Thursday, November 27, 2008

How To Invest In The Obama Recovery

How To Invest In The Obama Recovery

By Tim Middleton, MSN Money | 27 November 2008

Elected to fix the economy, the incoming president has signaled a commitment to focusing on 3 areas. Savvy investors can follow these trends for personal profit.

It's Always The Economy, Stupid

FDR won the Second World War, but he's better remembered for the New Deal. Ronald Reagan won the Cold War, but his economic reforms are what broke the back of stagflation [[and it's his elimination of steeply progressive tax brackets, unadjusted for inflation that he's remembered for: normxxx]]. Bill Clinton eradicated welfare as we knew it, but he'll be remembered more for free-trade deals that unleashed global prosperity.

Barack Obama won the White House promising to overcome the economic malaise created by his predecessor. He will be the first black president of the United States, but he wasn't elected because he's black. He was elected to fix a badly broken wealth engine. He made his priorities clear enough that we investors can see the outline of the kind of economic recovery he has in mind. We can, therefore, invest alongside these trends to our personal profit.

And though no presidential candidate can explicitly promise his favored constituents that he will give them absolutely anything they want, he can do it implicitly, and Obama has. These are the Three Anythings the incoming Obama administration offers to investors. Accept the invitation by buying:

  • Anything green, including the U.S. dollar.

  • Anything with its hand out, especially government itself.

  • Anything that would hurt if you dropped it on your foot, like a cement truck.

Alternative energy, municipal bonds and 'infrastructure' are the new Halliburton (HAL), the oil services giant whose stock more than doubled under the watch of its former boss, Vice President Dick Cheney— at least until the bear market came along. In league with global trends that recognize the greenback as the world's only reliable reserve currency, this trio will help restore the U.S. dollar to primacy over the euro. That bodes well for domestic over foreign securities, from stocks to bonds.

Here are the priorities, and how to invest in them, explained:

Go Green

When Sarah Palin cried "Drill, baby, drill!" she showed how clueless her ticket was in this year's election. Petroleum is so Republican. And except at extravagant prices, it is so scarce. (Ignore the current momentary dip; it won't last.) Moreover, so much of it lies beneath land under the sway of people who are not America's friends.

Wind and solar energy are expensive, too, but so was hydroelectricity once. Now it's the cheapest form of energy. Indeed, the Pacific Northwest has become the home to so many high-technology companies— including Microsoft (MSFT), the publisher of MSN Money— because theirs are generally energy-intensive enterprises— and that's where so many rivers were dammed to harness electric generating potential.

And the cost curve of alternative-energy sources is going down, not up. Solar panels exploit the same advantages in engineering as microchips, which makes it possible for them to become "relentlessly cheaper," just as LCD televisions have become, says Kevin M. Landis, the manager of the Firsthand Alternative Energy Fund (ALTEX).

Among the incentives the Obama administration could offer to aid alternative energy would be to expand net metering and time-of-day pricing, strategies already employed in parts of the nation. Under net metering, the excess electricity that power-company customers produce— through solar panels, for example— is bought by the companies at retail prices. Where time-of-day pricing is used, those prices peak in midafternoon during summer, exactly when solar energy is most abundant. The power companies, in turn, are spared the cost of building generating plants just to meet peak demand.

Stocks in this area can be extremely volatile, making funds a better choice for most investors. Relatively few mutual funds are specifically targeted to green energy, but several exchange-traded funds are, including PowerShares WilderHill Clean Energy (PBW), Market Vectors Solar Energy (KWT) and First Trust Global Wind Energy (FAN).

Buy American

The dollar began rallying earlier this year as the whole world dumped risky investments and flocked to U.S. Treasuries, which you can buy only with greenbacks. Demand was so great that three-month T-bills were yielding almost nothing. It was a reminder that, no matter what they say about the U.S., foreigners recognize it is the only superpower— economically as well as militarily.

Also, the U.S. was the first to recognize the current economic malaise and try to deal with it, in part by cutting interest rates. Thus, says Robert J. Froehlich, the chief investment strategist of DWS Investments, U.S. stocks will recover before those of other nations, and everybody knows that— including foreign investors, who will flock to our stock markets at the expense of their own.

The immediate way to play the dollar's rally is PowerShares DB US Dollar Bullish (UUP), up 13.5% for the year, through Nov. 19. The indirect way is to cut back on foreign funds and switch the proceeds to domestic stock funds. Froehlich also recommends Wal-Mart Stores (WMT), which gets only a quarter of its revenue overseas. In contrast, the average company in the Standard & Poor's 500 Index ($INX) is dependent on foreign sales for 41% of revenue.

Buy Government Bonds

Nobody is happier to give away taxpayer money than Congress, which has come perilously close this month to squandering it on the Big Three automakers, the stupidest managers outside the gold industry. The Democrat-controlled Congress will have no inhibitions in granting relief to states and cities, however, and you can invest in them through their bonds. Those bonds currently offer yields that approach 10% when you add in their tax benefits.

"We just bought some New York municipals at a 6.4% yield," marvels Lewis J. Altfest, a financial adviser in Manhattan. These are New York City double-A-rated bonds, which are free of federal, state and city income taxes. "Where does anyone come off giving you triple tax-free for a rate so much above Treasurys?" Altfest asks. "It's not an overstatement to say it's unheard of."

In more normal times, the bonds would yield about 15% less than Treasurys. Since a bond's yield is the reciprocal of its price— opposite ends of a teeter-totter, joined to each other— a return to normal yields would send prices soaring, generating lush capital gains for bond owners. Even federally linked bonds, namely mortgage-backed securities from the likes of the Government National Mortgage Association, aka Ginnie Mae, are selling at distressed prices, and most bonds backed by high-quality mortgages are explicitly or implicitly guaranteed by Uncle Sam.

But don't buy Treasurys. The federal issues are way overpriced because of the fear factor.

Buy Infrastructure

A substantial part of the municipal-bond business is tied directly to infrastructure, in the form of toll roads, airports and sewage treatment plants. Infrastructure is a favorite Obama theme and a perennial favorite of politicians because it can create immediate high-paying blue-collar jobs.

But you can also play infrastructure through equities. "You want to own the things that if you drop them on your foot would hurt— steel and railroads and those sorts of things," says Dennis Gartman, the publisher of an eponymous investment newsletter. "You want to own copper and Caterpillar (CAT), the movers and the makers of stuff. That's what infrastructure is." In usual investment parlance, infrastructure refers to public utilities, which themselves are a decent defensive investment, but doesn't capture the web of suppliers and other vendors in the infrastructure matrix. A better alternative is a fund that targets basic industries, such as Industrial Select Sector SPDR (XLI). This exchange-traded fund's top holdings include General Electric (GE), United Technologies (UTX), United Parcel Service (UPS), 3M (MMM) and Boeing (BA), as well as Caterpillar and Union Pacific (UNP). This is the "stuff" that Gartman is talking about.

Infrastructure isn't just a domestic issue. China has pledged more than $800 billion toward expanding infrastructure into its vast interior. China is roughly the size and shape of the United States, but only China's equivalent of the U.S. East Coast has been modernized. In U.S. terms, everything west of Pittsburgh is still dirt roads and rice paddies.

Saddled with an economic mess that would have tested FDR, Obama will not be free to implement as much of his agenda as he probably would like. And Congress, always fractious, can be counted on to throw up obstacles to success at every opportunity. But what James Carville famously told Bill Clinton's campaign staff in 1991— "It's the economy, stupid"— is just as true now. Obama will certainly fix his attention there, and he's more likely to build bridges than buy bullets. The investment climate will be tough for some time to come, but there will be winning sectors, and these Three Anythings will be among them.



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The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.


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