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Economic Insights

Highlights of Economic Recovery Plan from Heath Lefort

January 22nd, 2009 2:32 PM

Has there ever been a period of time historically in which a concoction of such heavy social strife, yet “turn-the-page” optimism, existed at once?

As Barack Obama's Inauguration Ceremony comes and goes, a new page will have officially turned in history. Regretfully, the slate we'll be starting from is far from clean, and we're the only ones that can apply the much needed elbow grease. But despite the seemingly endless challenges ahead, new opportunities will present themselves.

Penned shortly after Election Day, we focused on some of the key priorities that President Obama and his Administration would be concentrating on as they came into office. Since then, much has changed — and in the following paragraphs, we'll look to provide you with an updated snapshot of exactly what's going on and how to potentially position your portfolio as we formally enter the Obama Era.

The Balancing Act

Many will agree that the enormity of this economic crisis requires a policy response that matches it in size, scope, and speed of implementation. The most recent estimate of the Obama Economic Recovery Plan comes in at around $825 billion, occurring over the course of multiple years, and taking many different forms of disbursement.

Obama's pending stimulus plan will focus on a number of issues, specifically; dealing with shoring up the foundation of our nation's financial markets, tax relief targeted to the middle class, assistance to homeowners, and providing unemployment training.

The following is an analysis of some of the potentially actionable tenets of the proposed plan, which is expected to be debated and passed by Congress in mid-February:

Job Creation

An emphasis will be placed on the creation of manufacturing, “green,” and environmental technology jobs.
A $150 billion investment over ten years in next generation biofuel, fuel infrastructure, acceleration of commercially viable plug-in hybrid, commercial scale renewable energy, and beginning the transition to a new digital electricity grid. The Obama Administration's estimated number of jobs created from these various projects totals five million.
Specific sectors of focus for these projects and training programs will be in the following areas:
- Clean Technology
- Renewable Energy
- Next-Generation Broadband
- Science and Technology
Our Take:
- There is still a level of uncertainty surrounding the specifics of these projects and how quickly they will make a positive economic impact — estimates range from almost immediately to years.
- It's not unlikely that, just between 2008 and 2009, the US Economy will lose five million jobs (2.6 million were lost in 2008). The five million in additional jobs from these plans, which will occur over ten years, may not actually have a significant impact. Especially when factoring in population and immigration growth.
- It appears that the obvious beneficiary of these programs are the large, well established alternative energy and infrastructure companies that will provide the research, manpower, and oversight for many of these projects.
- With Obama vowing to spark a “clean green revolution,” it's increasingly evident that alternative and clean energy will not just be a passing fad, but will become a staple of our nation's strategic landscape.
- Gaining exposure to this group can be done in a variety of ways, but a diversified approach is probably best, as many of these companies and technologies are too new to saturate your portfolio with just one name. Here are a few closed-end and exchange traded funds to explore:
  - PowerShares Wilderhill Clean Energy (PBW)
  - First Trust NASDAQ Clean Edge US Liquid (QCLN)
  - Market Vectors Global Alternative Energy ETF (GEX)
  - PowerShares Global Clean Energy (PBD)

Infrastructure Investment

As with the rest of the market, many of the pure-play infrastructure companies have dramatically sold off in recent months helping to bring in their valuations to more reasonable levels.
Obama's plan also calls for heavy infrastructure reinvestments in schools, libraries, and government buildings.
Additionally, Obama has stated that he would like to embark on a national effort to upgrade the infrastructure of our nation's medical record keeping system, creating a digital database where our records can be stored and referenced — a project which has the potential to help drive down healthcare costs.
Our Take:
- As with the rest of the market, many of the pure-play infrastructure companies have dramatically sold off in recent months helping to bring in their valuations to more reasonable levels.
- Be aware of volatility in this space as the market begins to price in the potential impact of Obama's infrastructure investment plans into these stocks. Also be cautious of chasing these stocks if the market really gets behind them.
- Though these companies deserve to sell at a premium to the market, be valuation conscious when taking positions in this area.
- Some of the major infrastructure players that we believe may be worth looking into:
  - SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII)
  - Foster Wheeler (FWLT)
  - Jacobs Engineering (JEC)
  - Fluor Corporation (FLR)
  - Chicago Bridge & Iron (CBI)

Inspiring Confidence & Managing Expectations

While most are focused on the nuts and bolts of Obama's economic plan and stimulus package, it may be worth paying attention to how it is perceived by the American people and the markets. Obama ran, and was elected to office, in large part due to his ability to connect, motivate and inspire the American people — he must maintain this connection, as well as a high level of inspiration through the remainder of this crisis.

His ability to convince the American people to trust the decisions made by him and his administration, to make necessary sacrifices, and to maintain a healthy degree of optimism is just as vital as the actual policy actions being decided on this very minute in Washington, DC.

Another item to watch is how Obama manages expectations. In the weeks before the Inauguration Ceremony, the Obama Administration laid out a very dejected and gloomy outlook for the economy — estimating a $1.4 trillion deficit, comparing the current economy to the Depression, stating that its going to “take some time to fix it,” etc.

This is smart. Beat down expectations while the economy is still officially under the watch of the previous administration and before you take office and implement your policies. Thereafter, you should be able to exceed those lowered expectations and credit the steps that your own administration took that “reignited” the economy. I believe UPOD (under promise, over deliver) is the proper acronym.

The Super Bowl Commercial Corollary

As we approach the big game, and await the one time of the year when we as a nation hold a high collective level of anticipation for over-the-top, over-priced, and over-hyped television commercials, you can't help but wonder if we're also doing something similar in our anticipation of what the Obama Administration will do for our economy. While there is a strong probability that President Obama will successfully manage expectations about the economy, will it be possible for him to actually fulfill the expectations that the public has for him?

Politics and political power in Washington is only one piece of an even larger puzzle that helps to construct an investment outlook. To say that it is unwise to entirely shape one's investment portfolio around the outcome and expectations of elections and political activities would be an understatement. It is, after all, fundamentals such as earnings and valuations that ultimately move stock prices over longer periods of time.

As we continue to navigate and define our current “crisis” — each day adding an additional layer of anecdote or factoid for use in the next generation's case study material or to be devoured and analyzed by future historians — we struggle to balance an appreciation of the unprecedented moment we live in, all the while surviving it.

For many, the effort to merely stay on top of breaking news is often greater than understanding their implications. Our challenge remains the balance of taking advantage of future opportunities, all the while staying on top of current events.

Survival is key, and the opportunities that will come from the current turmoil will be bountiful, but you must be positioned — both in knowledge and capital — to take full advantage.

Call Heath Lefort @ 401-461-9987

Posted by Heath Lefort - Personal Financial Advisor on January 22nd, 2009 2:32 PMPost a Comment (0)

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