How Politics Affect Your Investments

By Charles Delvalle

Dear Reader,

Over the past two weeks, you’ve read about how the media is manipulating the political process.  I received a flurry of e-mails in response to last week’s article, mostly supporting the assertion that media manipulations should end (and a couple who believe I’m anti-American for challenging the war on terror policies up to now).   But I also noticed a few readers who wondered why I was talking about politics in an investment newsletter

The answer is quite simple: because politics can affect the very investments you choose to make.

For example, take ethanol production in the U.S.  Right now, the entire industry is supported by subsidies and tariffs.

If the U.S. stopped subsidizing ethanol production, the industry would bleed badly.  And if the U.S. stopped putting tariffs on Brazilian ethanol (which is half the price of U.S. ethanol) due to some new free trade agreement, the U.S. ethanol industry would be destroyed.

Say goodbye to your Pacific Ethanol (PEIX), Archer Daniels Midland (ADM), and Andersons (ANDE) stock.

Or what would happen if the U.S. became sympathetic about placing a windfall profits tax on major oil companies?  Could you imagine how quickly energy stock prices would nose dive?

Income investors around the world who depend on the steady income payments and capital appreciation of BP Amoco (BP) and ExxonMobil (XOM) would suffer.

One recent example of how the government can affect the market is one that didn’t happen in the US.

You remember all of those Canadian royalty trusts that paid out huge dividends?  Well, for years investors found these trusts were a great way to generate passive income.  These trusts paid out huge dividends because they were granted a special tax-free status by the Canadian government.

But after a while, the Canadian government realized that companies that didn’t necessarily need the extra income took advantage of this tax-free status.  Phone companies and banks suddenly started signing up as royalty trusts.

So they decided to remove the advantaged status, and almost every Canadian trust quickly fell.  One company, Precision Drilling Trust (PDS), dropped from nearly $30 to just under $23 per share.  That’s more than a 20-percent drop in just one to two trading days!

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Beware:  Hillary, Obama, and Rudy
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Clearly, what goes on in the political world has a huge effect on the investments you choose.

So back to the U.S.

What are the next big political debates that could affect your investment choices?  Social Security, Medicare, immigration, the government’s policy towards U.S. car manufacturers, tobacco policy, and farming subsidies are just a few.

Each of these political debates will not only help shape the future of this country, but also the future of the stock market.  If the government decides to bail out car manufacturers, you’ll probably see share prices of General Motors (GM) and Ford (F) go through the roof.  If the government decides to privatize social security, you’ll see an influx of new money hitting the stock and bond markets.  If the U.S. decides to secure the Mexican border, the contracted companies will see their share prices rise.

There’s no end in sight to the profitable opportunities the government opens up just by changing policy or even keeping it the same.  Knowing the public policy debates going on today will help solidify your portfolio for tomorrow.

- Charles

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

[Ed. note: Speaking of Politics, the front runners in both the Democratic and Republican primary debates are hell-bent on destroying your Social Security nest egg. Click here NOW to find out how to avoid the total wipeout of YOUR Social Security Account.]

Market Watch

Making Money While Microsoft Falls

By Charles Delvalle

It’s no shocker that options can give you huge leverage with only a small move in the underlying stock.  One potential play that shows how this leverage works is with Microsoft (MSFT).

Right now, there are three things supporting a price fall for MSFT.  First, the slow stochastic is overbought.  Second, its RSI is overbought.  If you’ll notice, every time the RSI passes the 80 mark, the stock responds by going down in price.

And last, MSFT hit two-pronged resistance - the top of its four-year-long trend channel, and a previous high near 31 hit back in 2002 and in January of this year. 

A move to the bottom of its channel would be less than 10 percent.  But if you bought the right long-term option, that same move could generate an easy 100-percent return.

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