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* THE ISSUE: President Barack Obama called on Congress late Thursday to pass a $447 billion package of spending initiatives and tax cuts to boost economic growth and generate jobs. Here are several investment ideas based on his proposals.
By Manuela Badawy
NEW YORK (Reuters) - Obama's American Jobs Act, which he announced to a rare joint session of Congress late Thursday, includes proposals for a $175 billion one-year extension and expansion of the employee payroll tax holiday that would halve the tax rate to 3.1 percent in 2012 as well as a $65 billion tax break to encourage small businesses to hire more workers. The Act also features $50 billion in spending to upgrade highways, transit, rail and aviation infrastructure.
Wall Street stocks tumbled on Friday as the surprise resignation of a European Central Bank executive board member and skepticism over President Obama's economic stimulus spending plans weighed on sentiment.
The Dow Jones industrial average dropped 233.93 points, or 2.07 percent, to 11,061.88. The Standard & Poor's 500 Index dropped 22.55 points, or 1.90 percent, to 1,163.35, while the Nasdaq Composite Index dropped 36.24 points, or 1.43 percent, to 2,492.90.
Consumer discretionary stocks could be helped by the announced moves to help small business. The Obama push is expected to help families with combined incomes of $80,000, said Bernie Williams, vice president of discretionary money management for USAA.
Dollar Tree stores could gain if this stimulates hiring at this income level, added Brian Lazorishak, a portfolio manager at Chase Investment Counsel with $1 billion in assets under management. McDonald's and Starbucks Corp. and other restaurants could benefit as well, Lazorishak said.
Small business service providers like Intuit, the maker of TurboTax and Quicken accounting software, and those related to staffing that are directly tied to employment are likely to get a boost.
"This financial crisis was a consumer-led recession, so anything that you can do to prop up the consumer and spending is good," said Williams of USAA. The tax cut is a direct injection to consumers' pockets.
"That money will get spent. It will get spent more in necessities, like the Targets of the world, staples companies," said Williams, who has direct management of $4 billion from high net worth individuals. "They will have that stimulus this year and next year if that gets passed."
Obama's spending allotment included a healthy dose of funding for public infrastructure, an area of focus in the 2009 'stimulus bill,' and a traditional area of focus for the current administration, J.P. Morgan noted in a report Friday.
The firm said beneficiaries could include aggregate-focused companies Marietta, Vulcan Materials and Eagle Materials and infrastructure-focused firms such as URS Corp., Jacobs Engineer and Fluor Corp.
Keith Wirtz, chief investment officer at Fifth Third Asset Management, with $18 billion in assets, added that capital investment in infrastructure has him bullish on shares of Caterpillar Inc., Fastenal Co. and Cummins Inc..
"Fastenal, for example, is a construction supplies company. It markets globally, experiencing a strong top-line, and is shareholder friendly via dividend growth rate. This fits into the whole infrastructure play," he said.
Janna Sampson, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois, shared Wirtz's sentiments.
"Caterpillar, Navistar -- the big earth-moving equipment and construction vehicles -- would benefit on additional spending in construction," Sampson said.
Government-funded projects including $30 billion to modernize at least 35,000 public schools and $27 billion for investment in the nation's highway system is "significant" for the construction sector, said Robert Gardiner of Davy Research.
"The act in its current form would be a significant positive for CRH (highways and refurbishment projects) and Wolseley (refurbishment projects)," Gardiner said.
Overall, whatever the federal government does to help states will tend to help cash-stressed local governments, which could consequently help municipal bonds.
Munis should outperform in this environment, Morgan Stanley said in a report. But too much stimulus might boost interest rates. That would not be great news for fixed-income investments like munis, which lose value as rates go up, though the appetite for yield could negate that possibility.
Whether the Obama proposal will actually get passed in a gridlocked Congress remains a major issue. Early results from investors indicate skepticism.
Shares of Dollar Tree were down 1.12 percent while McDonald's and Starbucks stocks were under more selling pressure in mid-day trading on Friday. McDonald's fell 4.65 percent and Starbucks dropped 3.37 percent.
Additional reporting by Chip Barnett, Rodrigo Campos and Sam Forgione; Editing by Richard Satran, Walden Siew and Jennifer Ablan