Market Overview

How to Trade the 2012 State of the Union Speech

Tonight, President Barack Obama will give his State of the Union Speech in front of a deeply divided, and unprecedentedly unpopular, Congress. In what many observers are characterizing as a kick-off to the President's 2012 re-election bid, the event is likely to be an opportunity for more political posturing from both parties, but lacking in any deep policy revelations. Legislatively, this year is expected to be fairly uneventful as both Republicans and Democrats gear up for the November vote.

That doesn't mean, however, that the speech won't be heavily laced with politically expedient rhetoric as the President attempts to frame the 2012 elections in terms of an ideological choice as opposed to a referendum on his first term. In particular, the issue of taxes, framed in language of fairness and equality, will be a key point. In fact, Warren Buffett's secretary Debbie Bosanek, will be attending the speech as a special guest of the President, sitting in the box reserved for First Lady Michelle Obama.

Buffett, has famously said that Bosanek pays a much higher tax rate than he does, and used this example to highlight the need for tax reform as it relates to the super-rich. According to sources close to the President, he will make a renewed push for the so-called Buffett Rule in tonight's address. Communications Director Dan Pfeiffer told ABC News earlier today that, “Billionaires should not pay a lower effective tax rate than the middle class. He'll talk about details tonight." He added, “We can make sure everyone is being responsible, everyone is playing by the same set of rules. And the system both on Wall Street and in Washington is not being rigged at the expense of middle-class and working class Americans.”

Speaking along the same vein, White House press secretary Jay Carney said that the President “will be very clear about his vision, will be very clear about his principles ... about fair play and people getting a fair shot, economic security and protecting the middle class.” In sum, it is likely that Obama will lay the groundwork tonight for an election strategy where he attempts to clearly distinguish himself as the champion of average Americans while portraying Republicans as the party of the rich.

Against the current backdrop of Occupy Wall Street, stark income inequality, and pervasive economic uncertainty, the President and his advisers believe that framing the political debate in terms of equality and fairness will bolster his re-election chances - even if his policies have offered scant solutions to the current economic crisis.

What does this mean for the markets? Despite having the support of Warren Buffett, among many other rich investors, President Obama's State of the Union Speech is unlikely to contain a great deal that the market will be genuinely enthusiastic about tomorrow. In fact, it may be quite the opposite. Even though the President was financed in large part by Wall Street banks in 2008, his rhetoric, if not his actions, have helped to flame the current firestorm which surrounds the finance industry - which doesn't seem wholly unjustified.

If for no other reason than political gain, Obama is unlikely to pass on the opportunity to castigate Wall Street and billionaire investors and bankers in his speech tonight. As a result, this could catalyze a near-term sentiment shift in the banking sector which has been rallying recently. Particular securities that could be effected by tonight's speech include the Financial Select Sector SPDR ETF (NYSE: XLF), and the "Too Big To Fail," brigade of Wells Fargo (NYSE: WFC), J.P. Morgan (NYSE: JPM), Citigroup (NYSE: C), Bank of America (NYSE: BAC), Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS). If Obama is going to try to strike a Populist chord, these banks are easy targets for his ire.

Furthermore, the so-called Buffett Rule is aimed at striking the richest American investors in their pocketbooks. Most of these investors are in some way connected to the hedge fund and private equity industries. As a result, poor market sentiment on the heels of the President's likely "soak the rich" message could hit stocks such as Och-Ziff Capital Management (NYSE: OZM), Fortress Investment Group (NYSE: FIG) and The Blackstone Group (NYSE: BX).

Finally, if by some miracle, the President's inspiring and uplifting words about the future of the United States economy somehow sparks an overnight jump in consumer confidence, retail stocks could benefit in the coming months. Investors who are overcome by a sense of optimism after hearing tonight's State of the Union Speech may want to consider buying retailers such as Macy's (NYSE: M) and Best Buy (NYSE: BBY) or an ETF such as the SPDR S&P Retail ETF (NYSE: XRT) tomorrow morning.

Posted-In: Long Ideas News Short Ideas Hedge Funds Movers & Shakers Politics Events Global Best of Benzinga

 

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