Prepare for Gridlock…or Worse

Tomorrow night the polls will close. There will likely be a change in the leadership of the House of Representatives and maybe the Senate. If change does occur in just the House, then the order of the day will be gridlock. Up until now the Dems have been able to push their agenda through Congress with only token opposition. That will change, as the Republicans will want to hamper the Democrat agenda in hopes that they can take back the Whitehouse in 2012. If they win control of both houses, expect mayhem, as they will try to reverse the policies of the past two years.

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Under scenario one, a change in control of the House of Representatives, the market should react mildly as it is all but priced in. Under the second more radical scenario, the markets may react negatively as it spells uncertainty. What the market is keying in on right now is enough opposition to the change in tax regimen that has been promised by the Democrat party. Reversing the tax changes set forth by the Bush administration would negatively impact the market since it affects capital gains and dividend taxation law directly. Whatever happens on Tuesday, one thing is for certain – the markets will be volatile for some time to come.

The Volatility Index or VIX has come back to life in recent sessions after heading in a straight line downward. If this reversal continues, look for a sharp correction in the market as the “gap” that is needed to be filled on a technical level indicates a correction of around 10% or more is in the cards. With the level of quantitative easing promised by the Fed, any sharp correction should be viewed as a buying opportunity as easy money is the best catalyst for market out performance.

Back in the Real Economy

The real economy still stinks. Job creation is still benign at best, median home prices nationwide have corrected a whopping 35% since the top and in places like Florida, the median home price has corrected by more than 50% from the top. This type of correction in the housing market is unprecedented. It is also creating unprecedented opportunity.

I recently spoke to a top realtor in South Florida and for him, business is booming as money is flowing in from South America, China and Europe to take advantage of a weak US currency and a weak housing market. Bargains abound and if you have cash and patience you can score the deal of a lifetime. Not unlike the stock market in 2008/2009, the housing correction has reached its zenith and the downside is quite limited from here. However, it is also when the bottom is near that most people tend to shy away the most from opportunity. It is the ‘herd mentality” at its best.

Recently I had the opportunity to invest in some income producing real estate in South Florida. It was a rental house with an additional apartment. My partner who put the deal together bought the property for $26 per square foot. It needed about $20 per square foot in renovations and refurbishment; bring my total cost to about $46 per square foot. Both the house and apartment are now rented and producing excellent cash flow. Opportunities like these are everywhere and it takes effort and due diligence to find the right one, but the rewards are quite plain to see.

QE II

The Federal Reserve once again has stated that it is in favor of even more quantitative easing (QE). Goldman Sachs believes that the stimulus to the economy needs to be something in order of $4 trillion dollars in order to get the employment engine going again. That is a whopping 30% of GDP. If that is the real number, we can expect the dollar to tank further and the price of gold and equities to soar. However, Goldman is known for its exaggerated price targets during times of crisis. About $1 trillion in stimulus is already priced into the market as it stands today. The wrong place to be is US Treasury obligations, which are close to their top in terms of low yield and high prices. Additional issuance, which is the source of stimulus funds, will create less demand and higher supply as investors lose faith in the greenback. While it hasn’t happened yet, the laws of economics have not been repealed either. The resulting higher interest rates could have severe consequences on the market especially if the early results of any stimulus continue to show tepid growth.

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Gold prices have declined in the past week despite the talk of additional stimulus. I believe the decline is due to a normal correction in an asset class that has outperformed. More perplexing is the performance of senior gold mining shares. They are still trading at 2009 levels for the most part not reflecting the performance of the underlying metal at all. If priced in, these shares could jump 20% to 50% in the months ahead and still be considered undervalued. The best way to play this move would be through the purchase of LEAP options, or long term options. Why? Because they give you greater leverage to the price of gold shares and require an investment of just 15% to 20% of the underlying share price for control over the shares for a period of two years.

The final two months of 2010 should prove to be the most exciting and maybe most volatile months in the market this year. Be sure that you are ready for some wild swings as investors digest the results of the election. And, always be aware of the fact that this market could correct 10% or 20% in one week…it has already shown us that the only predictable aspect of the stock market is its ability to be unpredictable.

Regards,

Kevin Raymond

8 Responses

  1. Don White

    Kevin Raymond you are a progressive pawn. How can you say if the conservatives take both houses of Congress that uncertainty will increase – a hazard? I don’t think so. Uncertainty is running rampant today under the Dems. Republicans will bring back a degree of certainty, exactly what small business owners are looking for. Yes, we will roll back many or most of the Obama agenda – but we will have to throw Obama out of office in 2012 before that can be accomplished because if you think Congress will be hard to deal with, don’t forget Obama. He will suddenly become adamant not to sign any conservative rollbacks and with that he will sign his own “demise” sentence. Don White

  2. Kevin Raymond

    Whenever there is a radical change in the parties in power, there is uncertainty. To say that the Republicans will bring back certainty is naive. They are facing the same budgetary issues that the Democrats face. Both parties are at equal fault for creating these issues. To think that the Republicans will somehow wave a magic wand and eliminate the issues facing the country is inaccurate at best. The recent showing by the “Tea Party Movement” will impact the Republican platform and if either party thinks that it can move forward without radical changes to taxes or spending, then they are kidding themselves and us. It doesn’t matter who is in office in 2012. The problems faced by the US from a fiscal and monetary standpoint will trump whomever is sitting in the oval office. K. Raymond

  3. Eugene Garner

    It is obvious that most democratic incumbents in this election cycle will be dumped. The real question is WHO will replace them? If it is rank and file republicans, most likely it will just be business as usual with more finger pointing as the Federal Reserve just grinds us into more debt slavery.

    If the Tea Party candidates and other independents that are serious about getting back to the checks and balances of the Constitution, auditing and dumping the Federal Reserve, a lot of positive things can happen.

    Admittedly, in the short run a lot of chaos will ensue, but in the long haul, only the restoration of unalienable rights and freedoms will allow the private sector to once again take control of small business and allow growth.

    Government cannot produce anything that it first has to steal from someone else.

  4. Tony

    I have no faith in either the GOP for Dems. Forget party line vote, both are worthless. What we need is none of the above, none of them are the lesser of the two evils. I’m not coming to the voting booth and I don’t care who’s winning.

  5. Richard

    The only thing that will cause chaos and mayhem is a lack of intelligence. A healthy economy depends on exchange of goods and services. Exchange of goods and services happen when consumers have money to spend. Consumers spend less when they are unemployed. Employers and consumers have more money and more people are employed when taxes are less. Therefore the only intelligent and sustainable stimulus recovery is created by a tax holiday on the payroll tax – $50 billion per week, or $1.3 trillion infused immediately into the economy in 6 months — elimination of cap gains tax and a 2 year corporate tax holiday on new bank start-ups. This would end our current depression overnight; trillions of dollars of business investment would pour into the economy, bank bailout money could be withdrawn, employment would drop to best ever levels and the DOW would soar toward 40,000. Some reasonable tax rate could be re-established after 6 months, or an alternate tax method implemented, within that time. Even better, someone of public prominence, with even minimal IQ, could explain the cause and effect scenario and convince most voters to get the Marxists out of Washington — hence our best years would again be ahead of us. Again — the missing ingredient is intelligence – there just isn’t much of it in the general population; a fact the Marxists rely on, clearly benefit from and, as in all Marxist societies, directly encourage.

  6. Eugene Garner

    Richard,

    are you missing something here? There are extremely few jobs left that aren’t in the government sector or the military/industrial complex. Both of these are a net debt to the country. Our domestic private industries have been shipped overseas, so public buying would benefit foreign countries and not add signifigant jobs in the U.S.

    Since the Federal Reserve is the only source of money, banks running the usual fractional reserve ponzi debt scheme would furher our slide into debt slavery, while massive inflation would sink our 5 cent dollar into oblivion.

    You are right that inteligence is the way out of our delema, but we have to fix the money/debt cycle. The existing system can only get worse, it was planned that way.

  7. Richard

    Eugene:

    You are trapped in a disfunctional paradigm — the Marxuist view that economic activity revolves around govenrment initiatives — and appear to either not have read or not understood a word of my previous post. More money in the econmoy grows business and grows jobs. Letting people keep their money results in more spending which again grows jobs, more spending and economic growth. Creating tax incentives for investment takes the trillions of dollars sitting on the sidelines today because of our governmental mismanagement and pumps it into our economy, creating jobs and placing the DOw on steoids. Save me repeating myself by reading my previous post (use a dictionary if necessary) and make sure you understnad the concepts before raising any further questions. If I were president our depression would be over tomorrow, for the reasions cited. It is amazing the lack of functional illiteracy that exists in this country, [particularly about history), as we are repeating it. FDR actulalyh pecreated and prepetuated the 2nd depression by unecessarilly taxing add socializing our society. Our First Depression, in 1920, was solved by using the prescription I have previously set out. If you do not relate to the terrm First Depresision of 1920, I suggest you study history.

  8. Tammy

    History does seem to repeat itself. People are slow in learning from past mistakes. Anyway, i think the two-party system is bull. The only thing the two party system has accomplished is keeping the people divided. I’ll be voting for the 3rd party.


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