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Obama's Short on Details, Long on Optimism

Robert Holmes

President-elect Barack Obama went for the hard-sell when he discussed his economic recovery plan Thursday, and despite being short on specific details, market analysts say investors should be optimistic about a potential near-term boost from the program.

Arguing that the current recession could "linger for years" if nothing is done, Obama said dramatic action must be taken as soon as possible. "In short, a bad situation could become dramatically worse," Obama said during his speech at George Mason University in Fairfax, Va.

Estimates currently peg the price tag of Obama's proposed American Recovery and Reinvestment Plan close to $800 billion, with 40% of that designated as tax cuts to individuals and businesses. The remainder would be used for infrastructure spending and to help individual states pay for Medicaid programs.

Obama's hope is to also increase spending on alternative energy, to computerize medical records, and to modernize schools, labs and libraries with new equipment. The president-elect argued that his solution will not throw more money at problems, but instead "invest in what works." He also plans to cut spending in other areas, promising that his goal is "not just another public works program."

However, when combined with the federal budget deficit, which now stands at a staggering $1.2 trillion, nearly three times the record set in 2008, there are concerns that the U.S. is mortgaging its future in order to fund a quick fix to an economic recovery. While Obama is preaching a "clean break from a troubled past," saying that "only government can provide the short-term boost needed," some worry that a $2 trillion deficit for the U.S. will be hard to overcome years down the line.

"It forces the nation into a deeper debt load, and it'll constrain the ability to take on additional projects," said Robert Pavlik, chief investment strategist with Banyon Partners. "They're taking on more debt to get us out of the hole. That's counter-intuitive to logical thinking. Yet, this is what everybody wants. This is the only way we're going to get out of this situation now. We're not prepared to handle a harsher reality."

The take on Wall Street to Obama's speech was muted, with the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite showing few signs of being impacted by his comments.

"There hasn't been much of a reaction by the market because we don't know a lot of the details," says Richard Sparks, senior equity analyst with Schaeffer's Investment Research. "It's going to take time to flesh out the details, and there are a lot of moving parts. It makes no sense for him to get down to details as Congress could decide to do different things. He's given them broad ideas on what's important. He can work with Congress to compromise on the details."

Despite the lack of specifics, market observers argue that it's imperative that investors remain optimistic. "As an investor, it's better than nothing," Pavlik says. "It's going to be higher debt loads, but the economy should eventually recover to a point where we can reduce those debt loads. Better times will come, but we have to contend with the problems at hand. You have to do something. It's a step in the right direction."

Sparks says that Obama is doing a good job at straddling the fence in regard to the infrastructure spending aspects of his program. "On one hand, he keeps talking about the programs he wants to spend more in," he says. "On the other side of the coin, he's suggesting that there are cuts that can be made in places where there's wasteful spending. It seems as if there's a balance, and that there's not all-out, full-scale spending."

In terms of the infrastructure spending, which Obama claims will be a foundation for long-term economic growth free of earmarks and pet projects, analysts say that investment opportunities exist. Pavlik and Sparks foresee a continued migration into alternative energy, technology, engineering and construction firms. Many infrastructure plays have rallied off of last fall's lows based on the idea that they could attract a lot of business if the U.S. makes major improvements to roads and bridges.

"You'll see, as the year moves forward, consumer staples and health care being a potential source of funds. People will migrate out of those and into more cyclical names," Pavlik says. He notes that companies like Caterpillar (CAT Quote) and Fluor (FLR Quote) improved in trading after Obama's speech. Sparks was quick to point out the move in Granite Construction (GVA Quote).

Sparks adds that Obama intends to increase spending with respect to alternative energy. "Solar companies, for example, should benefit from that. We saw a pop as soon as that was announced," he says. Among solar concerns, First Solar (FSLR Quote) and Suntech Power Holdings (STP Quote) were on the rise Thursday.

On the downside, Obama's pledge to repair the financial system and prevent its collapse "but only with the maximum protection for taxpayers" should concern investors looking to take long positions in some companies. As the government has invested in financial names like Citigroup (C Quote) and AIG (AIG Quote), share prices have crumbled.

"Additional regulation would be a headwind for financials," says Sparks. "That might cause them to be more conservative in their business plans, and therefore possibly underperform the overall market."

If anything, though, Obama has done a splendid job at tempering expectations, helping investors brace for the worse, Sparks says. "He's not one to overpromise and underdeliver. He's actually trying to do the opposite, suggesting that the outlook is bleak and things will last longer than expected," says Sparks. "He's arguing that the stimulus packaged is an absolutely, necessary first step, but it's not the panacea for all the problems that we're facing."

More bad news for the U.S. economy is expected Friday, when the Labor Department releases the nonfarm payrolls data for December. Economists expect the report to show a decline of 500,000 jobs in the U.S. last month and for the employment rate to rise to 7% from 6.7% in November.

However, Obama's choice to step out in front of the crisis has helped solidify support while adding to the sense of urgency. Even if the payroll data comes in weaker than expected, Pavlik argues that Obama's decision to move quickly has helped the market brace for the worst.

"[Obama's] team is preparing for the first day in office so they are able to be up-to-speed, the way a proper manager should handle the situation," Pavlik said. "They're trying to get a jump on things. Eventually the optimism will fade as it takes time to actually start the projects. It's not going to happen overnight, but he's prepared the country and investors for that."