Book Rooms For The IMF In Sacramento this June

What do you do when you have time on your hands and don't get your way? Ask the Greeks. Ask our illegal alien population. Soon you will be able to ask those with their hands out in Portugal and Spain. Why riot of course. Tell the news media the world will end and children will be harmed. Threaten not to vote for anyone that cuts your entitlements. Why would you vote for the SOBs that cut your six weeks of vacation? Riots, riots, riots and we're going to see more. Right here in the good old USA.

California is supposed to have their budget approved in mid June for the 2010-2011 fiscal year. The Governor and the legislature are miles apart. Arnold says all the low hanging fruit has been picked as well as the medium hangers and the high hanging fruit as well. All the easy cuts are history. Republicans refuse to enact tax increases or new levies/fees. Cutting programs that have loud constituencies is all that remains. What do loud constituencies do? Complain to the media and riot.

June ought to be a difficult month for the markets. California's problems aren't new or surprising, neither were those of the PIIGS. But no one worried until they were upon us, then panic set in. First with traders, then politicians. Expect the same to occur this coming month as California deals with its budget and angry recipients and taxpayers. Arnold & Co will hit close to home. It's not some foreign land, it's part of us and it will remind us of all of our own unsolved problems.

If markets don't like uncertainty, then we ought to see some significant downward pressure on stocks as the drama unfolds. Here's the sequence of events: talk of program cuts, recognition of huge deficits and debt, riots, pleading to Washington for help, panic and stock plunge, buckets of money from DC, promises to cut and tax enough to get California's house in order, equities rebound significantly. Bet I'm right.

So, even though they will go down in value also, I'll stick with my income stocks and MLPs, gold and silver positions, long-term hold speculations, and short positions. On the first big bounce back day from last weeks decline, I am going to pitch my index funds and buy a few more puts. I should do more, but I'm often wrong, especially with timing so I always have to hedge my bets. But the future sure looks clear and the picture isn't pretty short, nor long term. Too much debt everywhere and an investor class that has started to recognize that fact and is becoming more fearful daily.

Invest in Sacramento hotel rooms as they will have high occupancy as the media and Obama's henchmen come to town.

The Circus Starts Anew Monday

The circus comes to town again tomorrow morning. Possibly this evening if the Asian markets get flustered. Later the Europeans will be celebrating a Greek bailout or stewing over the next candidate and the taxpayer footing the bill for the shiftless. The day's stage may be set by the time the U.S. markets open.

What will we fear or celebrate on Monday?

Greek stalemate? A strong Eurozone plan? Contagion? Volcanic ash clouds disrupting air travel? A gigantic oil slick that can't be contained? American bank exposure to Europe? Goldman Sachs? A slowing Chinese economy? IMF funding of the Euro plan with 40% contribution from the USA? Riots in Greece? Riots in Arizona? The latest, mind numbing statistic?

Will I be happier with my Brunswick short or my new Neutral Tandem position? We'll find out shortly as volatility has returned and markets are being swayed by the concern of the day. It isn't investing, it's speculation and fear that are driving the day to day pricing of the stock market. The actual value of the underlying companies cannot gyrate to the extent their stock prices do. But the prices do gyrate. So wait for a return of sanity, sell into declines, or a little of both.

Who will have control of the bigtop in the morning?

Keep Looking Over Your Shoulder

The stock market has performed nicely over the past few weeks. Confidence appears to be growing and investors have been piling in. However , confidence can be fleeting. When it changes, damage can be severe. Making money is exhilarating, but losing is traumatic.

I hate trauma. That's why it's prudent to always look over your shoulder and see if investor psychology is changing. And change it will. Every professional investor knows that debt as a percentage of GDP is at an all-time high, far exceeding the Depressions ratio, and rapidly growing. Not just in the USA, but worldwide. They are all exhilarated and will continue to ride the momentum until they are shocked. Then the exits will become crowded and trauma pricing will set in. A forward looking stock market will soon see issues that government can't solve because government is a large part of the debt problem.

2011 is coming. Bush era tax cuts will soon be expiring. Quarterly estimated tax payments will hit the psyche of businessmen between the eyes. The realization of higher taxes will be here. Higher taxes stunt growth, hiring, and investment.Will the market actually anticipate the upcoming damage of rising taxes? I think it will.

Will we lose confidence prior to the tax increases for other reasons? I think so. State and Soverign debt is a smoldering problem. Central banks and governments can't bail them all out. Taxpayers, eventually, won't stand for all the debt forgiveness being placed on their shoulders. If debt will no longer be able to be transfered to taxpayers, banks, bond funds, and pension plans will need to start eating losses. Confidence and markets will erode. Everyone will look for safety and the exits will get crowded.

Our debt binge hasn't been solved so keep looking over your shoulder, better yet, shoulders.

Are Central Bankers Throwing Life Preservers or Anchors?

Central banking 101 seems to view "financial rescue" as a virtuous deed. We saw this tenet put into action in the subprime crisis and it is about to emerge again in the coming European sovereign debt bailout. The problems are kicked down the road rather than addressed. CB101 states that it is better for all taxpayers to suffer later, so that creditors and investors don't feel immediate pain. It was put into effect to rescue Fannie and Freddie, and, it appears, the Germans and IMF are about to do an encore with troubled Euro zone borrowers.

Belt tightening is the solution. But, as proven by the recent strikes in Greece, politicians, and their constituants, don't have the stomach for actual solutions. Anchors disguised as life preservers are more palatable. Loan guarantees and public ownership do not solve problems, they only transfer and redistribute the problem. More debt doesn't cure a debt induced ailment. But it does if you are a central banker.

If failure isn't an option and if entitlement cutting isn't viable, what is left in the CB101 playbook. First, defer as long as possible. Put as much lipstick on the debt pig as possible. When she is no longer pretty to anyone, inflate the debt repayment to a manageable level. The bond market is starting to get it "a little" as yields have been moving upward. The Chinese get it "a lot" as they are diversifing their holdings and attempting to minimize the impact of upcoming reflation. There is no other option and smart creditors see the future clearly. The process to protect buying power has begun and will continue.

What might be done to counteract CB101? Equities should do better over time as businessmen tend to be nimble. But, my bet is that markets will offer a much lower entry point prior to reflation in ernest. Midwestern farm ground, even though prices have increased, should hold capital together and produce a modest return. Municipal bonds are going to get very risky as they carry not only interest rate risk, but, increasingly, default risk. Cities, states, and special improvement districts have serious problems, on balance sheet and off. A short term government bond ladder has merit only if one can stomach book losses and hold until maturity. Byron Wein, strategist at Blackstone, opined yesterday that fed funds would go from zero to two percent by yearend 2010. If his view is correct, I'd be patient till later this year and then build that ladder. But, consider quality corporate bonds for additional yield, and if you believe my statement that businessmen are nimble, and safety. Finally, gold, even though it doesn't produce any income and supply never goes away, should gain luster in face of bond inflation.

The next time you see Jean Claude Trichot or Ben Bernancke toss a life preserver, don't get giddy and think good times are here again, get wary and think capital preservation.

What Will Monday Bring?

After three days of misery, caused by a combination of potential Chinese fiscal restraint and Obama political expediency regarding bank and Fed bashing, investors are recooperating and wondering what Monday will bring. I believe we will see more selling as everyone knew stock prices were too high, but were playing a game of musical chairs as they wanted to continue to make money while momentum was pushing equities upward. Everyone thought they could exit before the downdraft.

Just as Massachusetts changed the political landscape, the past three days have reinforced what investors knew, but didn't want to accept. Stock valuations had been too high and everything was not improving. We aren't in for a quick bounce back. Gains should be protected and speculations reduced. Selling will continue, causing a significant sell off until prices reflect a more reasonable multiple of earnings growth.

As I laid out a few days ago, my positions have been lightened with only about 25 percent in stocks. The remaining 25 percent still hurts. I feel lousy. Recently opened short positions in DFS and COF have paid handsomely. A large long position in K-12 has been reduced to only 5000 shares as I wanted to capture the gain and I felt the company would tread water till next September when school districts and parents decide on internet education decisions. Luckily LRN hasn't gone down in the downdraft and I've been able to sell at good gains. My remaining positions are largely concentrated in emerging markets and international companies. I haven't decided what to do with those.

While the past three days have been painful, the percentage decrease has been minimal. I'll look for more vulnerable companies over the weekend and sell them on Monday. Some up days will present themselves, but the tide has changed and investors are starting to treasure capital which means selling. My suggestion is to lessen long positions and add negative positions. As Charles Barkley says " I could be wrong, but I doubt it."