Navigating Silly Season: An Investor Guide to the Political Landscape

When politics takes the fore, we have what I call "silly season." This is a time when many investors get caught up in the emotion of politics and make bad investment decisions.

For those who can keep a clear head, it is a time of opportunity. I'll start with some background, and then turn to the investment implications.

The Democratic Perspective

This is a pretty simple proposition. It has the following legs:

1. Obama inherited a bad situation;
2. He has made many right moves, and been blocked on others;
3. Things would be even worse without his efforts.

You should read every economic story with a critical eye to these themes.

The GOP Perspective

This is also a simple argument, with a few legs:

1. Obama promised unemployment below 8% and did not deliver;
2. Obama killed new business with additional regulations and general uncertainty;
3. Obama tax policy threatens job creators — various ways.

You should read every economic story with a critical eye to these themes.

Interpreting Data

Investors need to have a sharper eye. Right now the GOP is reaching to deny progress. Here is how you can spot this.

Visibility without credentials

There is a group of people who get visibility only because they have had it in the past. There is no test about education, success in past jobs, or accuracy of prior forecasts. These guys are part of a club where they get on TV because they have been featured in the past. Check out this example, the bio of someone who has gone through more (unmentioned) firms that I can remember, while never changing his incorrect message.

Mr. X is the President of X Portfolio Strategies and serves as Senior Market Analyst for research firm XYZ Financial.

X Portfolio Strategies provides a nexus between prospective clients and a select group of the country’s finest and most seasoned investment advisors, who utilize X’s economic models in developing their portfolio strategies. XYZ Financial publishes award-winning newsletters, critically acclaimed feature documentaries and international best-selling books.

Mr. X is a well-established specialist in the Austrian School of economics and a regular guest on CNBC, Bloomberg, FOX Business News and other national media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes and is a blogger at the Huffington Post.

Prior to starting X Portfolio Strategies and joining XYZ Financial, Mr. X served as a senior economist and vice president of the managed products division of another financial firm. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors.

Additionally, Mr. X has worked for an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street. Earlier in his career Mr. X spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Mr. X graduated from Rowan University in 1991.

So this guy worked for several unnamed firms, had an undergrad degree in an unknown subject, and has gotten on TV a lot. His resume includes the most dangerous phrase for investors: Self-taught in Austrian Economics.

Actually it says that he is a self-proclaimed expert, but that is the same thing. It is possible to study Austrian Economics, as my George Mason friends at the Kauffman Conference regularly highlight. I find that most people who claim this credential without formal study have started with an ideology and then sought an economic fig leaf to support a viewpoint.

The Super Bowl Shuffle

When the data do not support your argument it is time to spin! The employment report always has a lot of room for interpretation and error, something that I always emphasize. Last week's report had a bigger opportunity than most for the spinmeisters, since the Census Bureau did updates based upon the 2010 Census results.

This led to horrific blunders by the "shoot first, think later" crowd, as I noted in my weekly market review. Since then, there has been a rapid retreat –without apology — by the sources that got this wrong. They are now shifting the argument to a ten-year analysis of employment participation.

We should recognize this for what it is.

My Take on Employment Participation

Let's get real on this subject. We all know the following:

1. The Y2K high was induced by a "buy forward" of computers. We will never see this high again;
2. The aging population means that employment participation will naturally decline; and
3. The extended recession has created early retirements, extended studies, travel abroad, and other elements reducing labor participation.

We will never hit the old highs.

Compare my take with that of a noted Republican stalwart, Brian Wesbury:

But, with one big exception, the economy is increasingly clicking on all cylinders. Adjusted for inflation, personal spending is up, business investment is up, and – finally – home building is growing as well.

January data from automakers show sales are up 53% from the bottom in early 2009. If the economy is so bad and credit is impossible to get, how is it possible for Americans to be driving so many cars and trucks off dealer lots?

And notice that the recent improvement in job creation comes several months after we hit an upward inflection point in home building, which is a labor intensive industry.

The major outlier is government, where purchases in 2011 were down the most in more than forty years. (For GDP purposes, transfer payments are not counted as government spending.)

Ultimately, we believe most of the disbelief is driven by politics. Back in 1992, President George H. W. Bush was never given credit for a recovering economy by those who wanted to see someone else in the White House. Now, from the opposite side of the political spectrum, there are those who want to see President Obama replaced so badly that they refuse to believe signs of improvement no matter how clear.

Investment Conclusion

The implication is that we are still early in the business cycle — something that is bullish for cyclical and technology companies that I have highlighted, including CAT, INTC, MSFT, as examples.

[long all named stocks]