What Has And Hasn’t Changed In The Markets After The Obama Win?

Yesterday was an historic day, and the election of Obama should reduce some of the uncertainty in the market.  America’s standing in the world has been renewed, and there is hope that we will finally have some new economic policies in the country.  Today, America and the world are filled a new with hope — hope that Obama can deliver on the real change that he promised.

What has not changed is the fact that we are in a deep hole.  While the credit markets seem to be thawing due to the massive injections of liquidity by the Fed and fiscal stimulus (aka budget deficits) on a scale that has rarely been seen before, the damage has been done.  The economic readings we have been getting have been dismal, and mostly far weaker than expected, even though expectations have been set low.

This week, we have seen auto and truck sales fall to levels not seen in decades, and if one adjusts for population growth, not seen since almost all auto production was halted in favor of turning the U.S. into the arsenal of democracy.  It had been expected that both auto and truck sales would be up slightly after a dismal September; instead, auto sales were only 3.8 million (seasonally adjusted annual rate), 11.8% below September’s reading, while truck sales were just 4.1 million, down a stunning 22.6% from the September pace.

Factory orders fell by 2.5% in September following a 4.3% plunge in August (revised from an initial reading of a 4.0% decline).  The ISM manufacturing index fell to 38.9 from 43.5.  Any reading there below 50 indicates a contraction, and this is the worst contraction on this basis since 1982.

The ISM service index is not faring much better, dropping to a reading of 44.4 from 50.2 a month ago, and an expected reading of 47.0. This morning, the ADP employment report (which in recent months has been way too high relative to the government numbers) showed a decline of 157,000 jobs.  Last month, ADP only saw a loss of 8,000 jobs initially, although that number was revised up to a loss of 26,000 jobs.  The expected decline for this month was a loss of 100,000 jobs on the ADP report.

Friday will bring the government employment report, and it is expected to show a decline of 200,000 jobs.  If I had to take the over or under on that number, I would take the over.

The stock market will turn well before the economy turns, usually about six months before the economy actually starts to improve.  I think it will take much longer than six months to get this economy turned around.  The hole that we have dug is simply too deep.  However, historically the best possible time to invest in the stock market is when the economy is mired deep in despair.  Serious economic difficulties produce great investment opportunities.  There were few time in history that were better to put your money to work than in early 1933 or late 1974, or the summer of 1982.

We are not there yet, but probably within a few months of one of the best investment periods in the lifetime of anyone reading this.  Keep some of you powder dry, but don’t be entirely in cash.  Use the market volatility to restructure your portfolio.  Use weak days to add to your holdings of stable health care and consumer non-durable names.

Some examples of names we like would be Kimberly Clark (KMB), Unilever (UN) or (UL) and Del Monte (DLM)) among the non-durables, and Pfizer (PFE) and Johnson & Johnson (JNJ) in health care.

Use rallies to get out of financials, retailers and consumer durables; if you have to play those names, use the senior debt instead of the common stock.  Short-term energy faces a bit of a tough slog since economic weakness is weighing on demand.  But low energy prices are likely to slow the development of alternative energy and curtail the exploration efforts needed to offset the natural decline in oil production from existing fields.

This is planting the seeds of even higher energy prices than we saw this summer down the road when the world economy recovers.  Patient money in that sector will be handsomely rewarded.  The big integrated names like Exxon Mobil (XOM) and Conoco (COP) are a good place to start.  If you are more aggressive, the oil service names like Halliburton (HAL) and National Oilwell Varco (NOV), as well as the deep-water drillers like Transocean (RIG) and Diamond Offshore (DO) look attractive.

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