The Big Picture IV

I hope we all had a good weekend. Regular readers know that I write about the "Big Picture" occationally to re-adjust our thought process and to make sure we do not stray away from our original goals. In the internet age, it is too easy for us to receive multiple information regarding one subject matter that we sometimes loose our focus. I understand that most investors have this problem and the worst part is that they don't even realize this has profound effect in portfolios.

If you wish to know where I stand on investment issues in 2006, it will help you to go back and read my previous "Big Picture" series. Assuming that you have read them, I still expect the low point of 2006 to be in the 3rd quarter. And I still expect good things to come in the 4th quarter. This is one of the reason why we are fully invested currently. Unless you have million dollar protfolio (where preservation of capital is your main investment objective) I do not believe in being too defensive in investing. Having defensive portfolios cost too much for too many people. Remember this one important statistics: Markets go up more than they go down. There are more up days than down days. In fact, up days out number down days by more than 2:1 ratio. Generally speaking, for most of you, it is not profitable for you to be out of the market.

Now, during 2006, markets go down for one main reason: fear of further rate hikes ( btw, this is just an excuse - stocks will go up & down no matter what anyway, people just need a b for various stock activities). So, will the "Rate" go up again or are we finished? Who knows - even Mr. Bernanke himself doesn't know. But I do have an idea, a gut feeling, an opinion, a prediction - call it what you want but I have it. And here are my thoughts:

1. This November 7th (less than 2 months away) is mid-term election. A third (33%) of Senate seats and all (100%) of the House seats are up for grabs. I hope you agree that this is very, very important for both Democrats and Republicans.

2. Our Fed. Chairman Mr. Bernanke, was and is very close to the Bush camps. Before this job, he was the head of Mr. Bush's economic advisors.

3. Raising rates now will hurt Republicans a lot. Do you think he will do it anyway? I personally would not bet on it.

4. The general economy is doing OK but the housing market is definately in trouable. Simply look at the housing stocks (great place to look for bargains ).

5. If rates are raised again, making the mortgages harder & more expensive to get, housing sector will fall much faster and deeper.

6. Recently ( unlike the past) many people bought houses with adjustable rate mortgages with interest only payments. As rates go up, many people will have to pay 150% of what they used to pay. Can you afford your apartment if the rent went up 150%? I think not.

7. The economy will definately be affected by the housing slowdown, and this will continue for quite a while.

8. Another words, economy has very little chance to overheat - thus no more need for further rate hikes - I hope.

Am I making any sense? Does not matter. We will be fully invested throughout 2006 for eventual gains. It is time to pick bargains for future gains. Oh, by the way, if the market realizes that Mr. Bernanke is finished with the rate hike game, market will hit new highs. This is probably how the story will end in 2006. I can not wait for the 4th quarter! Happy investing...

P.S: Due to above, HomeDepot (HD) looks very cheap. Too cheap. HD is not our usual kind of candidate but we may just add this to our portfolio. Look at it and wait for my signal.