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Risk Premiums For The Dow Indices
THE OBAMA EFFECT: What A Difference A Day Makes!
November 5, 2008
RISK PREMIUM ANALYSIS:
November 5, 2008
SECTOR VALUES: THE OBAMA
EFFECT, From Rhetoric to Reality
POST ELECTION
REVIEW
After six straight days of gains in the Dow Industrials culminating in a
1,450 (or nearly 18%) gain in the Dow Industrials by election day
(November 4th), the Industrials surrendered 486.01 in the
first single post election day of trading.
While there is typically a “morning after” decline in stocks
after Presidential elections, we do not think the 486.01 drop in stock
prices is quite what investors expected.
The Presidential winner, Barack Obama was by every measure expected to
post a landslide victory, which indeed he did by delivering 364
electoral points to a victory, versus 162 points for the challenger,
John McCain. One valid argument for the sell off is that the broader
market had advanced 20%
since the final day of October and initial days of November and,
therefore, after a sizeable
surge in prices, a fair degree of profit taking should be expected.
However, we question whether or not investors were prepared for
the 486.01 point sell off which ensued, the worst post-election day
decline “ever.”
NO POST ELECTION DAY RALLY
So
what went wrong? The candidate most favored to lift the U.S. economy out
of its slump, failed to benefit stocks. Is this Profit taking,
Presidential selling or just more of the same bearish earnings outlook?
Our Risk Premium model points toward a resumption of the bearish
trend. Nevertheless, the biggest question is which market segments will
benefit the most and which segments have the highest risk?
PRIMARY SECTOR:
Subsectors OUTLOOK:
Excited / Indifferent / Unexcited
 Airlines
Legacy Carries
Unexcited, fuel price instability bodes negatively for profits
Regional Carriers
Aerospace
& Defense
Aerospace
Indifferent Short-Term; Unexcited Long-term
Defense
Basic
Resources
& Materials
Aluminum
Excited based on Obama’s commitment to infrastructure
Chemicals
Commodity Chemicals
Forestry & Paper
Iron & Steel
Metals & Mining
Nonferrous Metals
Consumer
Non-Durables
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Beverages
Unexcited as consumers have less discretionary funds
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Brewers
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Distillers
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Food Producers
& Products
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Soft Drinks
 Electric
Energy: Traditional
Alternative Fuels
Unexcited, promises and objectives are not financially
viable
Fully Regulated Utilities
Partially Regulated Traditional Utilities
Merchant Power Producers
Natural Gas Distribution
Water
 Financial
Institutions
Banks & Non-Insurance Financial Intermediaries
Excited, macro agenda cannot be achieved
Consumer Finance & Specialty Finance
without a strong financial system
Insurance
Non-Life Insurance
Indifferent as consumer spending slows
Full Line Insurance
Property & Casualty
Reinsurance
Life Insurance
Real
Estate
Real Estate Development
Unexcited until consumer confidence
Real Estate Investment Trusts (REITS)
& Specialty REITs
and capital market stabilize
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Retailing
& Consumer Services
 Health
Care
 Gaming,
Lodging & Leisure
Media
Telecommunications
Technology: Software & Computer Services
Oil & Gas Exploration
Independent Oil & Gas
Unexcited, upward pricing / supply dynamics
Oil & Gas Drilling & Exploration
do not have a realistic political base
Oil & Gas Equipment Services
Oil & Gas Pipelines
Oil & Gas Refining & Marketing
THE LONG TERM OUTLOOK FOR STOCKS
If
history is to serve as any guide, then stocks should perform well under
a Democratic administration.
The unprecedented nature of the current economic downturn,
however, may frustrate the president-elect, Obama’s social agenda.
Insofar as stocks are concerned, our model remains in a bearish pattern.n
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