This week we take a look at the economic proposals from Barack Obama and John McCain as they pertain to the ten major sectors of the equity markets. Before we delve too deeply into this subject however let's keep a few things in mind:

1. Each candidate is currently playing to their party base, meaning the Republicans are generally espousing lower taxes and less regulation while the Democrats are promoting higher taxes on the wealthy, greater regulation and a clearer environmental policy; on the whole, a Republican victory would be better received by the stock market as they are the traditional pro-business/low tax party.
2. Campaign promises are like smiles at McDonalds... free. Putting flesh to bone requires navigating the Congressional process and finding ways to pay for new legislation.
3. Quite simply, the election is slipping away from the Republicans. Slate.com's rather accurate Election Scorecard points to gathering momentum for the Democrats, with the all-important swing states of Florida, Ohio, Virginia and Pennsylvania swinging away from John McCain. In addition, it would appear that the Democrats will maintain control of the House and manage a majority in the Senate. As Yogi Berra would say though, "it ain't over till it's over", and until the polls close on November 4th, it ain't over.

So with those disclaimers in place, let's investigate the key policy differences between the two candidates:

ENERGY

• McCain - Conventional Oil and Gas: "Drill here, drill now"... aggressively in favor of drilling, including the long-protected Outer Continental Shelf, opposes "windfall" profits taxes and would institute a summertime gas tax holiday. Renewables: would scrap the 54 cents/gallon import tax on sugar-based ethanol, spend $2 billion on clean coal technologies, promote the building of nuclear power plants and maintain something akin to status quo on tax credits for wind, solar and other technologies.
• Obama - Conventional Oil and Gas: No friend of "Big Oil", but less opposed to offshore drilling than he was a few months back, although still supports a "windfall" profits tax and increased regulations on oil traders. Renewables: a major proponent of renewable energy, he would spend $150 billion over ten years to develop the entire spectrum of clean electricity and transport fuels, while setting a hard (and aggressive) target of 25% of electricity coming from renewable sources by 2025.
• Investor's Preference - Conventional Oil and Gas: McCain by a wide margin. Renewables: McCain would be an improvement over the Bush administration, but Obama would be as well received as free beer at a frat party.

FINANCIAL SERVICES

• McCain - The primary focus is the "Home Plan" which enables eligible sub-prime mortgage holders to swap into 30-year fixed-rate mortgages rather than face variable monthly mortgage payments that are resetting sharply higher. Furthermore, fraudulent lenders will be pursued by the Justice Department.
• Obama - Will also vigorously pursue fraudulent and predatory lenders, while directing a 10% universal mortgage tax credit towards middle-class homeowners.
• Investor's Preference - Call it a draw. While both candidates will support increased regulation in financial services in the coming months, the consumer-protection initiatives that they are promoting will pale in comparison to the billions of dollars being injected into the global financial system by the Treasury, the Fed and the rest of the world's central banks. Let's rebuild the engine first, and then we can decide on the new floor mats.

MATERIALS

• McCain - Advocates globalization and will seek to reduce trade barriers through both bilateral and multilateral pacts. Will also eliminate all subsidies and mandates directed towards corn-based ethanol.
• Obama - Would skew corporate tax credits towards job-creation within the U.S., while seeking to renegotiate existing trade deals, including NAFTA. Would also limit farm subsidy payouts to $250,000 per farm (wow, that's really belt-tightening), while maintaining corn-based ethanol subsidies.
• Investor's Preference - As a free-trader, McCain is preferable, although his policies will be less supportive of the agricultural industry. Nonetheless, in the global materials industry, China's President Hu Jintao will continue to be far more important on the political scene than either potential U.S. president.

INDUSTRIALS

• McCain - Would continue the war in Iraq into the foreseeable future (currently costing $200 billion annually), build out the missile defense system and generally encourage defense spending.
• Obama - Would spend $60 billion over ten years to rebuild domestic transportation infrastructure, offer a $7,000 tax credit for zero emission cars, and target carbon neutral building across the entire construction industry by 2030.
• Investor's Preference - It's a close call, but McCain's pro-military stance likely outweighs Obama's domestic infrastructure build plans.

CONSUMER STAPLES/DISCRETIONARY

• McCain - Would make the 2001 and 2003 Bush tax cuts permanent, meaning that those with income above $227,000 would save on average $7,871 in taxes, while those making above $603,000 would save $45,361. Conversely, those making between $19,000 and $38,000 would save $113.
• Obama - Would by and large keep the tax cuts in place, but only for those making less than $250,000. Those making above $227,000 would pay on average an additional $12 in taxes, while those making above $603,000 would pay an additional $115,974 (there goes the new Mercedes). On the flip side, those in the $19,000 to $38,000 range would save $1,042.
• Investor's Preference - In essence, Obama would hike taxes on high income earners to pay for tax cuts for low income earners, whereas McCain would maintain the current policy. In short, Consumer Discretionary: McCain; Consumer Staples: Obama.

TECHNOLOGY

• McCain - Supports local government broadband provision in rural areas, while his lower income and corporate tax policies will provide some additional consumer and corporate IT demand.
• Obama - Enthusiasm for clean technology and renewable energy (see Energy and Industrials) will create an even better environment for Silicon Valley where late last year clean tech became the largest recipient of venture capital (surpassing software). Also proposes putting computers in every schoolroom in the country and making the Research and Development Tax Credit permanent.
• Investor's Preference - VC and start-ups will prefer Obama, while large multinational technology companies will prefer McCain's corporate tax cuts.

TELECOM

• McCain - Opposes Net Neutrality, meaning he would be in favor of broadband providers managing their networks as they see fit, e.g. limiting access to certain websites (and/or promoting other content), and restricting traffic types such as peer-to-peer.
• Obama - Supports Network Neutrality, believing the internet is a public good.
• Investor's Preference - Easy, McCain. Giving the telecoms greater control over how and where traffic flows over their networks means they are better able to maximize revenues and would likely lead to a faster rate of next-generation network building. The downside, of course, is that users are subjected to the decisions of the telecoms regarding content and network speeds (some would call this censorship).

HEALTHCARE

• McCain - Proposes making employer insurance a taxable benefit in an effort to push employees towards private third-party insurance. Would encourage cheaper drug re-importation and faster introduction of generics.
• Obama - Would require all employers to either provide insurance coverage or contribute to a new program that would cover those without insurance. Also a proponent of drug re-importation and generics, and would invest $10 billion over five years to promote the broad adoption of electronic health information systems.
• Investor's Preference - A draw. Both candidates will be putting pressure on large pharmaceutical companies in an effort to keep costs down. Similarly, both will seek to expand insurance coverage to the uninsured, but who will wind up paying for it will be a major sticking point. Ultimately, health care reform faces many hurdles and moves very slowly. Call us cynical, but we don't think the candidates will have the impact on the healthcare system that they say they will.

UTILITIES

• McCain - In favor of a cap-and-trade system for carbon emissions and would like to see nuclear energy play a significant role in the future growth of electricity generation.
• Obama - Also a supporter of a cap-and-trade system, but believes the initial round of permits should be auctioned off (whereas McCain would largely give them away) to raise funds to defer some of the costs of renewable energy investments.
• Investor's Preference - Again, either candidate would be a sharp change from the Bush administration's foot-dragging on climate change, but clearly the Obama plan would be more expensive for the sector. Advantage, McCain.

So there you have it, that's what the candidates are promising. What they will be able to ultimately pass in the form of legislation and how they will pay for it are open questions. Taken at face value, both candidates are proposing spending increases and fewer taxes, so clearly something has to give. We would guess that Obama's commitment to the environment and renewable energy is stronger than McCain's commitment to corporate tax cuts. On the income tax front, Obama's planed tax hike on the rich looks like a non-starter, although McCain's continuation of the Bush tax cuts is likely to be watered down as well. As always, politics will be about compromise amongst competing interests.

In other news...

From the 'some people never learn' category, the taxpayer-loan taking management at AIG saw fit to send 70 of their top performers to the luxurious St. Regis Resort in Monarch Beach, CA for a week-long spa treatment at a cost of $440,000. Now there's no doubt that the folks at AIG are a bit tense, but wouldn't a round of coworker massages have been more appropriate?