On to November!

by Steven M. Cohen  •  Feb 21, 2008 at 6:59 am

http://www.buyselljump.com/2008/02/on-to-november

The stock market has rallied of late in the face of awful news, even as the bond market continues to struggle.

We now have the spectre of Seventies-style "stagflation" hovering over us, which suggests that the Fed has little room left in which to influence economic outcomes. The credit crisis continues to deepen, reaching even into the municipal bond "auction" market. The housing market tailspin plummets on. So what is the market saying?

I would speculate that the market is giving a thumbs-up to recent political events, specifically Obama hysteria at the expense of an increasingly strident and depressing Hillary Clinton. In light of Obama's left-of-Hillary posture, why should the markets cheer his ascendancy? More on that below.

However, we can first dispense with the Republican side. The markets are becoming increasingly comfortable with a McCain candidacy, even if staunch conservatives are not. This would suggest that McCain's recently-created conservative credentials are gaining credence with the Republican electorate.

This is happening even in the face of conservative criticism--to put it mildly--of McCain's Senate record. However, one of his recent mantras is a pledge of no new taxes, precisely along the lines of Bush I. McCain knows that the disavowal of that pledge was the principal reason the elder Bush lost his re-election bid to Hillary's mate in 1992.

While anything is possible, especially in politics, it is hard to envision McCain making a similar pledge in an effort to reach out to conservatives, and then sour his presidency by violating it. This is a proven recipe for losing a second term, and McCain knows it. He has the benefit of learning from one of the classic politial blunders in modern times.

So the stock market generally likes the McCain agenda, which features free trade, lower taxes, and less government interference with free markets, even if he has sometimes exhibited some animus towards big business. Wall Street believes it can live with a President McCain.

How, then, to explain its growing comfort level with Obama's rising fortunes and Hillary's seemingly sinking ship?

Insofar as Hillary is concerned, her positions with respect to Big Government as a solution to every problem; to vastly extend the Fed's regulatory reach into just about every corner of business and industry; higher taxes as a means towards income redistribution; and a myriad of other market-terrifying initiatives are well known. The prospect of higher taxes in particular will prove toxic to an economy perhaps already wallowing in a deep recession by the time a new Administration takes the reins. Ask anyone who remembers Herbert Hoover.

In fact, Mrs. Clinton has a laundry list of specific, detailed, and thought out (if misguided) programs to achieve her objective. She has the benefit of seasoned advisers and aides, most of whom are veterans of her husband's campaigns, to help her construct and then communicate the specifics of these programs to voters.

For better or worse, Hillary's wonky obsession with detail comes through loud and clear. And what she has to say should scare the daylights out of investors, managers, business chieftains and the like. Conversely, her darkening prospects are beginning to provide some comfort in an otherwise extremely skittish market.

So that leaves Senator Obama. Since his redistributionist cant makes Hillary look like a centrist, why should the stock market derive comfort from his recent string of wins, suggesting that his juggernaut cannot be stopped? Well, Obama lacks precisely what Hillary exhibits in abundance: specificity, detail, an articulated game plan to engage the federal government wherever and however possible.

Instead, what we get from Obama is an endless stream of platitudes and soaring oratory about change, hope, blah blah blah. The markets love this absence of specific plans for governmental mischief-making. In its place prospective voters get a candidate who essentially reads excerpts from his popular books of hope, sort of like an Oprah performance; given their stylistic similarities, it is no surprise that she is a major supporter.

It suggests that Obama is a man without a plan, which is how he would show up for his first day at the (Oval) office. The only evidence of specific programs appears on his website in the form of musty position papers that no one will read.

Wall Street will warm to a President who mouths generalities but will actually have to start from scratch to come up with new ways to damage a recovering economy and stock market in an effort to redistribute wealth. It's a lot better than someone coming in with a running start and raises the possibility that the opposition, even in the minority, might succeed at damage control.

With Hillary arguably fading from the picture, the market's collective psyche is adjusting to whatever comes out of a McCain/Obama faceoff in November. Hence the recent rally in the absence of positive economic news.

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