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"What we’re seeing are the chickens coming home to roost, as the free markets begin the important process of weeding out the bad apples..."

BRIEF INVESTMENT UPDATE - September 29, 2008

Seat Belts, Everyone.–

For all the intelligence we are purported to possess, we sadly remain creatures of emotion. Witness the markets – absurd roller-coaster-like volatility – as investors swing from abyss to euphoria then back again, with every morsel of news the next precipitating shove. It is trying to even the most patient and wise of investors; it is exhausting for those of us who are in the trenches of the business. Just as we saw last Friday after Thursday’s drop, we suspect today’s radical downward move will be followed, sometime in the not-too-distant future, by a Newtonian rebound to the opposite direction with a push from some good news.

That said, as everyone knows, we are currently in the grip of Congressional wrangling in terms of the “bailout” proposal. The danger here is not not getting something passed -- something will be passed. Markets will breathe some sigh of relief no doubt when that happens, but then the questions will come. Have we whittled the proposal down too far? Will this work quickly to not only strengthen the banks but encourage them to lend? How will the international community react? That’s before they start focusing on the long term economic fundamentals, which are weak, weak, weak. All made weaker, still, by the lack of credit that means businesses can’t borrow to buy raw materials for products to sell, people can’t get car loans or mortgages to buy homes with, and farmers can’t borrow to purchase seed.

Part of the problem underlying the Congressional gridlock is the inordinate amount of both anger and ignorance of the American public (now essentially being “rewarded” for who and what they voted for in 2000 and 2004), and the expected responses from their Congressional representatives. What a remarkable thing, indeed, to witness both left and right wings in the House join in a Kumbaya moment of solidarity. Neither extreme really gets it, though, and Americans are being held hostage. Watching Wall Street punish the left and right fringe, as they did today, is trying to all. One trillion dollars disappeared today not just from the hands of wealthy investors, but average folk in retirement plans and colleges savings accounts. Ironically, the $1trillion lost today is greater than the bailout package the respective political wings are loathe to support.

Granted, this is far from the perfect package – more needs to be done than what this bill can, or could, do -- but it’s what we have, and it would go far to unglue our current situation. (Perhaps we’ll weigh the advantages and disadvantages of the plan at another time.) Certainly ideology is part of the impasse (the perception of it being a “bailout” for the rich, the lack of sufficient bottom-up assistance, more government control, etc.) but it’s way more than that.

The essential aspect to the problem here, as I have been debating with Dr. Paul K., is that of process. The greatest plan means diddly squat if it can’t be implemented. This rushed “from-the-mountaintop” deliverance of a solution from Messrs. Paulson and Bernanke and Bush just doesn’t cut it with our angry and cynical population, particularly when those same mountaintop emissaries have been systematically bringing plagues after promises of manna to their flock. “Like, what kind of reception did you guys expect? Duh!” They may have credibility with many of those in the economic and finance world, but not to the average Joe. And right now, Joe -- the poor schlep in West Texas -- doesn’t quite understand just how much the fat cats he hears about on Wall Street and he are paddling in the same canoe that’s fast taking on water. Joe’s scared, and angry, and he’s not thinking or seeing very clearly.

The process, not so much the plan, stunk from the get-go. Despite the urgency, the lack of a ground game to get both the American public and their Congressional (not just the leadership) representatives early to the table, and an “our way or the highway” attitude combined with deservedly poor credibility by those championing the plan, are to blame. Didn’t eight years’ of failed arbitrary government by this administration teach us, or rather, them, anything?

So the upshot…. Buckle in and hold on to your helmets. We’ll get through this, but we’re going to remain highly vigilant during these very bumpy, difficult, and frankly, historic times.

Portfolio Actions.  

We’ll be looking to maintain cash and reduced equity allocations. Bond allocations will mostly be retained. Some equity hedging will continue. We will continue to identify upcoming opportunities.


Please feel free to call with any questions or thoughts.

Ron Stein

Good Harvest Financial Group


Disclaimer: each investor has different needs. The information herein should not be used to direct investment decisions without assistance. No guarantees can be made or implied in the above information.
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