Libby Indictment Not All-Clear for Market

The Plamegate affair on the surface looks to be moving toward an end game. But as I described in my column earlier this week, it may be just beginning.

How does this affect the market? With the indictment of Lewis Libby, the chief of staff for Vice President Dick Cheney, one might think this is a "cover on the news" event for short-sellers, i.e., a positive event. But with Karl Rove still under investigation, this thing is just going to drag on. And as the case is prosecuted, the rationale for going to war will be debated, new bad facts will emerge, and the Bush administration will be seen as increasingly weak.

You may recall that the stock market did great in 1999 while Bill Clinton was under a cloud, but that was then -- during a major bull phase, with the Fed injecting tons of money into the system -- and this is now -- at the end of a bull phase, with the Fed withdrawing liquidity.

That means it's a totally different deal today, and I believe foreign investors are going to continue to pull their money out of U.S. equities as the presidency shrinks. In this context, American investors will need to remain flexible, but basically focus on defensive stock groups for longs and, except for occasional rallies, not give into the temptations of high-beta groups like technology, which depend on the strong gravitational pull of optimism and high expectations to keep their high price/earnings multiples inflated.

If this does happen, then where will the money go? Possibly a lot will go into certificates of deposit, which, if you haven't noticed, are paying as much as 4% guaranteed these days. Not bad in a negative 5% year for stocks. They may also go into foreign equities, as described in my column on Monday.

At the risk of sounding more like an anthropologist than an investment analyst, I feel compelled to offer you my view on how this thing got started.

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Jon Markman, writer of TheStreet.com Value Investor, is the senior investment strategist and portfolio manager at Greenbook Investment Management, a division of Greenbook Financial Services. Separately, he is publisher of StockTactics Advisor, an independent weekly investment research service. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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