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Is This Goose Cooked?

The equities market used to be the long-term investor's golden goose -- with blue chips as the perfect nest egg -- but that was before Osama and WorldCom changed the rules.

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We had been brainwashed into thinking that we were the most honest, hardest-working people on earth and that this country's securities laws and rules were the the toughest and the best. We laughed at other countries' stock markets; they were crony capitalists and socialists who didn't understand real capitalism. We had been brainwashed into thinking that buying and holding, not buying and doing homework and maintaining some discipline toward loss avoidance, meant getting and staying rich. We had even begun to believe that if you sold, you were un-American.

In the past two years, we have discovered just how brainwashed we were. Like Raymond Shaw, the Laurence Harvey character in The Manchurian Candidate, we are gradually waking up to the horrors of being all equities, all the time. We now recognize that our programming, if left alone, would destroy our nest eggs, not save them.

What has happened to the golden goose of American equities? What has gone so wrong so fast that lower interest rates and low inflation have led to staggering declines in all equities instead of the rally that has typically followed such actions? For all of the years that I have been trading, 21 so far, I could have told you that if I knew where rates and earnings were, I could figure out where stocks were going. Not this time. Because there are now two more variables in the equation, and both are serving as a ceiling, an invisible barrier on all stock prices: terror and ethics.

T&E, you see, can't be gamed. They can't be calculated or measured. But they have sapped our confidence and forced us to open our eyes to other alternatives that don't have nearly as much risk as the stock market, with, conceivably, more reward.

First, let's not kid ourselves about terror. It is aimed at us, or, more specifically, at U.S. equities. Tell me you wouldn't feel safer right now in a portfolio of Malaysian stocks, or Russian stocks, or even French, Japanese, or Thai stocks for that matter, because those countries aren't the targets. We are.

Their economies and their currencies are beneficiaries of the war we are fighting on behalf of civilization. The noncombatant nations are draining off investment money. For the first time in fifteen years, I know I have frantically tried to find Pacific Rim– and Euro-denominated equities because those markets have the wind behind their backs. Meanwhile, the dollar -- the currency of the upholder of freedom -- is undergoing the kind of punishment that is always meted out to any country that borrows recklessly, even if it has a good history of prudence.

We could handle that assault on equities if it weren't for the E in the equation -- the ethics of corporate America. I have to laugh here at the wrongheadedness of all but Paul O'Neill in the government. That's right, once-hapless Paul O'Neill, he of quavering voice but of honesty and morality. Only O'Neill, with his harsh statements about corporate responsibility in the boardroom, seems to know that unless we crack down on the chicanery -- and on the corporate lobbyists who are blocking us from cracking down -- investors will flee to better alternatives, where U.S.-style corporate cronyism can't hurt us. Let me give you two huge examples: your home and gold. The latter's easy to figure -- if you can mine something at $175 and sell it at $325, even dot-commers would realize that you can make a dandy profit. And there are no worries about bogus revenues and faked earnings. Gold's gold -- nothing more, nothing less. Of course, there are liars in the gold world, too, but the older, better companies, like Barrick Gold Corp., are coining money right now and have not even a whiff of dishonesty.

But even that shiny metal pales in comparison with something else that America has fallen in love with: the home. Put $40,000 into the nasdaq and you can turn it into $15,000 by picking the best of the selections. Put $40,000 into a new bathroom, and you might get $50,000 back, or more.

And the tax considerations for a home are better than for stocks! You get a onetime exclusion that allows you to book a huge profit. Is it any wonder that the one area of the stock market (after gold) that hangs in there is the sector that helps you augment your home -- Masco, American Standard, Fortune Brands, Lowe's? Your home, to mangle the metaphor, is the real money in the bank right now.

I realize that these options have always beckoned, but given the job that the mutual funds and brokers and academicians have done selling us on the long-term value of equities, almost everyone felt like a chump taking money out of the market from 1991 to 2001. Now, though, the only people who aren't glum at the cocktail parties are those who had to sell stocks to buy a home. They look like geniuses now. Your home doesn't suffer from the Terror & Ethics blight that has made U.S. equities such a gamble.

So what will turn back the tide of T&E? To stomp out terror to the point where those of us downtown won't jump when we hear a jackhammer might take forever, but to get it under some reasonable control will take the kind of global offensive that President Bush has only started, and the stock market hasn't discounted it yet. To stamp out the ethics problems, we need a series of successful high-profile prosecutions. But this will take way too much time to save 2002 or, for that matter, 2003.

Until then, how can you immunize yourself from the pain? If your portfolio looks like so many I have seen in the past few months -- the obligatory three semiconductor stocks coupled with two software companies, a wireless manufacturer, and a personal-computer assembler -- I don't know if you can be saved. Or, to put it another way, I don't know if it is worth selling. Many of these stocks have lost 80 to 90 percent of their value, and the pleasure of at last jettisoning them may be overshadowed by the potential, if there is any at all, of a turn sometime in the next decade.

What you have to do is find a few narrow bull markets and diversify into them, perhaps through the only areas that seem to do well in this new environment -- safety stocks like the products found in your supermarket, defense equities, a gold stock, and some health care that doesn't include drugs (we couldn't stop spending on that stuff even if we wanted to) -- while putting some equity into your home. Do this, and you'll at least stay in the game until T&E get cleaned up.

I know this is not a prescription for big money. Let's face it, though: We wrote those prescriptions for a decade. Alas, we have now developed immunity to the drugs.

TheStreet.com
Get all of James J. Cramer's stock picks via e-mail before he makes the trades, by subscribing to Action Alerts Plus. A free two-week trial subscription is available at thestreet.com/aaplus.

James J. Cramer is co-founder of TheStreet. com. At the time of publication, he owned stock in Barrick Gold. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions that he takes may change at any time.

E-mail: jjcletters@thestreet.com


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