Are we ready for Obamanomics?

Zoomer | November 28th, 2008

Yes, we’re all waiting to hear about Obamanomics.
Barack Obama’s election is providing some stability
during unprecedented financial turbulence. At least
now we know that some of the uncertainty has been
removed. Based on Obama’s campaign, we expect
the following to take place:

One of his first steps will be to address the financial
crisis. The subprime mortgage crisis and frozen credit
markets are the main factors that led to the
economic slowdown in the US and, in turn, the world.
The new guy can only do so much to fix those
problems quickly. As Bill Clinton declared, “it’s the
economy, stupid.” But Obama has made the
economy a key focus.

His politics should be the polar opposite of George
W. Bush’s. So we could see a complete reversal of the
last eight years. Consequently, there is a good chance
that we will not see a commodities market for the
next four years.

Effects on different sectors

Nevertheless, among investors, perception often
trumps reality: Obama’s victory has already boosted
some healthcare plays, because his insurance
proposals should increase demand for generic drugs
and companies that manage drug benefits.

We have also seen that the mere anticipation of his
victory triggered declines in the securities of coal
companies, because Obama hinted he is against
increased use of the dirty fuel until there’s a proven
clean-coal technology.

Governments alone can’t prevent a recession;
however,Obama’s promise of a stimulus package for
America’s struggling manufacturing industry, which
may include a bailout for the auto industry and plans
to invest heavily in infrastructure, could give the
economy a much-needed boost.

The Obama presidency could also negatively
influence the oil industry, as the president-elect has
said he will fight America’s ‘addiction’ to dirty oil,
(which could include crude fromAlberta’s oil sands).
This greening is his JFK ‘Man on the Moon’ speech.
And just as Americans put a man on the moon, they
will probably succeed in decreasing their demand for
global oil. The US is the largest consumer of oil in the
world, so consider what this means to those asking
for a return to high oil prices.

Other winners and losers under Obama

The Market

Although Obama’s prospects sparked the biggest
Election Day rally ever, the gains were more than
erased the very next day in the face of bleak
economic news. Get ready for more seesawing. Until the market decides if Obama is good or bad
for stocks, and to what degree, volatility will continue.

We’ll see Obama trying to shift to more peace
talks and discussions with dissenting nations. The peace premium will mean lower prices for
oil and gold.

What else can the new president do? With
economies around the world under siege, it could
be at least a year before any of his fiscal policies
dramatically affect stock prices.

You can expect hedge funds and their managers to
experience higher taxes. Taxes have to be increased
in the US to fund some of the proposed changes,
and this will probably continue.

Financial Services

The stocks of banks, brokerages, and other financial
concerns can anticipate stricter regulations that
may well crimp returns but result in a greater
consumer confidence in them.

Financial stocks are becoming so cheap that they
will soon be hard to resist. The Standard & Poor’s
financial index is down about 51 percent so far
this year, trading at 11.3 times ’09 earnings, versus
a 36.6 percent drop for the S&P 500. Financials
may well be among the most attractive sectors
when the smoke clears, all things being equal.

Infrastructure

Obama has made it clear that he wants to bolster
crumbling roadways, bridges, schools, and sewer
systems, and for that reason municipal bonds are
gaining interest (they’ll have to raise the cash to do
the building). The Obama administration will likely
send increased amounts of grant money to the
states, improving their cash flows and allowing
them to complete old projects and start new
ones — all of which should energize the US
municipal bond market.

This infrastructure building will create jobs in the
US — jobs that can’t be outsourced to some call
centre in India or China.

Defence

Democrats have been threatening to whack the
defence budget. House Financial Services chairman
Barney Frank made headlines when he said the
defence budget should be cut by 25 percent.

Green Energy

Obama’s promise to create a green-energy
industry to reduce the nation’s dependence on
foreign oil has placed alternative energy in
everyone’s winner’s circle.

You can expect the oil nations to be severely
impacted, as they were under Clinton. Saudi
Arabia was in deep trouble and, if you remember,
so was Alberta! And they didn’t recover until eight
years later.

Already Obama is talking about people getting
credits for buying cleaner burning cars.

Auto Makers

Both Obama and the Democratic Congress have
committed to rescuing the US auto industry.
However, he has been quoted as predicting that
the bailouts will fail because Detroit’s production
costs are too high, and the world auto market
has excess capacity. So we are not sure which
direction this will take.

Healthcare

Another Obama play is healthcare, which is likely
to be a priority. The result? Drug companies may
get the shaft. Drug makers fear losses in revenue
as Democrats push to negotiate lower drug
prices under Medicare.

But there may be some winners in healthcare.
The generic drug makers could benefit from any
assault on drug pricing. And managed-care
companies could benefit by bringing technology
systems and other efficiencies to the insurance
market and pharmacy-benefits services.

The Bottom Line

We may see the reverse of the Bush era,much
like the Clinton era was the reverse of that of the
previous Bush.

What could it mean for our clients?

* You will still need bonds for a portion
of portfolios.

* Our managers are still seeking companies
with good balance sheets and dividends that
make sense.

* We are ensuring that our clients have the
appropriate allocation to weather the storm.

Over the next four years we will eventually emerge
from this chaos and become stronger. Obama will
be planning for re-election in three years, so he
really has three years to clean things up. Events may
take place more quickly than most expect, including
us, but we need to be prudent in our planning.

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If you would like to review your current portfolio based on the
new Obama economics, contact
your closest CARP Certified Advisor for a consultation.

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