Dr. Bob Adds It Up

Is it just me, or has anyone else noticed that things just don't seem to add up anymore? What used to be important to investors now somehow doesn't matter. And things that no one used to focus on suddenly have become the only things that matter in this crazy upside down world of investing. It's time to get back to the fundamentals of investing. When I add up where we are currently, I’m not sure if I can ever remember a more bullish, forward-looking investment environment in my 30 plus years in the business. Let me add it up for you:  

Oil Tax Cut
First let me add up this oil tax cut for you. I will give you the answer first: This is the largest oil tax cut in the history of the human race. Here is what I mean. It wasn't that long ago that oil was approaching $150 a barrel. According to the US Department of Energy, daily gasoline demand in the United States in barrels is 9.3 million barrels daily. At $150 a barrel that's $1.395 billion dollars a day. But with my so-called oil tax cut, with oil at $65 a barrel, we only spend $604.5 million dollars a day. That’s an oil tax cut of $790.5 million dollars a day. Multiply that by 365 days in a year and we have an annualized oil tax cut of $288.5 billion. This is an immediate oil tax cut that goes straight to the consumer without filling out any forms or waiting for any rebate checks. So far that's $288.5 Billion.

Rescue Plan and Bailout Multiplier
Second, let me add up the impact of the Troubled Asset Relief Program (T.A.R.P.). Congress has approved a $700 billion rescue for our financial banking system. The problem with this number, from my perspective, is that it underestimates the impact of this $700 billion. You see, in economic circles it is estimated that every dollar that goes into the banking system has a multiplier effect. Because that bank in turn lends that dollar out to someone else who uses that dollar to go to the store to buy something from a company that will use that same dollar to hire more people and so on and so forth. It is currently estimated that there is a 10x multiplier for every dollar the government puts into the banking system. That would mean that this is not simply a $700 billion dollar bank bail out. It’s the equivalent of a $7 Trillion Dollar ($700 billion x 10) rescue plan. So now that's $7 Trillion on top of the $288.5 Billion Oil tax cut which gives me $7 Trillion, 288.5 Billion dollars.

And remember, that $7 Trillion is just T.A.R.P.; I didn't include the bail-out of A.I.G. Insurance or the bail-out of Bear Stearns or the Fed's Commercial Paper Funding Facility or CPFF. My calculation also doesn't include all of the global responses we've seen. Just last week, both Korea and the Netherlands became the latest to provide banking sector guarantees. Korea alone provide $130 billion, including insuring foreign currency liabilities of its financial institutions.

Money On The Sidelines
Third let's add up all the retail money sitting on the sidelines. There is currently $3.4 trillion dollars sitting in money market mutual funds, according to the Investment Company Institute. This is nervous money sitting on the sidelines. If you ever wondered what a buyers' strike for our stock market would look like, this would be it. So that's another $3.4 trillion to go along with my $7 trillion and my $288.5 billion. Now I have passed the $10 trillion mark at $10.688 trillion dollars.

Why does no one else see this enormous silver lining?

I think I know why. There will always be times when fear and panic trump fundamentals and in those times nothing seems to make sense or add up.

Japan’s Sell-Off
In closing - talk about something not making sense or adding up - just take a look at Japan. The Nikkei is all the way down to levels last seen on October 7th, 1982 when the Nikkei was at 7,162.90. That was 26 years ago. To give you some frame of reference, at that time, the Dow was below 1,000 at 965. This is what it looks like when panic sets in. Things just don't add up. Do you really think Japan is no better off today than it was in 1982? That the world is no better off today than 1982? I don't believe that for a second and neither should you.

Buffett Buy
One thing that we can "count on" is when there is blood in the street, Warren Buffett will be buying, just like he is right now. Need something to count on? How about the best long-term investment advice I have ever heard from the world's greatest investor Warren Buffett who said, "When others are fearful be greedy, and when others are greedy, be fearful." If you take the time to add things up you too will realize that now is the time to be greedy and not the time to be fearful. I just gave you 10 Trillion reasons why.

Have a great day, keep a positive attitude and please join me in resolving to remain a long term investor in a short term world.

Dr. Robert J. Froehlich is Vice Chairman of DWS Investments and serves as Chief Investments Strategist.  DWS Investments is the US retail brand of Deutsche Bank’s global asset management division. All investments involve risk, including the possible loss of principal.The opinions and forecasts expressed are those of Dr. Robert J. Froehlich and not necessarily those of DWS Investments. All opinions and claims are based upon data at the time of the publication of this article, October 27, 2008, and may not actually come to pass. This information is subject to change at any time, based on economic, market and other conditions and should not be construed as a recommendation.