A Break in The Clouds
Research for Online Investors

by John Dalt

6/9/10

Federal Reserve Chairman Ben Bernanke testified before the U.S. House Budget Committee this morning.  He warned the committee of the importance of a budget plan that brought the deficit down.  He instilled confidence in the markets that the economy was recovering, as market rallied while he testified.

The hearing was typical political point making.  Every democrat seemed intent on introducing his question with a statement of responsibility pointing back to the Bush Administration.  Republicans pointed out the deficit increases since democrats took over congress.

Reuters reported that China exports grew by 50% in May year-over-year.  Copper prices are up almost 3% over Monday’s close.  Copper inventories are down 15% from February and at the lowest level since last December.  Aluminum stocks were reported 3% lower than the record inventory in January.  The official Chinese export report is due out on Thursday.

The New York Times reports that European Union finance ministers agreed to tighten oversight of individual government budgets.  Talks in Luxemburg ended on Tuesday with agreement on details of the bailout for eurozone countries with credit problems.  France wants Germany to stimulate demand while Germany wants to cut expenditures and rein in the budgets.  Germany has the economic engine in Europe as the continents main exporter.

Three macro trends have been weighing down the market for the last seven weeks.  Put simply.  Is the U.S. economy growing?  Is the eurozone going to collapse?  Is Chinese economic growth going to continue, or will their credit restrictions push them into recession?

The jobs report last week called U.S. economic growth into question, but the other two problems seem to be answering themselves.  Our market now is so damaged by perception from seven weeks of bearish action; we may have trouble restoring confidence in investors.

With all the belt tightening going on around the world, from Russia to Europe, wouldn’t it be a jolt of good news if our congress prepared a budget that actually cut spending in the U.S.?

To the Mailbag:
Spirited retort to my critique.  Richard Nixon kept Lockheed from bankruptcy, Obama kept GM afloat by making us taxpayers its new owners.  Why are Nixon and Obama wrong?--- subscriber J.R.

John’s reply:  J.R., always a pleasure to debate you.  I had to do some research for this as the Lockheed loan guarantee occurred while I was in college, and preoccupied with the fairer sex and beer.  I do remember the occasion, and my disgust with it.  Not to beat up on Nixon, but he chose the easy path of the world improver and planner.  He felt he had to do something rather than let free markets and capitalism work.  Lockheed should have failed; McDonnell Douglas or Boeing may well have bought the company or assets.  It merged in 1995 with Martin Marietta because of its valuable assets.

There are differences in the rescue and bailout.  Lockheed’s was $250 million in loan guarantees extended to their banks, not $40 billion spoon fed from the Treasury.  The government did not interfere with bond holders, or reward the unions except with continued employment.  The government intervened to keep Lockheed out of bankruptcy.  In GM’s case the government cynically used bankruptcy as an excuse to take over the company and reward favored interest groups.

Neither is defensible.    Remember also, Nixon instituted wage and price controls and took us off the gold standard.  These actions were to cover the costs of the Vietnam War rather than use honest budgeting.  It is no wonder the country spiraled down under Carter, but he was not up to the task of inspiring a country through hardships, and neither is Oh! Bama.  This is because Oh! Bama believes government can solve all problems, as opposed to the more realistic view that government is the problem.

Quote for today:
In my many years I have come to a conclusion that one useless man is a shame, two is a law firm and three or more is a congress.--John Adams

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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