Seeking Alpha
Long only, contrarian, special situations, value
Profile| Send Message|
( followers)  

I am struggling with coming up with the right words to describe my observations on last night's presidential outcome. Two phrases that immediately come to mind are: "No one ever went broke underestimating the intelligence of the American public" and "Insanity is continuing to make the same mistake, and expecting different results." However, the quote I think that probably best encapsulates my current sentiment comes from Winston Churchill: "Americans will always do the right thing, but only after exhausting all other possibilities."

Investors should make adjustments to their portfolio to prepare for the next four years. This is how I think last night's results will impact the next few years in the markets and the economy as well as how to invest in it. To be blunt, historians who wanted to know how a second term of Jimmy Carter might have unfolded will have an opportunity to find out. Investors that were not trading in the 70's will become intimately familiar with a term that dominated the latter half of the decade ... Stagflation.

In the next few weeks, there will be much talk about the need for compromise and "working together." Unfortunately, neither side will be able to maintain this façade for the medium or long term. The Republicans still control the House and have a filibuster proof majority in the Senate. After being defined by hundreds of millions of dollars as "racist obstructionist ideologues," they may play nice for the short term but will revert to obstruction over time as the two sides' ideologies are just too far apart. President Obama is paying homage again to "working across the aisle," but has never showed any propensity beyond words to actually compromise and get things done in a bipartisan manner which is exactly why we are facing the upcoming "Fiscal Cliff." So in short, the voters in their infinite wisdom basically voted for more long-term gridlock.

I see both sides kicking the can down the road for a few months while they wrangle about what to do with the budget. I can also see a minor bipartisan deal to fund infrastructure projects under the guise of helping the Northeast recover from Superstorm Sandy (The next excuse for a GDP growth rate of around just 1% in the next quarter). The heavy construction sector should benefit with this effort. I particularly like Tutor Perini (NYSE:TPC) here as they had already won some major subway work in NYC and over $70mm in building construction work in Brooklyn prior to the storm. The stock sells for just 6x forward earnings, less than 50% of book value and is projected to grow revenues in the low double digits in both FY2012 and FY2013.

Once these few months of "compromise" die a natural and predictable death, both sides will go back to trench warfare. Businesses will continue to push off hiring given the increasing regulations coming from Washington, the huge bite of Obamacare on the horizon and tepid demand. I think restaurant stocks, especially those with high valuations, will be particularly vulnerable over the next few years. I expect income growth, especially among middle class consumers, to continue to be disappointing, the "mandate" from Obamacare in 2014 to hit margins significantly and rising food costs due partly to QE efforts from the Federal Reserve to be substantial headwinds for the sector. Two of my favorite shorts in the sector are Panera Bread (NASDAQ:PNRA) and Buffalo Wild Wings (BWLD), which I profiled in September.

Another sector that will be under considerable pressure is the domestic coal industry. New regulations from the EPA are certainly on the way, and I would expect the administration to continue to view this fuel very unfavorably. Major players like Arch Coal (NYSE:ACI) and Peabody Energy (BTU) that have had huge run ups in the last month (See chart) on the hopes of a Romney victory will probably sell off now that election results are in.


(Click to enlarge)

I do not see anyway the current political configuration will result in a long-term deal that can prudently cut the current massive government overspending and the resulting $1T annual deficits and $16T national debt. I believe the United States will continue to do what every major debtor resorts to when they cannot grow their way out of their debt. We simply will continue to debase the currency and try to inflate our way out of the situation. Given this, I want to apply the lessons of the late 70's as I allocate money to new investments as that period of slow job and economic growth as well as rising inflation is instructive. This means putting money in hard assets like commodities and real estate as well as maintaining a significant short treasury position (NYSEARCA:TBT).

I would love to be able to recommend putting more money in gold and silver miners, given their cheap valuations and the historically high prices of the metals they mine. Unfortunately, the miners are experiencing a huge amount of cost inflation and increasing labor unrest. More regulations and escalating royalty demands from various governments certainly don't bode well for the industry either. Given this, I think the gold ETF (NYSEARCA:GLD) is probably a decent position to have for exposure to rising gold prices that should continue to climb in this stagflation scenario. One of my favorite real estate plays is Chatham Lodging Trust (CLDT), which I have written about before and is also providing a yield of 6.1% currently.

I would like to be more positive here, but I don't see any scenario where the current political structure does the necessary heavy lifting to put the country back on a sustainable economic track. I will end the article with a quote from another great British statesperson, Margaret Thatcher, which sums up where the country is heading: "The problem with socialism is eventually you run out of other people's money to spend."

Stay safe out there. It's going to be another tough four years.

Source: Surviving And Prospering Over The Next 4 Years Of Economic Darkness