Obama Won, Romney Lost: How That Would Play Out in Major Market Sectors
Investing ideas assuming Mitt Romney will be defeated in the fall.
Since then, the Supreme Court ruled to uphold the constitutionality of the Affordable Care Act’s health insurance mandate. In Chief Justice Roberts’ controversial opinion representing the court’s 5-4 majority, that mandate was viewed as a tax and therefore within the proper prerogatives of legislative power, simultaneously adding that had it actually been the mandate the law calls it, it would have been outside those proper prerogatives.
This stunning exercise in linguistic contortion from the high court sets the tonal benchmark for the times we live in, I think -- a world dominated by the ability of those in positions of immense power to decide the law of the land independent of a serious regard for the constitutional spirit of plebiscite-driven taxation with representation, accompanied by the nerve to word it in a way to appear just the opposite.
Combined with the response of dumbfoundedness to this ruling from the right wing, I can’t help but conclude that a sizable portion of America’s voting population is taking on the characteristics of a guy who set the alarm clock for 6:00 AM and then overslept by 110 years. After all, I wonder, other than for its relatively glaring legerdemain, why should the Roberts opinion be viewed as anything outlying the norm since Teddy Roosevelt’s progressive philosophy that put the federal government’s power above the states’ and which has continued without interruption through to the present day?
Western Central Bank Influence Key to East/West Economic Divergences
The critical variable in the worlds of business and economics, of course, is that the United States no longer dominates industrial production and is seriously dependent on the rest of the world for both materials and labor input, and central banks in both Europe and America hold the largest positions of Western world public debt and mortgage-backed securities (yes, larger than China’s), with the latter being exceedingly difficult to evaluate. The leverage implications of this unprecedented reach and murkiness of centralized power over the fate of business and the economy would be worrisome enough, if only for their unquantifiability. But I believe those implications pale by comparison to the impact in the geopolitical realm.
The minor differences between Democrats and Republicans in the context of this magnitude of centralized power relative to the declining influence, wealth, and opportunities of the ordinary Joe offer voters a negligible alternative at a time when only daring and large alternatives are sufficient. We may be setting up for a near to intermediate term time frame not significantly unlike what led up to World War I, and its unfinished business, World War II. And, just as the onset of World War I was preceded and accompanied by a huge migration of Europeans to the US, I believe there is a parallel potential to witness a major expansion of the now mostly unnoticed but still rapidly growing exodus of capital from the United States to the Far East.
Yes, this is gloomy stuff. That gloom as backdrop, however, highlights even more what I still view as the overriding importance in economic clout of the entrepreneurial class who, amidst this dour macro picture and armed with modern technology, carry the torch for value creation and are bigger than borders.
Tech Has Been Outperforming the General Market
We see consistent confirmation for this in both positive and negative trends in a comparison over the past six months between the Qs and the SPY, depicted in this chart in the most belt and suspenders way:
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So if you are long only, overweight tech. If you are hedged, short the general market against tech.
Weakness in the Euro
Recently I noticed the major tax increases being contemplated and effected in France. I noticed this particular development there because it followed Mr. Sarkozy’s exit, but I might have noticed any number of events on the continent (even contemplated UK QE plans) that all point the same way: A dim outlook for spending control there and with it, the euro. Markets are responding with innovative ways to play the euro, and the following chart depicts just one of those new ETFs that happen to be of the goosed up inverse variety:
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The recent rate cuts on the part of the Chinese central bank, even alongside the ongoing European financial crisis, tell us in boldface that China’s economy is a huge and growing influence. At current rates of respective growth, the Chinese GDP has a reliable probability of equaling American GDP by 2024. But right now, that economy is in a rare softening mode. Bear in mind that “softening” in China and in other Far East nations means coming down to the high or mid-single digits, which is still multiples of the American economy’s growth rate even in good years. For me, the single greatest takeaway is the direct translation of this trend to the demand for basic materials. You can see what the market is anticipating in the following chart of the S&P basic materials bolt-on:
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This sector can be used as a long against financials, it can be used as a long or a short on its own, or it can be used as a short against industrials. The last option is my preference. It should be noted that large American industrial firms, known for their labor outsourcing, are still feeding the bulldog in terms of earnings expectations. Yes, they have taken the heat in concert with general market downtrends, but my view is that they are undervalued as seen in the following chart for the XLI:
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And here is a chart pitting the XLI against the XLB:
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Where in the World is Emerging Opportunity?
A long-gone New York newspaper publisher named Horace Greeley is often credited with the adage, “Go West, young man, go West and grow up with the country,” allegedly offered up for public consumption on the pages of his New York Tribune around the time the Civil War ended. Ever since, historians have denied Greeley’s ever having said it, its actual wording, or alternatively attributed it to others. They’ve also labored over the timing and argued about that, too. Read about all that here.
Today you could take those words and turn them around: “Go East, young man, go East and grow up with the world.” I follow the Yahoo Finance published schedule of upcoming earnings reports continually. At times, it is dominated by Far East listed concerns (not during the American earnings season, of course). This part of the world is getting more influential with each passing moment. A fascinating folklore is growing up around it, from Eduardo Saverin’s forfeiture of his US passport to the Norwegian shipping presence in Singapore’s bunker trade. If you’re not paying attention to the Far East, you’re overlooking one of the few sources of optimism regarding freedom, free enterprise, and growth on the ascendancy worldwide.
Weakening State and Municipal Financial Conditions in the US
Contrast those folklore nuggets with real life in the United States, and the respective trajectories. One of the more worrisome trends in America is state and municipal finances. Stockton, California, is the latest on the hit parade, and we should be watching with rapt attention. Whatever extent municipal financial difficulties may reach, a new and untested federal statute enacted into law designed to transfer such burdens from localities to the national level will be tested both legally and financially for the first time—despite the fact that we’re about to head into the prospect for a federal government shutdown over the debt ceiling and automatic spending rescissions—also untested, forming part of the bargain in reaching agreement on the last debt ceiling increase.
The underpinning economic outlook—assuming you are thinking along the “way too cool for school” lines of “we need growth to support tax revenue” rather than “we need to increase tax rates, spending, and monetary expansion even if it kills the goose that lays the golden egg”—is not improving, as Mr. Bernanke’s recent testimony confirms, although he is hardly the only person who knows this.
Consider Connecticut, for example. Vin Candelora, a Republican who represents that state’s lower chamber’s 86th district, not only warns of preclusively costly business conditions -- he’s advocating the bankruptcy option. Connecticut, you may recall, is one of the most concentrated loci of hedge managers in the world, “the folks with private jets” as our president characterizes them, and yet the state in which they make their homestead is going broke. Here is Mr. Candelora’s stunning and provocative—yet very honest—take on the situation and what to do about it. Mr. Candelora is flat out comparing Connecticut’s finances to Bernie Madoff’s management style.
While I recognize the tax advantaged nature of state, municipal, and authority fixed income instruments attractive to taxpayers bearing the highest marginal rate profiles, at what point does some kind of sane view of the situation have a market impact? I would be the last person equipped to tell you that because I’m persuaded by a lot of what Mr. Candelora presents in his zero-filigree summary. At the same time, however, it remains the fact that in some municipalities, you can’t even get your hands on triple tax exempts even at a premium. So I’ll leave that to others to explain. All I can say is that something’s got to give at some point.
Traditional Volatility Measures May Be an Opportunity
One final word. The completely forgotten VXX (yes, I realize it now trades 50 million shares daily on average). My colleagues and I often exchange chuckles because there was a talking head on CNBC during the late spring who advised buying it at any level under 20 and now it’s in the $12-$13 range.
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We’re chuckling a lot less now.
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