The Direction of Equities in the Obama Economy

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The Direction of Equities in the Obama Economy

Corporate America has the largest cash reserves in recent memory. The product of the first Obama administration, the boards and management of the biggest companies, foregone mergers and acquisitions and cleaned up their balance sheets. Fear was the operative sentiment after the 2008 financial meltdown. Business confidence was marginal at best. Lacking consumer confidence was a natural result of a high unemployment and an insecure job environment. The modest improvements in the economy were a direct outcome of increases in government spending, especially an expansion in public employee endeavors.

For the beleaguered middle class, the Bush blame of an inherited awful economy was little relief. That shabby self-justification excuse is officially over with the prospects of a second presidential term.

The Wall Street Journal predicts in What an Obama Win May Mean for Stocks that watching monetary prescriptions of the Fed is crucial. 

“Anyone who has been following the markets over the last few years knows how important Fed policy has been to the direction of everything from stocks to bonds, oil, gold and other assets. From record-low interest-rate policies to multiple rounds of quantitative easing, Fed Chairman Ben Bernanke has been about as dovish as it comes enacting policies to jumpstart the economy.”

Equities have benefited amply over the first Barak Obama term. The WSJ continues, “No matter your beliefs, the Dow is up more than 50% since Obama took office during the depths of the financial crisis.” The zero interest rate setting and the sparingly granting of business loans caused stocks to advance from a distressed level.     

Now with Obama’s re-election, his ownership of economic circumstances will be hard to escape. The slide in stocks that started as soon as the ballot counting was over, forecasts the lack of confidence that the fiscal cliff will be resolved sufficiently to foster conditions to grow the economy.     

Add in the rapid breakdown in international stability and the prospects that the European Union will implode, does not bode well for the engines of wealth creation. Equities gain in value when the products or services of their underlying companies prosper. Without the reasonable expectation that actual economic prosperity is on the rise the basic conditions for an advance in stock pricing is simply wishful thinking.

Yet, under a fundamental standard, the lack of favorable circumstances does not mean that stocks will simple lose value. Volatility in pricing, often with no distinct connection to price performance, is the norm. The perfect storm for speculative betting seems the more probable course for the markets in the coming years.

The backstop of the Federal Reserve that comes to the rescue of too big to fail conglomerates, is the operative criterion used to keep the financial bubble inflating. As the currency is debased and loses purchasing value, the price of stocks must rise just to stay even.

In addition, the negative aspects of tax increases especially on capital gains and dividends are unmistakable. Investing Daily’s Roger S. Conrad recently reported in Stick With Dividend Stocks.

“Since Election Day last week, the S&P 500 has lost 4.5 percent of its value. And the Dow Jones Utility Index is off more than 5 percent.

But let’s suppose there really is a fiscal cliff and that the worst case forecasts of a 4 point drop in gross domestic product (GDP) prove on target. Such a shock could also trigger a tightening of credit conditions in the US, making it more difficult to borrow.

In such an environment, two things would really count for companies. One is reliable revenue, a business that will continue to produce cash flow come what may. The other is a lack of near-term debt maturities, so management can step back from a temporarily frozen credit market and wait for bond buyers to come back.”

The point is that stocks may not go up in real value while their relative pricing may mirror the overall lack of confidence in the economy in a persistent down market. However, a company with sound financial reserves and low or no debt will have a chance to survive in a depression.

As credit becomes non-existent, cash will be king in the short term. Notwithstanding this message from previous panics, the complexity of debasing the currency adds a new dimension to familiar lessons. Hyperinflation of price stability results in a slowdown of the real economy. Adding further government spending with monetized debt from the central bank cannot infuse productive commerce into an economy where consumer cash is fickle or nonexistent.    

Stocks can only be a sensible investment when domestic mercantilism is oriented towards fostering prosperity of the national economy. Foreign trade will plunge as the worldwide financial upheaval exports its turmoil around the globe.

Solid companies that actually produce necessary items or endeavors have the best chance to retain some semblance of treasure. Nevertheless, the definitive risk for owning equities lies in the danger that the federal government will recall the counterfeit Federal Reserve Dollar, in a desperate attempt to forestall debt repudiation.   

Only algorithmic trading with super computers will squeeze out fractions of price movement and generate returns on capital, because the equity exchanges are now structured to penalize or purge the individual investor from having any chance of profiting.

Market risk is nothing compared to the political hazard of collectivist policies slated for imposition in a second Obama term. In order to generate tangible wealth, the private sector must navigate around all the pitfalls that excessive taxation and destructive regulations impose on voluntary commercial transactions. Equities cannot reward stockholders under a command and controlled - centralized and imposed government. The expectations of an uncurbed Obama dogmatic executive order administration guarantees that stocks will suffer under all the restrictions of any socialistic economy.

When the conditions are unknown, uncertainty runs havoc with equity markets. Conversely, when the socialism of Obamaism is widely verbalized for all to digest, the gamble of stock ownership equates to your level of confidence in the future of the country and the economy. Good luck.

James Hall – November 21, 2012 


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