Sunday, August 7, 2011


We don't have time for long posts and rants about the stupidity of politicians, the Fed, ECB, and US Treasury so I'll be very quick about where we're at and what I expect.

Last's week drop was about Europe (Italy and Spain) and how the leadership of the European Central Bank, IMF, and leading countries are fractured and have no solution to the debt problems in the Eurozone.  Trouble has moved from the PIIGS to the inner circle and the bond market has called BS on the entire Euro structure.  Because the leadership in these organizations came  out with three different versions of solutions and all of them were half-baked and incoherent the equity markets got blasted globally.

Yes, the ratings downgrade was about 3 years overdue.  Yes the Tea Party forced the issue.  Yes the Democrats and RINOS agreed to much more, but the agreement was a sham just like the final agreement.  None of that mattered, the ratings agencies should have downgraded the US a long time ago and Standard and Poors was sending a much needed message to the politicians that they need to get our situation handled fast.  Democrats will say we need taxes, Republicans will say we need tax cuts.  I will say we need a flat corporate tax at about 20% that will unemploy hundreds and thousands of accountants that game the system and we need to start with GE.  We can also tax folks a bit more if they make more than $1.5 million a year and raise that rate to 40%.  We need to cut SS benefits, Medicare, and cut all foreign aid by 75%.  We need to have 10% cuts in every department in the Federal government to start.  We need to put Congress on a 401K and put them on a normal health plan and finally set two term limit maximums for Senators and three term limits for Congress.

The real answer is, "I don't know".  From the perspective of the European leadership,what needs to happen is that the ECB, IMF, and entire Eurozone with backing of the FED need to come out with a strong statement saying that they have a plan to buy up all the sovereign debt on the market and they are a backstop and will not let bond yields go above some number.  Yes, this takes huge firepower in terms of money but its all digital money anyway isn't it?  I'm writing this in a tongue in cheek fashion, but IF they want to have some market stability the only thing that can help is coming out swinging with a limitless plan that is overwhelming.  If the markets detect any weakness or fragmentation then all bets are off and those evil "bond vigilantes" will come back with a vengeance.  Let me be clear, this is not a real solution, nor is it viable for a sustained recovery, but these guys are just trying to keep the system alive.  The real answer is bond investors taking haircuts and losing billions of dollars, but so far the leadership in each area of the world has tried to prevent this needed solution from happening. 

This may only buy them a few weeks or months, but this is what must happen to prevent a total meltdown tomorrow. 

If the financial leaders come up with a solution as I suggest, we could actually see markets trade MUCH higher over the coming days.  If there is no solution or the sharks smell the blood of a divided Eurozone with no German backing, a market rout is sure to play out. 

Overseas markets in the Middle East traded down significantly this weekend.  Futures just opened up and the Dow Futures are down 270 as I'm typing, but there is lots of time left for the IMF, ECB, the Fed, US Treasury, and the President to do their overnight magic and work markets higher. 

I have received a couple of emails this weekend about where investors can hide in this mess.  The trouble is that most average investors don't have good places to "hide" because the money market funds they would normally go to could be much riskier than some of the non-money market options.  If you can short, then short and be careful, but I'm writing the following information with Joe-6 Pack investor in mind.

With that warning made, you could consider some short term investment grade corporate bonds as an alternative to money markets.  This strategy is not without risk, BUT there are positives here in the sense that investors will shun stocks for treasuries and corporate bonds if things get really nasty (nastier).  Companies have a lot of cash on their balance sheets and sometimes you'd rather risk the event risk associated with one company over taking a gamble on what time bomb is held in a money market that you have no control over.

I hate to say it but you need to stick with the ideas I posted several days ago in the midst of the total rout of the market, because if indeed this ship is righted you will need a "relative value play" for some of your money.  Please read GOLD IS GOOD, SOME COMMODITIES, THEN THE REST.

The thrust of that post is simply this.
1)  The Un-Currency (Gold) is probably best especially in the event that the ECB subverts national power and usurps the individual nation state's power and begins to issue Eurozone bonds.  Couple that with a QEIII being unleashed in some form and it is a place to not only hide but to gain.  Physical holdings are better.

2)  Selective commodity plays may also be winners however the entire global growth story is crashing to an end, so therefore you must only buy commodities that may be in short supply like agricultural commodities.  Oil will be subject in the short run to a fall.

3)  Dividend paying equities will also be relative winners.  Remember long only funds must go somewhere so by choosing these positions you may also lose, but the bet here is to lose less than the broader market.  I don't like this strategy, but some folks just feel like they need to be in the market 100% at all times (and remember those money markets can be and are risky too!).  These dividend paying stocks also compensate you while holding them.  Think firms like Phillip Morris (MO) and Campbell's Soup (CPB).

4)  I also outlined a longer term strategy of owning dividend paying commodity producing stocks.  Now this is going to be very volatile in the short run, but from a longer term perspective I think this is one of those long term home runs since they own everything that will go up in value as the dollar continues to crater.

I still haven't gotten a total body count on the damage that last week did to hedge funds.  Last week's volatility and commodity destruction surely blew up a few trading firms. 


Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at