Obama Administration Suppressing Bad News Ahead of the Election?

By Sasha Cekerevac for Investment Contrarians | Aug 10, 2012

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The economic forecast continues to be gloomy for America, with little positive news expected, making any investment strategy that much more difficult to formulate. On top of the worldwide economic slowdown, America is facing massive budget cuts that are due to hit January 2, 2013—a tornado to in the economic forecast. This includes approximately $55.0 billion in automatic cuts for the defense market sector.

This is not new, as various corporations have continually attempted to make the public aware that without the political will to fix the fiscal problem and prevent these budget cuts from being enacted, America’s gross domestic product (GDP) will be severely hit next year, depressing the economic forecast even more. I wrote about this in the article “Lockheed Martin Warns of Impending Crisis Unless Action’s Taken,” as the defense market sector is a huge target.

With such a negative economic forecast, one would think that politicians would attempt to work together to avert this disaster. However, it appears that politicians are only interested in deflecting negative criticism away from themselves.

The president of Pratt and Whitney, a subsidiary of United Technologies Corporation (NYSE/UTX), David Hess, stated that because of the company’s economic forecast and the looming budget cuts, it is about to issue notifications to employees that might be laid off. This is due to a provision of a law called the WARN Act, which requires employers to notify employees at least 60 days prior to any plant closures or layouts.

Pratt and Whitney is only following the letter of the law. However, the U.S. Labor Department stated that companies in the defense market sector should not issue these warnings, because the job cuts are uncertain at this point. This leaves many firms in the defense market sector at a crossroads; do they follow the law, or do they follow a statement by the U.S. Labor Department?

If corporations within the defense market sector are confused, I believe it is even more difficult for the average investor to try to determine an appropriate investment strategy, based on such a confusing environment and a negative economic forecast as a backdrop. Such ambiguity by the administration only hurts investors and corporations responsible for the creation of jobs. Don’t forget; the estimated job cuts over 10 years attributed to the defense market sector consist of two million jobs with $500 billion in cuts.

It appears possible that the Obama administration is trying to prevent negative sentiment caused by laid-off workers in the defense market sector prior to an election. By postponing notices until after the election, it is possible that the Obama administration might be trying to gain favor with the employees who might otherwise vote against the political party that did not come to a resolution regarding the budget cuts, which ultimately eliminated their jobs.

Chart courtesy of www.StockCharts.com

 The stock of Pratt and Whitney’s parent company, United Technologies, has already had a decline in share price due to investors anticipating possible cuts to the defense market sector. One investment strategy would be to believe that the politicians will resolve this budget cuts crisis. In this situation, the stock might be poised to break out from its current resistance level. However, placing bets based on political moves is always fraught with danger. I would urge caution for anyone looking to build an investment strategy within the defense market sector. While there are cheap values within this market sector, because of the uncertainty, risks are also quite significant.

Tags: economic forecast, investment strategy, market sector