Trading the Knot of Politics and the Credit Markets

There is no more important issue for investors than the effect of credit markets on the overall economy. The problems and potential solutions take place within a political environment where some government actors have power to institute immediate action while others must negotiate with key participants. Furthermore, some actions require legislative action. Complex problems require complex and comprehensive solutions, which raises the ultimate question: Can we get there?

The specific stock effects are myriad. Most directly affected are housing stocks (Toll Brothers (TOL - commentary - Cramer's Take), Pulte Homes (PHM - commentary - Cramer's Take)), banks (Citigroup (C - commentary - Cramer's Take) leaps to mind for some reason), investment banks (Goldman Sachs (GS - commentary - Cramer's Take), Merrill Lynch (MER - commentary - Cramer's Take)), and mortgage insurers (MBIA); however, the overall economic effects could influence cyclical companies and technology stocks. The asset allocation of investors is also an important consideration.

As someone who formerly taught at a top university and who worked with high-level government teams trying to solve problems of taxing and spending, I am trying to bring a unique perspective. My objective is not to state what should happen. It is rather to inform readers about the problems and what is likely to occur, especially on the eve of an election.

As an investment manager, I am well aware of what immediate steps would be greeted favorably by the market, and I have tried to show that government leaders live in another world. They have different views of data, different motives and different time frames from those of us focused on markets. The predictions based upon this have been pretty accurate.

So today, I want to go through the process of identifying the problem and the steps that should be part of a general solution.

First, it's essential to comprehend that the housing and credit problems cannot be viewed as a single market. Instead they must be viewed as unique components including (at least) the following:

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At the time of publication, Miller was long MER and GS, although positions may change at any time. Jeffrey Miller is president and CEO of NewArc Investments, a registered investment advisor, and Capital Markets Research. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Miller appreciates your feedback; click here to send him an email.