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Maybe in the middle of all of this financial insanity it’s time to look at stock fundamentals again.

To abuse a cliché – that is true – Congress may change laws, almost all laws it has made can be un-made, but it cannot change the laws of math. And the current fight against any stimulus – independent of your political leanings is going to the country’s slide into a recession and make it deeper.  (See my recent article on “The Ultimate Export: “Too Big To Fail”).

Sorry, math is math.

Here is the math – if you spend $100 bucks to generate a certain amount of GDP, and you now spend $95 bucks, what do you think will happen? Old and never proven ideology says that when you cut government spending the economy improves. Not only is there no empirical evidence to support this position, it flies n the face of common sense. The underlying theory is that excessive government spending means excessive taxation and/or borrowing, crowding out private investment. Today, taxation is at the lowest level in more than two generations – since the first Eisenhower administration, before even I was born, and banks cannot find customers to lend to.

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So how can an economy grow when government spending – at all levels of government – is reduced? It cannot until private spending picks up the slack With a busted housing market, 23%-25% real world unemployment, overly restrictive lending standards in place at the banks, a coming recession in Europe and a slowdown I China, well, do the math yourself.

This may sound political, that I am asking for more stimulus. I am not political despite where I live – Washington DC – I am agnostic but just do numbers folks. One hundred minus five does not equal one hundred and five.

And this is madness – again, regardless of politics, implementing even a watered down version of austerity due to empirically wrong and outdated ideology is a recipe for a recession that could be as bad then the last one. Right now, roughly 6.5 million households are living rent free – they are not paying their mortgages – that is more than five billion a month in consumer spending. Add to that extended unemployment benefits, the waiver of part of the payroll tax and the last vestiges of the first stimulus package and there is a lot of cash that is going to disappear helping the economy out.

Bottom line:  Austerity in the face of the double dip Great Recession is madness. And the madness will continue through the 2012 election. And probably beyond because the Tea Party types have enough votes to block anything even if a Republican is in the White House.

How should investors and traders play this market madness?

If you handle the volatility from Europe, think about something nobody thinks about anymore –at least not traders – stock fundamentals.

Great companies. Outfits that are world class in products, scope, revenue growth, and profit growth like Apple (AAPL), Amazon (AMZN) and Deere & Company (DE) have great long-term stock fundamentals.

And be contrarian – look at outfits prospering because consumers are spending less but spending in a more focused way Ralph Lauren (RL), Coach (COH) and Nordstrom (JWN).

Reborn companies—look at some companies who have reborn and are already configured to succeed in a reduced economy, as it is showing in their stock fundamentals– Ford (F) and General Motors (GM).

And, as soon as you own them, sell covered calls against your positions and create your own dividend.  Look to do every month, over and over again, enjoy the cash or average down, it will enable you to enjoy ups and downs – you sell the calls on the ups, buy them back on the downs – while long term the stock appreciates.

 

 

 

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