by Neil George | September 29, 2010 3:05 pm
It doesn’t matter what side of the political aisle you might favor. When it comes to the Nov. 2 election, what you need to focus on is your own net worth.
With politicians constantly at each other’s throats, joined by third parties and lobbyists getting out their opinions, it’s no wonder the markets are always worried at ballot time. There’s always been the hand of government in every facet of the markets — and depending on the industry and market, that hand can either be helping or hindering.
The one certainty is that whatever the intent, the hand of government is getting bigger. In the past decade alone, Uncle Sam’s contribution to the economy has soared by over 72%.
Over the past couple of years, the percentage of the U.S. GDP that’s attributed to government spending has grown by almost a third — to nearly 25 percent of everything that the nation produces and significantly above the 60-year average.
And let’s not forget our beloved hometown officials. Not to be outdone by Uncle Sam, his nieces and nephews on the state and local levels of government have joined the surge of spending with budgets about 50% bigger over the past decade — amounting to an average annual gain in spending of some 4.5%. That’s above long-term core inflation rate a few times over.
So how does that affect your strategy come election time?
Well first, forget debating whether this spending spree is right or wrong. You can’t afford to waste your time over the reality that government is too big and only getting bigger. Instead, you should focus on the areas of opportunity — namely pensions, muni bonds, health care and oil.
Let’s start with my stealth favorite — pension management as an election opportunity.
There are currently nearly 3 million folks working directly for Uncle Sam and they’re all part of one of the most massive pension programs in the nation. Called the Federal Thrift Savings Plan (TSP), the plan isn’t actually run by the Federal Government, but instead is contracted out to one of the most plugged-in of asset managers.
BlackRock Inc. (NYSE: BLK) runs the core five funds that make up the TSP. And with both sides of the political aisle seeking to show job creation — and with contract employees bought fully on Uncle Sam’s payroll as the prime employment source — that could potentially add 10% or more to current pension rolls. And the more participants, the more assets and fees for BLK. In just the past year, BlackRock has seen asset growth continuing to soar by nearly 800% — thanks largely to government payrolls skyrocketing!
This play in BlackRock stock is not without some general market risk. The firm is also dealing with a stock overhang with an expected spin-off of shares held by its biggest holder — Bank of America, which came with its shotgun marriage to Merrill Lynch. But as Bank of America is dealing with ramping up core capital post Fin Reg and Basel III regulations, look for this liberation to only help BlackRock’s share performance.
With a total return of more than 105% over the past five challenging years compared with the anemic performance of the S&P 500 with its price loss of over 6%, BLK is a buy. Grab shares of BlackRock under $186.itigating Muni Risk
While Uncle Sam might have nearly unlimited funding capabilities (at least for the near term), many states have been struggling to make ends meet. This has resulted in some nasty reckonings and some concern by the bond markets.
The result is that the municipal bond market has sorely lagged the overhyped performance of U.S. Treasuries as traders ditched munis in fear of defaults.
But while not all states are in fiscal balance, the vast majority are. And thanks to voter demands for getting budgets in balance and the fact that 29 states have seen tax revenues soar some $24 billion so far this year, many munis are safer than you think. Corporate taxes are light, but income, sales and property taxes are seeing healthy gains for state and local coffers over last year.
The key to munis is to focus on the underlying issues — and avoiding the cockamamie insured deals that have largely been discounted as not worth the effort. And to get the biggest and safest performance, look to three core national muni closed-end investment companies.
The AllianceBernstein National (NYSE: AFB), BlackRock Muni II (AMEX: BLE) and Nuveen Quality (NYSE: NQU) have an average dividend yield running at just shy of 6.5% — and while all trade at or a hair above their book value, all continue to perform and should only benefit from electoral demands of state and local governments.
And with the three generating average returns for the past eight years of inception of over 70 percent — look for this to be just the ticket for steady tax-advantaged dividends with gains as well. Then with or without a dividend tax hike, you’ll either keep the same after-tax cash flows or more in the years to come.
Two highly charged issues that should be addressed post November are healthcare costs and off-shore drilling. And there are two very politically savvy companies that are already cashing in and will only get more coming their way next year.
First, on healthcare: Even with the labyrinth of the legislation still under dispute, politicians and their constituents are agreed on the need to control costs. And with prescription drug demand only getting stronger, the need for cost controls and greater efficiencies is a paramount focus. And one of the leaders that was integral (via its lobbyists) in writing several parts of the legislation was ExpressScripts (NASDAQ: ESRX). This company focuses on controlling drug costs in both patented and generic drugs.
Sales continue to soar by ample double-digits and more importantly so does its margins, resulting in stellar returns for its shareholders with a return on equity of over 35 percent and climbing. And with those returns, share performance more than exceeds its peers and the general market with gains of over 25% over the trailing 12 months, and over 218% over the past five years. Buy the drug company that’s the private and public’s favored under $55.
Aside from Florida, the rest of the nation is demanding more petrol production via off-shore drilling. But post election, a new series of Federal regulations will focus first on at least appearing to try to avoid another disaster.
One of the best drill rig contractors that’s used to working in hostile waters — both political and natural — is Seadrill (NYSE: SDRL). With management focused on liability management — it has an admirable track record of drilling and budget safety. And not only does it satisfy the politicos — it also more than satisfies shareholders. Its dividends are solid and heavy — climbing strongly to a current rate of over 8.5%.
And the market is beginning to notice as shares are performing much like its rigs with gains over the past year of over 50 percent. Buy under $35.
Neil George is editor of The Pay Me Strategy.
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