Before I begin, I should mention that, two days ago, I thought the stock market may be seeing a bottom. Then, yesterday, there was a 500 point drop. Yesterday's downdraft is suspected to have been driven by a couple of large hedge funds that were being forced to unwind (liquidate) their positions. This is contrary to the "business news" reporters who seem to think that yesterday's sell-off was because of recession fears. I hate to tell those less-than-in-depth reporters, the stock market has pretty much sold off over the last year and a recession is already built into this market with prices down between 40 and 60 percent. In a market that is so weak from collapse and without any real strength of buying, these hedge fund "unwindings" are going to have a serious impact on the overall stock market as selling greatly exceeds any strength of buying. I still think we might be at a bottom; but, caution is definitely warranted.
Now, to the point of this commentary.
Every evening, I quickly scan through the stocks and Exchange Traded Funds (ETFs) that may have had gains for that day. What I have been noticing over the last 10 day is that Municipal Bond ETFs are seeing quite a lot of gains. For example, the Alliance Bernstein National Municipal Income Fund, Symbol AFB, has risen 50% in the last 10 days of trading. The Van Kampen Municipal Trust, symbol VKQ, had a 38% increase. The BFK or Blackrock Muni Trust saw 41% in gains. 30% was seen in the MFL or Blackrock Municipal Holdings Insured Investment Holdings Trust. The list is actually quite long.
Municipal bonds are offered by local and state governments to secure a loan in the form of a bond in order to cover the high cost of some building project. This can be for the expansion of a state university or for new or repaired city roads, etc. The main reason that they are attractive to the investment community is that they are Federally tax free; and, that is an important point in today's context.
This sudden activity in all these Muni-bond funds clearly indicates a movement from Federally taxed investments to tax-free investments. People are apparently trying to get in on the bottom floor of what could be a tsunami of movement into these kinds of investment instruments. What this activity is really saying, in my opinion, is that some investors are moving their money away from what could be high capital gains taxes under a Democratic/Obama controlled government. This is clear evidence that smart money is saying Obama is going to win and that taxable capital assets are not the place to be. This is also surprising because, in a weak economy, state and local tax revenues are sure to go down. As a result, the risk associated with any municipal bonds and the potential defaults on those bonds will go up as bond rating agencies, most assuredly, downgrade these types of investments.
Clearly, there is fear about a recession which has caused the stock market to decline. However, this Muni bond action proves that there is actually a political component that is responsible for the stock market's going down. There is no real business person or investor in this world that would believe that Mr. Obama's tax plans won't be extremely detrimental to businesses in this country and to the global economy. Investors are yanking their money out of the stock markets, around the world, in order to keep their powder dry until they can navigate through the future of investing. That future definitely includes the plans that Obama and the Democrats have in store for business in this country. I also think that the investment community is concerned that we will move into a protectionist mode because Obama and the Democrats appear to be so resistant to free trade agreements. Certainly, any protectionist movement by the United States could seriously hamper international trade and that could ripple throughout the global economy. America is still looked upon as the primary driver in any world economy. What investor's are seeing from America is causing global fear and not confidence.
Another evidence of the fear of Obama rule, is the fact that power and gas utility stocks have tanked almost 50% in the last year. Normally, utility stocks are "safe havens" because those companies have a captive consumer base that tends to have limited losses of profits in a recession. While those consumers might reduce consumption of electricity and natural gas, their is a finite limit to what they can do to save energy costs. At best, maybe 10 or 15 percent. For a gas or electric utility to fall as much as 50 percent makes no sense unless you really start thinking about what the investment community is saying. Under Obama's plan, dividend income will be taxed at the pre-Bush levels of 39.6% as compared to the current 15% rate. This fact, alone, makes utility stocks unattractive; especially in comparison to a tax-free municipal bond that is paying near 6 percent but is tax free. This is a substantially better investment than a utility stock that may be paying a 5% dividend and will carry a 40% tax rate under Obama.
There is another factor that seems to be hitting the usually "safe" utility stocks. Barack Obama (and John McCain, for that matter) are global warming preventionists. Utility companies in this country generally deal in the consumption of carbon based fuels that output green house gases. All this talk of imposing penalties on them for burning natural gas or coal is just going to ruin profits and growth. Any push for wind and solar is seen as competing businesses that reduce their economic base of customers. That's why these usually friendly investments have been hit so hard.
No investor is going to put their money at the curb for the Obama recycling truck to come, pickup, and distribute to someone else. The current movements in the stock market speak volumes as to what is being feared under an Obama Administration. This isn't like the old E. F. Hutton TV commercials, where you had to lean in to overhear what is being said about investment advice. This market is screaming that advice. And, that advice is to watch out for Obama!