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Post-Election Stocks: Winners and Losers

By Jim Fink on November 5, 2010

There are industries whose prospects really are improved or worsened by politics, like utilities and telecom.

 — Roger Conrad, Utility Forecaster

What a week!  Both the mid-term elections and the Fed meeting are game changers for the markets. Investors who appreciate the forces that were unleashed by these two events will prosper. But keep in mind that these political forces are secondary in investing to fundamental analysis. As Roger Conrad of Utility Forecaster wrote to subscribers immediately after the election:

The key to investing success is the same, no matter who controls the levers of political power. That is to buy good companies trading at bargain prices and let them build wealth for you.

The best investment process is a combination of bottoms-up stock-by-stock evaluation and a top-down analysis of political and macroeconomic events. So, without further ado, let’s talk politics!

2010 Election

Historically, the opposition party (i.e., the one not in control of the White House) does well during mid-term elections because voters are disappointed that the hype of the presidential campaign two years before does not mesh with reality. But even by this standard, the Republicans kicked ass, taking back control of the House of Representatives by picking up at least 60 seats (9 House contests are still too close to call). This amounts to the largest seat gain for the GOP since 1938, even more than the gains Republicans saw during the 1994 midterm election. The semi-final tally is 239 Republicans and 187 Democrats, which gives Republicans a comfortable 20 seats more than the 218 needed for a majority.

In addition, the Republicans gained six Senate seats, which ends any chance that Democrats can prevent Republicans from filibustering liberal legislation such as increasing the national debt ceiling. The final tally is 53 Democrats (including 2 left-leaning independents) and 47 Republicans.

Meaning of Republican Victory in 2010 Election

The election acted like a huge restraining order on Democratic legislation. The key word is “gridlock.”  Put bluntly, the era of Obama’s massive borrow-and-spend regulatory programs is over. Some industries that will be affected are listed below:

Coal. In a post-election press conference, Obama said that he was abandoning all efforts to pass clean energy legislation, which includes CO2 climate control through “cap-and-trade.”  This has to help coal companies, which traffic in the dirtiest of all fossil fuels.

Still, one must curb your enthusiasm because, as Utility Forecaster‘s Roger Conrad states, “action on the state level is alive and well.” In particular, California overwhelmingly rejected Proposition 23, which would have put the state’s targeted reduction of CO2 on hold until state unemployment fell from the current 12 percent-plus to less than 6 percent. Similarly, clean energy also scored a big victory in Colorado’s gubernatorial election, where Democrat John Hickenlooper has vowed to support utility spending on efficiency and renewable energy.

Market Vectors Coal (NYSE: KOL) is an ETF play. An individual stock idea is Peabody Energy (NYSE: BTU), which sells a lot of product in high-growth Asia (just in case state regulation hurts the U.S. coal business). For a complete analysis of the coal market and the best coal stocks, try out Elliott Gue’s Energy Strategist investment service.

Renewable Energy (Solar and Wind). As I wrote in Canadian Wind Power is Blowing Strong, solar and wind power are not economically viable without government subsidies. Except in financially-healthy Canada, subsidies are getting cut throughout the debt-plagued developed world. The end of clean energy legislation means that subsidies in the U.S. will continue to wind down (pun intended). I’d avoid ETFs like PowerShares WilderHill Clean Energy (NYSE: PBW) and solar stocks like First Solar (NasdaqGS: FSLR).

Utilities. The untold story of the election is Republican gains in state legislatures.  Not only did pro-business Republicans gain a net 9 new governorships, but they gained control of at least 19 more state legislatures and now control 53% of all state legislative seats – the most in 82 years. Since utilities are regulated at the state level, this is great news for them.  As Roger Conrad recently wrote:

Governors appoint state regulators that set utility rates determining return on investment. That makes the race for state houses always critical for utility investors to watch.

Utilities SPDR (NYSE: XLU) is an ETF play and individual utility names include Exelon (NYSE: EXC) and Kansas-based Westar Energy (NYSE: WR). I like Westar because pro-business Republican Sam Brownback just got elected to the Kansas governor’s mansion. For a complete analysis of the utilities market and the best utility stocks, try out Roger Conrad’s Utility Forecaster investment service.

Health Care. New House speaker John Boehner says one of his first orders of business will be to repeal Obamacare:

I believe that the healthcare bill that was enacted by the current Congress will kill jobs in America, ruin the best health-care system in the world and bankrupt our country. That means that we have to do everything we can to try to repeal this bill, and replace it with common-sense reforms that will bring down the cost of health insurance.

The House may pass health care repeal, but the Democrat-controlled Senate won’t and Obama would veto in any case. Still, oversight of the Health and Human Services Administration by a Republican-controlled House will ensure that regulations will be less onerous than they otherwise would have been under the healthcare reform.

To hedge my bets, I’d diversify out of the U.S. by looking at a global healthcare ETF like iShares S&P Global Health Care (NYSE: IXJ) and make a small bet on a resurgence of managed care providers like Wellpoint (NYSE: WLP).

Federal Reserve and QE2

At their Wednesday meeting (Nov. 3rd), Fed Chairman Ben Bernanke and his Fed compadres adopted a second round of quantitative easing — $600 billion in new bond purchases (i.e., printing money). In a Washington Post op-ed piece, Bernanke said he did it for two reasons: (1) stimulate housing through lower long-term mortgage rates; and (2) boost the stock market. According to Bernanke, a higher stock market will:

boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.   

Wow. I’ve never heard a Fed Chairman say before that his job was to jack-up stock prices. I thought it was to promote full employment and maintain price stability. Regardless, as investors we should take heed of his statement and act accordingly.

Homebuilding. Don’t fight the Fed. Bernanke says that one of his chief objectives is to boost the housing market, so take a look at SPDR S&P Homebuilders (NYSE: XHB).

Stocks in General.  Bernanke says he want to boost the stock market so check out Vanguard Total Stock Market (NYSE: VTI). For those investors who want a portfolio of only the best growth stocks rather than a general stock index, the Personal Finance investment service is your best bet.

Emerging Markets. Heads of state in many emerging market economies are criticizing the Fed for QE2, saying that it will:

send more capital rushing into their already hot economies. They also fear that as the move depresses the U.S. dollar, their exporters’ leg-up on U.S. manufacturers will erode.

Similarly, the International Monetary Fund says that QE2 will “raise capital flows to emerging economies and weaken the dollar.”

Investors, take note!

In the ETF space, I’d check out Vanguard Emerging Markets (NYSE: VWO) and country ETFs with strong currencies that are appreciating against the U.S. dollar, such as iShares MSCI Australia (NYSE: EWA) and iShares MSCI Canada (NYSE: EWC). For individual names in Canada and the emerging markets, there are no better places to find ideas than Roger Conrad’s Canadian Edge and Yiannis Mostrous’ Silk Road Investor, respectively.

Commodities. Since most commodities are denominated in U.S. dollars, a weaker dollar means higher commodity prices. Investors should consider SPDR Gold (NYSE: GLD) and iPath DJ-UBS Commodity Index (NYSE: DJP)

Crude oil is another commodity that should do well. Crude oil ETFs do a lousy job tracking crude oil, so I would stick with individual energy stocks focused on oil production. ExxonMobil (NYSE: XOM) is one individual stock idea, but it is an integrated energy company and not a pure play. Elliott Gue’s Energy Strategist is the place to find the best pure-play energy stocks leveraged to oil.


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Here’s What’s Really Going to Crush the Market

Most folks understand the basic concept of inflation… things cost more money. But tragically, most don’t understand the real implications of what it means for their financial future. 

Or just how dangerous it’s becoming right now. Today.

And there are two reasons for that…

First, the U.S. government’s calculations barely take into account two of the things you and I are paying more and more for every day: energy and food.

Second, since inflation really hasn’t been an issue for the past 30 years here in the U.S., most analysts won’t dare to say it’s on the rise because they’ll suffer professionally. 

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