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Stocks and Social Events

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Over the last month or so, Kevin Depew, who is as sharp a mind on social trends as I know, and I have been discussing a topic that we have heard few pundits talk about. Perhaps its possibility is too unattractive to contemplate or perhaps it's simply too far fetched to warrant giving serious thought to it. But Kevin and I are seeing more and more evidence accumulate that suggests that, even if a low probability event, we should at least think about its possibility.

Almost all of the presidential election political analysis is centered on how a Bush or a Kerry administration would affect stocks and the economy on November 3rd. How is pharma affected? Oils? The GSEs? The underlying assumption in each of these analyses is that there will in fact be a victor on the second Wednesday in November.

According to news reports that we've seen and some digging we've done, we know that both Republicans and Democrats have, literally, thousands of lawyers on the ground in each and every state where the presidential election contest is expected to be close (10-12 or so). On top of these lawyers, both the Republican and Democratic national parties have "swat teams" of lawyers ready to kite into any state or locality where there may be even a hint of impropriety in terms of the voting process.

This is a potentially caustic mix of ingredients: (1) an electorate that is largely split (and partisan) between Democratic and Republican affiliation, (2) an already highly partisan and negative campaign season, (3) a Democratic party that believes the current president had "stolen" the election last time and is ready to fight ceaselessly to prevent it from happening again, (4) a Republican party that believes that the Democrats are breaking laws to get ineligible voters to cast ballots, and (5) a veritable army of lawyers on the ready to kite into each and every locale that has any improprieties whatsoever. Polling 100 million people on anything will inevitably produce mistakes and errors, so the probability that lawsuits are filed approaches 1.0.

All of these factors increase the probability that this presidential election result will be contested no matter who wins. And depending on how close and what "mistakes" are made, the lawsuits may take quite some time to resolve. Of course, the same process took place in 2000 between Gore and Bush and that ordeal had a substantively negative impact. But the 2000 election took place within a wholly different atmosphere: the 2000 bull/bubble market peaks were still very fresh in people's minds, terrorists had not presented a homeland threat, and the U.S. was not undertaking a war in another nation.

One would expect then, that the same type of unresolved election result fracas that took place in 2000, when placed within the confines of a bear market and a nation at war both home and abroad, might produce even more or a potential crises, this one of the constitutional kind.

No one can say for sure of course how the election is going to come out. But the point is that you don't need to know who is going to win to understand that the probability is quite high that the election will be contested and perhaps even more bitterly so than in 2000. Within the confines of a domestic and foreign war and a secular bear market, it is a safe bet that the acrimony this time between the Bush and Kerry camps - no matter which wins the election - will be far greater; and such acrimony could very well lead to a greater political crisis than the relatively benign one the U.S. witnessed in 2000.

How would such a contested election impact stocks? Well, this is the truly interesting part.

Take a look back at the SPX, the DOW, and the NDX for the year 2000. Each index made its peak in Q1:00. NDX and SPX on March 24th, the DOW on January 14th. From these peaks, each index declined more of less impulsively (i.e. changed trend from bullish to bearish) to lows in the March/April/May timeframe. Each index then, in an overlapping, choppy, and corrective fashion, rallied to Late August and early September peaks, only to turn down impulsively again to the middle of October. That rally lasted until precisely November 6th, posting a swing high and then falling impulsively lower from there, as media pundits blamed the contested election results for the ensuing decline in the indices. The NDX declined steadily for the next 6 months, the next 5 months for the SPX and the next 4 months for the DOW, declining by 60% in the NDX, 25% in the SPX and 17% in the DOW. Only the DOW was able to recover these losses to gain new ground (putting in new swing peaks 3.2% above the November 6th peak before failing hard and declining 30% into September 2001.

Notice any similarities here? I could have written this same history for each index in 2004 year to date. And now we have the prospect of and conditions for a political crisis of potentially even greater proportion on our hands in less than a week.

Back in 2000, pundits and market strategists alike brayed endlessly on about the fact that the election crisis - of not knowing who would be president - was souring investors on the market and causing them to sell.

This is interesting. But it's wrong; they had the cause and effect relationship backward. The market was a leading indicator of a larger negative mass psychology, having peaked in Q1:00 and turned impulsively down many months before the 2000 election. It was the stock market that was presaging the "political crisis" that took place in 2000, not the other way around.

Fast forward 4 years: stocks have peaked in Q1:04 and turned impulsively down. Teams of lawyers are standing ready to fight the election results no matter who wins a closely matched election, creating the environment for a potential constitutional crisis that could at least replay the 2000 fracas if not dwarf it.

The important point won't be that such a potential political crisis will cause stocks to fall. The trend in stocks has already been established. It's social events - like elections for political office - that could be playing "catch-up" to the bearish trend in stocks.

Stay tuned.

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