Buy Low! Hang ‘em High! And The Rich Get Richer

“Buy Low. Sell High. And don’t get them confused!” There are few more important rules for investors. I’m struck once again by the faithful Pavlovian response of those who were hating stocks as they dipped briefly into Bear Market territory and now, after a 14% gain (in the S&P 500), are waving their bidding paddles and fanning their short-term gains.

This rally has occurred over the past three weeks when earnings reports have been mostly solid, but none of the macro headwinds have changed much. Europe is still promising a solution and the US is a month closer to a budget deadline for the Group of Twelve. Keep in mind that the EU leaders are promising a plan to alleviate the immediate financial crisis that is Greece, but we remain fractions away from crises in other European countries, including Italy, Spain, Portugal and Ireland. The European bank exposure to these impaired sovereign credits is vastly greater than similar exposures at US banks. But, the US banks will certainly suffer from any European default. We are all Europeans now.

Former Goldman Sachs Director Rajat Gupta is in Federal custody today over accusations he passed inside information to a money manager friend. Bravo to the regulators who may connect culpability with consequence and set an example to others. There will be fewer mini-Madoff’s if the original is paraded behind bars wearing handcuffs and an orange jumpsuit. Shame on you, Rajat.

A report from the Congressional Budget Office says the rich have gotten richer. According to the CBO, from 1979 to 2007 the average household income for the country’s top 1% increased by 275% (adjusted for inflation) while middle class incomes increased by less than 40%. The recognition of this disparity is the driving force behind the Occupy Wall Street movement.

I went to McPherson Square in downtown DC and talked with several of the protestors. They ranged in age from 19 to over 60. The average appeared to be in their 20’s. All reported to be upset by the state of the world, the economy, the government, corporate America and the plight of the average man. Surprisingly, a few of the protestors show up daily after work and come on weekends. A 26-year old named Jack told me that he had a job as a mechanic. He wanted term limits for Congress and fairness. He said that an elite Congress should not grant themselves privileged healthcare and retirement benefits that are much more generous than those available to their constituencies. (I paraphrased, but not a lot. Jack was bright, clean-cut, and articulate.)

I’ve written before that this outcry against the arrogant behavior of bankers and politicians may be garbled but should not be ignored. In current economic conditions, this group of disgruntled and disenfranchised will only grow in number and in their collective frustration, demanding to be heard.

In the fish market we advise ignoring the screaming and yelling and pay attention to the price of fish. Corporate earnings have been pretty solid. Balance sheets are strong for most US corporations, and dividends are healthy. As cracks in the euphoria threaten short-term gains, blue-chip shares are garnering much deserved attention. We are not on the brink of economic collapse nor are we at the threshold of economic Valhalla. The slow bumpy ride to recovery is underway and potential profits will be available to the prudent.

Hang in there!

Peace,

Michael