Tuesday, July 29, 2008

Sell Boardwalk. Buy Water Works.

commentary from this week’s “Sectors and Styles Strategy Report”*:

In economic life as in the game of Monopoly, what you buy determines how large your pool of assets will be. If the Republicans are advocates of the high life, then the Democrats are more pedestrian in their interests. Consider the need for public works programs in the US.

Regardless who wins the White House, the crumbling infrastructure in the US will almost certainly receive considerable focus and funds beginning next year.

There are two reasons that should drive this initiative. First, the need is clearly there. Years of neglect and priorities elsewhere (Iraq, for example) have produced a pent up need to fix bridges, roads, and water facilities (see today’s C-Span program on water infrastructure issues). The second reason for the initiative will likely come from the need to offset the second down wave in the US economy with bank losses exacerbating the circumstances. Moreover, should such a second down leg occur, it is highly likely that the global economy will get sucked along in the slide as emerging market economies must begin to come to terms with their own inflationary difficulties thereby necessitating a serious increase in monetary restraint.

Investment Strategy Implications

The US Congress is likely to push through another consumer-focused rebate before election time this year. However, past that point the need to address the neglected infrastructure will be both necessary and politically useful.

The necessary part is self-evident. The political dynamic is also apparent when you consider that the longer lead time for infrastructure spending programs (versus consumer directed initiatives) dovetails perfectly into the election cycle as the benefits for programs begun in 2009 will begin to be felt most strongly in 2010 – a mid term election year.

As noted a few reports ago, infrastructure spending worldwide is projected to be $41 trillion (2005 to 2030). Added to this is the vision put forth by Al Gore re renewable energy and the companies playing in the infrastructure space are in the secular sweet spot.

As for the MGP, in addition to building on the modest position established in ..., I am considering the .... Will advise on this shortly.

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