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Author: BrianMotleyFool One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74344  
Subject: Congratulations to Dems! Date: 11/7/2012 8:02 AM
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All those Dem partisans out there - well done. Not as close as polling said, really very impressive effort with turnout to create a D+6 electorate.

So now maybe we can get back to investing (mostly).

The election mostly maintained the status quo - some Dem gains, but not enough to change anything fundamentally. So there are still major, existential problems facing the US, and no clear solutions proposed and achieving public backing. Say what you want about Romney Ryan, but the fiscal plan proposed by Ryan in Congress, and largely adopted by the campaign at least addressed the debt problem. You may not like the solutions (I certainly thought they could be improved), but it was a serious attempt to address the problem. The problem hasn't gone away, and there is now clearly no agreed upon solution.

I'm not sure people entirely grasp that these problems are, quite literally, existential. The debt crisis is severe enough that, if there are no course changes, at some undetermined but quite close future point, the US will cease to exist as a single nation. And tax increases won't solve it, particularly if they are limited to the top few percent of income recipients, and especially with the economy still only slightly better than moribund. Perhaps a broad based middle class income tax increase along with a 10 - 15% VAT might get enough revenue to somewhat limit the spending cuts required, but we still need to reform entitlements and cut some programs. Plus, such a tax program would devastate the economy. It's not personal - it's just math.

After the election, President Obama and the Dem Party pretty much own these problems. We know the solutions they propose will include new taxes. What else is in the plan? And, more to the point, to get back to my investment theme, how do we make money off the coming policies?

In the new US paradigm of significant tax increases, aggressive implementation of the PPACA, and increased regulation and government involvement in a number of industries, how do we invest to get positive returns?

My thoughts, for what it is worth:
1. Energy sector. Probably the easiest sector to make some accurate guesses at. President Obama has never been particularly enthusiastic about fossil fuels, and clearly would like to pass carbon tax and/or cap and trade legislation. I'd be surprised if the Dem Party did not make a pass at this concept. So perhaps we can consider shorting coal producers, and going long on some renewable energy ("Green") Companies that seem likely to get propped up by Fed $$. Other companies that would be decimated by a carbon tax would include trucking Cos, and cement producers. Then there is the "tight rock" energy revolution. I suspect they'll face a raft of new regulation. Will it be enough to slow down fracking and production? Maybe. Prices already seem to be falling. Simultaneously falling prices and production? Perhaps it may be worth taking a look at shorting producers in tight oil plays.
2. Medical and health care insurance sector. It is clear that the PPACA will go ahead full steam. It is also clear that provisions in this law will devastate certain companies. In particular, the guaranteed issue and minimum payout ratios will make insurance impossible to make a profit on unless you are really, really large. Mid tier insurance cos will stop selling health care insurance or go bankrupt. In either case, they are likely targets for shorting. Once some of this competition is worked out of the system, the large cap insurers (Cigna, Aetna, Wellpoint, United HC) will increase market share, may get some pricing power and be worth investing in.
3. Dividend cos. With the desire to eliminate consideration of dividends at a 15% rate, and increase the rate to normal income (desired 43.5% rate), companies issuing dividends will be destroyed - particularly BDCs and many other large payors. Nevertheless, it is hard to consider shorting them because of all the cash you need to come up with to pay the dividends while you're waiting for the Company to die. Not sure if this is worth pursuing.
4. Retailers. If a VAT is proposed, retailers will be pounded, particularly those specialising in discretionary items.
5. GM. I've already made a bunch shorting GM. But there is more there while US Gov still has 26% of the Company.

Any other thoughts?

Brian
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