We have had a lot of people ask us what will happen to the stock market and other investments if Obama is elected or if McCain is elected. First of all, we think any sitting president gets way too much credit if the economy is good and way too much blame if the economy is lousy. That’s not to say the president is irrelevant. Clearly he (not a “she” yet but getting closer) can have some effect but there are so many other factors over which a president has no control that we think it is dangerous to make big investment “bets” based on who you think is going to be elected.

Our government has a rather large debt to pay off and either candidate is going to be faced with not enough revenues to pay all the expenses. Both of them have discussed raising taxes but in different ways. Neither of them has been very specific about how he will reduce spending. But that is the real problem with the campaigning system….if you get specific about how you are going to raise taxes or where you are going to cut spending, you don’t get elected. We repeat, don’t over-engineer your investment portfolio based upon who you think is going to be elected.

The bigger issue to worry about when investing your money today is the issue we have been dealing with for the past 12 months….sub prime lending, the resulting credit crisis, the slow-down in consumer spending and the higher costs of goods and services. Our economic malaise is far from over.

We had a little bit of good economic news in July. Oil, which peaked at about $145 per barrel in the first week of July, proceeded to trade as low as $121 in the last week. And we have actually noticed it in the prices at the pump (barely). I paid $3.79 yesterday. However, at the end of July, 2007, oil was priced at about $77 per barrel so it is still up over 60% in one year. Corn also declined in the last month from a high of 751 to 593. However, one year ago it was priced at 320 so it is still up over 85% in one year.

More disturbing is that, as quarterly earnings are being announced, financial companies that took huge write-offs three months ago (losses from sub-prime mortgages), are writing off more losses this quarter. Merrill Lynch just wrote off another $4.7 billion. Why? Because the sub-prime mortgages they thought were worth about 50¢ on the dollar three months ago are now being valued closer to 22¢ on the dollar.

The Wall Street Journal reported today that 4% of all homeowners are delinquent on their mortgage payments and 2.5% of all outstanding home loans were in some stage of foreclosure. If consumer spending in the U.S. is going to be robust, it won’t be because of any of these people. The WS Journal also reported that the average single family home declined in value by 16% for the 12 month period ending in May. This erosion of home equity further restricts the US consumer’s access to funds.

On a side note, the WS Journal also reported today that a family who was the recipient of a luxurious new home via ABC’s Extreme Makeover television show defaulted on their mortgage payments and is now in foreclosure. They took out a $450,000 mortgage (against this home that was donated to them) to start a business that failed. Should the government bail them out of their financial mess? We don’t think so.

Even though we are not very optimistic regarding the global economy, we have started to purchase some securities. In the near term we are focusing on defensive stocks (food and beverages and health care) that pay handsome dividends. Since the S&P 500 peaked October 9th last year, it has declined 19%. So as negative as we are on the economy, some of that negativity is already built into the prices of some stocks. Over the longer term, we continue to think that inflation and higher interest rates will pose a hurdle to investing. Hard assets, raw materials and short-term fixed income securities will become more important.

The monthly update on my daily bicycle ride (see June and July Commentaries):

There are 25 homes for sale, an increase of 2 from last month. Although some signs from earlier this year have been removed, I have not seen one sign that ever said “SOLD”. In this economy, if you are a realtor with a house that sold, you would definitely want to announce it loudly. Bottom Line: no improvement.

 

This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice.  Past performance of any market results is no assurance of future performance.  The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.