Fade the Election

With the big day finally upon us, my advice for traders is: fade the presidential election.

Neither man changes the fundamental economic problems of the U.S., so along with Barry Ritholtz, I find the election irrelevant for investment decision-making, except to trade against those who do think it is relevant. If Sen. Kerry is elected, we get divided government, and a change in tax policy on capital gains, dividends, etc. Vice versa if President Bush is re-elected. Either could be a wash.

Even if we don't know who the next president will be on the night of Nov. 2, we might get a little volatility, but there should be little permanent damage to the markets. (Damage to our political culture, now that's another matter.)

Whoever wins (assuming we have a winner in due time), it's important to recognize that stimulus is waning in the U.S. economy at present. Federal Reserve policy is a negative. Fiscal policy can't get more pro-cyclical, no matter who is president. Foreign central banks of nations that we trade with are sucking up a lot of the new Treasury securities that finance our government. We get goods and deflation, which is stimulative to the U.S. economy; they get Treasury notes, and inflation.

The People's Bank of China had to raise rates as a result last week, because they are importing our inflation through their pegging of the Yuan to the dollar. They are unwilling to buy our goods, so they buy our debt instead. The raising of the PBOC's benchmark rate, and the loosening up of the restrictions on lending rates, indicates to me that China is not breaking the Yuan-dollar peg yet, but slowing down the economy and liberalizing it somewhat.

I sense that Asian central banks are getting skittish about taking down more Treasuries, as borne out in the August Treasury International Capital data, which showed foreign purchases of U.S. debt dropped to a net $14.6 billion vs. $22.4 billion in July. Thus, the recent weakness in the dollar and less stimulus through U.S. interest rates, though maybe we can sell more goods and services abroad.

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At time of publication, Merkel and/or his fund was long Allstate and Reinsurance Group, though positions may change at any time.

David J. Merkel, CFA, FSA, is a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. Previously, he managed corporate bonds for Dwight Asset Management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Merkel cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send your comments to [e-mail].

Analyst Certification: All of the views expressed in the report accurately reflect the personal views of the research analyst about any and all of the subject securities or issuers. No part of the compensation of the research analyst named herein was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in this report.

Merkel is employed by Hovde Capital Advisors LLC (the "firm"), a registered investment advisor with its principal office located in Washington, D.C. The Firm and/or its affiliates have or may have a long or short position or holding in the securities, options on securities, or other related investments of the issuers mentioned herein.