Buy and hold. Depending on whom you speak to it's either a tried and true strategy to live by or a relic of the pre-crash days.

Jeff Mortimer, chief investment officer of Charles Schwab Investment Management, is still one of the faithful. In fact, the more investors' turn away from 'buy and hold' the more he believes in it. Mortimer says doing the "opposite of what everyone else is doing" has always been a winning strategy in his career.

Mortimer’s not opposed, "if you want to trade around the edges" with a small portion of your portfolio, but warns trading in and out of the market is a sucker's game for most.

Which stocks are worth owning in this environment?

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The precipitous collapse that took stocks down almost 60% from their highs scared many small investors out of the market, says Jeff Mortimer, CIO of Charles Schwab Investment Management.  And now, sadly, these investors have missed a massive rally.

So what should they do now?

Ease their way back into the market, says Mortimer.

Yes, it hurts to buy in at prices that are 50% higher than where they were when you ran for the hills. But the alternative--missing more of the rally--is even worse.
 
Usually, Mortimer says, investors who bailed at the bottom don't get comfortable enough to buy back in until the market has doubled off the low. And we're not there yet. 

Mortimer thinks gains over the next year will be muted--5%-10%--but the alternative is near-zero returns on cash.

And, next time, don't believe those folks who tell you "buy and hold is dead"!

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With American voters going to the polls today in key elections, a lot is at stake, including whether to continue Democratic rule in two states and President Obama's overall influence.

The timing couldn't be more crucial. "State and local governments have picked up the slack where companies and consumers have stopped spending," says our guest Diane Garnick, investment strategist at Invesco, which has more than $400 billion of assets under management. 

But as local municipalities continue spending, key tax bases are shrinking as real estate remains weak and unemployment rises. In a nutshell: local coffers are shrinking.

"This S&L crisis is likely to be the state and local government," says Garnick, who says Americans should prepare for higher local taxes and all kind of creative "user fees." 

More bailouts? Looking ahead, Garnick says it's not difficult to imagine direct bailouts for states, when taxpayer-funded rescues were made available for the private sector.

So the good news for investors. Now is the time to invest in municipal bonds...

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Washington D.C. has finally begun to talk about financial reform in earnest, with Treasury Secretary Tim Geithner and FDIC head Sheila Bair both making trips to Capitol Hill to outline potential reform plans.

Unfortunately, both plans are lousy, says William K. Black, professor at the University of Missouri Kansas City School of Law.

A former regulator who helped resolve the Savings and Loan crisis in the 1980s, Black says the current reform plans take a terrible doctrine--Too Big To Fail--and write it into law.

Professor Black says Tim Geithner's plan includes a secret list of institutions that are too big to fail and that will always be bailed out no matter what. This explicit protection, even if kept secret (keep dreaming), will distort the market and create the worst form of moral hazard: Bank executives will know that no matter how much risk they take, they'll always be bailed out, and they'll therefore be encouraged to take crazy risks in the hope of scoring huge short-term gains.

What's Black's solution?...

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Remember all the reform talk from a year ago? With the massive post-March rally still intact and big profits and bonuses back en vogue on Wall Street, it's easy to lose track of the excessive risk-taking that triggered a near depression and financial system meltdown. 

"Compensation right now is completely screwed up. It is not tied to long-term performance," says our guest William Black, white-collar criminologist and associate professor of economics and law at the University of Missouri-Kansas City. Black recently testified before Congress on executive pay.

Sure special "pay czar" Kenneth Feinberg last week announced seven taxpayer-rescued firms are subject to statutory rules on executive compensation. But the restrictions are temporary and far short of longer-term "prudent" solutions needed, says Black, a former federal bank regulator and a top investigator for the definitive Congressional report on the S&L crisis.

Primarily, Black calls for the:

1. Need to adopt compensation reform at all companies -- not just the gang of seven under Feinberg's purview (AIG, BofA, Chrysler Group, Chrysler Financial, Citigroup, and General Motors, General Motors Acceptance.)
...

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Another one of the nation's largest lenders has filed for bankruptcy.  On the brink for months, CIT filed for Chapter 11 protection on Sunday.

The prepackaged plan allows CIT to restructure its debt while trying to keep badly needed loans flowing to thousands of mid-sized and small businesses. The plan keeps CIT's operations alive and makes it possible for the company to exit bankruptcy by year's end.

But here's the bad news:  While senior debt holders will only lose 30% of their investment, we, the U.S. taxpayer, will lose the entire $2.3 billion we lent the company this summer.

William Black, professor at the University of Missouri-Kansas City School of Law is dumbfounded.  "We put ourselves on the hook in a completely inept way where we lose first. We lose entirely as the taxpayers."

Black, a former top federal banking regulator, blames Treasury Secretary Timothy Geithner for negotiating such a bad deal on behalf of the American public.

His argument goes as follows: 

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From The Business Insider, Nov. 2, 2009:

Prior to the bust, the Japanese yen was the favored currency behind the so-called "carry trade." Traders would borrow a cheap currency, buy risky assets, and then profit. It was basically that easy.

But the cheap yen has been replaced by the cheap dollar, so that everything priced in dollars has soared like crazy.

And just as the dollar is showing some signs of life, and just as the market shows an inlking of a breakdown, here comes Roubini warning about the coming bust of the carry trade.

FT: The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

Click here for the full post from the Financial Times.

More coverage from The Business Insider:

• Roubini: A dollar rally, not a crash, could slam markets
• Here's more dollar strengthening and more bad news for stocks and gold

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Contrary to the hysterical panic you hear about inflation these days, it's actually not a problem, says the FT's chief economics commentator Martin Wolf.
 
Right now, the economy's capacity utilization and bank lending are so low, that inflation isn't taking hold.
 
All that could change, however, if the Fed blows its exit strategy.
 
If the Fed waits too long to stop giving away free money, inflation could start to gather steam. If the Fed tries to combat this by raising rates, meanwhile, the shock could hit the stock market and slow the recovery.
 
Wolf thinks the Fed will have to start making noises about raising rates within six months--faster than most people expect. Martin also thinks this move could hit the stock market.

Earlier with Wolf:

• "Still a very shaky sort of world recovery"
• Fed's massive secret Wall Street bailout still going strong
• The dollar isn't doomed, "big shocs upwards" coming!

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America's economy grew at an annual rate of 3.5% in the third quarter and stocks surged yesterday on the better-than-expected news. The IMF also raised its forecasts for Asia to 2.8% growth this year, 5.8% in 2010. 

It's hard not to feel better about the recovery, given those headlines. But the question on all our minds: Does this recovery have staying power?

"It's beginning to look like the old cycle," says our guest Martin Wolf, chief economics commentator for The Financial Times. "U.S. consumers go out and spend like crazy. Probably the current account deficits start rising again. ...The Asians wait for their exports to recover. And that in my mind would be an incredibly unsatisfactory sort of recovery that would just generate difficulties down the road."

However, what may be different this time is the consumer. "It's very difficult to believe in a really strong consumer-led recovery in the U.S.," Martin tells Aaron and Henry.  "I think this is still a very shaky sort of world recovery."

Some other key issues of note:

• The stock market....

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Remember last fall, when our government explained that the reason we needed to give $800 billion to Wall Street was so the banks could lend it back to us and shock the economy back to life again?

That was a happy story!

And we fell for it.

What happened, of course, was that the banks took the money, stopped lending, and used it to pay themselves and their shareholders through the nose.

Twelve months later, the banks still aren't lending, and we're still bailing them out hand over fist.

By lending the banks money at zero interest rates, the FT's Martin Wolf says, the Fed is helping the banks recapitalize themselves. The banks aren't lending because they're still trying to recover from all the lousy loans they made three years ago (and because there aren't all that many folks to lend to). So there's nothing else to do with the money other than hoard it, buy safe Treasuries, and pay huge bonuses.

It's annoying to watch banks that would have collapsed a year ago now minting money at taxpayer expense. But that's the way monetary stimulus always works.

Wolf, however, believes the public's outrage over the bailout and bonuses will drive Congress to pass some kind of financial reform. And, in an ideal world, he'd also like to see a windfall tax levied against bank bonus pools, which he says serves "no economic purpose."

The important questions for the economy and market now, says Wolf, are whether the Fed will remove the stimulus in time to stave off inflation, and it does, whether the removal will hobble the economy.

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