THEME: ELECTION & TERROR PREMIUM
SENTIMENT: CAUTION
The market continues to be cautious. As such, it is still in a bullish mode and has room to rally.

The election outcome is really the thing that the market is watching with baited breath. It is interesting that the dictum that politcos began to accept as truth was "Its the economy, stupid." People are puzzled that this election does not seem to be about the economy, but Iraq. In actuality, both are one and the same. The market is charging a huge terror premium. The War on Terror on the domestic front looks good because we haven't had any major terrorist incidences since 9/11, but the War in Iraq does not look so good and the price of oil is a gauge for that. Until the market can get around the fact that a dirty bomb is less likely to be exploded in a large modern city or that another plane won't be crashed into a skyscraper, it will continue to be cautious.

The market was more than willing to give John Kerry a chance to offer it a better way on both the economy and the war, but his message has been muddled.

Here's what the market knows about George W. Bush:
1. He has cut dividend and capital gains taxes
2. He has cut income taxes
3. He has increased the deficit but interest rates remain low

The market likes these tax measures but it would like a safer world even more. As far as the deficits go, as Dick Cheney supposedly said "Deficits don't matter." Certainly for bonds they haven't, but let's hope the Chinese and Japanese continue to agree.

Unfit for Command continues to fly off the shelves. John Kerry has failed to neutralize the image that it has portrayed.

Here are the two negative images being portrayed:
John Kerry
1. Opposed Vietnam War before going
2. Fought for less than the standard 1 year tour
3. Had purple hearts but was not hospitalized
4. Came home and protested
5. Is photographed with the North Vietnamese

George W. Bush
1. Rich daddy
2. Jumped the list to get into the National Guard
3. Punted on his guard duties

The problem with both negative images is that Bush comes off as a coward who acted like many rich well-connected cowards, while Kerry comes off as much more scheming and duplicitous. The real issue here is which candidate is more predictable? Its easy to understand the psychology of a coward. Its much harder to understand the psychology of someone who fights in a war that he opposes.

America is trying to judge who to depend on to lead us through the mess that admittedly Bush got us into. Behavioral Finance has documented that people are risk averse and would prefer not losing rather than winning. Kerry is the riskier quantity because he has never been President. His "waffling" and his so far unexplained behaviour in Vietnam makes the market nervous because we don't know what to expect from the guy. At least with Howard Dean, he played the same notes consistently.

As the market is coming to see that Bush is the likely winner, it will then focus on the tax benefits of continued Bush leadership. That is why dividend plays are leading the rally!

My prediction is that the rally will continue straight up till Election Day. So stay long and keep watching for changes in sentiment.

I still support John Kerry, but I have learned a long time ago not to fight the market for political reasons. It is better to give money away to charity than to lose it in the market.