Markets Pay the Price for Political Paralysis

Do the markets care whether the U.S. fiddles while Europe burns? Apparently.
This week's 600-point nosedive by the Dow should prove (for anybody who didnt
realize it already) that America isnt about to decouple from Europe, financially
or economically. For the past few weeks, a parade of smiley faces has tried to
tell us that Europes woes didnt matter for the U.S. markets. We, and maybe the
Chinese, could keep chugging along regardless of what was happening in the EU.
It was a foolish conceit, for two reasons: First, as Ive explained in previous
blogs, Europe is an important buyer of U.S. exports. A deep recession over there
will hurt the bottom line of many large U.S. companies, particularly in the
otherwise thriving industrial sector. But theres a second reason why the
decoupling chatter makes little sense. America, too, is creeping down the road
toward a debt crisis yep, our very own home-grown edition! The failure of the
congressional supercommittee to reach any kind of agreement even a teeny,
flimsy one exposes a profound weakness in Americas political dialogue. Even at
this late date, when were dangerously close to the point of no return, neither
party is willing to look the problem in the eye. In the months (lets hope not
years ) ahead, the markets will remind us, again and again, of the financial
perils that most of the industrialized world including the U. S. is facing.
Volatility wont go away. As investors, our task will be to survive the wild
swings and, if possible, take advantage of them. Lets get down to specifics. The
stock markets latest retreat, from the Oct. 27 intraday peak, is troubling. Its
not normal (even in a bear market) for prices to pull back so deeply after a
rally of only four weeks duration (Oct. 4 through the 27). My technical gauges
indicate that the market is now severely oversold on a short-term basis. Thus,
the odds argue for a bounce, beginning soon, that should carry into the first
half of December. However, Im no longer as confident as I was that the S&P will
make it back to 1,300 before turning down again. Should you be buying anything
now? Barrick Gold (NYSE: ABX ) looks promising. If the Europeans attempt to
wriggle out of their crisis (as well they might) by resorting to massive money
printing, gold will skyrocket. Whats more, even at current bullion prices, ABX
is trading at less than 10 times this years estimated earnings a discount of
almost 20% to the average industrial stock. Theres a good case for protecting
your portfolio with a stake in Barrick.