Money, Politics and Energy: A Common Thread

Just Like Deep Throat Said: "Follow The Money."

Two emerging stories got air play last week due to the Colorado massacre. And while that is understandable, from a market standpoint these two very specific things will likely have some impact on the November election.

Last week we noted that the U.S. election is now becoming the dominant issue for the markets and for the people. In four months voters will decide who is the President of the United States for the next four years. And as businesses, workers, especially those unemployed, and those who have already been affected by the Affordable Care Act have found out, the president matters.

There is a very subtle but important set of developments in the election now which is being reported but not being aggregaged by the media. And that is that the Obama re-election effort is having a hard time with its finances. In our "News for Thought" section we noted that corporation donations to candidates via proprietary political action committes (PACS) have shifted toward Republicans. The Wall Street Journal reported that there has been a $300 million shift away from Democrats as time has passed. That is significant.

According to the Associated Press, Mitt Romney has now raised more money than Obama for the past two months. This comes as the Obama campaign spends millions on negative ads aimed at Mr. Romney. And the ads haven't seemed to move public opinion. At least not yet. To be sure, neither candidate seems to be moving public opinion one way or another.

Yet, according to AP, in June, Mr. Obama took in $46 million, while spending $68 million, a $16 million outflow. In contrast AP reported that Mr. Romney took in $33 million, while spending only $27.5 million. When you add the money raised by both the DNC and RNC the two candidates are virtually even on the amount of money that each will have available. What is important here is that GOP Super PACs, fueled in part by wealthy donors are starting to kick in more money as the home stretch nears.

The real issue, though, is why is an incumbent president having problems raising money, and in turn spending money in a way that yields better results. The answer is that, as the change in the business community donation pattern proves, there is a great deal of unhappiness with Mr. Obama. In a sense, Mr. Obama is getting the same kind of treatment in many ways that unhappiness with President George W. Bush brought about. To be sure, Mr. Obama's poll numbers are better than Mr. Bush's. But the concept is the same.

What's interesting is the lack of media reporting and analysis that should point this out. The bottom line is that popular politicians bring in big money and unpopular ones don't. In the current election, neither guy seems to be bringing down the house in raising money. But the indication seems to be that unless something dramatic happens to the economy, Mr. Obama's money is more likely to dry up than Mr. Romney. Once that becomes evident, life will become very interesting.

The second story that is getting little attention, except in market circles is that the energy sector is becoming more resilient. Despite crude oil's price dropping on Friday, West Texas Light Sweet crude still closed the week above $90. The biggest surprise was the close above $3.00 for natural gas, a commodity whose price has been hampered of late because of a glut of shale gas deposits in the U.S.

Over the weekend, a pipeline that delivers oil from Iraq to Turkey had an explosion. Speculation is that it was attacked by Kurdish rebels. The situation in Syria is very fluid. And there are reports of potential attacks at the London Olympics.

What's our point? Money is moving into the energy sector. And money is moving into the GOP campaign coffers. Neither of those two stories is being widely covered by the mainstream media, or by the financial media to any great extent.

This week will be important on both fronts. If these money flows continue, in our opinion, they will have a very large influence on what happens in November.

The Markets

The S & P 500 (SPX) may roll over and head back to the bottom of its trading range. The failure to close well above 1375, and the ongoing fears with regard to Europe and the global economy are likely to move things lower again.

The energy stocks may or may not be able to buck the trend. Energy did well last week but may not be able to show relative strength this week, although anything is possible. We like what we saw last week. But, in this market, last week was a long time ago.

Chart Courtesy of StockCharts.com

The small stocks in the Russell 2000 (RUT) have been weakening of late. Even during last week's generally up trending sessions, small stocks began lagging the large stocks. That's a negative.

Chart Courtesy of StockCharts.com

The Nasdaq Advance Decline line (NAAD) may have broken down on Friday, another bad sign for the market. What makes this break more dramatic is that the up trend in the indicator that preceded it was fairly weak.

Chart Courtesy of StockCharts.com

The Nasdaq High Low Line (NAHL) is still in an up trend. This is a hopeful sign. Still, it's only one sign in a deteriorating environment.

Chart Courtesy of StockCharts.com

Conclusion

The market looks set to start the new week on a very difficult note. Still, we've seen this before. There is little to do but manage each individual position.

We stick with what's working. We remain cautious. We are not likely to be surprised by anything that happens in the next four months.

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