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Five Things You Need to Know Special Election Edition: Grim Decision 2006


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Democrats Sweep Congress, Burn Down Stock Market, Take Out Home Equity Loan on House of Representatives

Another dramatic midterm election is now in the books, and with the stock market opening in the red this morning it's easy for Wall Street to get hysterical about this kind of thing. But what does this election really mean? Who wins? Who loses?

  • At the latest count, Democrats had gained full control of the U.S. House of Representative, 227 seats to the Republicans 194.
  • The Senate remains tight, though it appears the hotly contested and crucial states of Montana and Virginia are going to swing Democratic as well.
  • So, what does it all mean? Balance? Gridlock? Certain Doom?
  • We asked Minyanville Professor Bennet Sedacca who has made a name for himself in the 'Ville by tracking closely election cycles and what they mean for financial markets.
  • "Simply put, over the last 106 years, according to data from Ned Davis Research, the economy did much better when there was a Democratic president or Democratic Congress, or both, as compared to Republicans being in control," Sedacca said.
  • Look at the numbers:
    Industrial Production averaged 4.12% per year when Dem's were in total or partial control as opposed to 1.77% under Republicans.
    - CPI was MUCH HIGHER when Democrats were in control averaging 4.37% versus 0.70% under Republicans, Sedacca said.
    - Real stock returns, net of inflation was much closer as stocks tend to do better under Dem's but the CPI hurts the real, after inflation return.
  • But what about the late 90s bubble years under President Clinton?
  • "I guess you can say that the data is skewed by the bubble in the 90's," Sedacca said, "But 106 years worth of data is a bunch."
  • So what's your bottom line? "I get a couple of things from this data," Sedacca said. "First, stocks should do well and bonds could get crushed."

Fearing imprisonment under Democrat rule,
American businessmen flee United States for
more business-friendly home.

2. How the Rest of the World Sees Us...

Although we Americans make up less than 5% of the world's population, our dominance in the fields of media, pop culture and America sometimes fools us into thinking we're the majority. But it's a big world out there, a world where 95% of the inhabitants are not just like us. We thought it would be interesting to get a global perspective on the U.S. elections. Below is a survey of U.S. election headlines from around the world...

  • United Kingdom, BBC: Democrats Celebrate Major Gains in US Polls
  • China, People's Daily News: Politicians, Lawyers Switch Jobs in Dramatic American Government Shakeup
  • Venezuela, Caracas News: American Democracy Takes Step Forward With Relatively Trouble-Free Election
  • Saudi Arabia, Aljazeera: American Voters Call for Change, Relaxed Security at Airports, Shopping Malls, Landmarks, Parks, Computer Networks, Banks, Sports Events, Municipal Drinking Water Facilities, Power Grid Operations and Groceries.
  • Italy, ANSA: Tom Cruise to Wed in Rome Castle

3. The Numbers Behind the Numbers

While the historic data provided by Professor Sedacca paints a picture of higher inflation and a better-than-average economy, there are quite a few variables at work here, some of which suggest past performance may not be indicative of future results.

  • First, historically the stock market goes up 75% of the time anyway, so we're not exactly keen to let any one political party lay claim to the "We're Great for Stocks" label.
  • Second, after the major TV political hoopla dies down (look, it's cheap network programming that captures a wider-than-usual audience share) the same problems that were in place before the election will magically reappear:
    - The housing market has yet to stabilize.
    - The U.S. has too much debt, both federal and consumer.
    - Global central banks are continuing their tightening bias.
    - Economic growth in the U.S. is largely credit-induced.
    - We have a new Federal Reserve Chairman presiding over an apparently quite divided Fed.
  • Moreover, an election tidbit that so far has gone unmentioned is that Republicans entered Tuesday's elections with a 28 to 22 majority in gubernatorial seats.
  • Today that balance of power has shifted with Democrats seizing control of 28 gubernatorial seats to 20 for Republicans (two remain undecided).
  • Remember, governors are the guys who set local agendas and help elect presidents.

4. Six in '06

So with Democrats seizing control of Congress and gubernatorial seats, the handwriting is on the wall for a clear legislative push against a lame duck president who is taking heat for an increasingly unpopular war. Gridlock? We don't think so.

  • The first noticeable change in Washington will likely be House Democratic Leader Nancy Pelosi's ascension to the role of Speaker of the House, the first female speaker in history.
  • Fortunately, we already have a very good idea of what her agenda will be: Boston Globe: "In House, Democrats vow aggressive agenda."
  • Ever heard of Pelosi's "Six in '06" platform? Well, we hadn't either. But you soon will.
  • We took it upon ourselves to uncover what the "Six in '06" are, but ran into a bit of difficulty since the following list appeared in three separate articles under a "Six in '06" Google search
  • Depending upon whom you ask, the platform includes the following:
    - Increase in minimum wage.
    - An end to oil company tax subsidies.
    - Reduced interest rates on student loans.
    - Pension reform.
    - Modifications to the senior prescription-drug plan.
    - Phased withdrawal of troops from Iraq.
    - Preserving Social Security.
    - Enacting recommendations from Sep. 11 Commission.
    - Energy Independence.
  • Wait, that's nine. Right, but six is part of nine, so there you go.
  • Regardless, real market winners and losers are emerging from the ashes of "Grim Decision 2006."
  • Winners include Fannie Mae (FNM) and Freddie Mac (FRE) as Democrats favor more lenient GSE regulations packages.
  • As well, look for boosts to biofuels entities and alternative energy companies.
  • Minyanville Professor Jon "Dr. J" Najarian this morning said he expects alternative energy companies such as Evergreen Solar (ESLR), SunTech (STP) and Sunpower (SPWR) to benefit.
  • Believe it or not, certain Life Insurance companies may ultimately benefit thanks to a potential loss of support for major changes to estate taxes. This helps annuities and other Life Insurance death benefits plans retain their attractiveness.
  • Among losers, look no further than Retailers who are dependent upon minimum wage employees.
  • With prescription-drug care back on the agenda, look for Pharmaceutical companies to feel pressure until Washington lobbyists get their feet back under them.
  • What about oil companies? Watch for plan specifics to emerge in the coming weeks for how to cut subsidies and tax "profit windfalls" related to oil companies.
  • Bottom Line?: Republicans praying Pelosi falls victim to "Ghost of Gingrich."

Contract with America apparently
included hidden poison pill clause.

5. Marijuana Legalization Rejected in Successful "Stub Out the Vote Campaign"

According to the latest published results, ballot initiatives in South Dakota, Colorado and Nevada which would have legalized marijuana possession and use under various conditions have been defeated.

  • The South Dakota bill to allow the use of the drug for medical purposes came the closest to passage, failing 52%- 48%. Colorado's initiative to legalize the drug failed by the widest margin with 61% of voters Just Saying No.
  • Nevada's curiously rational plan to legalize the sale of up to one ounce of Marijuana to persons over 21 through state-controlled stores (much in the manner states such as New Hampshire and Minnesota currently sell liquor) was trailing by roughly 8% in the polls with most votes counted.
  • Below we asked Minyanville Professor Jeff Macke to sort out the Marijuana Legislation Winners and Losers:

- South Dakota, where the close defeat has thousands of college students and Dave Mathews fans rethinking their Spring Break '07 plans to possibly include a trip to Pierre ("it's like the Negril of South Dakota, dude").
- Drug Dealers, who were "thisclose" to having to go to work in some state-sponsored "7-11 of Dope" store.
- Liquor and Beer producers. "America picked its intoxicant of choice when we repealed the 18th amendment. Anyone who would like a little something different to 'take the edge off' is, by definition, a long-haired, America hater."
- Big Pharma; collectively offering free samples of Vicodin to those convincingly "pained" by the outcome.

- Baby Boomers. So... You folks dedicated your younger years to Sticking it to the Man who was, back in the dark days of the 1960's, getting America involved in pointless wars, lying to the public and restricting personal freedoms. Wow; things are... Um... Much different now that you guys are in power. Now, go to the doctor and get your testosterone patch refill, dad, your second family wants you to seem "youthful" (presumably so you can sell out again when you turn 80).
- Snack Foods. Papa John's (PZZA), Dominos (DPZ), Yum Brands (YUM) and McDonald's (MCD) (et al), while issuing no official statement, have to be at least a little bit disappointed
The Estate of John Denver. "Where the Columbines
Grow" remains the you've-gotta-be-freaking-kidding-me official state song of Colorado while "Rocky Mountain High" remains an amusingly ham-fisted metaphor.

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