But how different will things really be?

Unless you’ve been in a coma in the nearest hospital, you’re well aware that Barack Obama has been elected the President of the United States of America in pretty much a landslide vote.

The main theme of his campaign has been ‘change’. Well, just how much financial change can we expect from the new man in power?

For a hint or three, let’s look at what he did before he became the President-Elect: Obama voted for the massive $700 billion financial rescue package passed by lawmakers and signed into law by President Bush in October. He subsequently announced his own proposals to cushion Americans in the short-term against the stunning stock market drop and anticipated layoffs and troubles.

He’s proposed exempting seniors from having to make withdrawals from retirement savings … exempting jobless workers from having to pay income taxes on unemployment benefits (and recommending an extension of those benefits) … and offering a tax credit to businesses for every new hire they make in the USA.

Obama has also called for the Treasury to require financial institutions receiving help from that $700 billion rescue package to put a 90-day moratorium on foreclosures for homeowners "acting in good faith." (whatever that means!)

Furthermore, he wants to amend the law that would let bankruptcy judges reduce mortgage principals for bankruptcy filers. Supposedly this would encourage lenders to modify more loans for troubled borrowers rather than risk the loan being rewritten by a judge. However, there is a significant risk that this could prompt a de facto interest rate rise because mortgage investors would price in the risk of new loan terms.

Good News For Consumers,
But What About Business — The Lifeblood of America?

Still ‘fighting for the little guy’, Obama has additionally called for the creation of a fund to help state and local governments ward off foreclosures. He even wants to boost penalties and law enforcement to fight mortgage fraud.

But rather discouragingly, he supported the government’s takeover of mortgage giants Fannie Mae and Freddie Mac in September. (We’ve previously made our opposition to government bailouts quite clear — especially if they don’t involve equity that would return at least some profit to the taxpayer!) However, in apparent mitigation, he’s also called for agency reform with the ultimate aim of severing their public functions from private functions. It’s never too late to close the barn door after the stallion has bolted, right?

Even more broadly, Obama has proposed giving a tax credit to homeowners who don’t itemize deductions and don’t get a tax break for the mortgage interest they pay.

To help pay for many of the new programs he’s proposing as well as the cost of his new proposed tax breaks, Obama has said he would repeal some of the Bush tax cuts for high-income taxpayers – specifically by increasing the top two income tax rates and the capital gains rate to their pre-2001 levels.

Whoops, no wonder the markets went down! Increased capital gains tax is not exactly an incentive to buy stocks.

And so today’s trading has not exactly been a profitable revelation unless you were recently short.

As you might note from this chart of the Dow, the negative close today would seem to cap a rather ominous top as highlighted by an overbought Stochastics oscillator and an On Balance Volume indicator that has barely responded to the recent price rise.

A Hint of Things to Come?

The Dow seems poised for further losses, and it certainly hasn’t helped that most global stock markets have also closed lower since the election results came out.

For example, Britain’s premier index, the FTSE 100, was off 2.34% and Germany’s DAX index was off 2.11%. Is a Democratic president really that bad, or was this just a short term knee-jerk reaction?

Maybe it’s just a reaction: after all, Obama is on record for saying that he would consider lowering the corporate tax rate if enough corporate tax loopholes are closed. That sounds promising …

And according to a nonpartisan study, only upper-income taxpayers would see a tax increase on average under Obama’s tax proposals.

Let’s look at a historical precedent: since the economy prospered under Clinton, perhaps it will do similarly well under Obama?

Well, maybe not.

Obama’s going to have quite a difficult time coping with the massive amount of debt accrued by the Bush II government in just eight years, after all . And the future obligations imposed upon him by the bailout packages are significant while – let’s face it – he’s inheriting an economy that’s poised for recession rather than inspired growth.

We’re not trying to make excuses here (McCain would be facing the same depressing debt overhang and ongoing bear market) but it will take some kind of superhuman miracle to rescue the economy in the short term.

What About Commodities and Inflation?

Just to prove that the market currently hates all investors equally, the Gold Bugs index and the Oil index also went down today (although not as decisively as the Dow):

It seems that nobody who invests in the market loves Obama as much as the people who elected him today. Going by the Stochastics oscillator, the OIX is looking doomed in the short term and the HUI seems to have limited short-term upside. No inflation here, right?

However, all oscillators can be overbought and oversold for extended periods of time. This might very well apply to the Dow too, but our bets are that the commodities will outperform in the months and years to come – even if they get beaten up again in the immediate short term.

And so while we congratulate Obama on his historic victory, we don’t envy him. He has a Herculean task ahead, and restoring confidence in paper assets as opposed to tangible assets is likely to pose a massive leap of faith for anyone, no matter how much change he promises and diligently labors to achieve.

Good investing,

Nick Thomas
Analyst, Oxbury Research