Friday, June 10, 2011

The Market Downdraft Is Politically Bad, But Fiscally Sound

The White House is probably a very uncomfortable place of employment of late. Unemployment is rising, state and local layoffs loom, two wars continue to drain the Treasury, and the stock market is behaving terrible. The loose money induced market has been, along with private sector job growth, the two bright spots of Obama's presidency. Both have changed negatively. An overly political White House cannot be happy about the situation.

But the market decline may actually be good for the country's deficit and, ultimately, Obama. After the past 18 month's performance, selling is producing capital gains that will begin showing up in quarterly tax estimates. There probably aren't a lot of losses to set the gains off against given the markets rise. Therefore, tax receipts up and deficit down. Now hopefully the Republicans can tie firm spending cuts into any debt ceiling increase before the Democrats figure out they have some increased revenue heading their way.

Once the selling stops, that cash will need to be redeployed. There aren't many good alternatives available. The economy isn't as robust as previously thought, but companies are still lean and profits good. Commodities are stretched and bonds subject to the potential effects of inflation. Cash earns nothing. The money will find its way back into equities and that pressure will elevate the indexes.

Like all investors, I haven't enjoyed the past six weeks, but the world's not coming to an end and other than a little portfolio adjusting, I believe it wise to stand pat. A bright spot in this bleak period is that none of my covered calls are going to be called away and I get to keep the premiums. As the market hopefully recovers, I haven't been sold out and won't have capital gains to pay. There's a positive aspect to bad markets, for both Crusty and Obama.

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