How to Make Money on the 2008 Campaign (1)

(2007-06-29 10:28:58) 下一个
How to Make Money on the 2008 Campaign
By Jeff Miller
RealMoney.com Contributor

6/29/2007 10:56 AM EDT
URL: http://www.thestreet.com/p/rmoney/marketanalysis/10365619.html

This is the kickoff article of a series on the 2008 election I'll be writing exclusively for RealMoney. If the current election is anything like the last two presidential elections, there will be plenty of excitement for political junkies, and there is much at stake for investors.

I am a longtime consumer and critic of election coverage related to the markets. Past media coverage has overemphasized the journalistic, horse-race aspects of the election. In 2004, causal relationships were loosely asserted, with little supporting evidence. I am delighted to have the opportunity to make RealMoney a source for more authoritative information about the linkage between elections and markets. I hope for plenty of help from interested readers and colleagues on the site.

The 2008 election is important to all investors, although they may not yet realize it. The potential for policy change is much greater than usual, with consequences for the overall markets as well as for many specific sectors and stocks.

As candidates clarify issue positions, we will have a better idea of the stocks and sectors where the effects are the greatest. The following sectors and stocks present a few good examples:

  • Defense policy: This could hit companies such as Allied Defense Group (ADG) and General Electric (GE) , as well as firms such as KBR (KBR) and BearingPoint (BE) .

  • Energy policy and taxation: Keep an eye on Exxon Mobil (XOM) , Royal Dutch/Shell (RDS.A) , BP (BP) , Total (TOT) , Chevron (CVX) and ConocoPhillips (COP) , plus a host of smaller companies.

  • Stem-cell research: Stocks affected would be StemCells (STEM) , Geron (GERN) and Aastrom Biosciences (ASTM) , and this is just one important but narrow area of health.

  • Big drug companies and biotechs: These include Pfizer (PFE) , Merck (MRK) , Amgen (AMGN) and Genentech (DNA) , to pick a few.

  • Ethanol companies: Producers include VeraSun Energy (VSE) , Pacific Ethanol (PEIX) , Aventine Renewable Energy (AVR) and The Andersons (ANDE) , plus some names associated with alternative fuels.

  • Investor taxation: Some issues of taxation will affect the overall expected market return via the Spyders (SPY) , Nasdaq 100 Trust (QQQQ) and Diamonds (DIA) .

But these topics and these stocks just scratch the surface. Each candidate is different.

Investor Beware

U.S. stock investors have good reason to keep a close eye on this election, because there is plenty of reason to be worried.

1.) It could be the end of a very market-friendly era. Economic policy has been supportive of markets through the entire Bush administration. Some would argue that Bill Clinton's policies were also good for the market, so from this perspective, the election could mark the end of a long-term trend.

2.) Democrats have the early lead. Prediction markets show them with a 55% chance of taking the White House, while the GOP is trading at about 41%. The prospects for legislative control are even greater, with the Democrats showing about an 80% chance in each house of Congress. Various head-to-head polls are less favorable to Democrats but show interesting results. Some of the best Web sites show creative analyses of factors influencing the primaries in both parties. This is important for evaluating head-to-head data.

3.) Democratic candidates seem threatening. A preliminary but hardly exhaustive list of these threats includes:

  • Changes in existing tax policy relating to dividends and capital gains.

  • Protectionist legislation that could undo many of the advantages derived from globalization and free-trade agreements.

  • Punitive taxation of companies in specific sectors, such as energy.

  • Massive changes in the pricing and delivery of health care that will affect the prospects of drug companies and the private health insurance system.

Many of these policies, if adopted, would frighten existing investors in specific sectors, and perhaps the overall market.

Of course, it's politics we're discussing, so it's not quite that simple. Democrats (and some Republican candidates) may improve long-term prospects for balancing the budget, balancing trade deficits, meeting future obligations and reducing defense spending by ending the war. This is a candidate-by-candidate question, not a matter for a knee-jerk reaction.

The Necessary Perspective

As any trader knows, it is just as important -- maybe more so -- to predict the market reaction than to know the ultimate truth. This series will explore both, and consider issues of timing.

It is likely that most investors are not yet thinking about these prospects. After all, the election is still almost 17 months away. The process will increase in market significance as the election grows near. Investors who do their homework will have an advantage.

This series has a disciplined approach. These are articles about investments, not advice about voting. We are interested in how stocks, bonds, commodities and the dollar may react to the change in the prospects of particular candidates. The ultimate objective is to make trading profits by building a portfolio of bullish and bearish trades associated with each candidate.

I have a process for developing these ideas. Each article in the series will raise some trades for consideration, but it is still very early. The overall portfolios will change over time as candidates drop from the race and we learn more about issue positions.

By way of contrast, there are many important factors in choosing a president. These factors include personal qualities such as character, ability to communicate and leadership. There are also single-issue voters for whom one question such as abortion or gay marriage or gun control may be more important than taxes and trade.

If the Iraq war is still going on at the time of various elections, many voters may find that issue more important than all others taken together.

To summarize, this series will not be about choosing the best president. It is intended as dispassionate and analytical.

An example is often helpful, especially one that is drawn from a more familiar context.

One of my first experiences as part of an options trading group involved news that broke during the day. The CEO of a major corporation had died unexpectedly. The stock of his large-cap company was rallying on the news. It was a typical case where the market was unhappy with the CEO's leadership, but it somehow felt wrong to the old prof. (Well, back then I was the young prof, but you get the idea. It offended my academic sensibilities.)

One by one, our traders came upstairs from the floor and this news was mentioned. "That's bullish," said the first. "That's good for the stock," said the next. "How much is XYZ up?" said the third. And so it went. I was impressed by two things.

First, each trader had some knowledge of the company involved and what the existing market perception was about the problems it faced. Second, each one had an immediate reaction that was market-oriented. There would be time later to express sadness about the loss of this well-known corporate leader.

I have learned as an investment manager that my first responsibility is to my clients. One's personal views must be separated from the analytical process of evaluating investments. That is the challenge to RealMoney readers who follow the candidates and the election. Once you have chosen a candidate, for whatever reasons, there are powerful psychological forces that blind you concerning the candidate's real positions. It takes intellectual rigor and strength to put these forces aside.

To get the most benefit from the Election 2008 series, the reader should treat each piece of news as if it were something about weather or a new technology development or the outbreak of a disease. You will still enjoy learning about the candidates and issues, and you will benefit much more from what we discover together.

The Next Steps

Future articles will take up some necessary background in understanding the electoral process. Readers will learn about the electorate, how candidates take and change positions, and how to follow the process to gain an investment edge.

I appreciate the desire of readers to discover immediate investment opportunities. This is part of my own daily quest. Sometimes, however, the payoff does not come so quickly.

In the Election 2008 series, it will be necessary to learn something about the process before drawing conclusions. The next step is to learn more about how candidates win. It is not all about issues. I will start with some facts about the electorate. This background determines campaign strategy and many of the issue positions candidates take.

My objective is to make this process entertaining, instructive and ultimately profitable for us all.

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