Weekly Recap - November 9, 2008

Not a bad week after all. We have elected a new president, Barack Obama, and the Chicago Business School got a new name: Chicago Booth, for a cool $300 million, both historical events that will affect our lives for years to come. As hope usually dies last, we can all hope that these changes will bring better life for ourselves. That’s fine, but prepare for the worst and hope for the best. Because the economy is not getting any better any time soon. President-elect Obama has his work cut out for him, dealing with so many issues that it pains me just to enumerate them here. I’d say, why wait until January 20th to let Obama in the White House? The sooner, the better as it stops Bush from making other mistakes and increase the risk of ruin for the economy.
Under Obama, there will be clearly some winners and some losers. Let’s take a look.

The Market
Latest swings in the market – the huge rally on the election day followed by erasing the gains the days after the election – signaled market’s uneasiness about what’s to come in the next two months, as it looks for direction from Obama’s cabinet. The seesawing may very well continue, until we know how will Obama deal with the credit crisis. One of the first moves will probably be replacing Mr. Paulson with either Lawrence Summers, former Clinton Treasury Secretary or New York Fed President Timothy Geithner, but Mr. Obama has said that it will approach this decision with great care.

Financial Services
The banks may take some more beating under Obama, as more regulations may be implemented, which will reduce returns. The financial stocks have gotten so cheap now that they will be the first ones to bounce back once the smoke clears. The S&P financial index is down about 51% this year, trading at 11.3 ’09 earnings, versus a 36.6% drop for the S&P500.

Infrastructure
Muni bonds are gaining some appeal lately, as Obama has made clear that the infrastructure of
the nation needs improvement. The Obama administration will likely send money to the states to allow them to complete old project and start new ones. But playing in the infrastructure stocks may be trickier. Don’t just hope that this government spending plan will turn around entire industries, like steel for example, where United States Steel (ticker: X) is down 72% for the year.

Defense
You may be tempted to put defense sector under losers, as lovable House Financial Services Chairman Barney Frank said that the budget defense should be cut 25%. Not so fast! Obama is in a tight situation, and with other issues at stake, he has little room to maneuver here. Even if he pulls troops out of Iraq (pulling them out costs as much as putting them into the country), he wants to add more troops in Afghanistan, so it’s a wash. He can’t really cut the weapons spending. The unintended consequences of cutting Lockheed Martin’s F-35 jet, for example, could be disastrous. Some of the U.S. key allies may be hurt, as they want to buy the jet and put money into the R&D budget. For these reasons, the defense stocks may be oversold. Raytheon (Ticker: RTN) boosted estimates for 2009 earnings in recent weeks, and it’s now trading at a reasonable 10.6 times estimated earnings for 2009. Lockheed’s shares (Ticker: LMT) have fallen 25% this year and trade at a reasonable 9.8 times estimated 2009 earnings. Northrop Grumman (Ticker: NOC), down 44% year to date, trades at 8.2 times 2009 estimates.

Green Energy
Obama’s promise to create a green energy industry has alternative energy stocks in everyone’s attention now, despite recent sell-offs in the sector. Manufacturing capacity is constrained by the high cost of credit, but the winners may emerge from the better positioned players, such as Danish wind-turbine producer Vestas Wind Systems (Ticker: VWDRY), and solar MEMC Electronic Materials (Ticker: WFR). Because Obama supports a carbon cap-and-trade system to curb greenhouse gases, U.S. utilities could move away from coal to alternatives like natural gas. Given the weak economy, the plan may be put on hold for a while, but eventually it could hurt coal producers like Peabody Energy (Ticker: BTU) and Massey Energy (Ticker: MEE).

Auto Makers
Obama is committed to rescue the U.S. auto industry, which he called “the backbone of American manufacturing.” But this has to be treated carefully, for all we remember Fannie and Freddie disasters. Detroit’s costs are too high and there is excess capacity.

Health Care
Drug companies may take some big hits, as Obama and the Democrats are trying to come up with an universal health care system, which will bring down the costs of drugs and services. Shares of Pfizer (Ticker: PFE) and GlaxoSmith-Kline (Ticker: GSK) both fell 8% the day after the election. Some winners may be Teva Pharmaceutical (Ticker: TEVA), a generic drug maker. Medco Health Solutions (Ticker: MHS) and Express Scripts (Ticker: ESRX) could also benefit, as each offers pharmacy-benefits services. But the best hope for the health care sector is this: the public needs a hefty dose of painkillers while Obama finds a way out of the current fiscal mess.

Other news:
• Joblessness hits 14-Yr High of 6.5% - Employers cut 240,000 jobs in October, worse than expected, with broad declines across industries, and pointing to a severe and rapid recession
• Pending home sales fall 4.6% - and they could fall even more in October and November, signaling that the sharp recession may pressure home sales.
• Bank lending rates keep falling – the 3-month dollar-based LIBOR fell 10 ticks to 2.29%, a 4-yr low and well off the Oct. 10 peak of 4.83%. The overnight rate held at a record low.
• Factory, service data dive – the ISM manufacturing index fell 4.6 points in October to 38.9, a 26-yr low, with a plunge in output and orders – including export demand. ISM’s service-sector index slid 5.8 pts to a new low of 44.2. Factory and service indexes fell sharply worldwide, even in China.
• The dollar strengthens, oil dips – the dollar gained against the euro and pound, but the yen outpaced the pack. Crude futures settled off $6.77 for the week to $61.04 a barrel. Gold climbed 2.2%. Other metals were mixed.