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Can You Profit From the Next Administration Now? + Vic Wisemann’s Thoughts on KO, AEO, GE, GOOG and more....

Vic Wisemann
InvestorsObserver
Featured Contributor

Something to consider: this article was originally published on Friday, October 31st and, since my crystal ball was out for cleaning, I didn’t know who actually would win the election. If you are reading this on Wednesday, November 5th, hopefully a new President has been elected and it’s the candidate who you voted for.

With just a few days to go before the Presidential election, the rhetoric is getting loud and the number of ads is increasing exponentially -- or at least it seems that way to me. It's like setting sail when you know a storm is coming, but the tide is going out so you have to make the best of it. You ride out the waves the best way you can and pray you don’t get lost in the troughs.

Heading into this election we have seen some really huge swings in the market. Just look at Coca-Cola Co. (KO). In the past few weeks, KO has lost 9%, gained back 5%, lost that and gained it back plus some. Having similar rides are companies like American Eagle Outfitters Inc. (AEO), General Electric Co. (GE) and even Google Inc. (GOOG).

The issues in the financial and housing sectors have had a lot to do with that volatility, with the likes of KB Home (KBH) and Wachovia Corporation (WB) going for wild rides as well. Adding to this is the pending election and the uncertainty of what the next administration will bring to the market. Both sides have made numerous position statements, but until one side or the other wins, there will be a certain amount of uncertainty in the market.

Read on to see how you can profit no matter who is the next President.

Investors should not let their current investment decisions be overly swayed by who wins, or who they think will win, the White House. Many articles appear before elections assessing what impact the election of a particular President may have on the market. But too often, the authors seem to have forgotten that for legislation to take effect, it requires not just a Presidential signature, but passage by both Congressional chambers.

The question right now is: how can you position your portfolio to benefit no matter who wins? Regardless of who is elected, there will be changes. Both these guys are running with a change theme. To respond to voters who want immediate economic help, both candidates have proposed plans on how to jump start the economy. Both candidates pledge to lower taxes overall, but the key point to the debate is who will be paying the bills. Both candidates want to expand access to affordable healthcare as well. The point is there will be change in the next administration.

They are both offering very different proposals and both represent different directions than the economy seems to be going now. The current administration is running on a lame-duck footing and, once a new leader is known, for the next 4 years the markets may stabilize because one big unknown will become known. At that time, look for certain sectors to make moves based on the party in charge in January, but the overall market should calm down.

With all the talk on both sides about healthcare, mortgages, banks and energy, we can expect these sectors to show a strong reaction to the announced winner. This will most likely be pronounced but short lived. Until actual legislation starts coming out, the true impact on any sector still has some uncertainty. It won't be long before the President-elect starts backtracking on his more lofty campaign promises and we see the true direction of the new administration.

One thing is for sure though: the volatility will come out of the market and option prices should moderate from their recent high levels. With option prices calming down after the election, now is a great time to put on hedged trades. The excess premiums can be worked to our advantage as we try to move into the middle of some of these huge bid/ask spreads.

One company that looks to be somewhat insulated from either candidate is KBR, Inc. (KBR). KBR is a global engineering, construction and services company supporting the energy, petrochemicals, government services and civil infrastructure sectors. Since both candidates are touting the need for expansion in these areas, the company should make out well in either administration, but the current economy is holding its stock price down. The economy will not recover over night when the election is over, but the nice premium on calls probably will.

For a hedged trade, look at a Dec 17.50/20 call credit spread for at least a 30 cent credit. After the election, the volatility will go down and the high premium for a position, over 15% out of the money, will drop.

Be sure any trade you enter fits into your personal risk and goal profile and remember to have some fun.