Model Portfolio timbo56:SSOF1

Some believe that they can see far into the future in predicting the stock market, but I do not believe it. For example, October nosedive was not the result of any irresistible long term cycle, but rather the effect of recent government errors that were easily avoidable. These were: 1) failure to prevent a bankruptcy of Lehman Brothers; 2) the twenty day delay in the passage of the Emergency Economic Stabilization Act 3) Bush’s rejection of a stimulus package.

Weeks after Lehman Brothers declared bankruptcy; Fed Chair Bernanke and then Treasury Secretary Paulson stated that neither the Fed nor the administration had the authority to save Lehman Brothers. How strange, then, that both Bernanke and Paulson waited weeks to take this position, rather than stating this right at the time of the Lehman Brothers bankruptcy. So very strange that the government had been able to avoid a Bear Stearns bankruptcy before, and was able to save AIG a day later, but could not save Lehman Brothers. How very, very peculiar it is that neither Bernanke nor Paulson asked for expanded authorization from Congress, so that they could save Lehman Brothers. How weird that at the time Paulson stated that, "I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers." If he had not had the authorization to avoid a Lehman Brothers bankruptcy, why did Paulson announce his opinion as to appropriateness? If there had truly been no authorization, appropriateness would have been moot.

It was only after it became clear that the Lehman Brothers bankruptcy caused a chain reaction that resulted in devastating problems for the world economy that both Bernanke and Paulson took the position that they were not authorized to save Lehman Brothers. One must sadly, however, reach the conclusion that the Lehman Brothers bankruptcy resulted from a choice made, principally by Paulson. No other conclusion makes any sense.

The decision to let Lehman Brothers go bankrupt was bad enough, but then the delay in passing the Emergency Economic Stabilization Act (EESA) made a bad situation worse. With the investing community waiting on tenterhooks to see how the vote would go and tension mounting day after day, the economy paused and fell during this period. When the bill was passed, the situation had become so much worse that the EESA was unable to stop the downward momentum.

Finally, on November 6 Nancy Pelosi proposed $61 billion in stimulus spending and on November 7 Tony Fratto, Bush's press undersecretary, killed the idea. Never mind that liberal and conservative economists agree that this is what needed and needs to be done, we have been cursed with a president who does not listen to what the learned say. So we have been in a free fall.

It is also instructive to go back farther. For some reason the Office of Housing Enterprise Oversight did not promptly raise the limit on conforming loans, and when it did raise the limit, did so only tentatively and part way. A big increase in the limit for conforming loans could have done a great deal to buffer the fall in housing prices and to avoid the resultant fall in the value of mortgage backed securities. The accounting rules decision that banks would have to mark to market their mortgage backed securities also greatly damaged the solvency of the major investment banks.

The issue that I have with lauding and now crediting the early predictors of doom, such as Nouriel Roubini, is that things did not have to be this way, and the way things have developed is the result of terrible government decisions that were unpredictable. Perhaps I should have realized that with someone like Bush in the White House, someone who has never shown an appreciation for scholarship and expertise, that disaster was waiting to happen.

The good news is that in a mere 17 days Bush will be gone. We will have a new Administration that does respect scholarship and expertise. The National Economic Council will no longer be directed by Keith Hennessy, who does not have an economics degree, but will be directed by Larry Summers, who has a Ph.D. in Economics from Harvard and a world of experience in Academia and public service. I have nothing against Keith Hennessy (who does have a bachelors in math and poli. sci. from Stanford and a Masters in Public Policy from Harvard), but his appointment as director of the National Economic Council, when he does not have a degree in economics, showed that Bush does not value scholarship and expertise in economics.

The greater point is that Obama is assembling a great economics team, one from which we should expect great things. There are some things that I will not believe, and one of these is that we are the helpless victims of circumstance, unable to do anything to better our situation. This cannot be the case, especially when it comes to economics. The government can and should make a difference. Starting in 17 days, thank goodness, I believe that government will.

As the focus shifts to the Obama administration, with the new Congress being seated on January 6 and work beginning on a stimulus plan, I believe the market will tend to go higher. Of course, Bush can still create problems on his way out, so every day closer to the inauguration is another chance for trouble finally gone. History shows that recovery rallies take place before most investors expect. The stock market is still remarkably low, with great values abounding. If we wait until Obama has been in office for a few months, the opportunity is likely to be largely passed. Of course, that is the general rule: Things are only clear after the fact. Opportunity must always be taken when prospects are not clear.