Rally Extends

The Dow Jones is back above the 7,000 level and the rally that began last week is extending into this week. The S & P index rose more than 10 percent last week and today marks the sixth straight day of upside. While it may be tempting to jump back into the market all at once, I suggest investing in small increments. We will most likely see a correction to the 6,500 level before we move up again. The fundamentals of the economy have not changed, which is why this rally seems overextended. Build a list of companies you like and invest in each cautiously.

To hedge against the risk of the market reversing itself, purchase gold. Gold around $900 is cheap considering its demand in this market as a safe-haven. All of the measure being taken by the government in addition to the very low interest rates will eventually start to have an effect on the market and create a slightly inflationary environment in which both gold and oil should benefit. ETF's such as GLD and OIL are the best ways to track and invest in the performance of these commodities.

How Much Lower?

For the first time in 11 years, the Dow Jones has fallen below a benchmark level of 7000. There is no bottoming action and despite all the efforts of the government, the outlook is not much clearer. At these prices, it's hard to take your losses and sell because a bounce is inevitable. On the other hand, it's also tough to watch your investments deteriorate slowly. Take today's levels into historical perspective. The Dow was at the same levels as it is now in 1995. Subtract inflation over that time period and you have ridiculously cheap stocks. Warren Buffet today said that our best days are ahead. Have a mindset for the long-term and stay out of companies that are vulnerable to the credit situation. Invest in sure things and don't make any speculations whatsoever. Three years from now, you will look into hindsight and be glad that you did the opposite of what everyone else is doing: buying into panic.

Stimulus Package

Almost every day, there is a headline that briefs Barack Obama's push for the passage of the economic stimulus package. He is confident that the bill will pass in Senate. The vote could take place as early as today around 5-7 PM. While I like Obama's sense of urgency, he conveys pessimism. He warns of a "catastrophe" if the lawmakers do not pass the bill. The situation that we are in and the need for a stimulus to the economy is so great that we might overlook the actual plan itself. The only way to truly "stimulate" the economy is to spend and when consumers are not spending, the government must step in. Let's break down the proposed allocation of the money in the bill.

Energy:

•$32 billion to transform the nation’s energy transmission, distribution, and production systems by allowing for a smarter and better grid and focusing investment in renewable technology.
•$16 billion to repair public housing and make key energy efficiency retrofits.
•$6 billion to weatherize modest-income homes.

Science and Technology:

•$10 billion for science facilities, research, and instrumentation.
•$6 billion to expand broadband internet access so businesses in rural and other underserved areas can link up to the global economy.

Infrastructure:

•$30 billion for highway construction;
•$31 billion to modernize federal and other public infrastructure with investments that lead to long term energy cost savings;
•$19 billion for clean water, flood control, and environmental restoration investments;
•$10 billion for transit and rail to reduce traffic congestion and gas consumption.

Education:

•$41 billion to local school districts through Title I ($13 billion), IDEA ($13 billion), a new School Modernization and Repair Program ($14 billion), and the Education Technology program ($1 billion).
•$79 billion in state fiscal relief to prevent cutbacks to key services, including $39 billion to local school districts and public colleges and universities distributed through existing state and federal formulas, $15 billion to states as bonus grants as a reward for meeting key performance measures, and $25 billion to states for other high priority needs such as public safety and other critical services, which may include education.
•$15.6 billion to increase the Pell grant by $500.
•$6 billion for higher education modernization.

Health Care:

•$20 billion for health information technology to prevent medical mistakes, provide better care to patients and introduce cost-saving efficiencies.
•$4.1 billion to provide for preventative care and to evaluate the most effective healthcare treatments.

Unemployment Benefits:

•$43 billion for increased unemployment benefits and job training.
•$39 billion to support those who lose their jobs by helping them to pay the cost of keeping their employer provided healthcare under COBRA and providing short-term options to be covered by Medicaid.
•$20 billion to increase the food stamp benefit by over 13% in order to help defray rising food costs.

Many critics argue that the bill does not allocate enough funds for spending towards infrastructure, the real stimulus of the economy. However, the plan is designed to benefit the most number of people and if executed correctly with transparency, it should be effective in stabilizing the economy for the simple reason that it encompasses a vast number of sectors that need assistance. The stock market is reacting positively in anticipation of the passing of the bill. The Dow is currently up about 230 points for the day with a couple of hours left to go until the close. The passing of the bill in Senate is already priced into the market and this may be a case of "Buy on rumor, sell on news." In case the bill does not pass, we might see a huge correction on Monday. The passing of a stimulus bill is inevitable. The only question is whether it will be today. Going into the weekend, I suggest being cautious and hold more conservative stocks since the news is already priced in.

Compensation Limits

President Obama has proposed a $500,000 compensation cap for executives from companies that will receive federal funds. His proposal is sure to receive great criticism, questioning whether his plan interferes with principles of capitalism. But in the current economic condition, his plan makes perfect sense. He does not want to limit the pay of executives of companies that have not asked for aid, nor will he limit those that are considered 'healthy' even if they are receiving federal funds. A salary cap would ensure that government funds are not abused. This is the type of "change" that we need. Claims of Obama's proposal being socialistic are far-fetched because after all, it is the taxpayer's money that corporations were using for lavish spending and it is only fair that the executives make compromises as well.