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Cadinha Blog


Beware of Polititians!

In our last strategy piece in May, we felt that the tax cuts effectively placed a floor under the stock market and things were looking better. Since that message, Alan Greenspan has also come around providing constant liquidity to the system. The stock market responded with a 1,000-point move to the upside, and the economy is showing signs of life.

However, no one said making money was easy! We’re now into the political season with a presidential election 13 months away, and the misinformation presses are rolling! The Bush Administration will be attacked on every front as a number of candidates position themselves against whatever the Administration stands for. From Iraq to weapons of mass destruction; from weak employment numbers to tax cuts for the rich; from leaks to deficits; we will hear it all, but why should markets even care? Isn’t this just par for the course? The answer is yes, but as polls represent a moving prognosis of final election results, the markets will pay close attention because investors live in fear of someone taking away the punch bowl…(rolling back the Bush tax cuts). We simply have to endure the fearful downdrafts spawned by this wonderful political process.

Republicans are also on the attack, attempting to solidify their majority position. As the majority, their political posturing can be put directly into policy and even some legislation…which is even more frightening. Laws and programs put into effect simply to win votes are often poorly conceived and lead to larger and more prolonged problems. With an all-out Democrat attack to take back the hill, the risk now lies with how the Republican leadership manages and counters these attacks. There are some hints and signs that tell us the Bush Administration may well be prone to wrong headed ideas. After all, it is this Administration that used steel and lumber tariffs to pressure certain foreign producers while concurrently talking up a free-trade policy. Treasury Secretary Snow’s recent pressuring of China, using the currency lever, is dangerous stuff. The whiff of protectionism is unmistakable and frightening for markets.

Such is life in a political year. We only hope that the Administration and Congressional leaders can manage the politics without creating lasting harm for the rest of us. We think they will, but confess to a nervous trigger finger in what otherwise is a very bullish environment. We need to remember that tax policy (until changed) is positive for stocks. Federal Reserve policy is accommodative with no inflation in sight. This is all good for stocks.

The bond market is now too volatile for anyone to figure out. The two Goliaths in the mortgage-lending arena, Freddie Mac and Fannie Mae, are making larger scale hedging and unhedging moves to keep their highly leveraged balance sheets from tipping over. This, in turn, is creating Goliath-sized price swings in the Treasury market. To add to this confusion, we now have a weak currency, created by Secretary Snow’s comments. Currency devaluation (disguised by terms such as floating rates) is a dangerous game. Historically, it has never produced the desired results and will likely trigger global inflation, or possibly a deflationary spiral. We will be watching the currency markets closely. For clients that don’t have income needs, bond money is largely in cash until we get some clarity. After all, it’s still a game of managing risk.

As we head into the holiday season, it’s important to reflect and marvel at the resiliency of our remarkable country. Politics is an ugly process, but we still have the freedom to choose. This factor alone will likely get us to a reasonably priced stock market near 10,000 on the Dow by year-end.

About the Author

Harlan J. Cadinha
Founder, Chairman and Chief Strategist




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