Using Politics To Make Money

Includes: DIA, QQQ, SCO, SPY
by: JAR Financial Management

During my college days I had a professor that often stressed the importance of understanding politics. His theory was this, "The United States was established as a country where decisions by the Federal Government would have little to no impact on the economy/markets. However, the Federal government has gotten so big that the opposite was now true. We as investors must understand politics not to be politicians but to make prudent investment decisions." He often used the Federal Reserve as an example of how government decisions affect the markets. Today, we are seeing my professor's views play out as the markets and economy are handicapped by the debt limit talks. The purpose of this article is to demonstrate how to use political knowledge to your advantage. I will demonstrate this by sharing how I have personally researched and studied politics and have applied them to my personal investments. I will start by showing how I collected information/research. Followed by how this research was used to invest my funds and show the results. Lastly, I will provide my opinion on how I believe individuals should invest based on where we currently stand. I would like to note three things before I get started. First, the research you do is meant to supplement your other research and not to be used solely as a determinant for investing. Second, this article is not being written as a political article. These are simply my opinions I have established based on my own research and facts I have found. When it comes to investing, leaving your political bias at the door is hard to do and something we all need to continue working on. Third, I do not go into details on various political aspects because the most important aspects of this article are the recommendations for your current investments and how you can potentially add your understanding of politics to your future investments.

Section 1: Getting Started

Candidate Obama burst onto the Presidential scene seemingly out of nowhere in 2008. Little was known about his past or his views by the voting public which included myself. I have found the best way to find information about politicians is by listening to their critics and by closely listening to the words politicians use in speeches. The key is that all information is good information. For example, President Obama recently gave a speech regarding the government shutdown and how the Affordable Care Act will help thirty million uninsured individuals. In that speech he made the following comment, "This bill will provide the American people with security and freedom." If I knew nothing about the President and heard him say this I would have a good grasp on his political views. F.A. Hayek states in his book, The Road to Serfdom, that you can not have both security and freedom but instead will have security or freedom. In addition to this he states that the more a country's citizens seek security the less freedom there will be for the other citizens. This is one of the key differences between individuals on the right side and the left side of the political scale. The far left side of the political scale believes in a "utopian" society in which wealth is distributed equally to all citizens and this distribution is determined by the "elite." President Obama has used this verbiage during his Presidency as well as during his first campaign. His critics were also quick to point out his relationships with known communist and controversial acquaintances such as reverend Wright. These relationships I was able to confirm through various channels and have also been confirmed by the President himself. The most important piece of criticism I heard was about his understanding and use of Saul Alinsky's teachings. He has been called by both friends and critics "The greatest disciple of Saul Alinsky."

In 2008 I knew vary little about Saul Alinsky so I decided to read his books and review a few of his additional writings. Some will say Saul Alinsky's methods are genius while others chastise them. My opinion is this: right or wrong his methods work. Therefore, I needed to determine if the Mr. Obama truly studied Mr. Alinsky's ways or if this was a dead end. Right from the beginning it was clear that then candidate Obama had studied Saul Alinsky's teachings. Saul Alinksy states that the first job should be that of community organizer which happens to be how the President began his political career. In my opinion, the key takeaways regarding Saul Alinsky's teachings are the following:

  1. Target the Individual not a group and polarize him.
  2. Do not argue on facts and numbers. People do not relate to them. Ridicule your opponent because ridicule is one of your greatest tools.
  3. Appear strong. Even if you are not in a position of strength it is important for people to think you are.
  4. People will not react until there is a problem/crisis
  5. If need be create a problem or a crisis.
  6. Follow the will of the people and give/promise them what they want because they will turn a blind eye to what you really are doing no matter how controversial it is.

In the next section I detail how I used this insight since of 2008.

Section 2: Putting Your Political Research to Work

Going into October 2008, it was assumed by Wall Street that Barack Obama would become the next President. I had conversations with many financial professionals in which they were preparing for slow growth over his term because of increased regulations and left wing politicians being known for implementing policies that tend to harm a nation's economy in the long term. I often heard about how stocks in general would be hard hit especially in the defense industry, the banking industry and the oil industries. I believe this view was shared by many which is evident when looking at a chart of the S&P 500. The financial crisis began in early 2007 and the S&P 500 had declined roughly 18% through October 1, 2008. From October 1, 2008 through March 9, 2009 the market nose dived by roughly 42%. I listened as my colleagues voiced their concerns but I remained on the sideline because at that point I had little experience in the defense and oil industries to take any positions. Shortly after the election I started to put my research to work. Rahm Emanuel who was to be the Presidents Chief of Staff was quoted saying the following, "You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before." At that point I did not believe the President was going to go after the "normal" left wing talking points such as defense, oil, or the environment. I knew it was going to be drastic and involve an entitlement program along the scale of Medicaid and Social Security. By the end of January 2009, it was clear that the President would be targeting health care and at that point I felt the economic contraction had gone too far and the fears I had heard from colleagues would not take place because the efforts of the President would be solely on the health care law. At that point I began putting money to work, mostly in high yield bonds, index funds and dividend paying stocks. Two of my largest positions were in Disney (NYSE:DIS) and Microsoft (NASDAQ:MSFT).

These were the last investments I made where I used my political research until the summer of 2011 when the talk of the debt ceiling began. At that time I moved mostly to cash because of my prior research of Saul Alinsky, most notably his tactics that people will not react until there is a problem. If there is no problem one has to be created. I stayed in cash until roughly a week before the debt ceiling agreement was reached at which time I began to invest again. The reason being was I felt the economy was already going down hill and much of the blame was being placed on the President. If these negotiations went south he would shoulder much of the blame. It was also evident that the House would most likely remain Republican. With these two thoughts I felt confident enough a deal would be struck and decided to put my money to work.

The next time I put money to work based off of political research was the day after the President won reelection and the Republicans maintained control of the house. The reason is two fold. First, my view on politics is that if no agreement can be reached between the two parties then nothing should be done instead of just passing a bill for the sake of passing a bill. I believed Congress would not allow the President to pass any controversial bills and viewed this as a positive. In short, government would be out of the way. Second, I believe the President understood that he would not be able to put his policies into law without democrats controlling all branches of the government. I therefore believed after the 2012 election the President's sole focus would be on the 2014 mid-term elections. Therefore, he and Harry Reid would do whatever they could to destroy the Republican image. Since then I have been looking for signs of how they would do this. It became evident earlier this year that the debt ceiling would provide them with this opportunity. I formed this opinion when the House passed two separate bills saying the United States could not default on their debt payments. The President said he would not sign this legislation and Harry Reid would not allow it to be voted on in the Senate. At that point I decided to stay long until I saw a "red flag."

Before that red flag came I was able to make another investment based on politics in which I still hold some of the position. This had to do with the Presidents "red line" and Syria. When the Syrian conflict came into the headlines the price of oil spiked. Referring back to Saul Alinsky's teachings, I felt the President would not act against popular belief, especially before the debt ceiling and the 2014 mid-term elections. This view is from Alinsky's teachings on the power of crowds. I have given this teaching the title of "Never underestimate the power of stupid people in large groups." A few days after the Syrian crisis started, polls came out saying the majority of Americans were against going to war with Syria. At that point I went short oil mainly through the ProShares UltraShort DJ-UBS Crude Oil ETF (NYSEARCA:SCO). I continue to hold some of this position and will explain further in the investment recommendation section.

On to the topic everyone's been talking about, the debt ceiling. I sold my holdings the day the Fed announced it would not taper. In his speech he referenced the debt ceiling as one of the reasons for not tapering and that was the red flag I was looking for. I believe the President is more than willing to let the United States "default" on their obligations. Again, leaning on my research of Saul Alinsky's teachings, "People will not react until there is a problem and they are affected, if there is no problem you have to create one." If we do not have a deal done I believe there will be major consequences and the American people will get the "change" they voted for. As of now, the Democrats are benefiting from this nonsense in Washington. A recent quote from a senior White House official in the Wall St. Journal was, "We are winning." I believe the President feels this way and can only solidify his true goal, that of having democrats regain control of the house in 2014, by creating crisis that will be felt by millions of Americans. In my opinion, this also gives the White House something to point to and mask an already slowing/weak economy. I also see a President who is back in full campaign mode. He is back to ridiculing an individual, this time he is targeting John Boehner (this is another Saul Alinsky teaching). He is also back to using what is called neuro linguistic programming such as making sure cameras are rolling when he "decides to take a mid-day stroll to get a sandwich" and appear to be just like you and I or giving speeches at construction sites (This is not a knock on the President as every politician uses neuro linguistic programming, the President happens to be one of the best at it).

Section 3: Investment recommendation

I currently have two investment recommendations. I have already stated that I maintain a short position in oil. I have kept this position because I still believe oil is slightly overpriced from the Syrian crisis. Also, if no deal is reached I believe there will be a broad sale off in the market and this includes a sale off in oil. Therefore I view remaining short oil as having relatively low risk with a moderate to high return potential.

My second investment recommendation is to remain in cash. I have liquidated a majority of my investments since the Feds decision not to taper. If a deal is reached I will be quick to establish new positions. At this point I can not recommend any specific stock because it is to early to tell what stocks will be affected over the coming days. The reason I am not short the market is that I am hoping I am wrong on my prediction that Barack Obama will let us "default" on our debt. If I am wrong then I feel the market will continue to go up. I therefore view taking short positions as currently being a high risk high return scenario which does not fit my personal investment philosophy.

Returning back to many of my colleagues' views regarding their end of year 2008 outlook regarding the relative underperformance of the banking industry and oil industry, I believe there will be continued underperformance in these industries but also believe there are many other factors worth considering that may outweigh the political impacts on these industries.

Disclosure: I am long SCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.