Buy stocks like cans of tuna fish! 

Blame it on Congress!

On Friday, July 22nd, US stocks were within 1.4% of the high set for the year April 29th. Over the weekend, Republican Congressmen rejected a deal crafted between House Majority Leader John Boehner and President Obama. The resulting uncertainty caused stocks to drop 6.7% over the next 7 trading days. When agreement was achieved August 2nd, stocks fell another 4.3% in three days (11% or $1.8 trillion in market cap over 9 days) as investors agonized whether the fumbled legislation would turn US GDP negative in the second half of 2011 (the dreaded "double-dip recession.") In a recent New York Times/CBS News poll, when asked "Do you approve or disapprove of the way Congress is handling its job?" a record 82% of Americans disapproved, only 14% approved. When asked, "What are your feelings about the ways things were going in Washington, "56% were "dissatisfied but not angry" while 28% were "dissatisfied AND angry."

Naturally, we are fielding a number of phone calls and e-mails from clients who worry that the 11% selloff is a prelude to the 55% selloff we saw in 2008-9. As we have mentioned frequently over the last two years, with the system substantially deleveraged, there's very little chance of margin calls creating the cascade of sells that characterized the financial crisis three years ago.

Buy stocks like cans of tuna fish!
Instead, we have a garden variety correction (decline of at least 10%,) which creates opportunities for investors willing to look past the headlines and sound-bites. We have created an investment culture where the whole world gathers at 8:30 AM EST to debate whether the "risk trade is on or off." If the risk trade is "on" then we're supposed to buy stocks, commodities, corporate bonds, real estate, while shorting the dollar, gold and US treasury bonds." If the risk trade is "off," we're supposed to do the opposite. Yes, we can readily accomplish these transactions through various ETF's but what we actually achieving? We're buying assets that are rising in price, while selling declining assets. Isn't that "buy high/sell low?" Won't that lead to wealth destruction?

Read the entire commentary here.