Financial stocks

I've sold my Citigroup stock (C). Big whoop, you say, the financial crisis has been all over the news for months? Well here are my thoughts on the matter: I think it's best not to invest in financial stocks at any time, because the CEOs get paid for short-term results while the shareholders are left holding the bag for long-term losses. Citigroup and Merrill Lynch CEOs walked away with a bundle during the go-go years just past, leaving their companies loaded with bad debts. Surely these financial experts knew very well that all those subprime loans were going down, but it didn't matter - they just needed a few quarters of paper profits to pocket millions in bonuses.

The big problem with financial stocks is that they make their money borrowing short-term and lending long-term, and for this to work requires a conservative approach. Whereas maximizing the CEOs bonus requires a speculative approach. This fundamental disconnect makes the stocks a bad bet.

Tighter Immigration

The business papers have well noted the bearish effects of the housing meltdown. The tightening immigration situation is another bearish factor that is not often considered. Illegal immigrants work and produce things in this country, and they spend money here. They also need houses and apartments to live in. Deport them or make it harder for them to come here in the first place, and you reduce GNP. I'm just saying.

Election Day 2007

OK it's next Election Day now. Let's review: Saddam Hussein was captured Dec. 16, 2003 and finally executed Dec. 30, 2006. (I wonder how many have died in Iraq since 12/16/03?) Dow Jones is at 13,660 - up 1,500 from last election day. Crude oil traded at a record $97 a barrel today.

Speaking of oil prices, I remain bullish. Producers seem unable to increase production, inventories are short, and in China and India car ownsership is booming. There's no telling how high oil will go - it could easily reach $200.

VDMIX closed at $14.63, up 28% from May of last year when I touted it. I remain bearish on the dollar. The trade deficit shows no sign of slowing and the budget deficit is out of control. The big event coming up is when foreign goverments start to keep their currency reserves in a mixture of dollars and euros (which is only prudent) and which will hammer the dollar.

Microsoft is $36.41 - getting to that $39 target. The point & figure target is now $50, but I don't believe it. The new Windows Vista is lame and IMHO inferior its predecessor Windows XP. The new Office is nothing special. Soon people will wonder why they are upgrading. And the Mac OS now runs on Intel and could easily be sold for use on non-Apple PCs - then what happens to the Windows franchise? More on this later.

Election Day

Saddam Hussein sentenced to death two days before the election - coincidence? There is an appeal process, so perhaps his hanging will be delayed until the next election - we shall see. Dow Jones average at new high just before the election - will it drop afterwards? We shall see. Gas and oil prices ease - will they rise after the election? We shall see. Today's DJIA 12,105 and crude oil $60 to the barrel. Saddam still alive and kicking.

The Decline of the Dollar

The United States dollar has served as the world's main reserve currency since it took over from the British pound after World War II. Asian countries in particular hold huge amounts of US treasury debt as backing for their own currency. The Bush administration has cut taxes and increased spending, especially spending on war in the Middle East. As the national debt rises higher and higher, how will it be paid off? The choices are raising taxes, cutting spending or allowing inflation to do the dirty work. The President is famously in favor of tax cuts, and has said that the war in Iraq will continue through the end of his term. If a Republican wins in 2008, he or she is unlikely to end the war quickly, and the leading democrat, Hillary Clinton, voted for the war. So the huge deficit continues into the indefinite future. Those countries that hold all these dollar reserves must be thinking that a little diversification would be prudent, most likely into the euro and the yen, I would think, though Far Eastern politics might make yen reserves unlikely. Such a change, plus the increased amount of debt to finance, would force the US to raise interest rates to attract sufficient funds. And these higher interest rates would be bad for US stocks. So I'm thinking it's time to devote a significant fraction of the portfolio to European stocks and perhaps Japanese ones as well. Even if the stocks go nowhere in their native currency, the currency shifts will turn them into big dollar gainers, and the US stocks by comparison will suffer from the effects of high interest rates.

One mutual fund that looks attractive is Vanguard's Developed Markets Index Fund (VDMIX). It's invested 2/3 in Europe and 1/3 in the Far East. Today's price is $11.38.