More Government Cheese

During the 1980's, pasteurized processed American cheese was provided to seniors, welfare, and food stamp recipients in the United States as a form of assistance to those who needed financial help the most.   Much humor was embedded into the American culture about the cheese program.  A person receiving such aid was said to be "living on Government Cheese" in a derogatory manner.  Unfortunately living off the cheese still exists and has spread into corporate America.

Monday's government takeover of Fannie (NYSE: FNM) and Freddie (NYSE: FRE) represents the fourth attempt to pull the financial sector off life support.  The Federal Reserve has cut interest rates nine times or 3.25% since August 2007.  In March, the Feds helped arrange and finance the bailout of overleveraged Bear Stearns.  In addition, they created new systems that allow investment companies to draw emergency loans from the central bank, without specified reserve requirements.  Something Lehman Brothers (NYSE: LEH) is surviving on today.    And finally, the coup de grace, being the largest government bailout ever in US history, the conservatorship of Fannie Mae and Freddie Mac.

Treasury Secretary Henry Paulson Jr. said the government would inject up to $100 billion in each, but we have now backed approximately $5 trillion of debt obligations.  I want to check the U.S. Constitution to see if this is legal. We as taxpayers are now entering the mortgage finance business, using taxpayers' money to attempt to rescue the irresponsible lenders and homeowners from their own mistakes.  This time we are bailing out those who took the most risk!  Where is the lesson in that?  Be aggressive because if you get in trouble the government will bail you out?

There is a tremendous amount of cash on the sidelines.  But that cash is waiting for the right price to get in.  Water seeks its own level.  Investors find value at the right price.  Collectively it seems we have bought into the "too big to fail" mentality and in the long run it will cost us dearly.  The deficit is so large we are devaluing our money.  We don't see it with the current US dollar rally because this devaluation / deflation is a global experience. 

The best current place to invest is in cash or individual government bonds.  This may be "The Bottom" for the stock market or we could see a quick decline to 1080 on the S&P 500 which equates to another 10 - 13% from here.  Having a risk management plan is absolutely necessary in this risk charged environment.  Everyone is investing it "for the long term."  But in the end it is what you keep that counts.  Use a safety net such as stop losses on every position or at least decide today how much money you willing to lose on every position in your portfolio.  This strategy trades "opportunity" for "real money risk."  But money if finite and there will always be another opportunity.

For a Free, No Obligation portfolio review or how to apply stop losses on your accounts, call my office toll free (800) 449-9501.