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Michael Fowlkes' Analyst Insights

Options and ETF Analyst Writer
Michael Fowlkes
Author Bio

October 22, 2012 - Preparing for President Romney

With just under three weeks left before this year?s presidential election, GOP hopeful Mitt Romney has a lot of momentum on his side.

Just a few weeks ago it appeared as though President Obama had his second term all locked up, but that is no longer the case. Romney had a strong showing during the first live debate, which catapulted him nearly dead even with Democratic incumbent.

Having just watched the second debate, it appears as though Obama did rebound, but it was a fierce and close battle, and not one that is likely to hurt Romney too much. Both candidates fought hard, and Romney did a good job keeping his cool during the often-heated debate.

Some pundits have already stated that Obama won the debate, but it was close, and for Romney that was all he needed following his successful first outing.

Going into the second debate, several polls showed that the two candidates are running pretty much dead even, and that is probably what we will continue to see between now and Election Day.

Yes, we are now facing the real possibility of a Romney presidency.

Understanding that there is a real possibility of a Romney victory, it is important we understand what differences we may see should the Republicans take back the White House, and how it may impact Wall Street and the stocks in your portfolios.

One of the first things that a Romney presidency will attempt to do is repeal the Affordable Care Act. ?Obamacare?, as it has become known, will not be easy for Romney to repeal. Most likely Congress will remain split, and this will pose a problem for Romney. Despite his best efforts to repeal Obama?s healthcare plan, it is highly unlikely that a bipartisan Congress will allow him to do so, and because of this we would not suggest making healthcare plays in anticipation of an Obamacare repeal.

Another aspect of the Romney platform is increased military spending. Romney has a strong belief that the best way to protect America is through strength. While Obama wants to cut defense spending, Romney plans to boost spending and increase our military supremacy. He has stated that he intends to increase military spending by up to $2.1 billion, so there should be upside to the military sector should Romney pull off the upset next month.

Another policy change that we should expect to see if Romney and the Republicans reclaim the White House involves coal. Despite claims made by Obama, the coal industry has not thrived under his presidency. We have seen a lot of regulations in the coal industry, which Romney is definitely opposed to. Two of his main energy platform positions include increased coal production and the easing of EPA regulations, both of which should help turn the struggling coal industry around.

Along the same lines, Romney is also likely to increase the nation?s oil drilling. He believes that one of the main ways to restore the nation?s economy is through oil independence, and this would most likely lead to an increase in offshore drilling.

As the nation increases its offshore drilling activities, oil service companies that specialize in drilling and drilling equipment will benefit. With the additional drilling activity, we would expect to see companies such as Weatherford International Inc. (WFT) and Halliburton Co. (HAL) show gains in both revenues and earnings per share.

If you find yourself in the Romney camp, and want to start to prepare for a Romney victory, the oil services industry would be an excellent place to start. Of course there will be some winners and losers, and one of the easiest ways to play the sector without taking on too much risk to your overall portfolio is with the Market Vectors Oil Services ETF (OIH).

ETFs are great tools for investors that want to get involved in specific sectors, such as the oil services industry, but are unsure which individual companies stand the best chance of seeing upside moves. If you are willing to sacrifice big upside moves in exchange for downside protection, then an ETF such as OIH is a smart move ahead of this year?s election.

OIH is up 5.9% so far this year. A nice hedged trade on OIH would be the January 37/34 bull put credit spread. In this trade, you would sell the January 37 put while buying the same number of January 34 puts for a credit of 60 cents. This trade has a target return of 25%, which is 102% on an annualized basis (for comparison purposes only). With OIH currently trading at $40.56, this trade has 8.7% downside protection.

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