SOMEBODY HELP US.

Who is Going to Help Us? I just listened to the Fed Chairman discuss with members of congress the possibilities for helping us avoid a recession. I must admit, I don't have much faith in congress or the FED figuring out a way to resolve this problem. Although there is some talk of co-operation between Democrats and Republicans to obtain a solution that both sides support, it doesn't look to me like it can happen. The Republicans want to stimulate business growth to provide opportunity and higher incomes to consumers and the Democrats want to send money directly to consumers. I have a sinking feeling that neither strategy can work. Its kind of like trying to cure a night of binge drinking and overeating by sending the binger to the hospital for a stomach pump and an enema. That sometimes works in drastic situations but the cure is often more traumatic than the disease. Sometimes you just have to change your habits and let the natural mechanisms take over. Let's face it. We've been on a binge fueled by cheap money and foreign capital inflows. We need to slow down and regain our health to regain the confidence of the investment community. Some people will lose their homes. A tragedy, no doubt but they shouldn't have bought big houses they couldn't afford. Some consumers will have to stop spending because their credit cards and home equity loans are at a maximum. This will mean job losses and business failures in a number of sectors, especially retail. Some large banks and investment banking firms will have to scramble to shore up declining balance sheets and several highly paid executives will lose their jobs along with clerical and service workers. Home builders will have to cut their plans to produce more housing inventory in a market with more resale and foreclosure inventory than it can handle. When the smoke clears, we will regain our health and, hopefully, learn to live within our means.

How Do We Handle The Slowdown. I have a retired friend who recently informed me that he has sold most of his stock positions and has 75% of his investment portfolio in a savings account. He says his main problem is trying to support his family on a 4% yield. I have news for him. As the FED continues to cut interest rates, that yield will drop to 2-3%. While we have raised cash in most of the portfolios we manage, we don't recommend moving to that much cash. In a market where you can find 8-12% dividends, moving totally to cash is not a strategy I can afford to follow. If we utilize a portfolio that produces adequate cash flow and we employ more prudent personal spending strategies, it is possible to ride out the market adjustment and have some cash available when the markets recover. I realize this post is short on detail. I'll get more specific on strategies later on.