Trading John Boehner

Includes: CLMT, MOS, NTR, TNH, X
by: Michael Shulman

The Speaker of the House, John Boehner, waved the white flag last night and did what every good politician does in times of crisis - he disappeared for a while, sending the House of Representatives home through Christmas. Does he understand most businesses and individuals - all involved in making investment decisions impacted by tax policy and federal spending - are taking time off before Christmas? Yes, this post eventually gets to investment possibilities but the political back story deserves a few words. Agnostic words - my politics are not for public consumption - even though they may not appear to be.

It is hard to find a parallel to Boehner’s political ineptitude these past 18 months. Yes, he has a mathematically illiterate caucus - except when it comes to reading polls before primaries - no more literate than his Democratic counterparts. Yes, his right wing can never get anything they want that will pass the Democratic Senate. And yes, you never know when House Majority Leader Eric Cantor will re-sharpen the knife he tried to use on Boehner last summer.

That being said, Boehner’s troubles began when he assumed his role was to lead the Republican House Majority. It is not – his job is to be Speaker of the House, the entire House, and he has a constitutional, political and moral obligation to serve the country, not his party. The great Speakers – Sam Rayburn, Tip O’Neill – leaders of the entire House knew this when they compromised their overwhelming majorities in the House with Republican Senators and Presidents. Boehner is more akin to the failed leaders of the House in the period leading to the Civil War when the radical wing of the Democrats – backward looking Southerners – stopped any initiative that could have forestalled the Civil War. Boehner’s failure to lead the entire House is at the root of the fiscal cliff mess and the market instability related to that mess.

The issue now is whether President Obama will speak and ask 30 or so Republicans to cross the aisle and vote with the Democrats on a bill that passed the Senate earlier this year, a bill that would keep the Bush era tax cuts for all but those making $250,000 a year or more. He may, he may not. The political risk is zero – if he succeeds, he succeeds. If he fails he gets to blame the Republicans.

What will happen? Obama may succeed in finding 30 votes if he asks for them, Boehner may get a personality transplant over the weekend and so on. The bottom line: the U.S. is going over the fiscal cliff and the question is when is some order restored in Washington. The theoretical drop dead date is March, when the U.S hits the debt ceiling again.

Enough about politics – what about politics and markets?

Markets had begun to discount political failure and while there will be instability it is hard to see a big sell-off until we get hit by bad economic news. According to surveys by Changewave Research (part of the 451 Group), almost one third of businesses have and will continue to delay investment decisions due to the mess in Washington. This has created a noticeable drag on the economy that is being masked by GDP numbers that reflect inventory builds and the reduced cost of energy imports rather than real economic growth. This statistical anomaly will end in Q1 and the data showing a recession is here or around the corner will begin to hit the markets. Right around the time the U.S. hits the debt ceiling if the folks in Washington don’t get their act together. The flip side of this drag in business investment is these investments are being delayed, not canceled – for now – and the U.S. could see a mini-boom if the political equivalent of Moe, Larry and Curly – Boehner, Cantor and Senate Minority Leader Mitch McConnell - could figure out how to politically manage their caucuses and get a deal done.

How do you prepare for this instability, exploit this mess?

I am a true believer the best time to build a buy long-term position is during times of instability. Take these three realities that do not change even if we head into a recession.

People gotta eat, here and in China.

People want cheaper and cleaner hydrocarbon based energy.

Washington is not healing anytime soon.

Consider averaging into growth companies with tremendous fundamentals – the best by far are agricultural outfits like Terra Nitrogen (NYSE:TNH), Mosaic (NYSE:MOS) and Potash (POT) or fracking outfits and beneficiaries such as US Steel (NYSE:X) and Calumet Specialty Products (NASDAQ:CLMT). Buy in 100 share lots, sell calls along the way, and use some of your cash to buy longer term calls on the VIX, the measure of market instability.

One last note – the American public is, two to one, ready to blame the Republicans for a lack of resolution of this problem. If the fiscal cliff mess lasts too long, and the economy takes more of a hit, the Republicans will lose the House in 2014. Does this matter to markets? Traders will tell us over time.