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The GDP gets allocated between the factors of production: the holders of labor and the holders of capital, with the proportions oscillating between the two. Take a look at how the share of GDP that went to wages (to the holders of labor) has hit an all time low while the share of GDP allocated to corporate profits (the holders of capital) is higher than ever:

(click to enlarge)(click to enlarge)

Over the past 200 years or so, the relative reward between these two groups has been negotiated in America in a typically American adversarial way. The government played an increasing role in arbitrating between these two interest groups and its influence has been particularly notable since the 30's. This election was a reaction to the increasing allocation that took place lately toward the holders of capital. This election means that there is at least a rhetorical pretension that now the allocation toward the holders of labor will be gradually increasing. At least this is how the American labor holder, a.k.a. the consumer appears to see it: it's party time! Order another big-mac, buy another six-pack, get another pair of shoes or a new dress, go to the beauty parlor, take your life-time vacation to Las Vegas, etc. And yes, stop worrying about your healthcare which is now going to be free. Not really, but that's how a majority of our co-citizens seem to believe. No need to worry about who will pay: the government will take care of it. And yes, the price of your home started going up too… as we had forecast it two years ago already when practically no one believed that a bottom in housing prices had been reached.

What does this mean for investing though? It's obvious: more consumer spending and less savings. As the following three charts demonstrate:

(click to enlarge)

The "Great Recession" and the Great Recovery" were just reactions and counter-reactions to the overspending made possible between 2004 and 2008 by a recklessly loose money policy. Note that the American consumer does stick to the trend, as represented by the dashed green line, with almost mathematical precision as reflected by the very high R-square of 0..97 (an R-square of 1 means perfect correlation). The American consumer stays true to form: we have seen an exceptionally good Black-Friday and the Christmas shopping will be equally spectacular. The GDP will be duly positively impacted. So consumer stocks should be in.

And where will the money come from? The way I see it, most believe that the government will now "provide". But in fact the money will come from reduced savings and from more borrowing. Just take a look:

(click to enlarge)

As consumers grow more confident, they are going from being scared in May 2008 when they started saving again, to being a lot more relaxed by September 2012 when they were saving lees than half as much. The money not saved will go to consumption.

As for borrowing, the bottoming of the housing prices as demonstrated below, will increasingly act as a "wealth effect", just like it did many times before:

(click to enlarge)

Note again the oscillations around the projected possible trend line due to government intervention. The trendline is an extrapolation (chaining) of the price development observed in the very similar real estate price growth period after October 1993.

And what does the election result mean for the cost of capital and the cost of labor? It's equally obvious: they will increase. With what effect on the GDP? A negative one that will tend to largely balance the positive effect of increased consumption. Thus we are most likely in for a continued low GDP growth and a stock market growth for 2013 very similar to 2012.

Is this negative for the long run prospects of the US economy? It sure is: we are eating into our own flesh. But success in investing is not driven by the long term prospects of the economy but by WHEN you buy and sell rather than WHAT you buy and sell, CFA curriculum's and Wall Street marketing's adamant contentions to the contrary notwithstanding. This is true for any kind of securities. But since our expertise is limited to US equity, along these lines, when deciding which stocks to buy now, we propose that one should go for those that

  • do not have high on-going capital requirements (manufacturing was great but it is out now),
  • show the potential for high cash flow return on the invested capital,
  • have to do with consumers' increased appetite and
  • can help companies overcome the increasing labor cost (technology).

A couple of examples:

Weightwatchers (WTW) plays directly into the healthcare theme. Companies will - ever so gently - encourage their employees to lose weight. For example by giving them a material incentive to walk so many steps a week. And how will they verify that? Give them a pedometer and check it regularly. Is this intrusive? It sure is… But it has been done. And the goal justifies the means… Also WTW does not have large capital requirements as they buy the food from others who prepare it. And they recently made a joint venture with Danone. Could Danone buy WTW? Why not? After all Nestle did buy Jenny Craig.

Rockwell Automation (ROK) is a play on replacing costly labor.

The decision to buy these two stocks was predicated upon a proprietary quantitative screening to which a rather sophisticated generally used Discounted Future Cash Flow analysis (DCF) was added. Such DCF analysis is typically applied by professional investors who either have in-house systems or use one of several commercially available services: HOLT, AFG and New Constructs are some examples. Both companies mentioned are coming from a long period of underperforming Wall Street's expectations and have just met their sales and earning forecasts: a critical point at which we start considering companies for buying their stock. They also have good expected cash flow returns on the invested capital, a healthy asset growth and show a very attractive relative value. All these are quantitative measures but they directed us to stocks which play very well into the current environment as described above. Thus, after some additional due diligence that every investor must apply, we did buy them.

Are these "sure bets"? No way! Run from anyone who offers you a sure bet. But chances are that they will not disappoint over the next 2-3 years. Stocks selected on this basis did generally perform well for us over the past 12 years or so.

Note that graphs in this article come from FED sources and from research by Ogden & Co. Inc., a San Francisco based independent investment research firm whom Braun Research Consulting LLC represents for professional investors.

Source: Beyond 'The Cliff' -- Investing After The Latest American Elections

Additional disclosure: A partner of my firm did invest in these two stocks.