Broad Economic impact of an Obama Win 11/05

Running mates were considered yesterday as the market had its best Election Day rally since the Reagan Victory in 1984. There were also some interesting patents issued on this day – one to a George B. Selden for the automobile. But since I think people are more interested in the future than the past today you’ll have to do your own research on the history of the Association of Licensed Automobile Manufacturers.

Quick overview – The projected negative cycle kicked in today. The S/P500 broke its support of 960 so circle the wagons and expect to see some more weakness and a stronger negative cycle around November 14-17. Importantly, the credit markets continue to ease.

Politics make great cocktail chatter but economic fundamentals always outlive any political administration. Fortunately, I have the advantage of using the environment to find opportunities. Regardless, of who is leading the nation, opportunities always exist. Going back to something I said in early October – “I am a firm believer that uncertainty drives fear. As humans we are fundamentally wired to want control – decision making is a tool in our toolbox of control. Another aspect of my practice is to help people make more successful decisions. The magnitude of decision making over time in today’s world is tremendous. We are now living a second industrial revolution, but instead of steam, the new revolution is information. And, as in the first revolution, relative success will be determined by the ability to handle the propelling force. Do you have a process for decision making?” Can you distinguish the noise from real news?

Broad Impact:

* Any campaign promises will have to be passed and funded by Congress – while a majority in Congress should make it easier Democrats will not move lockstep on every issue and Republicans still have some clout

* Economic recession – the environment of weak economic growth will make it difficult for an Obama Administration and Congress to enact some wholesale changes; simply, there will not be enough money available

o Ex: Ambitious Healthcare Plan – providing low-income Americans with subsidies would require significant tax incentives or spending increases

* There have already been discussions in Congress about the possibility of creating a new fiscal stimulus plan. The outlines of such a plan are only beginning to fall into place, but such a plan could potentially include an extension of jobless benefits, investments in infrastructure projects, a moratorium on foreclosures and extended or new tax credits for individuals or corporations. It is also likely that some additional legislation focused on limiting the short-term risks to home prices will be enacted

Regulation:

* Regulation across a broad scope of industries is likely to increase, but investors should try to keep an open mind. The financial sector might be a prime target, but investors typically benefit from additional transparency. For example, although corporations generally dislike much of the post-Enron legislation (Sarbanes-Oxley), corporate profits were extremely strong subsequent to the enactment of these laws and the stock market performed well

Tax Outlook

* Taxes, especially on the wealthy and corporations, are likely to increase. Objectively speaking, that is not necessarily bad. The key question, which seems to be ignored by most observers, is what are the economic multipliers for programs funded by the new tax revenue? Raising taxes isn’t so bad if the multipliers associated with spending programs are bigger than the negative multipliers associated with raising taxes.

* With the economy in a recession the government will be forced to borrow more money and increase tax rates simply to keep the government running

* Higher tax rates for investors will be a headwind for equities, but not an insurmountable one

* Municipals are one of the few areas of the market likely to benefit from any increased taxation

Minor Headwinds

* From a historical perspective, equity markets tend to under perform when Congress and the White House are occupied by the same political party; diversity is needed - the most recent and strongest example occurred during the 1990’s when President Clinton faced a hostile Republican Congress. The next two to four years this is part of the equation, but again not insurmountable

At least the uncertainty over the election has been removed from the list of negatives impacting the markets.


Sources: Art Cashin-UBS, Bob Doll - Blackrock and Merrill Lynch Research – Rich Bernstein. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 5, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing