Stay One Step Ahead of the Obama Stimulus

None of it made any sense though. The market glossed over reality. Contractors are willing to place bids which only covered costs, 91% of U.S. construction is done by private firms, etc. It's going to be a fight for all the government contracts and the lowest bidder will be the winner (in most cases).

Earlier this month we were anticipating $60 billion in infrastructure spending. With the House of Representatives bill, that's down to almost $40 billion. Remember, only 9% of infrastructure projects are completed by public companies. So that leaves less than $4 billion to be spread across all the public infrastructure companies. That's not going to amount to much for these companies over the next year or two.

And, of course, what does "shovel ready" really mean? Let's have a look.

The nation's mayors have identified about 11,000 or so projects as shovel ready. Everything from tennis courts to duck ponds to pothole repairs (even the hiring of a few police officers were thrown in there as shovel ready – I've read the whole list ).

So the House of Representatives have set aside $40 billion for infrastructure projects. Now the ball is in the Senate's court. They'll surely increase the amount of money devoted to infrastructure. I'd bet $60 billion. That way they can say, "we increased the infrastructure spending 50%" and spin it some way so they come off as really great leaders.

Then it goes to the President's desk to get signed. This probably won't take long because we need urgent and decisive action. From there, that's where the fun begins.

The money will be sent to the state governors for distribution. This is where local politics, which is far more corrupt and not very closely watched, plays a huge role. The money will be stuck in committee after committee as the state government decides who gets the money.

In the end, billions will be spent on planning, oversight, and contracting. Whatever's left will make it into projects, the majority of which, likely won't even start for at least nine months from now.

Basically, I see know way this part of the stimulus won't be eventually viewed as an utter failure. I don't tell you this to get you upset or beat you down, it's because a chance to make lemonade from this government lemon exists.

A Disciplined Approach

In due time, the markets will realize the rally in infrastructure stocks has no foundation. Now, I realize in yesterday's Prosperity Dispatch, one of the mistakes we identified that most investors make is they " believe the market is wrong" way too often. And there are only a few times you should bet against the market.

When you consider the run-up in infrastructure stocks (across the board they're up between 50% and 100% since November lows), the complete and total lack of foundation for the rally, and the fact the market has priced in a lot of good news from federal government spending plans, this would be one of those times to bet the market is wrong.

Basically, if (or when) the Senators play the hero role and arbitrarily increase the amount of infrastructure spending in the bill, there could be another pop in infrastructure stocks. At that time, it'd probably be a good opportunity to stand up and say the market's wrong.

A Word of Caution

Now, I realize investors with a long-term horizon (10 years+) would certainly be interested in infrastructure related investments. India is coming off a baby boom and desperately needs infrastructure. China's economy, although it will have to go through very drastic shift, needs a lot more infrastructure

When it comes to infrastructure investments, I'd focus on the places which have a need for it, the means to pay for it. Places l

Good investing,