At Arm's Length - Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 04.27.05

Down Draft

You have to feel badly for him. Mr. Bush really believes he has the right plan for Social Security. He really believes that his political capital and focus(ed) group support are enough to sway American to sign up for a very costly solution to a not so complicated problem.

What is even more ironic is the fickle nature of the stock market as a backdrop to his sales pitch. Considered to be the answer to the New Deal program's financial woes, a conservative plan whose surplus has been skimmed from the surface to the tune of $150 billion a year, the equity markets decided to rain on the President's parade and give back much of this year's gains - and some of last.

We are all fully aware of the long lists of worries that the market can choose from on any given day. But should these concerns be considered from an individual perspective or as an indicator that the basket of bad news is a precursor for a major down draft?

The market is supposed to be a forward thinking mechanism that forecasts a company's value. That value is interpreted in the share price and calculated against earning to arrive at a price/earnings ratio. Those earnings, however are the result of a leaner operations staffed with skeletal workforces financed by incredibly cheap cash. Share buybacks hit record numbers last year as well and that has kept the share price inflated just enough to keep the market satiated. But if the market is based on this predictive model, the recent sell-offs, even with heavy volume offer a very telling tale.

That story has two distinct morals. The first of which applies to those with a short term horizon. The stock market is poised to give even hardened investors a wild ride. Keeping focused during the next three quarters might be better directed if we turn to grilling meats outdoors rather than looking for the next right place to put your money. The market is telling you that all of that artificial stimulus as a result of tax cuts have run their course.

The interest rates, accommodating the President's "deficits don't matter" economics, made matters worse for too long. With Mr. Bush looking to dip deeper into debt to fund his pet project, the veneer of strength in the equity markets has begun to crack.

Short term horizons of up to twelve to eighteen should be prepared to watch the markets look deep into a future. What they will see is a landscape of of higher oil and commodity prices with noticeable inflation - that might just turn into a stagflation. Is the market looking forward at slow economic growth and high unemployment and prices that can not be restrained?

Long term investors should by now understand the opportunity investing by doing nothing provides. These are the days that make dollar cost averaging so attractive to investors.

Mr. Bush is correct in assuming that the market will reward those who invest over the long term, with investments indexed against the S&P 500 during the last seven decades and held for at least 10 years returned 150% with dividends reinvested. The twenty year investor showed a gain of 600%. Those numbers seem incredible and they are encouraging but the strength of dividends were the shining spot in this type of investment.

The market is there to suggest that it will not treat all investors equally at all times. Mr. Bush falls short with his appeal to create private accounts indexed to these past gains largely because his plan would force retirees to purchase annuities at the time of retirement. Much of the gains that would have been made over the years of redirected savings in accounts outside the fixed Social Security benefit would have been diminished during periods such as these.

The market understands rolling averages. So would the President's private account investor looking for the right moment to lock in their benefits in a market priced with worry.

The previous week's articles.

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