How To Trade The U.S. Election

In case it has escaped your attention, the U.S. has a Presidential election coming up in a few weeks, on November 8th to be precise. It would normally make sense to wait until immediately before the Election Day, or just after when the results are known, to write about it, but this time I am doing so early for two reasons.

Firstly, despite the abject failure of polls when it came to the Brexit vote most people do pay attention to them, and if you do you will be convinced that the Presidential race is as good as over. Clinton has a lead in every poll now, with some showing as much as an 11 point advantage. Given that, those that wish to position themselves for a Clinton win had better start doing so now because others certainly will.

The second reason is somewhat more prosaic, but a lot more powerful. Like most people who live in the States I am now completely sick of this election, and want it to be over as quickly as possible. The campaigning and debates have been almost entirely personal and one can only listen to grown people saying "You're a puppet…" "No, YOU'RE a puppet!" for so long. Despite that almost overwhelming shallowness there has been one area where the actual policies of the two candidates are not just differentiated, but also clear, coherent and, most importantly could actually be at least partially enacted. That area is energy policy.

It seems to me that Americans frequently overestimate the power of the President when it comes to the economy, as it is Congress that actually makes fiscal policy, but when it comes to energy the real power lies in the executive branch and their control of the EPA. For those interested in the energy markets, therefore, an understanding of the candidates' energy policies is a must.

In this case the difference is clear. Hillary Clinton sees control of emissions as a priority and has detailed plans to invest heavily in alternative energy and restrict the growth of fracking operations, while rescinding existing tax breaks for oil companies. Trump, on the other hand, has said that climate change is a hoax perpetrated by China, and that "unleashing America's energy potential" is the priority, opening up Federal land for drilling, lifting the moratorium on deep water drilling and leaving the tax breaks in place, even as the overall corporate rate is cut dramatically.

Obviously, then, if you think Donald Trump is going to win the election it makes sense to buy stock in oil companies. If you believe that, though, you aren't paying attention. As I mentioned above, Brexit demonstrates ably that polls can be wrong, but the margins in this race look to be pretty much error proof. A Clinton win looks by far the most likely outcome and I learned a long time ago that when it comes to trading it is far better to rely on likely outcomes than what you may or may not want to happen.

That doesn't mean, though, that you should be shorting big oil on the assumption that Clinton will win. The tax changes could have a major effect, but given that most of the oil companies' deductions come from depreciation, a part of the tax code that most economists believe is important in stimulating investment generally, they are unlikely to have any real teeth. Restricting fracking, however, will have an effect, but not one that will hurt the like of Exxon (XOM) and Chevron (CVX). It would have the effect of to some degree limiting the supply increase that has, at least in part, been responsible for WTI's tumble from $100+. That in turn would push oil prices, and oil companies' profits, up. Overall, Clinton's potential attack on big oil looks like it would be a wash for the companies.

What will have an effect in the market though is all of the proposed spending on alternative energy, particularly solar power, where Clinton's policy paper gives a goal of a half a billion new solar panels in 10 years. Now that solar power has naturally become almost competitive with conventional energy in many cases, subsidies and incentives will give it a significant edge.

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I am currently long First Solar (FSLR) and Canadian Solar (CSIQ), having bought both as they bounced off of recent lows, and am quite content to stay that way or even to add to those positions. If you have no exposure to the solar power business you may want to consider adding some before the election. Nothing is certain in politics, but, barring a major disruptive event or news, a Hillary Clinton Presidency looks about as certain as you can get, and positioning for that result now makes perfect sense.