MONDAY, OCTOBER 15, 2007

UP AND DOWN WALL STREET  

By ALAN ABELSON


Rudy in a Burka?

FOR THE FIRST TIME in nearly seven years, al Gore is smiling.

And why not? Not only did old Stone Face snare a Nobel Prize, but what won it for him -- his Paul Revere-like warnings in book and video that "global warming is coming, global warming is coming" -- is gaining unwitting validation from the very people who successfully sunk his bid to succeed Bill Clinton in 2000.

We're talking about that mob of Republicans whose efforts to become their party's standard bearer in next year's election for the presidency are rapidly heating up, accompanied inevitably by the discharge into our precious, life-sustaining atmosphere of a massive barrage of vile and noxious emissions.

Which is no surprise, since pollution and politics have been joined at the hip ever since the first caveman to stand erect split open the skull of the second caveman to stand erect and declared himself Great Grunt. Although to be fair to our rude ancestors, politics in the intervening eons has become steadily more devious and unsportsmanlike.

The current swarm of candidates provides no shortage of glaring examples of how far down the slippery slope of deviant behavior politics has slid. John McCain, whom we long considered a man of bedrock principle, has mucked up his shining image with some snarky utterances. The latest was that he couldn't vote for a Muslim running for the presidency.

On the surface, this seems like a puzzling confession, if only because none of the senator's opponents in the race to gain their party's nod is a Muslim. Mr. McCain knows that. But his true target was Rudy Giuliani.

The senator cunningly calculated that since Mr. Giuliani is from New York, where anything is possible, a sizable slice of the electorate who are from the Real America (anywhere that isn't New York) might logically infer it was the former mayor he was referring to and swiftly agree that they, too, couldn't vote for a Muslim. Rudy's lead in the polls would melt like a snowball in Phoenix.

As someone who has known him for many years, we can swear on a stack of Bibles or Korans that Rudy Giuliani is not a Muslim. And proof positive is that despite a well-publicized affinity for occasionally prancing about in female dress, he has never -- not once -- worn a burka!

Mitt Romney, another serious contender, is at his most dubious when he's seeking to demonstrate his comprehensive knowledge of the issues, thanks to having been over the years on every side of them. This extraordinarily inclusive approach is not to be confused with John Kerry's flip-flopping, which did him in when he ran against the incumbent in '04.

Mr. Kerry was guilty of flipping from one side of an issue to another on the spot, out of genuine befuddlement, a common condition induced by excessive wind-surfing. Mr. Romney's much more measured technique consists of serially embracing one side of an issue and then the other over a lengthy stretch of time, as expediency dictates.

The problem with the pride of the Republicans vying for the nomination was graphically pointed up in their debate on the economy. The sole participants who displayed a firm grasp of the subject were Mike Huckabee and Ron Paul.

No matter how goofy on one issue or another their ideas may strike you, the two were not afraid to speak their minds and, more surprisingly, manifestly had minds to speak. Better yet, they even offered some sensible comments on the economy and how it has been treating ordinary folks.

Their fellow pretenders to the presidency strictly parroted the party line: As the newest entry, Fred Thompson, put it, the outlook was rosy both "short term" and for "the next 10 years." Pin a reminder on your extended calendar for the year 2017 to ask Fred -- or Rosy, as he may come to be called -- for an update of his courageous forecast.

Since neither Mr. Paul nor Mr. Huckabee seems to enjoy much of a shot at the nomination, the prospect for any even vaguely sound economic policy under a new Republican administration in 2009 seems bleak. But, for that matter, so does the prospect that the Republicans will hold onto the White House regardless of whom they nominate. Still, what they do have going for them -- and this is no small thing -- is it looks like they'll be running against Hillary.

AH, A TOUCH OF MANIA IS MAGICAL. It can change virtually overnight the mood in the Street and the stock market's direction. In just a relatively brief stretch in these parts, we've gone from furrowed brows to smiley faces, from sighs and moans to those happy squeals and cries that come with leaping and bounding share prices.

In a few short weeks, worry has been muscled aside by whoopee, fear of the worst has given way to certainty of the best. The credit crisis has eased some, but hardly vanished. The collapse of housing, along with all its ugly fallout of delinquencies and foreclosures, proceeds apace. The dollar continues to give a great imitation of a drunk trying to negotiate a beam a hundred floors up an unfinished building.

But the investor mood, so recently despairing, is strikingly buoyant. As one e-mail pal described it, this isn't just the return of the risk-taker -- it's more like the emergence of the risk-seeker. The most telling measures of the sprightly rise of investors' spirits from the slough of despondence they had so recently been entombed in are the sentiment soundings of the various investment groupings.

The latest poll of how its members feel taken by the American Association of Individual Investors showed a solid majority of 54.6% were bullish, while only 25.8% were bearish; three weeks ago, by contrast, bulls had a meager 39.2% to 31.7% edge. Our old favorite among such barometers, Investors Intelligence, registered 60.2% bulls among the advisory services canvassed, the highest since Dec. 23, 2005, and far outweighing the 21.5% who were bearish.

Since these are contrary indicators, based on the assumption that as the crowd gathers, the opportunity for profit narrows, obviously the sharp rise in optimism they evince among pros and amateurs alike is a warning of possible troubles ahead for the market. The timing is never sure, but prudence would suggest now isn't a bad time to be taking some play dough off the table.

The spark for the resurgence of the bulls was, no secret, the Fed's decision to ignore the possible evil consequence for both inflation and the dollar and buck up a panicky Wall Street by taking a hefty cut out of both the federal-funds and the discount rates. No secret, either, we think the panic obviously was not confined to Wall Street, but clearly infiltrated the sober confines of Mr. Bernanke's lair. And like most decisions made out of fear instead of considered reflection, time will prove it the wrong one.

Be that as it may, no denying the Fed's action provided the necessary juice for a powerful market recovery and fed investors' venturesome impulses by the clear implication that Bernanke & Co. would always be there to rescue us bumpkins from our follies. How could we have ever doubted Ben would prove a worthy successor to the master bubble blower?

LEE QUAINTANCE AND PAUL BRODSKY run money under the sobriquet of QB Partners (how they ever arrived at such an eloquent name is a mystery). What distinguishes them is they're literate and thoughtful, two qualities not rampant among the breed. Like all of us, they have a skeleton in their closet; as we recall, they admit to having done time in the bond business.

In their latest -- shall we make them happy and call it an essay? -- Lee and Paul voice their reservations about the market, not dissimilar to our own. They're concerned about runaway monetary inflation, the decline of the U.S. dollar and the fact that financial-asset markets are not set up to anticipate economic downturns (since Big Brother is always there to bail them out).

But they are professional investors and they probably, though we can't say for sure, like to eat. So where to invest when the financial markets seem unduly risky and the risk/reward ratio generally unfavorable?

The answer, they believe, is that hard assets will provide more profits and carry less risk than most financial assets. And that since most "hard-asset derivatives (equity) remain unpopular among financial-market investors," they provide intriguing investment potential.

To illustrate, even with oil at record high prices above $80 a barrel, "energy-related public equities continue to be valued on implied assumptions of long-term crude prices of no more than $45 a barrel." In like vein, they note that the equity-market valuations of certain global agricultural, precious and industrial metals, and mineral concerns are trading at a fraction of their future production/reserve values. Lee and Paul allow as there are valid reasons why such shares sell below their optimum value, but the discounting is typically much too severe.

Basically, their view is that "investors have not begun to allocate to these sectors en masse because we think they have yet to recognize the relationship linking money creation (and fiat currency declines) to the intrinsic value of natural resources."

They go on to explain that "most stocks that derive their value from natural resources are cheap because most investors that could sponsor such plays haven't done so in 30 years." But the pros will be forced to change that stance when economic fundamentals give them no choice. And, in due course, they'll be followed by the investment masses, who, as always, will be late to the party.


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