The Best Stocks for Political Gridlock
11/05/2010 9:55 am EST
The GOP's big gains are good news for companies that benefit when regulations don't get written or funded. Here's a rough guide to the likely winners.
The US Chamber of Commerce had spent $35 million on the midterm elections as of November 2, according to the Center for Responsive Politics. American Crossroads, a so-called independent organization, spent $22 million. The Club for Growth, $8 million. The National Association of Realtors, $6 million. Political action committees associated with commercial banks, $6 million.
Although in this election, as in most recent ones, Democratic candidates got their share of corporate donations (and more than their share of union election funds), most of the money from business lobbying groups and 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 a return on investment. Did they really intend to spend all that money on politicians who would just sit in the House and Senate and talk past each other?
Hopes of repealing financial reform? Dead. Legislation to reverse health care 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. Think the groups that spent all that money will be disappointed?
Ha! 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 had better take a crash course in 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 the 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 "What a surprise! Basel III bank regulations aren't as strict as feared, and bank stocks rally.")
What's Not Gridlocked
Before we jump over to legislative gridlock, however, let's look at the ways it may not be as solid as it seems.
The Republicans now control the House of Representatives with a huge margin. The Democrats cling to control of 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 had 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 little while, at least, and perhaps a long while) will shy away from giving Republicans another stick to beat them with. So, look for Democrats to 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 the Republicans can pick off independent Connecticut Senator Joe Lieberman, who caucuses with the Democrats in the current Congress. Democratic Senator Ben Nelson of Nebraska 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, D-W.Va., isn't exactly a dependable voting bloc behind Majority Leader Harry Reid, D-Nev.
But I think all this applies only 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 pigeonholes in the House and the Senate.
That will move the battle to the regulatory front, where some form of gridlock is all you need.
MORE: See the Winners (and Losers) in All This Gridlock|pagebreak|
If you want to create regulations, you usually need congressional action. (Not always, however. The proposed regulations on carbon dioxide we may see from the Environmental Protection Agency resulted from a change in administration and a court decision that cleared the way for 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 Congress. Gridlock will do.
Financial Reform? Not So Much
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 in the new Congress), you can hold hearings that put pressure on the regulators writing the rules. You'll press them 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 the new law requires 240 rules—because 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. 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 make sure 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 Democrats are going to fight to spend more money on regulations after the beating on spending they took in these elections? One agency budget that's almost certain to get cut 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 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.
The first casualty could be Elizabeth Warren, who before the election had been named a special adviser to organize the new consumer credit protection agency. At that time, Republicans said they would oppose her nomination to head the agency. The deadline for naming a director is July.
Winners and Losers
So who wins from regulatory gridlock?
The financial industry is a big winner: Visa (NYSE: V), Goldman Sachs (NYSE: GS), and JPMorgan Chase (NYSE: JPM) will benefit from less regulation on credit cards, consumer lending in general and derivatives.
Airlines such as Delta (NYSE: DAL) and United Continental (NYSE: UAL) will benefit from a pullback in efforts to limit the outsourcing of airline maintenance and from less antitrust scrutiny of global airline alliances.
Coal companies win twice, because of the death of any chance for serious climate-change legislation (and the possibility the EPA will be forced to retreat on carbon-dioxide regulation) and because of 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 (NYSE: VZ) and AT&T (NYSE: T).
Oil and natural gas companies win because of increased odds against any national regulation of hydraulic fracturing, or “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 proceed with only state regulation. (And if you think the EPA is outgunned in hearings by the Exxon Mobils (NYSE: XOM) of the world, you should sit in on a state-level hearing some time.) Companies such as Chesapeake Energy (NYSE: CHK), Range Resources (NYSE: RRC), Anadarko Petroleum (NYSE: APC), and Cabot Oil and Gas (NYSE: 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 casualties here are in the alternative energy technologies. I expect to see the newest generation of US solar producers, for example, suffer appalling casualties.
Look for winners among older, established companies in cash-cow industries: They're the ones that have the money to pour into elections. Look for losers among new, cash-stretched companies that need to put every dollar they have into building their businesses.
At the time of publication, Jim Jubak's personal portfolio did not include shares of any company mentioned in this column. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in stocks mentioned in this column. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.
Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.