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Last week I attended a Phoenix Coyotes and Vancouver Canucks NHL hockey game in beautiful Jobbing.com Arena in Glendale, Arizona.  While many pundits have suggested that hockey can’t succeed in the desert, a house full of “howling” Coyotes fans offered contrary evidence to that thesis.  And they were rewarded, as the Coyotes beat the Canucks 3 – 2 with a shootout being the deciding factor after a spirited battle.

As many of our subscribers know full well, both Keith and I enjoy talking and writing about hockey.  After all, we are at our very roots just a couple of hockey heads from small town Canada despite our sometimes presumption to be Macro Men.  This article though is not about hockey, but about admitting a bad call.  Sports and investment research are similar in that there are accountability mechanisms associated with them.  The score board doesn’t lie and neither does “You Tube”.

As it relates to President Obama, we were wrong this year.  Coming into 2009, we set aside our partisanship and made an objective call on the man.   On January 20, 2009, we wrote:

“Undoubtedly Obama has among the more impressive oratory skills of any politician we have ever seen on the national stage and his inaugural address from just hours ago will be one that will be reflected on for months and years to come. Beyond this first speech, a significant indication of Obama’s initial success as President will be the willingness of American consumers to reassert their confidence and engage in commerce in the coming months as they did with FDR by putting their money back into the banking system.”

Our view was that President Obama’s communication skills and popularity would be a key component in any recovery.  While we admittedly have seen a recovery of sorts, it is likely hard to argue that President Obama’s ability to communicate had anything to do with it.  As the  stock market has risen from its trough earlier this year, President Obama’s approval has consistently ticked down and we have not seen a true sustained recovery in these numbers.  The inverse correlation actually suggests, perhaps perversely, that an unpopular President Obama is actually better for the markets.

While we made a bad call, at least in hindsight, we were in good company.  In the same research note we also quoted the Oracle of Omaha, Warren Buffett, who said the following about President Obama:

“He’s the absolute right commander in chief . . . You know whether it was Lincoln, Roosevelt. And, I would say Obama, you couldn’t have anybody better in charge.”

As we review President Obama’s current approval ratings, well, facts are facts, and they are just bad.  According to the Rasmussen Daily Tracking poll, President Obama  is currently rated a -16, which is the difference between strongly approve and strongly disapprove.  In the Real Clear Politics poll average, President Obama’s approval rating is 49.0, which is barely above the lowest reading of his Presidency. The day after his inaugural address, according the Real Clear Politics poll average, 63.3% of respondents approved of President Obama and 20% disapproved, which is an incredibly high rating.  Since then, President Obama has seen the quickest and largest fall in approval of any modern President.

The question is now, of course, what is next for President Obama and his potential impact on the markets and/or economy?  One point that does seem to be clear is that a sustained negative approval rating for Obama will likely have a positive influence on domestic equity markets, although at a point a dramatically negative approval rating for a U.S. President probably portends a serious crisis in confidence and a worsening economy, which will be bad for the markets.

The reality is, if President Obama wants to alter his approval rating, he will likely have to strongly signal he is changing course in terms of leadership strategy.  As we have previously suggested, replacing Treasury Secretary Tim Geithner is one obvious idea.  If it weren’t known before, it is certainly known now: Secretary Geithner represents two constituiencies, the New York banking community, over whom he presided as the President of the New York Fed, and the entrenched federal reserve system, of which he has been a member of for roughly two decades.

From a policy perspective, Obama probably needs to shift back to the middle to improve his approval rating and prevent a crisis in Presidential leadership.  As a group of economists from the University of Chicago wrote today in the Wall Street Journal:

“Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health-care and many other areas. So in addition to continuing and extending the Bush-initiated bailout of banks, AIG, General Motors, Chrysler and other companies, Congress and President Obama signaled their intentions to introduce major changes in taxes, government spending and regulations—changes that could radically transform the American economy.

The efforts to transform the economy began with a fiscal stimulus package of nearly $800 billion. While some elements served the package's stated purpose and helped to soften the recession's impact, the overall package was not well designed to foster a speedy recovery or set the stage for long-term growth. Instead, the "stimulus" was oriented to sectors that liberal Democrats believe are deserving of much greater federal help. This explains why much of the stimulus money is going toward education, health, energy conservation, and other activities that would do little to soak up unemployed resources and stimulate the economy.”

In summary, recovery for President Obama, that will also be positive for equity markets and the economy, will have to come from combination of change in leadership, likely by replacing members of his cabinet, and by altering the course of the stimulus to focus on recovery needs, like lending to small business, not political wants, like green energy.

Daryl G. Jones
Managing Director