The election ended, the president was re-elected, the Republican House stayed Republican, the Democratic Senate stayed Democratic. And the sun rose this morning – in the East, mind you. At least I think so. What does this mean for investors?
Let‘s step back for a second. The crowd on Wall Street voted against Obama but secretly hoped he would win and keep Chairman Bernanke in place. They feared Romney would replace Bernanke with a central banker who actually believed the nonsense about inflation and raising rates while we are still suffering from massive asset deflation, a massive reduction in credit worldwide and capacity to build anything and everything far greater than we need or can use (except some commodities — more on that in a bit.).
Let’s step back for a minute. The “fiscal cliff’ – which I now believe is highly overrated and this will accelerate as the media turn from the election to the next great set of headlines – is the creation of the right wing of the Republican Party. Don’t take it from me, read Norm Ornstein’s book It’s Even Worse Than It Looks, a great read that puts 95% of the blame for gridlock and Washington nonsense on the Republican Party. Oh, did I mention Mr. Ornstein is lifelong Republican and is with a conservative think tank, the American Enterprise Institute? If the right wing pivots right due to the election, then the fiscal cliff could become a problem and the Republican Party will lose control of the House in 2014, big time, a big deal for investors. More on that in a bit as well.
Let’s step back for an hour or so. The Obama victory plus the fiscal cliff means we are entering a period of time when politicians will either lead voters or be led by them. If John Boehner, the Speaker of the House, continues to manage his caucus as if he were a traffic cop on Valium, and Obama lets him do it, we will be discussing a series of fiscal cliffs through the next presidential election cycle. Obama has told insiders he is going to take his hopes and plans to people outside the Beltway – sort of a super community organizer, with an airplane at his disposal – to put pressure on Congress to act. If he does that, succeed or fail, he is trying to lead. If Boehner continues to roll over and play dead for his right wing, well, more and more of the same. Leadership does matter.
Let’s step back for a day. What are the odds President Obama and John Boehner can get anything done during the lame duck session of Congress almost upon us? Zero to none, other than pushing back the worst parts of the new taxes and spending cuts for three to six months. Not my opinion; Boehner said this in code. Obama, before he was re-elected, said he did not want to kick the can down the road. That was the candidate. The president will kick it.
Let’s step back for a week. In a week, we will begin to hear noise about how the Republicans are going to pivot, at least short term. Odds are they are not going to pivot as part of that kicking the can down the road exercise on the fiscal cliff issues. At the same time the debate within the Republican party about how to proceed on all matters will get louder. The money in the party comes from the far right; the voters they need to win come from the center; the answer is a muddle for the party and for the country. That’s with one caveat — my first one, bear with me. If the Dems vote together, supported by the president, they need roughly 25 or so Republicans to go AWOL to get past intransigence from the right wing of the Party. Boehner is not one to punish those who stray. He may want them to stray. And far more than 25 Republican members of the House were in close elections and know the Republican base is eroding — fast. If these members go AWOL, there may be real action on structural issues as early as next summer.
Short-term trading, now and next year
Let’s step back and look at the markets and investing. What is going to drive short-term trading through the New Year and 2013, based on what we know and can surmise from the election?
• Headlines on a fiscal cliff Armageddon and so on will dominate headlines unless Jerry Jones hires a general manager for the Dallas Cowboys. This is going to make markets bumpy for the next four to eight weeks. The Street assumes there will be a compromise that at a minimum forestalls going off the cliff. Strangely, I agree with the Street. And since the worst-case scenario is part of the market — a real plunge — kicking the can down the road will lift the market.
• During the fourth quarter, business investment will continue to contract due to uncertainty over taxes, the markets etc and the economic recession now raging in Europe. Germany will fall into recession this quarter, things are slowing around the world and Iran no longer wants to buy centrifuges from them or have them build their bunkers. This sets up a lousy first and second quarters. These quarters will register some growth now, but when data is revised, will show the U.S. will be in recession in the first half of 2013.
• This means 2013 is not going to be as good a year for growth or corporate earnings as we expect. History says markets often go down after an election year. Greece is going to leave the euro in 2013 and the recession in Spain will become a depression and a near-depression in Italy and Portugal. Perversely, this means Ben Bernanke and the Fed will do more.
• Bottom line: Any good word on the fiscal cliff pushes the market up or keeps it in the 1345-1515 range on the S&P; a weakening economy means Fed liquidity measures stay in place or are strengthened; the market goes up or stays in that trading range.
What it all means for investors
Let’s decide what to do. Do not trade market movements. Look for great stocks or ETFs.
• First: Everything points to more liquidity, the financial dinosaurs who think more Fed liquidity means inflation — and that means they will push up gold (GLD), silver (SLV) and the gold miners (GDX). My favorite miner is Newmont Mining (NEM). These precious metals are gong to have a great run over the next one to four years as inflation fears overcome common sense.
• Second: Remember I mentioned commodities? People gotta eat and the close call in the election pushes major changes in the ethanol program back a few years – again. And when I say eat, I mean eat: More than 1 billion Chinese are not giving up their higher quality foods even if their economy slows down. Corn means fertilizer — Terra Nitrogen (TNH) may not appreciate a great deal but it sports a 7.7% dividend and due to fracking, it is looking at low-cost feedstock for two generations. Other fertilizer names — in my Options Income Blueprint service I recommend selling puts on these to generate weekly and monthly income — are Potash (POT) and Mosaic (MOS). If China goes to a two-child policy, I see these companies as the best long-term investments on the planet other than Apple.
• Third: Weak markets create great value in companies that trade down with the market despite their performance as a company. Think Apple (AAPL) — it is going to have an incredible fourth quarter with the iPhone 5, according to Changewave Research (part of the 451 Group), as I read the data a quarter far better than expected by most on Wall Street. And if you own Apple, you gotta sell calls if you want income. You can get 12% a year or more selling weekly or monthly calls on Apple.
• Fourth: Obama is going to approve the Keystone pipeline; this is going to be taken as a signal he is fracking-friendly, which he is. People are going to think gasoline prices may bounce a bit but are not going to go nuts given the increase in North American energy supplies. Stable gas plus baby boomers means RVs. I like the maker of the best RVs in the world – Airstream (Aren’t they beautiful? – you have to visit their factory in Jackson Center, Ohio) — and Airstream is part of Thor Industries (THO). Last time I wrote about Thor about a year or so ago and said take a look, the stock was under $20. Thor stock is now $43 and change. Well, think about it, I may know what I am talking about.
GOP at a crossroads
One last note — and this is not about investing, perhaps. I said I would get back to the possible future of the Republican Party. Here, I am. That party is at a crossroads. No pun intended; American Crossroads is the Super PAC run by Karl Rove that spent untold millions using tactics from previous elections to try to win the 2012 election and we know how that worked out for Romney.
If the Republican Party continues to be driven by seriously right-wing money, like that coming from American Crossroads, it is done. And I am serious – they are going to go the way of the Whig Party in the middle of the 19th century, a party soon replaced by, you guessed it, the Republican Party. The Whigs looked backward and they wanted to maintain the status quo; they were anti-immigrant, anti the anti-slavery people if not pro-slavery; and anti- the organization and support of the frontier. Simply put, they stood in the way of ideas whose time had come and got run over. And when the Whigs broke up, their rump of a party evolved into the most appropriately named political party in U.S. history, the Know Nothings.