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How To Invest in Obama’s Second Term (Part 1)

 November 08, 2012 01:12 PM

"Are you crying? Are you crying? ARE YOU CRYING? There's no crying! THERE'S NO CRYING IN BASEBALL!" – Jimmy Dugan (Tom Hanks) in "A League of Their Own"

And there shouldn't be any crying in investing, either.

Whether or not your candidate for President won, we have to stay on the field and in the game. Otherwise, there's no way to get ahead.

With that in mind, let's take a look back at how various asset classes and sectors performed during President Obama's first term.

Then, I'll share what we can expect to happen during his second term.

So let's get to it…

~ Precious Metals

How precious, indeed!

That's the first thought that comes to mind when I look at the performance of various asset classes since Election Day 2008.

[Related -Gold hasn’t lost its allure in my portfolio]

As you can see, precious metals are far and above the top performers.

Will it continue? Absolutely, as long as the Federal Reserve sticks to its easy money policies. And there's no indication that Ben Bernanke's even considering checking himself into a 12-step program for money-printing abuse.

Of course, while gold and silver continue to benefit, the U.S. dollar's destined to keep losing ground.

Since the last Election Day, the buck has already lost 15.2%. But the bloodletting's not about to stop.

[Related -SPDR Gold Trust (ETF) (GLD): Has Gold Entered a New Bull Market?]

As Michiyoshi Kato at Mizuho Corporate Bank told Bloomberg, "Monetary policy will remain loose under Obama… So the dollar will be sold." Agreed!

Key Takeaway #1: Go for gold (and silver). You'll need it as a hedge against an ever-weakening U.S. dollar.

~ High-Yield Bonds

High-yield bonds rank as another top performer. Including dividends, the iShares iBoxx $ High Yield Corporate Bond Fund (NYSE: HYG), the largest high-yield bond ETF, is up a staggering 77.7%. That's better than the S&P 500.

But don't be a sucker and chase performance by scooping up high-yield bonds.

As I warned Dividends & Income Daily readers last month, high-yield bonds rank as the most dangerous income investment in the world right now. I repeat, the most dangerous income investment in the world.

Why? Because prices rest near historic highs and yields sit near historic lows. So there's only one outcome: Prices are headed down in a major way.  It's just a matter of when. (You can check out my original warning for five more damning fundamentals.)

Savvy investors are already heading for the exits, too.

During the last six weeks, they've yanked over $2 billion out of junk bond funds and ETFs – including $619 million in the last week – according to Lipper.

Key Takeaway #2: Even in this zero-interest rate world, don't go chasing yield in high-yield bonds. Wait for a better buying opportunity to materialize. It's coming.

~ U.S. Treasuries

While we're on the topic of bonds, how about the performance of U.S. Treasuries? This "ultra-safe" bet netted investors a cool 48.9% over the last four years.

Sorry, but that's not likely to continue.

Much like high-yield bonds, it's just a matter of time before long-dated U.S. Treasuries drop in price. After all, the Fed can't suppress interest rates forever.

Key Takeaway #3: While Treasuries might still offer safety, it doesn't come for free. If we factor in inflation, Treasuries actually sport negative yields.

I don't know about you, but I'm not interested in paying the government to hold my money. For 30 years!

~ "Energy Independence"

During the campaign, both presidential candidates talked up America's coming "energy independence."

Oil investors enjoyed a volatile, but ultimately profitable ride. However, natural gas investors got clobbered, thanks to a glut of new supplies.

Looking forward, though, I'm convinced that natural gas stands to catapult from worst to first.

While we might have to endure a few more Solyndra's and A123 Systems (Nasdaq: AONE) because President Obama is enamored with renewables, eventually he's going to realize that natural gas represents the only feasible path to energy independence.

Key Takeaway #4: Bet big on natural gas transforming the energy market in the United States. As I've told you before, for maximum gains, I'd specifically focus on "pick and shovel" companies in the hydraulic fracking services space.

~ Stocks

Moving on to stocks – surprise, surprise – the United States put up impressive gains relative to international markets, emerging markets and the highly touted BRIC countries. Consider it more proof that robust GDP growth is not a prerequisite for double-digit stock market gains.

Do I expect it to continue? Absolutely. I shared 10 reasons why last week. Here's the most compelling one – U.S. stocks are still cheap.

The S&P 500 Index currently trades at about a 10% discount to its five-decade mean price-to-earnings (P/E) ratio.

Relative to the rest of the world, U.S. stocks are even cheaper. The S&P 500's current P/E ratio of 14.4 represents a 16.5% discount to the P/E ratio for the MSCI All Country World Index ex US Index Fund (Nasdaq: ACWX).

As Bloomberg notes,"The last two times U.S. equities were this inexpensive compared with global stocks, in 2003 and 2009, gains in the S&P 500 lasted for at least three years."

Obama got four more years in the White House. And I sure wouldn't complain about three more years of stock gains. Bring it!

Key Takeaway #5: The object of investing is to buy low and sell high. And the United States still represents the best opportunity to do so in stocks. So keep buying.

Next Thursday, I'll dig into the U.S. stock market even more, highlighting the returns of each sector and the outlook for the next four years. Be sure to tune in…

Ahead of the tape,

Louis Basenese



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