Long-term yields for U.S. Treasuries should indeed firm but be tempered by a slowing as this phase o...
So who won the elections?--which stocks? I mean
11/05/2010 10:30 am EST
Although in this election as in most recent ones Democratic candidates got their share of corporate donations (and more than their share of union funds), most of the money from business lobbying groups and from so-called independent campaign organizations, such as American Crossroads, went to Republican candidates.
And all those organizations got for their money was enough Republican victories to take the House and make a mockery of Democratic control of the Senate?
Doesn’t seem like much of return on investment. Spend all that money on politicians so they can sit in the House and Senate and talk past each other? Hopes of repealing financial reform? Dead. Legislation to reverse healthcare reform, the Democrats key achievement of the first two years of the Obama administration? Dead.
We’re looking at two years of solid as concrete legislative deadlock where no action will be the only action.
Bet the groups that spent all that money are disappointed.
Hah! Guess you don’t understand how what we call American democracy really works. And any investor who hopes to stand a chance at making a buck from this election better take a crash course how things get done (or don’t get done) inside the Beltway.
Legislative gridlock is only one flavor of the many varieties of gridlock in Washington. There’s also regulatory gridlock. And while legislative gridlock by and large does mean that nothing gets done in halls of Congress, regulatory gridlock can be hugely effective at advancing or killing agendas. (For an example of how the details of regulation can change profits in an industry, see my post http://jubakpicks.com/2010/09/16/what-a-surprise-basel-iii-bank-regulations-arent-as-strict-as-fear-and-bank-stocks-rally/ )
Before we jump over legislative gridlock, however, let’s look at the ways that it may not be as solid as it seems.
The Republicans now control the House of Representatives with a huge margin. The Democrats clung to control in the Senate. And the Democrats control the White House. Yet divided as power now is, I expect more to get done legislatively in the near future than the term “gridlock” suggests.
First, because the Democrats are in shock. Yes, everyone expected this drubbing, but expecting it and living with it are two different things. Having been blamed for everything from the economic slowdown to the Black Death, Democrats, for a while at least (and perhaps longer if the party does it’s usual “Backbone? Who me?” routine), will shy away from giving Republicans another stick to beat them with. So look for a Democratic fold on extending all the Bush tax cuts.
Second, because the Democratic Senate majority is even feebler than it seems. There’s a good chance that the Republicans can pick off Independent Connecticut Senator Joe Lieberman, who caucuses with the Democrats in the current Congress. Nebraska Democratic Senator Ben Nelson might be persuaded to switch parties. Even if he doesn’t, a Democratic majority in the Senate that includes Nelson and newly elected Joe Manchin (Dem. West Virginia) isn’t exactly a dependable voting block behind Harry Reid (Dem. Nevada.)
But I think that the possibility of some legislative action only applies to the near-term. Once the Republicans have picked the low-hanging fruit such as the renewal of the Bush tax cuts and some easy budget cutting (such as an across the board $100 billion cut in discretionary spending) I think Congress will settle into a pattern of meaningless show votes, designed for maximum political impact in 2012 but destined to produce bills that languish in the dustiest pigeon holes in the House and the Senate.
Which will move the battle to the regulatory front. Where some form of gridlock is all you need.
If you want to create new regulations, you usually need Congressional action. (Not always, however. The proposed new regulations on carbon dioxide coming (maybe) from the Environmental Protection Agency resulted from a change in administration and a court decision that cleared the way for the new rules.)
If you want to repeal regulations, you need Congressional action.
But if you just want to stop regulations from being written or enforced, you don’t need Congressional action. Gridlock will do.
For example, let’s say you want to stop enforcement of the financial reform legislation known as The Dodd–Frank Wall Street Reform and Consumer Protection Act.
Step one, if you control the House Financial Services Committee, as the Republicans will do in the new Congress, you can hold hearings that put pressure on the regulators writing the rules not to, as Texas Republican Jeb Hensarling, who sits on the panel says, “regulate capriciously, arbitrarily, without engaging in a cost-benefit analysis." That offers a good chance of at least slowing the rules—and this new law requires 240 new rules--and in Washington you’ll certainly find more than a few career civil servants who will decide that the wisest course is not writing any regulations at all. Which would, of course, require someone or some group to bring suit to get the regulations written. You don’t actually have to get legislation through both houses to achieve at least some of your goals if your goal is delaying or killing a regulation.
Step two, if the agencies insist on writing regulations, you can simply make sure that they don’t have the money to enforce them. Regulations can be as rough as the skin on an Arkansas razorback, but if there are no inspectors to inspect and no lawyers to even threaten to go to court, the regulations might as well not exist. How hard do you think that Democrats are going to fight to spend more money on regulation after the beating on spending that they took in these elections? One agency budget that’s almost certain to get cut back is that of the Securities and Exchange Commission, which was set to double over the next five years so that the agency could do all the new work mandated by Dodd-Frank.
Step three, if the agencies don’t have anyone to run them, then, again, nothing gets done. All that the practitioners of gridlock have to do is not approve the administration’s nominees. That’s always been easy enough in the Senate where a lone Senator can put a hold on a nominee. And now with the Democratic majority whittled down by the elections getting a White House nominee approved is likely to be even harder.
First casualty could be Elizabeth Warren, who before the election was named as a special advisor to organize the new consumer credit protection agency, when Republicans said they would oppose her nomination to head the agency. The deadline for naming a director is July.
So who wins from regulatory gridlock?
The financial industry is a big winner: Visa (V), Goldman Sachs (GS), and JPMorgan Chase (JPM) will benefit from less regulation on credit cards, consumer lending in general, and derivatives.
Airlines such as Delta Airlines (DAL), and United Continental Holdings (UAL) will benefit from a pull back in efforts to limit the outsourcing of airline maintenance and in less anti-trust scrutiny of global airline alliances.
Coal companies win twice because of the death of any chance for serious climate change legislation (and the possibility that the EPA will be forced to retreat on carbon dioxide regulation) and looser enforcement of rules against mountaintop removal and safety standards in general. (Not that safety standards have ever been more than spottily enforced.)
In communications, I don’t expect any new regulations that would change the balance in the industry. The winners from this triumph of the status quo are companies such as Verizon (VZ) and AT&T (T).
Oil and natural gas companies win because of increased odds against any national regulation of fracking in oil and gas shale formations. That will let the development of resources in such formations as the Marcellus shale of Pennsylvania and New York move ahead with only state regulation. (And if you think the U.S. Environmental Protection Agency is outgunned in hearings by the Exxon Mobils (XOM) of the world, you should sit in on a state-level hearing some time.) Companies such as Chesapeake Energy (CHK), Range Resource (RRC), Anadarko (APC), and Cabot Oil and Gas (COG) come to mind.
And the stock market losers?
Companies that need regulations or government intervention to crack new markets, to get new manufacturing technologies up to scale, or to go head to head against overseas companies that receive financial and other support from their own national governments.
The biggest casualty here is in the alternative energy technologies. I expect to see the newest generation of U.S. solar producers, for example, suffer appalling casualties.
A good rule of thumb: Look for winners among older, established companies in cash cow industries: They’re the ones who have the money to pour into elections. Look for losers among new, cash-stretched companies who need to put every dollar they have into building a business.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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