by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
Wednesday, August 22, 2012: Issue #1844
Four more years…
For some people, that’s terrific news. For others, the idea makes their blood pressure spike.
But it looks like President Obama is headed for re-election.
At least that’s what the smart money on Wall Street is saying.
I’m not talking about with words. Most of the players on Wall Street will tell you they would rather see Mitt Romney in the White House come January. But more important than the words coming out of their mouths, is what they’re saying with their money.
Don’t get me wrong, they’re still donating to Romney like crazy.
According to The Daily Beast, Wall Street employees have donated $56 million to Republican candidates versus $35 million for Democrats – a sharp reversal from 2008, when 75% of Wall Street employees’ money went to the Democrats.
On Monday, health insurer Aetna (NYSE: AET) announced it would acquire Coventry Health (NYSE: CVH) for $5.7 billion in cash. It’s essentially a $6-billion bet on Obamacare being upheld.
By acquiring Coventry Health, Aetna “substantially increases its Medicaid footprint creating more opportunity to participate in the expansion of Medicaid and to pursue high acuity positions as they move into managed care,” according to the company’s press release.
The Affordable Care Act (Obamacare) expands the number of patients eligible for Medicaid.
Other deals have taken place in the sector, giving the acquirers more exposure to the expanding Medicaid base. In July, Wellpoint (NYSE: WLP) announced it will buy Amerigroup (NYSE: AGP) for $4.9 billion and in January, Cigna (NYSE: CI) completed its $3.8-billion purchase of HealthSpring.
While these deals might make sense regardless of whether Obamacare remains in place, the timing of it is surely interesting. You’d think that a Romney victory in November would lower the price of a deal, as the Medicaid patients wouldn’t be quite as valuable to an acquiring company. So the fact that Aetna and Wellpoint are acting now suggests that they think healthcare reform is here to stay and they want to get ahead of the curve.
They’re not the only ones talking with their money.
Outspoken hedge fund manager Dan Loeb, one of the smartest and most successful investors around, is a former supporter of the President, but now is a harsh critic.
That didn’t stop him from placing bets on companies poised to grow under Obama’s watch. Loeb, along with David Einhorn, another very talented investor, both bought shares of health insurers Aetna, Cigna, Humana (NYSE: HUM) and UnitedHealth Group (NYSE: UNH) in the past quarter – companies that should all do well under the new healthcare regulations.
Listen to What the Market is Saying
The stock market is a leading indicator. In early 2009, we were smack dab in the middle of the financial crisis. A President was elected who opponents said had no business experience. His harshest critics called him a Marxist. Yet the market bottomed and went on to more than double in two years. Over the past year, the S&P 500 is up nearly 27% and year to date, the market has climbed 12.8%.
That doesn’t mean that the market necessarily sees a sharp rebound in the economy or a return to the golden days of the late 90s, but the action, particularly in 2009, did signal that we were not going to go over the cliff as so many had feared.
Similarly in early 2000, as dot com companies were hiring Kiss, The Who and James Brown to play at parties celebrating new funding, stocks started to slide, indicating the good times were over. Many dot coms didn’t start imploding for another year, but the market knew what many clueless CEOs apparently didn’t.
You can go back and look throughout history at many examples of the market climbing ahead of economic recovery or falling before economic weakness.
Looking at Presidential election years going back to 1980, when markets were weak, the incumbent party was voted out of office. The one exception was 2004 when George W. Bush narrowly defeated John Kerry. When the markets were strong, other than 1980, when Ronald Reagan won, the incumbent party was re-elected.
|Year||S&P Performance||Incumbent Party Re-elected?|
Average return when incumbent party was re-elected: 9.89%.
Average return when incumbent party is voted out: 0.19%.
If you agree with the smart money, you can follow them into health insurance stocks like the ones mentioned above. Wellpoint might be the best positioned to take advantage of the expansion of Medicaid, as it will be the top private manager of Medicaid benefits.
Master Limited Partnerships
Income investors should also consider master limited partnerships (MLPs). These are stocks that have a high yield, where most of the cash distribution is tax deferred. If the President is re-elected and the Bush tax cuts are allowed to expire on December 31, dividend income will be taxed at ordinary income rates, so a tax-deferred strategy might be even more attractive.
However, be sure to speak with your accountant before investing in MLPs, because there are significant tax considerations when investing in MLPs and you want to make sure the costs and risks are worth it.
Some examples of MLPs include Enterprise Product Partners (NYSE: EPD) and Energy Transfer Partners (NYSE: ETP).
Investors love to track where the smart money is investing. So although the two Presidential candidates are pretty much tied according to the latest polls, you can see some of the smartest money on Wall Street are placing their bets on Obama and stocks that will do well if he remains in the White House.
MarcThe Smart Money is Signaling An Obama Victory,