Back to Business...

With the election behind us, we should now consider what the near-term holds for our portfolios. To tackle the first question on everyone's mind: Is Barack Obama going to be good for our portfolios? My view has long been that the President has far less effect on economic outcomes than folks would like to believe. Mostly, people believe that if something good happened on "their guy's" watch, then he deserves credit for it. If something bad happens, it's not his fault. Conversely, if something bad happens on the "other guy's" watch, it's clearly that guy's fault. Phooey. Mostly, stuff just happens. I don't need to be shy about the fact that I'm no fan of G. W. Bush, but I'm not about to lay this financial crisis and economic downturn at his feet alone. Lay it at Greenspan's feet? You bet, but that's a blog for another day...

President-Elect Obama has shown all the signs of preparing to deal with our economic problem in a thoughtful and rational way without resorting to populist salves. He has, to date, surrounded himself with experienced and thoughtful advisors with a decidedly centrist economic bent. We remain optimistic that, to the degree an Administration can do much at all, the pending Obama administration will do a good job. The real cures for our economic turmoil are out here on main street and time needs to pass for things to turn right again.

I like to think about our current predicament as a family that has built a third story on its house, and then moved everything up to the third floor. The view from the third floor is grand and we have all the worldly comforts we can imagine. But then one day we realize that we can't afford the third floor that we built and begin to move back down to the second floor.

Once we are back on the second floor and a little time passes, we will realize that the view from here is darn near the same. We have pretty much the same stuff, even if it's not as new as we would like. Frankly, life is hardly distinguishable from that third floor we used to think was so essential.

The US Consumer is in the process of moving down to the second floor. The painful disruption is not in the eventual destination -- it is in the moving down process itself. The longer it takes to get the move over with and to board up and forget about the third floor, the longer the recession will last and the longer the bear market will last. As I write this, the move down seems to be picking up speed. While I do not gloss over the pain of that move down -- job losses, bankruptcies, depleted portfolios -- it's better to get the move over with sooner rather than later.

Our investment themes for the time that the movers are still carrying boxes:

- Remain underweight to stocks. Look for opportunties to buy small amounts when the S&P500 index is below about 925. Accelerate a move back to full allocations if the S&P500 moves sharply down into the <800 range.
- Stay short on the bond maturity spectrum. 3-5 years at the longest.
- Stay in high-quality bonds. Treasuries, mortgages and high-grade corporates.
- Buy muni bonds. Again, stay short (3-5 years). Munis are a screaming good deal right now. Stick with high-quality GO (ie, voter-approved) and utility revenue bonds and you won't need to worry about looming budget problems in the municipal sector.

Congrats to those whose candidates/initiatives won and condolences to the not so fortunate. We're all still one big happy family and we now look to the road ahead.