State of the Union Address, Effectively...

By The Greek:

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Tonight's address by the President before a joint session of Congress is exactly what it seems like, a State of the Union Address. In the first year of a presidential term, the new chief is not expected to make the speech, but President Obama is smart and realizes the need for it this year.

Bad news Obama is gaining an understanding of the importance of setting a positive tone for a public that is mostly unsophisticated. While George W. Bush's economic cheerleading likely insulted the intelligence of many of you, it also kept consumer spending from collapsing, at least until it was clear to the party that a Republican was not going to succeed Bush in office. Seriously, if you go back and study when the Administration's message got bluntly honest, it was right around the time Obama created a huge gap between he and John McCain. Perhaps that happened to be just how long the spit and dirt could hold things together.

Obama has been consumed with reminding America of his "inheritance" of this crisis, and in so doing, he has also been sobering for the nation. While Americans deserve complete honesty, they don't always want to hear it... Today's Consumer Confidence measure from the Conference Board hit a new all-time low in February, blowing the last record into oblivion in the process. By the way, that last record was set in the dark ages of January, yes this January.

Obama needs to now focus on uplifting America, while telling us the truth. We think he'll get started on that message tonight. However, before he does so, we are equally sure he will remind America once again of the faults of his predecessor and the direness of our situation. Like a wrestling match, tonight's drama will have twists and turns, loss and redemption, with a triumphant and energizing victory in the end... we hope...

We also expect the President will spend a significant amount of time exposing Republicans for their failure to support the passage of fiscal stimulus into law. This should throw burning salt into the wound of the recently decimated party, and hopefully help it put aside political posturing for the better good.

The President has a real opportunity tonight to uplift the nation, to give hope to the hopeless, and to start a path toward consumer confidence and investor sentiment restoration.

Meaning for Specific Sectors

The President's address will carry greater significance for some than others, and we suspect he's offered hint of his focus already this week. Obama noted in recent discussions that despite special spending targeted toward this economic crisis, he also plans to cut the budget deficit in half by the end of his first term. That's no small task with current needs in mind and because of the absolute size of the deficit. Obama is going to introduce his first budget on Thursday, but there's great chance he'll present some of his ideas tonight. So who will feel the bite of spending cuts, and what stocks stand to suffer and benefit from Obama's first four years in office?

Sell Defense for Now

It's no small secret that the President wants to end the war in Iraq and win the war in Afghanistan. However, we think it may not be well understood that he wants to cut defense spending. We expect the President will have something to say about this tonight.

Can you believe the guy who is telling you that a war with Iran is inevitable and probable this year, is at the same time telling you the defense sector will not do well, at least not until that war. Obama did not mince words during his campaign, and we understand he wants to reduce the nuclear warhead stockpile and work with Russia to revive efforts toward missile reduction.

Senior level military officials will be talking to the Chinese on Friday, and we suspect a similar goodwill outreach will occur with China. What two nations seem most likely to prove problematic over the next fifty years, and at the same time extremely dangerous to our safety? The answer is China and Russia. I haven't forgotten the risk posed by radical Islam, nor the weapon stockpile in Pakistan and dangerous passions of Iran. Also, I know what a cornered Israel is capable of, so no need to remind me. Feel free to comment though.

The competitive global landscape, with a scarcity of resources, while full of nations demanding those resources, will only grow more crowded with time. Obama is right. Now is the time to start working toward sincere and lasting goodwill, if ever there was. If nations could trust one another, and work out disagreements peacefully, imagine what good could come of all the money now being directed toward building aircraft carriers and nuclear missile submarines.

The most important question, however, remains the same, "How civilized is humanity really?" The realist understands that the world is a savage place where evil roams freely; a place where America's military might has likely kept chaos in check up until now.

That said, our President seems a pious man interested in world peace. Conspiracy theorists will warn of biblical scripture of false prophets, and I will remind them that whatever will be will be, by God's will.

President Obama is going to cut defense spending, and that points toward avoiding the shares of defense stocks. Now, as all sector correlation converged in the downturn, defense was not spared. Also, investors could foresee Obama's rise and the likely defense spending cut. Therefore, defense has already taken a hit, and the Fidelity Select Defense and Aerospace Fund (Nasdaq: FSDAX) is down about45% over the past twelve months, adjusted for dividends.

Even so, we think defense will take some more pain as the President talks about his plans. While we have not looked at individual dynamics, a necessary step before investment in a particular stock, some shares that might take a hit on the President's speech include Alliant Techsystems (NYSE: ATK), Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC), Rockwell Collins (NYSE: COL), Honeywell (NYSE: HON), etc.

I would also avoid the health care sector for a while now, as free health care for all has got to cost somebody something, and so the providers are going to have to bear the load.

What might rise? How about alternative energy stocks, since we know this is a favorite area for the President. Even though he talked up clean coal, we're not a fan here, and so we will not recommend Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI) on this catalyst. However, it might be time to take another look at wind and solar stocks like Vestas Wind Systems (Nasdaq: VWDRY.PK), First Solar (Nasdaq: FSLR), LDK Solar (NYSE: LDK), Evergreen Solar (Nasdaq: ESLR) and others.

Remember, do your individual homework before buying any stock. Our call is a sector specific one, and so you might take a look at the ETF's and select investment mutual funds in these areas.


(Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK). Please see our disclosures at the Wall Street Greek website and author bio pages found there.