Politicians, Bureaucrats Threaten Free Markets

IT'S SAID THE market hates uncertainty, which is unfortunate considering we're living in an age that's seemingly drowning in it, in terms of both politics and economics.

In the political realm, the presidential election has now come to focus on the likely VP candidates, with Sen. Barack Obama's choice expected any day and Sen. John McCain's not long after. Intrade.com, the real-time, real-money prediction market, is giving strong odds to Sen. Joe Biden (D-Del.) for Obama and Minnesota Gov. Tim Pawlenty for McCain.

Sen. Joe Biden (D-Del) VP Contract

Of course, it's not the vice president we elect, but the man at the top of the ticket. And although both senators would seem to occupy opposite sides of the political spectrum, a recent forum highlights their underlying philosophical bond: altruism and self-sacrifice.

At a conference hosted by the Saddleback Church of California, Pastor Rick Warren asked both men what they thought was America's greatest moral failure.

Obama's response was that "Americans' greatest moral failure in my lifetime has been that we still don't abide by that basic precept in Matthew that whatever you do for the least of my brothers, you do for me."

As for McCain: "America's greatest moral failure has been throughout our existence, perhaps we have not devoted ourselves to causes greater than our self-interest."

Both men essentially convey the same message: Self-interest is bad, while self-sacrifice, whether it's to your neighbor or your country, is good. It's as if America was founded by celibate nuns, not the rugged individualists who left an oppressive theocracy in order to pursue their own life, liberty and happiness.

America's true moral failure has come in instances -- think anti-trust laws, military conscription or bans on fast food -- when the individual's right to lead his own life has been trampled by publicity-seeking politicians intent on sacrificing the independent, sovereign entity to the majority mob. Unfortunately, both McCain and Obama fit that mold.

Economic uncertainty dominating the headlines this week is what, if anything, the Treasury Department plans to do about the rapidly deteriorating state of Fannie Mae (FNM) and Freddie Mac (FRE), the government-sponsored entities, or GSEs, that hold or guarantee as much as half of the nation's $12 trillion mortgage market.

I highlighted this very danger weeks back, citing the government's newfound interest as a negative influence on capital markets. Now the most egregious power, that to actually invest taxpayer dollars into the debt or equity of these rapidly disintegrating companies, is apparently likely to be used after all, despite numerous assurances from cocky lawmakers who fashion themselves economists. Ironically, it's the government backstop itself that's essentially prompting these companies into their death spirals: What private investor wants to buy equity that's likely to be wiped out when the government steps in anyway?

The tragic part is that even those individuals who were shrewd enough to pay their bills on time and not invest a dime into these government-operated Ponzi schemes will now be on the hook for bailing them out, all in the name of protecting the American housing market from correcting, which, in case you haven't noticed, it already has.

I'm not the definitive authority on technical analysis or the intricacies of comparing the benefits of moving averages vs. Bollinger Bands. I also don't believe there's a Holy Grail, or a technical approach that's always profitable. Every trader must develop his own approach, style and technique.

Let's define our terms. Fundamental analysts evaluate a company's financial statements and business strategies in order to determine if a stock is correctly valued. If they come across an attractive company that's selling at a discount to where they believe it should be, they'll buy, expecting that eventually the market will adjust.

Technicians, the good ones anyway, solely study a stock's price history to determine its future direction. The basic premise of technical analysis is that the market is not chaotic; rather, it moves in trends, which tend to persist over time. One need only to look at some longer-term stock charts to see a multitude of examples. The Nasdaq Composite didn't' go from 5000 to 1114 in a day, nor did crude oil rise from $30 to $147 overnight. There are exceptions, of course, but markets are generally bullish, bearish or trendless. The technician essentially attempts to determine those conditions and place his wagers accordingly.

Personally, I put special emphasis on the selection of asset class. Many investors were dogmatically schooled with the notion that stocks are always the highest performing asset class. And while over long periods of time that might be true, there have been plenty of multi-year periods when stocks were flat at best. One big benefit of technical analysis is to keep you out of markets in which the odds of a sustained rally are slim.

More than anything, I find technical analysis gives me a framework for discipline in my investment technique. If you believe in buying securities as they cross over their 50-day moving-averages, then knock yourself out. The trick is to also be disciplined enough to sell them should the market reverse and your signal becomes a sell. Because fundamental indicators, such as an earnings announcement or management changes, are usually factored into a stock's price immediately, the trick isn't picking the right technical discipline but picking any technical discipline -- and sticking with it.

(I welcome questions, by the way. Send emails to jhoenig@smartmoney.com.)

The South African rand, highlighted in this space last month, has taken investors on quite a ride lately. After rising steadily, it promptly dropped over 10% in 11 or so days, pummeled by falling commodity prices and a renewed aversion to risk. The continued economic implosion in neighboring Zimbabwe, where inflation hit a record 11,200,000% in July, didn't help matters either.

Although I trade the rand in the spot market, a recently launched ETF also tracks the trade. WisdomTree Dreyfus South African Rand (SZR), which peaked at $28.26 at the end of July, fell as low as $25.60 before recovering slightly to $26.64.

This is one currency that's more akin to an Internet stock than a stable store of value. But given the continent's growth prospects and renewed appeal of the carry trade amid a drop in U.S. interest rates, this is an exposure I'm sticking with as part of a diversified portfolio.

Looking for a tasty alternative to stocks and bonds? Liv-Ex offers a recently launched electronic marketplace for professional wine merchants looking to trade fine wine. Although its platform isn't open to individual speculators (or drinkers) just yet, they can monitor the movements of its Liv-ex 100 Fine Wine Index, which tracks the price movement of 100 of the world's most sought-after fine wines.

Turns out wine can be tasty as well as profitable. The index, which the Financial Times calls "the wine world's version of the S&P 500," is up 9.5% year-to-date.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.

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