimize or eliminate the fallout from the scandal, DeNiro created a fictitious war with Albania, dominating the news for an extended period of time while the president moved on, unscathed by the scandal.

I can't stop thinking that somehow, the fury over the AIG bonuses is somehow an attempt to shift our attentions to something that in the end is pretty much irrelevant. What is going on that we are not seeing? Can it be true that are government officials were so incompetent to allow the Executive Branch of the government to remove bonus provisions from the AIG bailout bill because of potential lawsuits? Hey, our government is run by and for lawyers. Why would they want to reduce lawsuits??

Are we to believe that the President and the Treasury Secretary had no knowledge of the bonus provisions? And the Congress! It seems that everyone has said that he or she did not read the bill. One congressman stated that on his right was an 800 page document and on his left, an 1,100 page document and he had to vote on it in hours. It's really nice to know that our elected representatives take their responsibilities to us so seriously. Across the board, both the executive and legislative branches of government are admitting incompetence! And then the ensuing legislation to tax bonuses at 90% - where is this intense concern regarding lawsuits now? Somehow, someway, this doesn't at all add up. I thought that Obama was a bright guy. I was pleased to see that he was appointing highly educated and seemingly qualified people to run the government. My fear is, perhaps they are too smart and again, the American people are being deceived.

What might we be missing?? If you have any ideas, please contact me at


The announcement that the Fed would spend more than a trillion dollars to buy mortgage backed securities as well as long-term treasury securities caused bond prices to skyrocket on Wednesday. While it appeared to many to be a surprise, I had mentioned the possibility only last week. The bond and note options market was also reflecting something this week as call prices (options to buy a security at a given price in the future) were very expensive on Tuesday and Wednesday. Many were betting that something big was going to come out of the Federal Reserve's meeting. Sure enough, the announcement rattled the markets.

Stocks surged BUT COULD NOT GET TO 7,600! We mentioned in our last communication that the rally should be used to adjust portfolios as a move to 7,500-7,600 was an expected scenario. In our short-term portfolios, we sold certain bank stocks such as Regions Financial (RF - bought below $3.50 and sold above $5), General Electric (GE), ProShares Ultra S&P 500 (SSO) and bought Dow Industrial Ultra Shorts (DXD). We also lighted up on positions of ProShares 20 Year Bond UltraShort (TBT) (but only in trading accounts). Our only activity in our core portfolio was the addition of Power Shares short Dollar Fund (UDN) (our trading accounts already have been positioned in this as well as Power Shares Agriculture Fund (DBA). Our core portfolio is up 2.81% year to day with still more than 40% cash on hand.

Despite the Fed's move, the surge in stocks and bonds was short lived. Stocks could not get above the resistance level of 7.600 and bonds began retreating. We need to wait however to see how this will be resolved. The next assault on our senses is expected to come next week when Treasury Secretary Geitner reveals the “long-awaited” Toxic Assets plan. The plan is expected to be a government and private joint venture to take the bad assets off of the books of banks and other government supported financial institutions. At this point though, why would any private organization want to participate? What will be the incentive to reap gains? Salaries of those in companies participating in the plan might be capped and any bonuses could wind up being subject to the 90% tax provisions Congress is now trying to get through.

What a mess.


While there are sure to be many great trades in the market, long term investors need to be hunkering down for what is to come. The government is spending too much money and the Federal Reserve is printing too much money. The government and Fed are still trying to manage the economy. For those with risk-averse profiles, Treasury Inflation Protected Securities (TIPS) might be the place for you to look. Unlike other types of fixed income instruments, TIPS gain in value in inflationary times, increasing in value as the inflation rate increases (increasing your interest payouts). While the government and Fed try to assure us that they will take measures to keep inflation down once the economy heats up again, keep in mind that the Federal Reserve’s move to dampen a heated economy by raising interest rates several years ago seemed to be the impetus behind the mortgage meltdowns. The Fed raised rates from 1% to 5% in a very short time, causing credit card rates and adjustable mortgage rates to soar. This was the beginning of the meltdown. They propose to do it again. President Obama declared that there will be no more boom and bust cycles. If he truly wishes to get rid of boom and bust, he must eliminate the federal reserve system.

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