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Related Articles Cant figure out the global economy? Go local Stocks that swing with Bush and Kerry SuperModels Recent articles: • Can Coca-Cola be the real thing again?, 9/22/2004 • PCs languish, but Dell leaps ahead, 9/15/2004 • Psych yourself out of the market's rut, 9/9/2004 More... | SuperModels Play local stocks for a Bush or Kerry win The fortunes of individual stocks over the next four years may well depend on who wins the Nov. 2 election. Heres how you can use the election to assess stocks in your state. By Jon D. Markman The stock market and the presidential election appear to be on a collision course for November, as both sides of each are stalemated. Despite what you may have read in the latest poll du jour, President Bush and Sen. John Kerry are essentially tied in the battle to gain advantage from voters, just as bulls and bears are tied in the battle to wrest an advantage this year from investors. A major test for both comes this week. The presidential candidates meet in Miami on Thursday for a debate that could make or break their campaigns to obtain last-minute affection from undecided voters while corporate chief executives meet with their staffs to exhort quarter-ending purchase orders from undecided customers. The interesting thing now is that the two efforts are so intricately intertwined. A wide range of companies are likely to do better or worse from 2005 through 2008 depending on which candidate wins. Indeed, the stock-market side of the race is more of a sector-by-sector contest rather than a broad-market contest. The national scale of both efforts can be rather daunting to analyze. So, this week, Id like to reprise two earlier columns -- Cant figure out the global economy? Go local and Stocks that swing with Bush and Kerry -- by trying to narrow the dual election/earnings seasons down to a local scale.
For an assist this time, I am leaning on analysis from International Strategy & Investment Group in New York. Not long ago, ISIG deftly divided the two races into a Bush Index and a Kerry Index, and the company assigned weights to sectors to denote how much they might prospectively gain or lose in the event of the respective candidates victory. In my version, I will show how the two races look from the perspective of an investor in the state of Washington. To substitute your own states companies in the equations, run this screen and put a different state abbreviation in the first criteria field (e.g., CA for California, instead of WA for Washington). Bush index Sector: Pharmaceuticals. WA angle: ZymoGenetics ISI Group analysts contend the drug sector has by far the greatest stake in the election outcome because the next president will direct the rules that determine how the new Medicare drug benefit is implemented. The Bush administration is considered far more friendly to Big Pharma than a Kerry administration might be. Bush would also attempt to fight off drug re-importation, which would slash drug-makers profits, as well as Congress-dictated drug price controls. ZymoGenetics and Icos are biotechnology companies dependent on the prospect for high drug prices in their partnerships with large drug makers. The former has marketed its key products, aimed at diabetes and blood coagulation therapies, through Novo Nordisk Sector: Defense. WA angle: Boeing Boeing has moved its headquarters to Chicago, but its aircraft manufacturing plants still provide a large percentage of the states employment. Spending on jet-fighters and satellites will rise in either candidates' administration, but more so under Bush. Esterline makes avionics, controls and sensors for military and commercial aircraft, as well as electronic warfare modules and components for tank and mortar ordnance. Sector: Utilities. WA angle: Avista Republican members of Congress and a second Bush administration are expected to try to repeal the Public Utility Holding Company Act, which has governed electric companies for 70 years, as part of an energy bill in a second term. Advocates say unleashed utilities would be freer to compete with international utilities, spend less on pesky regulation compliance and improve profitability through opportunistic mergers. Additionally, a continuation of new, lower taxes on dividends would underpin the appeal of investments in these high-yielding stocks. Avista, based in Spokane, generates and transmits electricity and transports natural gas; it yields 2.9%. Puget Energy, based in Bellevue, is in the same business and yields 4.5%. Sector: Multi-line insurance. WA angle: Safeco ISI analysts note that tort reform, if pursued in a second term, would help insurers like Seattle-based Safeco that are exposed to a wide variety of individual and business claims. Sector: Paper. WA angle: Longview Fibre Most U.S. paper companies used asbestos extensively in their mills and are thus subject to expensive litigation from workers who contracted lung disease. These companies could gain a great deal if Bush wins and the GOP obtains more seats in the Senate, where legislation on reducing asbestos-liability awards has been bottled up for years. Kerry index Sector: Pharmaceuticals. WA angle: Short-sales of ZymoGenetics and Icos. ISI analysts contend that a Kerry administration may attempt to use regulatory authority to undermine the private-sector delivery of the Medicare drug benefit and also attempt to amend the act, allowing the government to negotiate prices. Kerry also supports a broad drug-reimportation bill and slaps Big Pharma around in his stump speeches. Sector: Utilities. WA angle: Short-sales of Avista and Puget Energy. Opposite of the Bush story. The potential for a Kerry-era repeal of lower dividend tax rates would hurt the appeal of all high-yielding companies, while at the same time you could see tougher emissions requirements that would boost spending with no revenue offset. ISI points out that a goal to produce 20% of energy from renewable sources by 2020, as has been proposed, would also require an increase in R&D spending without an offset of higher revenue. Sector: Cars and trucks. WA angle: Short-sale of Paccar Its that do-good streak again. A Kerry administration is likely to push for higher fuel economy standards, which could cut into the profits of a company like Paccar, which makes Kenworth and Peterbilt heavy trucks. Sector: Banking. WA angle: Washington Federal If Kerry were to win but the Democrats were not able to pick up enough seats in Congress to obtain voting dominance, then we may see the best of all worlds: absolute legislative stalemate. This was one of the secrets of the great 1990s boom, as a Republican Congress butted heads with a Democratic White House, allowing few important bills to pass. This would allow the natural economic cycle to work with a minimum of government intervention, thus allowing for an increase in jobs and higher income for which both parties would claim credit. Banks and savings and loans would benefit from a rise in the savings rate and, probably, a continuation in the trend toward wider home ownership. Sector: Retail. WA angle: Nordstrom Same as above. A stalemate in legislation would forestall any acts of Congress aimed at raising taxes significantly and generally lead to market forces permitting an increase in consumer spending. Retailers across the spectrum -- from value-oriented Costco to luxury-oriented Nordstrom and devil-may-care Starbucks -- would benefit. Sector: Technology. WA angle: Microsoft A Kerry administration is expected to be more hawkish than a Bush administration on intellectual property rights. Thats a matter close to the hearts of Hollywood and Silicon Valley, where companies wish to protect their copyrights and patents for as long as possible -- preferably forever. Microsoft, publisher of this site, is one of the largest patent-holders in the world, and it would probably benefit from an administration more focused on strengthening intellectual property rights. Ill track these two indexes over the next six weeks and the next four years and let you know how they turn out.
Fine Print Some other considerations for the winners spoils: A Kerry administration would be more likely to bestow grants on education and to lend an ear to unions -- an issue that should help for-profit education companies and worry heavily unionized companies. . . . If youre a municipal bond buyer, you might worry about the potential for a second Bush administration to give a cold shoulder to states that do not support the president, such as Washington and Massachusetts. . . . I received a ton of mail on my column about Coca-Cola Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, he had long positions in Microsoft and Starbucks. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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