The CBO

December 13, 2010

The CBO: Congressional Budget Office Clinton, Bush, and Obama Stimulus Program

Politics Makes Strange Bedfellows Indeed

Weekly Market Commentary 12-13-10

At the end of the week just as everyone was heading out to enjoy the weekend, I took a quick glimpse at the future, or should I say the past. On TV was former President Clinton standing in front of a Presidential banner backdrop in the White House Press Briefing Room. This must be a replay from the 90’s I reasoned. Yet he was talking about the current tax cut proposal in front of Congress. Maybe it was the stress of the week, or perhaps the delayed impact of the couple of glasses of wine I had the night before. I felt I was in some kind of time machine malfunction; a past Democrat President pitching a past Republican President’s tax plan that will help the future on behalf of the current Democrat President.

In any case, I shook off the shock and awe and began to analyze the implications on politics and the economy.

The economy first and foremost


The tax plan calls for somewhere unto $900 billion in spending, tax breaks, give backs and other items. (http://bit.ly/ht4qQA) (http://nyti.ms/gSkDIK)

tax plans and estimates

Now if we go back to an earlier blog and review the components of our 14 Trillion GDP economy we can make some logical inferences. GDP breakdown

So what does the additional $900 Billion do for GDP? What sectors will be impacted the most? These seem to be the main questions investors need to answer.

Most analysts prior to the details of the tax plan estimated GDP growth for 2011 to be around 2.5%. (http://bit.ly/byj8fJ) It's no surprise we are now seeing quick estimates for 2011 GDP coming in around 3.5% to 4% by Q4 of 2011.

3.5% GDP in the form of good consumption could be enough to get the “Great American Consumption Machine” flowing at a self sustaining pace. It's simple, and I have said it many times before:

Consumption and Investments = Jobs, Wages, Profits = More Consumption and Investments

3.5% to 4% GDP is enough to create net new jobs including new entrants to the labor force in my estimation. This is good for everyone.

In fact, the benchmark gauge for American equities (the S&P 500 Index) is predicted to rise 11 percent to 1,379 in 2011, bringing the possible increase since 2008 to 53 percent, the best return since 1997 to 2000, according to the average of 11 strategists in a Bloomberg News survey. (http://bit.ly/dVIgjU)

The New CBO and Politics

The CBO (Clinton, Bush, Obama) tax plan is stimulating in the short run, if the consumer is willing to consume. Obama is betting his election on an improvement to GDP before 2012. He must have concluded he was not going to be re-elected no matter what he did if the economy is not better by 2012. If he now focuses in on mid and long run deficit reduction, he might hit a home run compared to the rest of the world as they face austerity and we continue to borrow from tomorrow and spend today.

My Investment Themes

So my investment themes continue to be centered on targeted improvements in the economy. Only now, I am adding a large focus on consumer discretionary (assuming the tax plan actually passes). While we have had a focus on the high end consumer, I believe the CBO stimulus will reach down to most American consumers. While I don’t personally support huge deficit programs it’s clear that short run spending might be the best chance we have to keep the US economy from becoming Japan’s economy.

  • Luxury Goods with growing emerging market exposure
  • Weak dollar opportunities - exporters
  • Select technology - specifically business processing
  • Media (Print that is adapting to on-line)
  • Rare Earths (again see our Tweets on this)
  • Emerging Markets Debt and Equity that is driven by US dollars finding better investment environments
  • Segmentation of emerging markets rather than broad based emerging markets exposure, specifically Brazil Energy and Telecom
  • Mega Cap US companies that are finding great margins with little top line growth, especially exporters
  • Healthcare Assisted Living
  • Germany
  • Financial Asset Managers/Hedge Funds
  • High end retail

Tim Phillips, CEO