Election 2008: After Super Tuesday Downer, Investors Seek Answers in Today's "Potomac Primaries"

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This is the latest installment of "Election 2008," an occasional Money Morning series that examines the investing implications of the looming U.S. presidential election.

By Martin Hutchinson
Contributing Editor

Super Tuesday has come and gone, and for investors who want to keep a decent share of their hard won dividends and capital gains, the news isn't good. The most investor-friendly candidates have pretty much been eliminated from the race, and we're left trying to craft a strategy that allows us to survive and even profit no matter which of the remaining candidates finally makes it to the top of the pile in November.

On the Republican side, the picture is pretty clear. Ron Paul was unquestionably the most investor-friendly candidate based on the fact that his plans to downsize the government and end the United States' Middle East involvement would both increase the resources available for the private sector and reduce the burden on taxpayers. However, he was never likely to go anywhere, if only because his foreign policy was unanimously opposed by the party bigwigs. Rudy Giuliani was also pro-investor, but got nowhere, and the same was true of Congressman and Law & Order star Fred Thompson.

Republican Realities

Because of that, the reality was that by Super Tuesday, the party's Bloomingdales-like profusion of attractive candidates – each with rather different advantages that had been displayed a month ago in Iowa – has been reduced to a display that more-resembled a Soviet-era GUM store, with bare shelves, a bickering staff and a general disregard for the wishes of the investor/voter/consumer.

On Super Tuesday, the most investor-friendly candidate, Mitt Romney, did poorly, while the least investor-friendly candidate, Mike Huckabee, did much better than expected. In the end, we were left with the virtual certainty that the final nominee would be John McCain. Subsequently, Romney pulled out of the race and the primaries and caucuses held over the weekend have left Huckabee fighting a rearguard battle to stop McCain. However, most of the party bigwigs have already endorsed McCain, so he is the likely nominee.

McCain has his strengths. His economic advisor, Douglas Holtz-Eakin, former head of the Congressional Budget Office, has a firm grip on the nature of the fiscal train-wreck that is approaching us in the next decade or so. Given that the current incumbent is proposing a budget with the highest spending since 1994, and within $3 billion of the highest deficit ever, this will be a big plus. Make no mistake about it: If the U.S. economy chugs into a recession pulling railcars loaded with a $400 billion deficit, the budgetary shortfall will soar to $1 trillion before we know what happened.

At least McCain's advisors understand this, meaning he has the best chance of preventing that $1 trillion deficit from sweeping away the bond market and causing irreparable damage to the U.S. economy as a whole.

Having said that, you have pretty well exhausted McCain's advantages. He has no great objection to higher taxes, so we will undoubtedly get them [we will under the Democrats too, but tax increases by Democrats leave the promise of being reversed next time the Republicans win the White House, while tax increases by a President McCain make no such promise]. McCain also has a visceral objection to both Wall Street and the pharmaceutical industry, and no great commitment to the private sector as a whole.

Romney may have been a dislikeable guy, but to cast rocks at him for working for a private equity fund, or for having friends on Wall Street, is not encouraging in a potential Republican presidential nominee. You might thus see some other investor-unfriendly laws passed – for example a transactions tax on share dealings, or a return to the days when there was a heavy reliance on the estate tax for revenue, abandoning the Bush Administration's plan to end the estate tax in 2011.

You probably wouldn't want to be invested in financial services companies or pharmaceuticals with McCain as U.S. president.

Decision Time for Democrats

Turning now to the Democrats, the picture is much less clear. Barack Obama ran Hillary Rodham Clinton nearly equal in terms of delegates, which was a very strong performance – especially since the states being contested included her previous home state of Arkansas and her current adopted home state of New York. Subsequently, Obama won a bunch of primaries and caucuses at the weekend, by handy majorities. If the pundits prove correct in their belief that the primaries today (Tuesday) in Maryland, the District of Columbia and Virginia on February 12 are natural Obama country, he is likely to have a substantial delegate lead after those states vote.

Clinton apparently likes her chances in Texas and Ohio in early March, and in Pennsylvania in late April, but Obama's candidacy seems to be picking up speed, and he may be able to neutralize her advantage in those states.

If he's able to achieve that, his main problem then will be the 800 super-delegates – selected separately by party leaders – which might be expected to favor the establishment candidate Clinton. However, since Obama has attracted the support of Edward Kennedy and a number of other party bigwigs, Clinton's advantage there may not be so great, either.

In short, the outcome is still uncertain, but the probabilities are about 65-35 for Obama.

Key Considerations for U.S. Investors

If Clinton is the Democrat nominee, November's election should be a close one, possibly with the intervention of a third-party candidate. Her negatives are sufficiently strong that even those Republicans who dislike McCain will end up voting for him [yes, possibly even including Ann Coulter, who has sworn to support Clinton!].

As president, Clinton would introduce a healthcare plan with a universal mandate, which would probably be heavily skewed towards the public sector, relying on government controls to keep costs down. That would introduce government inefficiency into a huge additional swathe of the U.S. economy, raising taxes and costs and reducing economic growth.

Obama, by contrast, is temperamentally more free market oriented; for example, his health plan contains a mandate that is universal only for children. Like Clinton, he would raise taxes, and concentrate tax relief on those at the lower end of the income scale, but his generally market-oriented approach to healthcare would lessen the dangers of introducing major un-competitiveness into the U.S. economy. He is also more determined than Clinton to end the U.S. involvement in Iraq, which might provide further savings that would limit the potential tax increases. You could certainly argue that a President Obama would be more pro-investor than a President McCain; an Obama presidency would have the additional advantage that there was always the possibility of a Republican return to power afterwards on a free-market platform.

For investors, the picture is bleak, but not yet entirely clear. A McCain presidency would probably be the least inflationary, and the least likely to produce a runaway budget deficit; that might suggest an investment in bonds. An Obama presidency would probably not damage the free market excessively, but you wouldn't want to own defense stocks. A Clinton presidency is probably bad news for investors, particularly if her protectionist instincts caused her to inflict damage on the world's fragile trading system.

To avoid U.S. political risk, the remedy is simple: Put your money in Asia.

[Editor's Note: In our last installment in this series, Managing Editor Jennifer Yousfi penned an investor-oriented preview of Super Tuesday. For an overview of all the candidates and their implications for investors, click here to read Election 2008: Which Republican Candidates Will Be Best For Investor Profits and Election 2008: Which Democratic Candidates Will Be Best For Investor Profits.

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