By Ben Shepard (Investing Daily | Original Link)
Over the past three months, Americans have been bombarded with political advertising, much of which has focused on which candidate is most likely to get the US economy humming again. With unemployment stuck stubbornly above 8 percent for three years now, this election cycle hinges on the perception that policymaking can spur employers to start hiring again. But Jerry Jordan, manager of Jordan Opportunity (JORDX), believes we need to put partisanship aside and acknowledge the fact that it probably makes little difference who occupies the Oval Office come January, unless the winner is willing to address spending on Social Security and Medicare—the proverbial third rail in politics.
Ben Shepherd: How do you expect the economy to perform over the next year or so?
Jerry Jordan: I think we’ll continue to muddle through, with continued risk toward the downside. I’m struck by the fact that most businesses are making do with less. Instead of hiring, they’ve been making existing employees work longer hours. So we’ve seen the number of hours in the average work week continue to rise, while job creation is basically stagnant.
Energy prices have fallen from recent highs, and that’s been a big help to the consumer. But any sort of massive intervention by the world’s central banks (the Federal Reserve, along with the European Central Bank and the Bank of China) would make oil prices take off again, particularly in the second half of this year, given the already strong seasonal demand.
Oil inventories in the US remain fairly high, but inventories in the rest of the world are middling to low; so we’re not wildly overstocked on a global basis. I don’t think we’re talking about oil at $150 per barrel any time soon. But our recovering economy is still quite sensitive, so even small upticks in commodity prices can impair growth.
The effect of the recent surge in grain prices is another concern. Although I don’t expect it to impact the US too badly, it will likely have adverse consequences for the developing world.
When you or I pay $2 for a loaf of bread with 25 cents of wheat in it, a doubling in wheat prices only causes the cost of bread to rise to $2.25. In the emerging markets, they’re paying 50 cents for a loaf of bread with 25 cents of wheat in it. So when wheat prices double, the cost of their bread jumps an alarming 50 percent.
If you look back through history, major societal shifts have been prompted by skyrocketing inflation in food prices, as evidenced by last year’s Arab Spring.
In the US, the so-called “fiscal cliff” that everyone’s worried about will ultimately be sidestepped, but nothing will be done toward that end until after the election. Some pundits have said that if presumptive Republican presidential nominee Mitt Romney wins the White House, then the Democrats will be spoilsports, at least initially. That means our budget problems may not be addressed until early 2013. But given our government’s massive deficits, we can’t keep cutting taxes and raising spending indefinitely.
Ben: Is the election really that big of a concern for the economy?
Jerry Jordan: I think it’s more of a secondary issue. A lot of folks are unhappy with the president, so they like to think of the election as a game changer. But I believe that it doesn’t really matter who the president is at this point. While there are fairly sizable fiscal differences between Romney and President Obama, the full realization of their policies would only come into play if they were kings; but no president can simply issue edicts and expect Congress to bend to his will. Instead, political compromise tends to dilute policymaking.
Our government’s typically sluggish approach to implementing policy is part of what makes our system great. And when there’s a lot of turmoil and angst, that’s usually when we start to shine. As Winston Churchill said, “Americans can always be counted on to do the right thing … after they have exhausted all other possibilities.”
I’ve dubbed this the guardrail- to-guardrail economy, where we have to slam into a guardrail before we do anything; then we react by hurling ourselves across the road to the other guardrail. This makes for a wild ride, but at least it keeps us ping-ponging back and forth down the road, while the rest of the world often just piles into the guardrail and gets stuck there. I see the current humdrum status quo continuing until there’s another crisis, be it the S&P 500 at 1100 or less, interest rates going up, or another Mideast crisis.
If Romney takes office in January, there’s nothing he can do unilaterally. He can talk about cutting spending, but social programs only represent about 15 percent of the budget. Is he going to cut 2 percent of that?
That’s not going to get us very far, so he’d likely have to also cut Social Security, Medicare and defense spending; but he’d have a hard time pushing those cuts through Congress after the election. That’s why I don’t think it really matters who’s in office, though in the intermediate term, it will make a difference in terms of extending the Bushera tax cuts for all income levels. Still, at some point, those tax cuts have to lapse and spending has to be cut; no one in history has ever been able to fix this kind of debt problem without raising taxes and cutting spending.
But that’s going to be a tough sell. So we might need a 10 percent to 12 percent decline in the S&P 500 to reset the bar a bit and get policymakers more focused on our debt woes. Also, in the wake of a significant market decline, I’d expect a wave of mergers and acquisitions, since companies are now sitting on a ton of cash.
Ben: How should investors be positioning themselves then?
Jerry Jordan: I don’t think bonds make any sense, particularly Treasury bonds with yields in the 1.5 percent range.
The focus should remain on niche plays in equities. For instance, we’re doing a lot of work on next-generation Internet companies such as Yelp (NYSE: YELP) and Angie’s List (NasdaqGM: ANGI), which are really going to leverage the Internet to produce value-added services. The best opportunities aren’t in computer hardware or software anymore, though there might be pockets of strength in that space.
We also own a few names in deepwater drilling, as energy demand continues to grow. The US needs to find more oil. There are plenty of places domestically where wells could produce 10,000 barrels a day, but we need to discover fields that yield 300,000 barrels a day, and those are all offshore.
I think the consumer sector is one of the riskiest areas right now, particularly high-end retailers. Those companies have performed well lately, but their stocks have done even better, so that whole segment of the market is poised to fall apart, with companies such as Abercrombie & Fitch (NYSE: ANF) leading the sector lower. Companies such as Coach (NYSE: COH) and Ralph Lauren (NYSE: RL) still have growth left in them, but the brands are mature and the low-hanging fruit is gone.
Ben: What would you suggest investors buy now?
Jerry Jordan: We own ENSCO (NYSE: ESV), which can be pretty volatile, but has a very robust fleet of deepwater rigs that are in extremely tight supply. Its valuation is low, and there is a lot of upside over the next 18 months, barring a global recession that pushes oil prices as low as $60 per barrel.
I also continue to like lodging names such as Marriott International (NYSE: MAR) and Wyndham Worldwide Corp (NYSE: WYN). Their stocks have had strong runs and are probably due for a bit of a pullback, but valuations remain fairly reasonable. They also have great cash flows, which they will likely use to pay down debt and buy back shares. Another major plus is that they’re expanding their presence in emerging markets, where consumer travel is seeing tremendous growth.