— “Profit Confidential” Column, by Michael Lombardi, CFP, MBA

If I didn’t know better, I’d say Washington has declared war against Wall Street.

And who can blame the White House? Wall Street made billions of dollars in profits in the years leading up to the bust. But, once the bubble burst, the banks went to Washington looking for bailouts.

This past Thursday, President Obama outlined his proposal that would limit the size of banks, prohibit banks from running proprietary trading operations solely for their own profit, prohibit banks from investing in hedge funds and prohibit banks from investing in private funds.

These new measures would impair Goldman Sachs, Morgan Stanley, JP Morgan and Bank of America, amongst others.

The message from the stock market was very clear late last week: Wall Street feels the screws tightening and it doesn’t like it one bit.

Will President Obama’s banking proposals pass Congress? I doubt it. But the threat of these measures was enough to send the market into a tailspin. Maybe it’s the stock market giving Washington a message: change our greedy ways and investor stock portfolios will feel it.

After all, the stock market was enjoying a great earnings season, with companies like GE, e-Bay, Starbucks, Intel, JPMorgan, AMEX, Xerox, Google and more big names all delivering solid profits — and beating the Street’s expectations.

In a nutshell, what the President said on Thursday was that, when banks are making money, they give that money to shareholders and employees (via big bonuses). But when these same banks are in trouble, the American taxpayer needs to bail them out.

Well, Mr. President, that’s how Wall Street has always worked. And, I doubt Wall Street will let it change much.

President Obama pointed out on Thursday that banks are not lending out to small businesses. But, on the other hand, a survey by Bloomberg last week said that 77% of investors think President Obama is “anti-business.” Very interesting. Who is the problem? The White House or Wall Street? We’ll soon find out.

Old-time market analysts criticized the Fed for not letting the markets run their own bull and bear cycles. Bailing out the banks last year and in 2008 may have been a mistake. (Maybe the bear should have just done its thing in one fell swoop.) For Wall Street, it’s like the old adage: “The more you give it, the more it wants.”

This week’s stock market action will be important. We need to see if the market was giving the President a “leave us alone message” or if the bear has entered the room again. Personally, I doubt the bear market lured enough investors back into the stock market to pull the rug out so soon.

Michael’s Personal Notes:

Does the recent strength in the U.S. dollar have you concerned about your gold stocks? Don’t fret.

The euro dropped to a four-month low against the dollar last week and analysts were quick to blame Greece’s debt problems for the weakness in the euro. There is also concern in the European Economic Community that Greece’s financial woes will spill over into other member countries.

The weakness of the euro only cements my view that the euro is far from being a replacement for the dollar as the dominant world currency. I cannot see major oil-producing countries opting for the euro over the dollar.

The winner here is gold bullion, as a weak euro only makes gold more attractive. The death of fiat money as we know it? I think so.

Where the Market Stands:

Thanks to proposed new banking regulations (see lead story above), the Dow Jones Industrial Average gave back all of its gains for 2010 late last week. The Dow Jones opens this week down 2.4% for 2010. What a swing.

Let’s not panic yet. Market action will be important this week. There was concern that Fed Chairman Ben Bernanke (who Wall Street likes) would not be reappointed for another term. The White House was trying to play down that fear this weekend. A Bloomberg survey notes that traders have the odds at 92% that Bernanke will be confirmed for a second term, up sharply from just 64% last Thursday.

What He Said:

“As investors, we need to take a serious look at our investment portfolios and ask, ‘How will my investments be affected by an American grown recession?’ You should take what precautionary steps you can right now to protect yourself from a recession in 2007. Maybe you need to cut your own spending or maybe you need to sell some stocks that will take a beating during a recession. You know what tidying up you need to do. Don’t procrastinate…get to it now. And please remember: recessions can happen quickly, stock markets don’t go up during recessions, and the longer the boom before the recession, the longer the recession. Just based on my last point, we have plenty to worry about in 2007.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

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