Election results: Outlook the day after

First some local comments and then a broader National view on the elections last night. So called Liberal California defeated the Proposition to legalize Pot. It could have contributed tax money some estimate in the Billions, to alleviate a shortfall in tax receipts, but it didn't pass. So I don't want to hear anymore about "liberal California" or phrases like "Left Coast." If we were so liberal we would have passed the legalizing pot measure!

Jerry Brown beat Meg Whitman for Governor and Barbara Boxer held her seat for a 4th term. I expected Boxer to win but not Jerry Brown. I personally liked Meg Whitman because she was smart, a very good person and had good common sense. She was perceived not as warm and friendly and approachable for people, but any who knew her, know that she just wasn't a typical politician and she wasn't a phony. She was and is a genuine person who I have a lot of respect for. I knew her when she worked at Bain & Co. at the same time Mitt Romney also was at Bain. I like him a lot too and he is very smart. Bain & Co. was my client for many years and they had a crop of Senior Partners that were and are brilliant.

Nationally, the election unfolded as was expected. The Republicans won the House in a big wave taking many moderate Democrats with them and returning those States to the Republican control. The Tea Party had a respectable night getting about 50% of those races they were competing in. But what does this mean for the country going forward, as the Senate remains in Democratic control? It means that many problems will remain unsolved. If you are looking for legislation coming out of the House that will reverse Obama's policies, it isn't going to happen. The Senate will not pass anything the House sends over, that the Democrats don't believe in, just like the 420 bills the Republicans stopped from passage in the Senate with the filibuster. There is a short window to pass some key legislation from those 420 bills awaiting Senate approval, if the Democrats push some in the lame duck session. But that will take some guts. And I don't know if they have found their balls yet. Maybe Sen. Harry Reid did, as he was reelected for 6 more years, and he doesn't have to worry much now about reelection.

Time will tell but I don't see much changing by the politicians. I see gridlock, not the good kind, but the bad kind.

Overview of the next few months in the economy, politics and the stock market

I believe in the coming few weeks there will be a great battle in the stock market for the very soul of the market. One group of players will be those Bears, who like me, believe we have been lied to and the markets manipulated to keep us happy. The other players are the Bulls, who believe the lies of the Government and the Fed and think things have been getting slowly better.

I do believe the stock markets will drop significantly in Sept and Oct., set up a angry Consumer and Electorate, who will then go to the polls in November and vote to "throw all the bums out". This will be followed by a Republican victory in the House of Representatives, which will mean a return to endless investigations using the new subpoena powers they will have in the Congress and they will continue to stop all legislation on Energy, Healthcare and of course any Social agenda to help the Unemployed.

A stock market rally will follow the election in support for the change and a Republican victory and election to a majority in the Congress. They will continue the Bush the tax, which are scheduled to expire in January 2011. They won't allow it to end as it has been big business for them to stop it, so the most affluent can keep their money, which, in part, pays for the politicians to vote their way. The consequence of which will be that deficits will be out of control going forward as will the interest payments we will need to pay each year to pay for all our debt. It will be an irresponsible policy move. Of course these newly elected members of Congress will get us into a catastrophe much quicker with reactionary new policies, and this will drive us faster to the Great Depression, Version 2.0.

I think the Fed has done an amazing job managing our psychology these past 18 months along with the Government. I haven't liked it, as I keep seeing the man behind the curtain pulling the strings, as you do. But the facts of what we see everyday is hard to change by hype and manipulation alone. We need to see positive change in our community with better Home prices and Sales, less For Lease signs from Commercial Real Estate problems, less unemployed and more hiring and the business community taking a bit more of the risk and investing in new capital equipment. That is why the stock market has been in a tight range between 11,600 and 9800 during this period, with no significant breakout in either direction. It has been a tradable range of -15.5% to as high as 18.4%, but the timing has not been very easy to trade as most of those moves happen within a few days in each direction and by the time one reacts 50-75% of the move is over. That works fine for Wall Street with their program trading, but isn't so good for the average individual investor.

The battles in the future are going to be between the have's and the have nots. It has already begun if you haven't noticed these past few years. The Middle Class is being slowly extinguished. Eventually Unions will become stronger again but if we aren't careful as a country, we are going to resemble a country in Central or South America, where workers fight to try and live and governments eventually turn like Venezuela. The wealthy in this country are playing a very dangerous game that is going to come back and bite them badly.

One must ask them the most difficult question, which some amongst them have finally asked themselves. When is enough, really enough! How much wealth must one have and when is it counterproductive to the society one lives in to garner more just for the sake of having it. Bill Gates asked himself that question, as did Warren Buffet. I salute them both. But how many more, which I will not name, come to the same realization. You made as much as you have because of the America of the past, which had a vibrant Middle Class. It is equally important for them to have a strong Middle Class as well. It keeps peace in the streets and hope in people's hearts. We need more of that now.

The anger of those politicians who are riling up voters and has spawned the Tea party, is a prime example of what I mean. Being a politician and saying "No" all the time, does not create great solutions to problems, where all can live with a truly compromised solution. They are one sided solutions and half the population is going to be unhappy with the change. We need genuine compromises by elder Statesmen (and Stateswomen) if we are ever going to attack the deficit, Social Security, Medicare, the Military Industrial complex and ensure our national and individual security.

So that's what I see ahead of us. You can make a difference by not letting your anger get the best of your choices. Think rationally, not emotionally, what is truly best for the majority of people and choose accordingly. As to the stock market, don't let the swings between the ranges drive you crazy. Pick a strategy and stick with it until it is proven correct or false. As the charts of the Dow 6 month, 3 year and 30 year show below, there is a great battle brewing both short term and long term. This too will be the effect and affect on the economy and the stock market as it is impossible to discern which leads which and which follows.

Update on this week's market outlook

The big tell this week will be to watch the politicians on the Stimulus package as the markets will react to the politics and what's in the package. It must be bipartisan to enough of a degree to have a positive reaction on Wall Street. Watch for the fear level to rise. This is very necessary to get the politicians back on the same page on the stimulus plan.

UPDATE 12:30pm PST

3 Month Libor rates have risen from a low of 1.09% a few weeks ago to now at 1.23%. Maybe this is a signal that banks have started to lend and want to get something more for the trouble bank to bank.