Two Trading Ideas For the Election

On Tuesday, Americans will be heading to the polls to determine whether the incumbent President of the United States, Barack Obama, will be serving another four years in the Oval Office, or if Republican challenger Mitt Romney will take the reins of the country. Investors across the globe will be watching the outcome of this incredibly important event with keen interest. While many observers may assume that market participants, as a whole, would prefer Mitt Romney to be elected, this would be an oversimplification of the matter. The political views of the world's top investors, like the general population, fall across the spectrum. For example, the two most successful investors of the modern era, Warren Buffett and George Soros, are enthusiastic Obama supporters. The President also had significant financial backing from Wall Street in 2008. Overall, however, it is safe to say that market participants skew Republican and the stock market may react favorably to a Romney victory. In the world of finance, the consensus opinion of the President's first four years in office is that he has been overly critical of Wall Street and the banking industry. The rhetoric that the President has used to paint Wall Street in a negative light has created a degree of backlash in the investment community. It is safe to say that he does not have the same support among this constituency in his re-election bid as he did in 2008. In Mitt Romney, Wall Street sees the opportunity to elect one of its own. Whether this is good for the country or not is up for debate, but it is hard to imagine that the financial markets will react unfavorably to the election of a true Wall Street insider to the highest office in the world. Where the President has frequently been openly hostile to Wall Street, Mitt Romney has always treated the entire finance industry with kid gloves. This comes as little surprise, as Romney created vast wealth and power for himself as a top private equity investor. The policy differences between the two men also suggest that the markets will react more favorably to a Romney win than the re-election of Barack Obama. Rising tax rates for the rich would be a burden that would be disproportionately borne by the finance industry. Also, there are questions about tougher regulations being implemented during a second-term, and the potential that the tax treatment of capital gains, dividends and carried interest could be unfavorably altered under the current administration. Furthermore, this election has been cast in some quarters as a decision between capitalism and creeping socialism in the United States. While all of these issues would suggest that Wall Street would benefit from a Romney Presidency, it is also important to note that the markets have done incredibly well during Obama's term and the economy has been slowly improving. Barack Obama is also a known quantity at this point whereas a new administration could inject a degree of uncertainty into the markets and the economy. Overall, however, it seems unlikely that the stock market will make a huge move in either direction based on Tuesday's election results. Some particular securities, however, could provide opportunities depending on the outcome. Two potential trades that Benzinga believes might be profitable in the immediate aftermath of the election results are in precious metals and coal stocks. The thesis behind the first idea, precious metals, is that there will be a knee-jerk upside move in gold and silver if Obama is re-elected. The gold and silver markets have been falling over the last month, but are higher on the three-month chart. An Obama victory may reverse the near-term downtrend in silver, and particularly gold. There are two specific reasons why precious metals may rise on an Obama win. First, the fiscal situation in the United States continues to deteriorate and is extremely concerning from nearly any perspective. The U.S. national debt is now over $16 trillion and the administration continues to run staggering deficits. When you look at the country's fiscal situation, and ponder its systemic implications, it conjures up significant concern about the future. While the President is not entirely dismissive of the situation, it is hard to imagine that his policies over the next four years would sufficiently tackle the problem given his track record. On the other hand, his opponent Mitt Romney has made conservative fiscal policy a cornerstone of his platform. The decision to select Paul Ryan has his running mate would seem to lend credence to how critically he views the county's fiscal situation. The reality, however, is that only time will tell if Romney, once elected, would pursue policies that would meaningfully address the crisis. After all, the last Republican President buried the country in debt and the situation has only been exacerbated by Barack Obama's administration. In particular, the gold market is a very accurate barometer of the collective anxiety over the United States' deteriorating fiscal condition. It is certainly possible that if the President is elected to a second-term, these anxieties will become even more acute and precious metals will move higher in a short amount of time. The second potential catalyst for precious metals in the wake of an Obama victory is the fact that a large swath of the country is very distrustful of his administration and its policies. There is a widespread perception, deservedly or not, that Barack Obama represents a threat to economic freedom and the American way of life. A very good example of how this President engenders fear and distrust in a large segment of the population is the brisk rate of gun sales during his time in office. The country is very divided along political lines and the atmosphere has become extremely acrimonious. In the event of an Obama re-election it would stand to reason that individuals who hold deep suspicions about the President's agenda would buy not only more guns, but more gold. It is important to remember that the gold market, at its essence, is a measuring tool for collective fear and anxiety. For this reason, do not be surprised if both gold and silver react bullishly to an Obama victory on Tuesday. The second trading idea for the upcoming election centers on coal stocks. The coal industry has been devastated in recent years as a result of a weak economy, slack demand and the discovery of plentiful and cheap shale natural gas. The President's energy policies have also hurt coal companies. In this environment, coal stocks have been devastated and St. Louis-based Patriot Coal even declared bankruptcy in July. Over the last year, Alpha Natural Resources

shares have fallen 66 percent. Peabody Energy

is down 40 percent. Arch Coal

has shed 59 percent and James River Coal

has lost nearly 61 percent of its value. Mitt Romney has made it very clear that he is a friend of the coal industry and that he will pursue policies that will help it to become competitive once again. Furthermore, many major organizations and individuals who derive their livelihood from coal have contributed heavily to his campaign. For some, this election may be a matter of life and death economically speaking. This reality can be seen in the performance of coal stocks in recent months which have been rising and falling with the hopes of Mitt Romney. When the former Massachusetts governor rebounded in the polls after falling very far behind, so did coal stocks. In the event of a Romney victory, traders and investors may want to consider immediately buying the above mentioned names as they should experience a strong rally. While it is difficult to predict exactly how the broader market will react in the wake of Tuesday's election results, both coal and precious metals are two sectors that may provide high probability opportunities depending on the outcome.