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The day after tomorrow

The U.S. election is tomorrow. How will markets react on Wednesday?

Nov 5, 2012

by Max Fawcett

At long last, it’s almost over. The latest U.S. presidential campaign, which feels to most people by now like it started back in 2010, will come to a merciful end on Tuesday. How will the markets react on Wednesday? You might think they’d take some rooting interest in the outcome, given that they spent most of the last year agonizing over the outcome of elections in places like Greece and France. Never mind the fact that you have a nominally pro-business candidate running against a theoretically heretical socialist. It’s not quite that simple, though. After all, while Romney is unabashedly pro-business, he’s also a proponent of fiscal austerity, the very policy approach that has driven Europe back into recession. And while Obama may not act as quickly to avoid running the country off the so-called “fiscal cliff,” his willingness to stimulate the economy and stay out of Federal Reserve chair Ben Bernanke’s way are traits the market should – and does – appreciate.

In the end, it probably won’t matter who wins. According to Paul Hickey, the co-founder of an investment research firm called Bespoke, what really matters are the longer-term trading patterns that tend to crop up in election years. Traditionally, there’s an early-year rally, a spring setback, a rebound in the summer and another retreat in the fall – all of which we’ve seen so far – before a post-election rally. One interesting bit of data: there’s only been one time in the past 100 years when a Republican has defeated an incumbent Democratic president, and that was 1980 when Ronald Reagan – a small-government aficionado with Hollywood good looks (sound familiar?) defeated a relentlessly conciliatory Jimmy Carter, who was struggling to energize a moribund domestic economy (again?) That November, the Dow Jones Industrial average rose by 7.5 per cent.

That’s the market’s beta, but the alpha, of course, still matters. On that front, Canaccord’s Phil Skolnick suggests that investors take a long look at Athabasca Oil (TSE:ATH), which spooked investors when it announced plans to raise up to $600 million using secured lien notes and a revolving credit facility. That announcement, he suggests, raised doubts about the long-discussed joint-venture with Kuwait’s state-owned petroleum company, and whether the company might have a funding gap in 2013. Skolnick says those fears are overdone, and the current price assigns almost no value to the company’s light oil assets (which are a growing part of the company’s production profile) and reiterates the company’s buy rating and $16.50 price target.

The news around Penn West Energy (TSE:PWT) is decidedly less bullish. The company’s reported third quarter production failed to meet estimates, and it warned that it won’t meet its exit guidance for the end of the year. The stock took a bit of a beating on Friday, and FirstEnergy trimmed its own target back to $17.50. Bonavista Energy (TSE:BNP) just barely missed its own third quarter production targets, and continued its year-long program of divesting non-core assets in order to pay down debt. At the end of the last quarter it sold 1,900 boe/d, and subsequent to Q32012 it sold off another 600 boe/d for $46 million. On the year it has divested a total of $188 million in assets. FirstEnergy maintained a $20 price target on its shares.

And, of course, it wouldn’t be Monday without an update to our Stock Picking Contest leader board. Brent Mielke has opened up a considerable lead, with a stellar 15.2 per cent return to date (as of Monday at noon). Can he be caught?




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