Barack Obama, who Tuesday became the president-elect of the United States, will head to Washington with a majority for the Democrats in Congress. This shift will bring about strikingly different economic policies than the current administration’s; here’s a look from Money Morning at what Obamanomics will mean for investors:
With his landslide election victory Tuesday – coupled with Democratic gains in the House of Representatives and in the Senate – U.S. President-elect Barack H. Obama II will have the ability to pursue more or less any policy he wants.
For investors who have been trying to analyze the economic outlook for the New Year, the election of U.S. Sen. Obama (D-Ill.) provides a major piece of the forward-looking jigsaw puzzle that these analysts hope to assemble. That’s because the likely trends of the United States and other economies around the world – and the relative success of different sectors within those economies – depends crucially on who’s in the White House, what policies they have, and how effectively they can pursue those policies.
Only one thing keeps the triumph of the incoming Democratic president from being totally complete: The Republicans appear to have held onto 41 Senate seats, enough to prevent the Democrat majority from overriding a united filibuster. In practice, however, there are few issues on which the Republicans will be completely united. Thus, on only a few “litmus test” issues – such as the “Employee Free Choice Act,” which removes the secret ballot from union elections – is this filibuster threat likely to be effective.
Obamanomics: From the Environment to Health Care
A review of President-elect Obama’s economic policies – characterized by the term, Obamanomics – clearly offer profit opportunities. Let’s take a closer look at some key areas to consider in 2009.
In the economics area, Obama’s two signature policies are a promise to institute a “cap-and-trade” system of carbon emissions permits to combat global warming, and a substantial expansion in state healthcare provision, notably to include universal healthcare provision for minors.
On the energy front, the support of U.S. Sen. John McCain (R-Ariz.), for the “cap-and-trade” system will make it much easier for Obama to pass legislation quickly, probably in the first half of 2009. Under Obama’s proposed legislation, emission permits will be auctioned to utilities and other businesses with substantial carbon emissions. This has the advantage of being more of a free-market approach than McCain’s plan to give away the permits for free, which would have required the creation of a huge government bureaucracy to decide who would get those permits.
Even so, Obama’s approach has the disadvantage of imposing gigantic new costs on utilities and other carbon emitters. Indeed, Obama himself has said that new coal-fired power plants would become hopelessly uneconomic under his plan – chiefly because of the costs of the emissions permits they would need. That suggests that nuclear power plants (which he does not oppose) would account for the majority of new power-station construction during the Obama presidency – although solar, wind and other power-generating technologies that look pretty and can be made to work also will fare well.
The corollary of Obama’s emissions permit program, therefore, is that an investor should sell coal-producing companies and coal-fired electric utilities, and invest in nuclear power stations and uranium-mining companies. In principle, there should also be opportunities in the solar- and wind-power sectors, but the “new energy” fad of the last couple of years has already driven their valuations to uneconomic levels.
On the healthcare side, investment recommendations are more difficult to isolate. Generally, Democrats are skeptical of the patent protections enjoyed by pharmaceutical companies – as well as the high prices those protections create – so the major manufacturers of patented drugs should be avoided.
Conversely, the producers of generic drugs appear poised to benefit from the increased spending on healthcare – especially the manufacturers of pediatric healthcare products, including pharmaceuticals – should benefit from the Obama program’s emphasis on children’s healthcare.
Financial Crisis Redux
Of all the questions investors will have about the New Year – following Obama’s victory – is what the new administration will do about the current financial crisis.
A federal bailout package – consisting chiefly of spending increases – seems almost certain in the short term; that will cause the federal deficit to balloon even more than it has already, will make U.S. Treasury bond financing increasingly difficult, and will further stoke inflation. In those circumstances, avoid Treasury bonds, except the inflation-protected buying Treasury Inflation Protected Securities (TIPS), the principal and interest of which are linked to the Consumer Price Index (CPI). TIPS currently have an attractive yield around 3.0%.
It seems likely that an Obama administration will tend to impose costs on the financial-services sector in return for the bailouts it receives – perhaps, for example, banks will be required to funnel lending into low-income areas, or toward other chosen beneficiaries. Limits on financial-sector remuneration also may make it difficult for the major banks to do business, particularly in the trading area. The Democrats have a more aggressive attitude toward “predatory lending” than the Republicans, and will undoubtedly find innumerable examples of such lending in the mortgage and credit card area over the next few years, which they will wish to punish. Hence, financial sector investments should be generally avoided.
Potential Profit Plays
On the other hand, both Obama and the Democrats seem more likely to propose bailouts for states and municipalities that find themselves in budgetary hot water because of the recession that’s sure to come (if it’s not here, already). Thus, municipal bonds, which carry a considerable credit risk under a tight-fisted Republican administration, may be thought of as less vulnerable to default under an open-handed Democrat administration with sympathy for the issuer’s problems, particularly if that municipality represents a core urban Democratic constituency.
When New York City got in trouble, U.S. President Gerald Ford – the Republican who succeeded the disgraced Richard M. Nixon – took an unsympathetic attitude and The New York Daily News captured his perceived attitude with the headline: “Ford to City: Drop Dead!” No such episode will occur under the urban-oriented, free-spending Obama!
And that makes munis a “Buy.”
Also in the “Buy” category are automobile and auto-parts companies. No matter which candidate ended up winning Tuesday, the victor would almost certainly decide to bail out U.S. carmakers, as well as the suppliers that rely on them. After General Motors Corp. was rebuffed in its bid for aid by the Bush Administration, the bailout of U.S. carmakers is now being billed as a top priority for the incoming President Obama.
Automakers such as GM and Ford Motor Co. benefit from being the headliners in an iconic U.S. industry – especially because it’s one that employs lots of potential Democrat voters in industrial states and suffer from international competition that increasingly riles the more protectionist Democrats. A bailout is thus inevitable, probably without involving the automobile companies in a Chapter 11 bankruptcy. And that makes their shares worth a “flutter.”
President-elect Obama’s supporters celebrated ecstatically Tuesday night. Investors should be more skeptical. But looked at carefully, an Obama administration – and Obamanomics – would still seem to offer opportunities for profit in the New Year.
This article has been reposted from Money Morning. You can view the article on Money Morning’s investment news website here.