Changing People, Changing Values ?

Like many young boys who were raised in the mid-1950s, my initial values were "flag, motherhood, and apple pie" . . . and in that order.  (I was raised to be fiercely patriotic and suspect my military record supports that.)  However, I later learned my three primary values:  love of democracy, love of privacy, and the rule of law.

Readers know I have been struggling with the idea of democracy, as currently practiced in our country.  I am deeply concerned about the U.S. House of Representatives, which could more aptly be named the House of Representatives From Hyper-Partisan Electoral Districts.  They represent only the most partisan voters of their gerrymandered districts.  I wonder what the limits of democracy are, and how will we know it when we get there?  I wonder what comes after democracy, and whether it will be permanent?

Love of privacy has become a quaint notion as well.  We willingly surrendered it to Facebook, Google, and the like.  Did you know there is a company just north of Little Rock, Arkansas, called Acxiom that employs 23,000 computer servers to collect, collate, and analyze data about YOU?  It is the largest commercial database about individuals -- 500 million of them, with about 1,500 pieces of information on each one.  It is nobody's business what kind of toothpaste I prefer!  I do not live for the convenience of advertisers on Madison Avenue.

The famous existentialist, Paul Satre, described each individual as an island, isolated and protected by water, but still the sole master on that island.  Privacy protects the individual from being transformed or controlled by advertisers.

Maybe, the loss of privacy is a good thing.  The medical industry is rapidly moving toward Electronic Health Records (EHR), which enables a doctor to make sure you are taking your medicine properly and that no other doctor is prescribing reactive medicine for you.  It also enables sleaze-balls to know if your daughter had an abortion when she was 18 or your son got venereal disease when he was in the Army.  Of course, there will be even more laws to protect our privacy, so such breaches could never happen, as they have never happened before??  (Think about "form over substance.")

This brings us the last point:  the rule of law vs. the rule of too many laws vs. the rule of too little punishment. Sure, it was the rule of law of that put Bernie Madoff in prison, but it was the rule of too many laws that made his crimes invisible to the "rule-bound" SEC for so long, who looked at his paperwork and not the substance of what he was doing.  And, it is the rule of too little punishment that provides him with free room & board for the rest of his life, as well as better medical care than many law-abiding Americans receive.  Would his situation today be different if his victims decided his punishment?

I always thought that, while people change, values don't.  Maybe, I was wrong?  Maybe, values just need to be sharpened or nuanced.  Maybe, my three primary values should be:  love of political purity, love of advertisers, and the rule of appropriate punishment . . . maybe?

Sometimes, anything will do . . .

Worldwide, stock markets are up this morning, on news that the EU agreed on something.  Working late into the night, national leaders of Europe browbeat Angela Merkel into doing something.  My first thought was "thank God, they are not completely useless and can actually do something."

The something is that the European Stability Mechanism (ESM) can put money directly into bank capital.  (This is what the U.S. did with TARP, and it worked well in stabilizing our banks.)  This means those banks have more money to buy government bonds, which should drive down the interest rates nations must pay.  Then, they can use those bonds they just bought as collateral to borrow even more money from the European Central Bank (ECB), which they will use to buy even more government bonds, which will be used for additional collateral . . .

Any something has been fought by Merkel for almost three years.  She said government debt of the various European nations would be "mutualized" or guaranteed by ALL nations (including Germany) "over my dead body."  The debt was not mutualized last night, but a big step was taken.  So, why did Merkel agree to that?

Merkel wants all nations to surrender that portion of their sovereignty that relates to fiscal policy or national budgets to the EU, which is dominated by Germany.  This is the something Merkel wants but didn't get -- yet.

I've argued that the fix to this crisis would be a more muscular ECB.  Last night, there was agreement that ALL banks would be supervised by the ECB.  This is a big step forward, but we won't know if the new supervisor has any real authority until year-end.

The something that is still needed badly is to remember the Rahm Emmanuel's rule:  Never let a crisis go to waste!  Europe has an even worse entitlement problem than the U.S., and they have done almost nothing to address that.  The regulatory environment around jobs in Europe is crippling, and they have done almost nothing to address that.  They has just bought more time to issue more debt.

Futures indicate the Dow will gain about 130 points at the open.  If this something was the real fix to the European financial crisis, futures would be up well over 500 points.  The market is just happy that anything is still possible. 

Concern vs. Worry

Today, Americans stand transfixed, waiting for the Supreme Court to determine the fate of ObamaCare.  As it directly impacts as much as one-sixth of our economy, it is a very important decision indeed.  But, note that  it has long-term economic importance.

Today, stock markets around the world are transfixed, waiting for tomorrow's announcement from the 20th European Summit on the European financial crisis.  That crisis is also very important indeed.  But, note that it has immediate financial importance and short-term economic importance.

I'm interested in the Supreme Court decision, but I'm worried about the European financial crisis.

My Two Cents Worth

Many Americans get all riled-up when they read about the thousand dollar commode seats, etc. bought by the Federal government.  To me, that always seemed like "chump change" compared to the stupidity of paying people who are living longer . . . to retire sooner.  Or, even worse, to borrow billions from China, so we can spend unlimited amounts of money on terminal patients??

However, my inner-economist does get riled-up occasionally, like when I read it is costing us 2.4 cents to produce or "mint" a penny.  It costs us 11.2 cents to produce a nickel.  How long would a business remain viable if its production costs exceeded its retail price?  Last year, our loss was $116.7 million.

Zinc, nickel, and copper are the three ingredients in the recipe for our coins, and those prices have risen in recent years.  Because these metals are used for everything from batteries to suntan lotion, I don't see the raw material prices falling enough to stop losing money.

The approved recipe of those metals in our coins hasn't changed in thirty years and needs to be changed.  In all fairness, the President did send legislation last year to Congress . . . where it was promptly pronounced D.O.A.

Grrrrrrrrrrrrrrrrrrr . . . .

Even when faced with a relatively simple issue, the elected children of Congress remain useless . . .  and that's my 4.8 cents.

Nitpicking Good Guys

It is time-well-spent for me to read the perspectives of other investment advisors, such as Goldman Sachs or Wells Fargo.  Locally, I enjoy reading the perspective of Palladium Registered Investment Advisors, whose newsletter is aptly named Palladium Perspectives.

Their summer issue makes the point that the European financial crisis is "the most over-examined debacle in financial history . . . which, by the way, has not occurred despite the months-long, 24-7 prattle of talking heads."  They go on to a comparison of the gloom during the Great Depression and finally conclude that "Uncertainty has been and remains the issue."

I agree that uncertainty is the issue, and I agree that the European financial crisis is over-examined, but not without reason.  It is a financial crisis, not a recession, and is easily transmitted in the globalized world of finance.  It has the possibility of being a "black swan" event or a sudden, disastrous event!  It is THE major cause of the uncertainty, even more so than the Fiscal Cliff, and it should not be trivialized.

While I disagree on how worrisome Europe might be, I do agree with their clear reminders that the world will not end, that stocks will out-perform bonds over the long-run, and that America still has many more advantages than politicians or pundits ever mention.

Monday Morning Musings

The weight of uncertainty is crushing.  The stock market abhors uncertainty.  I'm surprised it is not at least a  thousand points lower.  It seems spring-loaded to go up, but I don't see that happening anytime soon.  The weight of uncertainty is just too heavy.

The Supreme Court will rule this week on one-sixth of the economy.  That ruling is likely to increase uncertainty even more.

Spain this morning effectively asked for a bailout by asking all its banks to be bailed-out.  Unfortunately, Spain is too big to bailout.  So, what's next?  More uncertainty.

There will be yet another European Summit this week.  Greece wants a two-year deferral to austerity, which is unconscionable and is probably motivated by internal politics.  Failure to make real headway this week will weigh very heavily on the market.

There is an uncertain Federal election in a few months, costing almost $2 billion.  And, all that money is likely to be wasted, if there is a European collapse.  If there is, our economy slides into another recession, and the incumbent loses, no matter how much money politicians spend.  Europe could easily determine the U.S. vote.

By the way, the market is not sanguine about the Fiscal Cliff at year-end, when the Bush income tax cuts and Obama payroll tax cuts expire, and Federal spending is severely cut.  Non-partisan think-tanks have estimated our GDP will be depressed at least 1.0-1.4%, which is huge . . . and unnecessary.

Just to add more drama, there is likely to be another debt ceiling debacle this year, adding the weight of embarrassment to the weight of uncertainty.

There is nothing new about uncertainty.  Business deals with it routinely.  However, the level of uncertainty must be near an all-time high, at least during my lifetime.

At 5 AM, futures indicated the Dow would lose about 80 points at the open.  Both Asia and Europe were down overnight.  We might be saying that frequently . . . for awhile . . . for months . . .

Chubby Checker Was Better

On Wednesday, the Fed left the world markets with a lollipop instead of a box of chocolates.  The market was hoping for another round of quantitative easing.  This is a way of injecting money into the market, because the Fed then buys either Treasury bonds or mortgage bonds.  These bonds were already in the market.

Think about "supply and demand."  When demand increases, the price will normally increase.  In the case of bonds, when prices increase, that means the yield goes down.  For example, if a bond sells for a $1,000 and pays a 2% interest rate, the bond owner receives $20.00 in interest annually.  However, if that bond rises in price to $1,010, the annual interest income remains the same, which means the yield has dropped to 1.98%.  ($20/$1,010)

When the Fed says they will buy more bonds, the demand for bonds goes up, which means the yield goes down.  Lower interest rates are expected to help the economy (although it may cause commodity prices to rise).

What the Fed announced on Wednesday was that they would continue "Operation Twist" until year-end, which is a watered-down version of quantitative easing.  Normally, bonds that mature early pay lower interest rates than bonds that tie up your money for a long time.    If you graph the relationship between interest rates and bond maturities, it is called the "yield curve" and would look something like this:

Now, under "Operation Twist,"  the Fed sells short-term maturities and buys long-term maturities.  That increases supply of short-term bonds, driving down their price, and driving up their yield.  That also increases demand for long-term bonds, driving up their price and driving down their yield.  The end result is raising short-term rates while lowering long-term rates.  In other words, the yield curve becomes flatter.

This encourages people to buy homes and businesses to refinance their short-term debt into long-term debt, making them even stronger.  But, is it effective?  Yes, businesses are aggressively refinancing their short-term debt into cheap long-term debt.  No, because mortgages are so hard to qualify for, regardless of the interest rate.

There is a certain irony in all this to economists, who were taught that a flat yield curve is a strong indicator of an impending recession.  Now, the nation's economists are intentionally causing the yield curve to flatten.

Bottom Line:  Operation Twist is a lollipop, better than nothing, but not as good as a box of chocolates . . . or quantitative easing.

From the Devil's Lips ??

Readers know the only thing I like about Goldman Sachs is their research.  Here is a recap of their latest research analysis, which was released today:

1.  While GDP growth was 1.9% in the first quarter, it will drop to only 1.6% this quarter and average 2.0% the rest of the year.  They stated  that "fiscal policy remains the biggest source of uncertainty in the outlook."  (This investor agrees.)

2.  They don't expect the miserable job market to improve much, despite a decreasing unemployment rate.  "The reasoning is that the high level of long-term unemployment may lead to lower labor force participation rates as workers lose skills, develop a stigma in the eyes of employers, or simply become discouraged."  (This has awful long-term implications for millions of people but may give some "bragging rights" to the incumbent president if that unemployment rate falls just prior to the November election, but I doubt it falls enough to make a difference before November.)

3.  Despite massive balance sheet expansion by the Fed, they don't believe inflation is a major concern, and that the Fed still has room to maintain loose monetary policy.  (This investor thinks there is a real risk to printing so much money.  Unless the Fed does an unbelievably good job of withdrawing money as the growth rate increases, I don't see how you avoid inflation.  And, when it comes, it will come quickly.)

4.  Europe will "muddle through," and Greece stays in the Euro zone.  (This investor badly wants to believe this but thinks there will be a great deal of nerve-wracking drama before it happens.  It will make cash feel good.)

5.  They have become bullish on commodities, such as oil, gas, copper, aluminum and gold, because prices have gotten so low.  (This investor agrees that commodities are cheap but are cyclical, which means they will increase in value faster than GDP growth rates . . . when GDP growth rates start increasing.)

6.  Because central banks around the world have such a low likelihood of rate increases in the foreseeable future, they are buying long-term bonds.  (This investor is not doing this, because the stampede out of bonds when the first bank increases rates the first time will be dramatic; crushing the value of those bonds.)

7.  They believe the Fiscal Cliff of December 31st this year will be extended past December 31st of next year.  But, they didn't say when that highly-important decision will be made.  (This investor thinks that kicking-the-can-down-the-road one more time is likely in order to protect the politicians, while hurting business.  Everything has a cost . . . including uncertainty.)

Often, I ask myself if I'm too "Pollyanna" or sanguine or calm about bad market conditions.  However, when I read that the legendary Goldman Sachs is more "Pollyanna" than I am, I feel even more confident!

Begging For Sugar

Have you ever watched a kid's face when asking him if he wants to go to the candy store?  His eyes get big, and his enthusiasm increases.  He even smiles.

That's the reason the stock market has been rising lately.  While there has been no good news out of Europe, the flow of bad news has slowed.  Also, the economic data on jobs over the last two weeks has been disappointing, and investors know the Fed has two equal mandates:  low inflation and low unemployment.  Since inflation data remains tame, the Fed is free to stimulate the economy.

The Fed was meeting yesterday and again this morning.  An announcement will be released during lunch today.  The stock market is as excited as the kid heading to the candy store.  It is expecting something, maybe QE3 or a continuation of "Operation Twist" or Bernanke will show his creativity again.  If the Fed doesn't give the stock market the expected candy this afternoon, I expect it will sell off.  It will pout like a kid.

The stock market is so primed to go up that it is grasping for good news . . . or a sugar hit.  

Today's Battle

Congratulations to the voters of Greece!   Yesterday, they voted to accept severe austerity, thus preventing a bearish attack on stock markets worldwide.  Of course, their only alternative to severe austerity was a severe depression . . . a terrible choice between the Devil and the Deep Blue Sea!

Still. the world is celebrating, not because the war to end the European financial crisis is over, but because we lived to fight another day.  Predictably, the Asian markets were up strongly.  Europe also opened strongly but then weakened as Spanish bond rates rose, reminding us that today is just another day to worry about the European financial crisis.  At least, Greece didn't kill the world stock markets today -- before we got a chance to worry or to fight!

Our headline-driven market will now turn its attention to the G-20 meeting in Mexico.  In an ideal world of unlimited funds, the G-20 governments would simply bailout Europe.  In the real world, the G-20 governments will urge Europe to bail itself out . . . SOON!

Our headline-driven market will be more focused on the regularly scheduled Federal Reserve meeting this week.  The market seems pretty evenly-split as to  whether the Fed will do "something" in the face of generally weakening economic data.  I don't expect a market drop if the Fed does nothing but do expect a market jump if it does.

Next week, there is yet another European summit to deal with their crisis.  Many European leaders complain they feel like they have a gun to their heads . . . GOOD!

Now, if that isn't enough headlines to drive the stock market, don't forget the U.S. Supreme Court is expected to release its decision on ObamaCare this month, and June is running out.  I've enjoyed watching market analysts try to predict how the market will react, but that is Mission Impossible until we know what the Supreme Courts actually rules on.  If the insurance mandate merely comes from the state government instead of the Federal government, I suspect the market will react positively.  If the whole bill is declared unconstitutional, I expect the market will react negatively in confusion about the future of one-sixth of our economy.  Who knows . . . nobody knows!

A headline-driven stock market is not as predictable as one driven by economics or corporate earnings -- nor as much fun!  Another problem with a headline-driven market is that newspapers are published every day . . . darn it!

A Medium Tension Weekend

This Sunday, the slow-motion train wreck known as Greece makes a momentous decision.  They will go to the polls to elect either a pro-bailout party or an anti-bailout party.  The pro-bailout party or New Democracy will continue the ongoing severe austerity program.  Assuming they win, Europe will continue the bailout program.  The anti-bailout party or Syriza will ask for a two-year window before resuming the austerity program.  Assuming they win, Europe will suspend the bailout program.  As much as the Greeks are suffering now, it will then get much worse.  The polling surveys say the election is too close to call.

A year ago, this would have been a high tension weekend.  Since then, the world has had a chance to prepare for the worst.  I have never seen so much cooperation among central banks around the world, to get in front of a problem and announce they will provide all the liquidity needed.

That is one reason the market has been up nicely this week.  Another reason is the increasing awareness that Europe is finally trying to get ahead of the problem.  There is hope that next week's G-20 meeting in Mexico will produce commitments from around the world to help Germany bailout southern Europe.  The following  week, we will see another European summit, and there is increasing hope of meaningful progress this time.

Despite the rising optimism, this is not a time for investment bravery.  The stock market is normally whip-sawed by corporate earnings and economic reports, making it somewhat predictable.  Today, the stock market is badly whip-sawed by political headlines, which are far too unpredictable.  Remember:   It is better to miss some of the upside than to catch most of the downside.

So, enjoy this balmy summer weekend.  You've survived high tension weekends before, and this is not!

A Mere 1.2 Decades

It was only twelve years ago -- that most investment advisors still believed that bonds, especially U.S. Treasury bonds, were a safe investment.

It was only twelve years ago -- that the U.S. had a balanced budget (ignoring some off-balance sheet entitlements).  The Berlin wall had recently fallen.  America clearly dominated the world.  Investment advisors expected the supply of U.S. Treasury bonds available for investment would soon start decreasing, as our budget surpluses grew.  What safe investment would take its place in client portfolios?

In those twelve years -- we dug a huge hole.  We enjoyed two large tax cuts, without offsetting spending cuts.  We borrowed enough money from the Chinese to fight two wars, ignoring the thousands of dead Americans and tens of thousands of wounded Americans.  Oh, we also created another huge entitlement program to provide prescription drugs to seniors, without cutting any other spending or raising revenue to pay for it, adding almost a trillion dollars to our national debt since then.  And, there was a terrible financial crisis, increasing our annual deficits to over a trillion dollars per year.

Yesterday, I read a political column about how the trademark optimism of America, especially the sunny-Ronald-Reagan-America, is drowning in pessimism.  Even Jeb Bush, whom I respect, believes America is "in decline."

It was only twelve years ago -- that we dominated the world, and now we're in decline already??  I strongly believe America can return to greatness within a mere twelve years!  But first, we have to stop the bleeding.  Neither the Republicans nor the Democrats are going to get what they want, and it is inconceivable to me that the November election will change that.  At what point will the radicals understand that?  At what point will Republicans and Democrats look in the mirror and see Don Quixote?

Our best hope is the Simpson-Bowles compromise -- yes, I used the word "compromise" -- it is not a four letter word, regardless of whatever Grover Norquist preaches.

Our national debt is now $15.8 trillion and growing another trillion dollars each year.  Do the arithmetic yourself and figure out our national debt in twelve years.  Now, tell me you're not pessimistic or even scared.

The Simpson-Bowles compromise is not perfect.  After all, it is man-made.  But, it will help stop the bleeding now, and we can make it "perfect" later.

It won't fix this country immediately, but we will be a far better nation in a mere twelve years.  I'll bet we even recover our sunny-Ronald-Reagan-optimism again!

Europe Finds A Clue ?

There were two important news reports out of Europe this weekend.  The first one is a report that Merkel is holding serious discussions about a genuine fiscal union, whereby no nation would be permitted to run a budget deficit without consent of a panel of European finance ministers, plus consent of a new pan-European finance minister for all of Europe.  This is news because it suggests Germany would then back the new Eurobonds, which would be guaranteed by all nations of Europe.  It is very interesting but not very important, because the profligate nations like Greece and Portugal would be surrendering their budget sovereignty theoretically to Europe as a whole but practically to the same nation that produced Hitler.  (While I agree it is unfair to state it so rudely, I believe such rude and unfair thoughts are commonplace in Europe.)

The second important news report is that the finance ministers of Europe have agreed to a bailout of the Spanish banks, not the Spanish government but the Spanish banks.  This is news because the funding arrangement makes it easier to help profligate nations like Spain without violating existing agreements.  While it is also interesting and much more important than Merkel's discussions about a pan-European finance minister, it is not the most important thing that happened this weekend.

The most important thing was that, for the first time, Europe did something proactive instead of reactive.  Instead of waiting for the bond vigilantes to attack Spain, which they will do after the Greek election next Sunday, Europe has prepared the Spanish banks ahead of time!!

It was estimated that the Spanish banking system needed 50 billion euros, and the finance ministers agreed to put in 100 billion euros ($125 billion).  They finally learned why Hank Paulson, Bush's Treasury Secretary, asked for a bazooka instead of a BB gun to defend our banking system during our own financial crisis.

While it is still too early to read futures for Monday morning, I expect a happy, bullish market reaction.
In addition to this good news from Spain, inflation dropped in China, making it more likely they will introduce another stimulus.

So . . . Happy Monday!  Enjoy the giddiness of the bull whenever you can, but don't forget the real solution to the European financial crisis is what exactly Merkel has proposed . . . which few nations can accept.  

Humans Being Human

Last Friday, the Dow dropped 275 points, and the world was ending.

Today, it was up 286 points, and the world just yawned.

Situation normal . . . 

The Face of the Cavalry

Yesterday, I was asked what the likely outcome of the European debt crisis would look like.  Will the Cavalry save us?  And, how will we recognize the Cavalry when they arrive?

Reporters chase politicians . . . because that's what reporters do.  Politicians think about politics . . . because that's what politicians do.  It is not surprising that the current perception of the crisis is a struggle between Germany to exercise greater control over the individual governments of Europe versus the other nations who don't want to surrender their sovereignty to Germany.  This is a political conundrum that cannot be solved on a timely basis.  As George Soros has pointed out -- Europe only has three months left to resolve this problem.  Unfortunately, Europe cannot make any kind of decision right now.

As some pundits have observed, Europe is reaching the limits of democracy; where the weight of democracy makes it too difficult or too slow to solve problems.

So, is Europe doomed to a future with savages running up and down the Champs d'Elysees in Paris?  No!  The Cavalry will arrive.  The crisis will be resolved . . . but not by the politicians.

Except for TARP, the politicians in this country were less than useless in braking our economic fall.  Bernanke at the Fed did more to help end our financial crisis than all 535 members of Congress.  The same will happen in Europe.  There will not be a "big sloppy kiss" among the European leaders.  Instead, there will be a rather mundane announcement that the bankers and their regulators are working together differently.  It will subtly transfer some control over banks from individual nations to the ECB or some new "cooperative."  An example would be an announcement from the ECB that it would begin allocating bond portfolio holdings among the various banks across Europe.  This would allow the ECB to prevent banks from buying bonds issued by profligate member-nations.  It might be backed by an announcement that the IMF, the European Stability Mechanism (ESM), and the European Financial Stability Fund (EFSF) would make capital injections into each cooperating bank.

The solution will not look exactly like this, but it will be equally confusing!  The face of the Cavalry will be bureaucratic and boring . . . which means the bull will return over weeks, not days.  There will be ample time to reduce cash when this happens.

Just be thankful the Cavalry is coming . . .

"Currency Wars"

Last year, I read a book called Currency Wars:  The Making of the Next Global Crisis by James Rickards.  It was interesting -- because it changed my historical perspective of the last century from two World Wars to two Currency Wars instead.  But, in the end, I felt this book was just another ambush from a "gold bug."

Technically, a currency war occurs when one country intentionally devalues their own currency, because that helps their export industries.  It is a common method to boost economic growth and import inflation, both of which help decrease the burden of debt.  This is usually done by "printing money" or increasing the money supply greatly.  However, it hurts other nations because their exports fall and imports increase, reducing their trade balance and increasing their unemployment.  Currency wars really irritate trading partners.  It is a serious thing and often leads to shooting wars!

So, I kept thinking about the possibility of another global currency crisis and decided to read this book again.  Getting past the "ambush theme" this time, I noted that Rickards concludes there are only three possible outcomes, i.e., "paper, gold, or chaos."

If we do nothing, Rickards argues that another currency war is inevitable, as developed nations must deal with their national debt and devalue their currencies.  Doing nothing is a recipe for chaos.

He argues convincingly that a new world-wide currency, based on a basket of currencies (including the dollar, Euro, Yen, and Yuan) would preclude major currency wars in the short-run.  I believe that!  Then, he goes further by arguing that the new paper currency should be backed by gold, which would reduce the power of politicians.  Since politicians would have to vote to reduce their own power, I've never thought this was a realistic scenario and never took it seriously.

One step at a time . . . let's see the debate on a new world currency first.  It will hurt our American pride to see the dollar de-throned as the sole reserve currency in the world now . . . but it will help everybody in the long-run, including us.

The Fog of Battle

Some wars never end.  One battle just follows another.  That is the world of the investor, who is in a never-ending battle to manage risk and protect his or her portfolio.  Like all battles, there is fog everywhere, which makes it difficult to see reality.  There is the sudden eruption of loud things requiring immediate attention . . . but sometimes not.  There is always the threat of an incoming surprise mortar round from unexpected sources.   There are things that smell really, really bad.  And, there is the grinding fear of an ambush . . . or being out-flanked . . . or even over-powered.  It is easy to get "trigger-happy" and just start shooting.  In your gut, the urge to vomit and/or panic just waits for the right over-whelming moment of surprise.

Currently, investors are fighting the battle of Europe, which has already lasted two years.  Investors are tired and battle-weary.  They live in fear of each new headline out of Europe.  They are always listening for a rumor, any rumor, true or not.  They get ambushed by legal and political arrangements they are unfamiliar with.  They live minute-to-minute, waiting for an incoming round of destruction.  When they get ambushed by a surprisingly poor U.S. jobs report, for example, they get "trigger happy" and start selling.  The urge to vomit and/or panic starts to rise.

But, the odds of winning any battle are greatly improved by having a battle plan beforehand.  You know the first objective is to live to fight another day, while still taking the bridge or the town or holding a ridge.  You have been briefed on the enemy and their techniques.  You have planned for them.  You know to expect changes on the battlefield.  You adjust for them on-the-spot but stick with the battle plan.

For investors, you know your objective is to protect your portfolio for the long-run.  You know there will be changes that you must adjust for -- by increasing cash or reducing exposure to some sector of the economy or whatever -- but you stick with your battle plan . . . even when the urge to vomit and/or panic suddenly hits you!

One Knee Just Buckled

The all-important monthly Jobs Report was released this morning, and it was terrible.  While economists were expecting 155 thousand jobs were created in May, we learned it was only 69 thousand instead.  The unemployment rate rose from 8.1% to 8.2%.

Dow futures indicate the market will drop about 200 points at the open.  Interest rates on Treasury bonds are sinking to historic lows as investors look for a "safe harbor."  I expect to see QE3 soon.

All Spring, the U.S. economic data has been getting stronger.  Then, worries about Europe began to weigh on our stock market, if not our economy.  Now, we know the economy is being weighted down as well.

For the third straight year, the market and the economy are both taking a dive during the summer.  Hopefully, it will be the third straight year that both recover at year-end, and I'm confident they will.

Winston Churchill once complained that America can always be counted on to do the right thing, but only after exhausting all other possibilities.  I think that is true of all democracies, which includes Europe, who is taking forever to exhaust all other possibilities.

In the meantime, America needs a knee-brace to support the weight of Europe . . . or a decisive election in November!