2004 Post-Election Investment Strategies

It is always best to remove emotion from investment decisions, so whether you voted for the current administration or not, the fact that they will serve a second term makes investing somewhat easier as we already have four years of history to guide us as to what the next four years will likely bring.

As political contributions affect current policy, they wouldn't give if it didnt, it is often revealing to focus on those industries which favor the elected administration in their campaign contributions (i.e. the Republican Party for at least the next four years):

	Percent of total contributions to GOP
Contributions by Industry	2004	2002	2000
Pharmaceuticals/Health Products	66%	74%	69%
Health Professionals	63%	62%	57%
Health	62%	65%	60%
Insurance	68%	69%	65%

Oil & Gas	81%	80%	78%
Energy/Natural Resources	75%	73%	74%

Agribusiness	71%	72%	74%
Commercial Banks	64%	63%	63%
Construction	71%	69%	68%
Defense	62%	65%	64%
Telephone Utilities	62%	59%	59%
Tobacco	72%	79%	84%
Transportation	74%	71%	72%

Given that the above industries will likely fair much better under a Republican administration, the investment goal is to find mutual funds which are heavily weighted to these sectors. I will try to break down a few of the major industries one by one.

Health Care
The largest contributor to the Republican Party in 2000, 2002, and 2004 was the health care industry as a whole. The Bush Administration has been very favorable to the health care sector during his first term and there is no reason to believe it will not continue.

During Bushs first term, health care insurance premiums rose at a rate several times that of inflation (in 2002 alone it was eight times that of general inflation). During this entire period, there was no call for an investigation, which would be typical of even much smaller discrepancies.
The Republican Party has put up several roadblocks to both state governments and Medicare from buying cheaper drugs from foreign countries (i.e. Canada), even though in many cases the drugs are coming from the same manufacturing plants but are sold into the U.S. at substantial premiums.

Given one and two above, there should now be handsome excess profits built into the system for many years to come, making this a good sector to invest in.

Energy
Energy sector contributions favor Republicans on the order of three to one (75% to Republicans and 25% to Democrats). This sector has also faired very well under the current administration. As oil prices rapidly rose, in spite of no real shortage of supply, there was no call by the administration to investigate why. Of course the administration benefits greatly from higher oil prices (i.e. oil exploration becomes considerably more profitable the higher the price of oil climbs yes including Alaska, but also areas where there is less potential recovery). These higher prices will likely garner more support for the bloated energy bill (see next paragraph).

The energy bill is so packed with special favors that Sen. John McCain [R-AZ] has dubbed it the "No-Lobbyist-Left-Behind Act." It looks like this sector will be paid back handsomely for its campaign contributions. Once again, at this point there are substantial excess profits built into this industry stemming from higher oil prices which should last for many years to come.

Although there is no current shortage of oil, there is concern that if China continues its rapid growth rate, global supply will not likely keep up with demand. Also, if conflict continues in the Middle East (more likely than not), thus disrupting oil supplies, this could create short-term supply problems. Just the speculation of these two factors is likely to keep the price of oil artificially high, all of which lends support to investing in this sector.

Natural Resources / Industrial Materials
All physically supply-limited resources will continue to do well for two main reasons:

Given the falling price of the dollar (more about that later), the price doesn't even have to rise globally for prices in the US to climb (i.e. if the worldwide price stays flat but the US dollar is losing value relative to other currencies, the price climbs proportionate to the fall in the dollar). This represents a good reason for finding a US fund which is heavily weighted toward this sector (e.g. both precious metals/mining and other Industrial Materials). NOTE: Precious metals mining will offer leverage over investing in the raw materials, but will also carry greater risk, although diversifying through precious metals mutual funds will offset some risk by offering diversification within the sector.
With Chinas economy growing at a rate of 10+ percent per year, the demand for our limited natural resources (i.e. lumber, cement, industrial materials, etc.) will continue to climb at record paces. The supply problem looks bad enough that the Chinese government has been intervening to slow their growth rate to a more globally sustainable level.

These two factors can be capitalized upon by both domestic and foreign mutual funds which are heavily weighted to these sectors. There are a number of reasons natural resources will fair well; limited supply, increased demand, industrial/high tech applications which use up the limited supply (i.e. gold in electronics, platinum in catalytic converters, etc.), falling dollar (price doesn't even have to rise globally, just in US dollar terms), people flock to hard assets during periods of currency devaluation, etc.

Consumer Goods
There are many global regions eating our lunch when it comes to making consumer goods. The two largest areas are Central/South America and Southeast Asia. These two areas suffer from a substantially lower standard of living and will likely continue to outdo other foreign producers for some time to come. Even if the standard of living is doubled in these areas, it will barely affect global prices of cheap goods (i.e. if one of these countries doubles it standard wage from $5 per day to $10 per day, it would not significantly affect retail prices of these goods). They will likely continue to offer well-made, cheaper goods for some time to come. For these reasons, an international fund focused on one of the two above global regions (e.g. mutual funds with at least 80% of their investments in Southeast Asia or Central/South America) and heavily weighted toward consumer goods should perform well.

Financial / Banking
Steer clear of the US financial and banking sectors (most foreign financial sectors are OK). For several years now, the US has maintained an extremely easy money policy. This policy began within weeks of the first private meeting between President Bush and Federal Reserve Chairman Alan Greenspan in December of 2000 (cutting the discount rate an unprecedented 11 times over the next 12 months). This appears to have been an experiment in trying to avoid a recession, instead of the typical policy of pulling us out of a recession once is has begun. Noble in theory, but it neglects the beneficial aspects of the business cycle that accompany the temporary pain of a recession. Time will judge weather this was a wise move which spurred a sustainable recovery or something to avoid in the future.

In any case, what this lengthy easy money policy has done is loaned out most of the Banking industrys reserves at historically low interest rates for extended periods of time (ex. 15-30 year mortgages at sub-six percent rates). As interest rates climb (see next paragraph), the banks will have to pay higher and higher rates to keep investors money that they have already committed at less than 6%. In the case where rates climb substantially from current levels, it would lead us into another banking crisis which of course the U.S. government and your tax dollars will inevitably have to bail out.

There are substantially more forces which will lead to rising interest rates than our Governments power to keep them low. To highlight just a few of the major ones:

The falling dollar discourages foreign investment in US bonds, thus cutting off demand at current interest rates and increasing supply. Higher bond interest rates would be needed to even maintain the current level of government debt (i.e. as short-term treasury bills and notes expire, it will be difficult to find similar levels of foreign investment at the same interest rates).
The budget deficit currently requires 400+ billion dollars of NEW investment in government bonds every year. The current administration is still calling for additional tax cuts, and there is no evidence of desire to reduce spending, both of which will lead to even greater deficits (Bush has not vetoed a single spending bill during his first administration). If this doesn't seem bad enough, consider that the actual annual shortfall reported by the Treasury using GAAP accounting (the same measure applied to corporations), was in the neighborhood of ten times that number. Most of this expanded deficit is derived from the net present value of unfunded Social Security and Medicare obligations. This insurmountable deficit is what recently caused Alan Greenspan to release a statement urging politicians to come clean regarding our future inability to deliver promised Social Security and Medicare benefits as they stand today.
The trade deficit is now consistently in excess of 50 billion dollars per month. This adds up to a net half trillion dollars per year of US assets being acquired by foreigners. How long can we continue to exchange US wealth for cheap imported goods, mostly with very limited life spans (i.e. that 3-year/$40 DVD player is being exchanged for a piece of ownership of the U.S. Government Bonds, US stocks, real estate, lumber, cement, and other domestic natural resources).

These factors, coupled with the unfortunate fact that 40% of US government debt is held by foreigners, could lead to substantially higher interest rates as the US dollar loses favor. There is growing evidence that the US dollar could cease to be the world trade currency, given our reckless spending habits and out-of-control trade deficits. This would lead foreign governments to divest out of US dollars and into more stable/fiscally responsible countries (i.e. the European Union / Euro) thereby forcing substantial increases in US interest rates and at the same time dampening the rise in foreign interest rates (simple supply and demand). This process has already begun with Russia's Central Bank commenting on its desire to bolster its holdings in the Euro rather than the falling US dollar.

To defend against, and perhaps capitalize on, the above US financial sector problems you can put money into international mutual funds, foreign currency denominated Certificates of Deposit, international bonds, or US mutual funds which are heavily weighted in natural resources (i.e. precious metals, lumber, concrete, etc.). Also, steer clear of US mutual funds that are invested in the US financial and banking sectors. International bonds will not get hit as hard as U.S. bonds, but still carry risk during rising interest rates even though you will make back some percentage based on the falling U.S. dollar. If considering foreign bonds, to be safe, preference should be given to shorter maturity instruments of five years or less.

Conclusion
International investing has never looked so attractive as now, given such high US fiscal irresponsibility. Personally, I have moved 75% of my retirement assets into international mutual funds which focus their investing in consumer goods (only for Central/South America or SE Asia focused funds), energy, health, and industrial materials. To further reduce risk, I have diversified these investments equally into three of the following four promising global regions; Canada, Europe, SE Asia, or Central/South America (investing in all four regions would offer even further diversification). The remaining 25% of my retirement assets are domestically invested in a mutual fund which focuses its attention on health, industrial materials, business services, and energy. My personal non-retirement investment account is primarily invested in a gold mining mutual fund (as a percentage of total investment assets this represents less than 10%). The reason being my 401(k) plan offers no precious metals or commodities options to take advantage of the falling US dollar.

Invest wisely, do your research, always remove emotion from the decision, and most of all, good luck. Its impossible to call the direction of the stock market. The best you can do is to arrange your money to take advantage of current trends, directions, and government policy.

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