The inflation reduction act of 2022 has now been signed into law by the president. The politics around the issue is irrelevant to us as technical traders, yet it is still possible to get a few glimpses through the fog ahead.
New York Times: “The legislation would pour more than $370 billion into climate and energy programs aimed at helping the United States cut greenhouse gas emissions by an estimated 40 percent below 2005 levels by the end of the decade. It would also extend for three years expanded subsidies under the Affordable Care Act, as well as fulfill a long-held Democratic goal to lower the cost of prescription drugs by allowing Medicare to directly negotiate prices and capping the annual out-of-pocket cost for recipients at $2,000.”
“The package would be financed largely by tax increases, including a new tax on company stock buybacks and a 15 percent corporate minimum tax for wealthy companies. Initial analyses of the legislation found that it could reduce the nation’s deficit by as much as $300 billion over a decade.”
From an investment standpoint, who will likely win from this? A preliminary list should include:
-Alternative energy companies
-Companies that refit existing structures
-Companies focusing on carbon capture, which includes new investment in this area by some big oil trying to leverage their offshore operations ability into building & operating these facilities.
Various healthcare endpoint providers – will avoid a drop in revenue because of ACA extension & likely see an increase in profits due to lowered costs with somewhat less lowered prices passed on.
Who will likely lose?
-Big pharma & their major distributors due to reduced margins.
-Big oil – will still be very profitable, just somewhat less so.
-Large cap & others hit with the 15% tax will be adversely affected on what they can’t shield.
-The tax on company buybacks affects everyone, but not equally. When they have too much money, some companies prefer a buyback to a dividend. Smaller companies who want to go private will now find it more expensive to do so, as this makes it pricier to reduce the float.
How will this affect me in the next month? – It likely won’t, although some of these healthcare stocks may see a small rise in support levels.
How about the next quarter? – Again, healthcare or anything that benefits from the extension of a policy. Beyond that, it all depends how quickly these funds are allocated and distributed. As we saw in 2020, the government can flood massive amounts of money quickly when they are so inclined.
And next year? – What am I, a friggin’ crystal ball? There’s a potential recession looming, and if it hits, that government spending will help buoy certain parts of the economy, which will then likely perform better than the overall economy.
So what should I do?
My NFA answer is to start researching some of these industries to look for specific opportunities. As you whittle the list down, look at the news for each candidate. Read it. Dig deeper=due diligence. Search out university breakthroughs in the field anytime you see something on one of your feeds. See if they have other things already licensed, e.g., or potentially who may have funded or will most immediately benefit from the research. When you find your final list, take micro-positions of 1-10 shares in 3-5 of these candidates. This will allow you to track them in your portfolio, and having a few dollars in a stock always makes it more interesting. To some extent, forget back testing. We are in a somewhat novel moment in time here. Track these stocks for as long as you need in this no stress setting, as none of your mistakes will likely cost more than a good lunch. You can add a little at a time on pullbacks, or make a bigger commitment as the situation warrants. The idea is to build positions of a percent or two of several companies from this research as part of your wealth-building portfolio. Employing this strategy across a number of stocks can also act as a buffer in your account, preventing you from getting massively wiped out if you develop a case of Yolofomo fever.
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