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What the Massachusetts Senate Race Means for Investors

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Is shorting health care and going long the market the perfect pair trade for this week?

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I'm back from a short vacation from last Thursday. While catching up, I'm trying to balance President Barack Obama's new populist tax on the big banks, which, despite some of the big banks having paid back the TARP money, are still in the gun sight.

Obama's speech on January 16 only addressed the TARP, using the phrase: "We want all the taxpayers' money back."

A lot of TARP has been paid back with interest, so I was scratching my head until I thought of AIG (AIG). AIG collapsed after the Fed/Treasury decided to pull the plug on Lehman Brothers. AIG paid out $62 billion in derivatives at 100 cents on the dollar. There was no haircut. So in reality, AIG didn't get bailed out, the banks and hedge funds got bailed out.

So why didn't Obama just come out and say what actual taxpayers' money he wanted back? Well, because the guy who decided to pay out 100 cents on the dollar was Obama's pick for Treasury Secretary, Timmy Geithner. Somebody here can't handle the truth or at least let the truth out.

Personally, I have no problem with the tax except that I would phrase it differently. I would have said that we're going to raise a huge pile of cash for the FDIC to be ready for the next time the banks screw up, and we're taking it out of the hides of who we had to bail out, even temporarily. Simple, sweet. Why they never ask me, I never understand.

On the way back home we stopped in Newburyport, Massachusetts, a suburb north of Boston. Saturday's weather was decent for mid-January and I was amazed at the number of people on street corners waving signs for Republican Scott Brown and Democrat Martha Coakley, one of which will be elected today for the Senate.

Considering that registered Democrats outnumber registered Republicans by 3 to 1 in Massachusetts, the fact that this race is even close is remarkable, and I fully believe it is a referendum on the health-care bill. I live close enough to Rhode Island that I get a Providence TV station on my cable. The political ads are non-stop. What a windfall for out of state TV stations!

As of Monday night, the final polls seem to indicate that Brown has a lead of a few points, but it will all depend on the voter turnout. My guess is that the Republicans, who haven't won a Senate seat since 1972, will have a great turnout and Brown will win.

What are the ramifications, and, of course, is there a trade here? Brown has adamantly declared that he is the 41st vote against the health-care bill in the Senate. Are there any obvious winners if health care is dead? Once the public option died in the Senate, health-care stocks, like Wellpoint (WLP), have been on a roll. I have to think that any gap up is a head fake, and I'll be looking for a shorting opportunity.

On the other hand, the message delivered by the voters of Massachusetts is for smaller government, and that could be bullish for the market. Is shorting health care and going long the market the perfect pair trade for this week? Maybe.
No positions in stocks mentioned.

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