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THE WORLD IS IN FLUX

THE WORLD IS IN FLUX

THE WORLD IS IN FLUX

It is turning out to be a transition that we understand and enjoy. However, at times periods of flux can prove challenging. The crystal ball is not cloudy but the market is excellent at teaching us that there are always reasons to be humble. As the ancients said, “pride cometh before the fall”.

The November elections approach in the U.S. Part of an investment manager’s job is to see that the possible outcomes of any major change like an election, new legislation, political risks and rewards are well thought out.

IF THE DEMOCRATS MAKE A STRONG SHOWING IN U.S. ELECTIONS (Most likely scenario)

CASE 1:
What will happen is the Democrats make a moderately strong showing, and they win the House of Representatives but lose their bid to control the Senate?

In this case, the Democrats will have power to block but not really to create. This is the outcome most desired by Wall Street. Wall Street likes gridlock, and this would argue for the greatest amount of gridlock. The negative: the Democrats may still institute proceeding for impeachment of President Bush. This would not be viewed favorably by the U.S. stock market and would be negative for the U.S. dollar.

CASE 2:
What if the Democrats win both the House and the Senate by a substantial margin?

This will embolden their behavior. As a result, they will:
a. Bring impeachment proceedings against President Bush.
b. Try to create new legislation and dare the President to veto it.

U.S. COMPANIES AND INDUSTRIES HELPED BY A RISE IN DEMOCRATIC POWER:

1. We can expect more leniency toward Fannie Mae and Freddie Mac as cheap and available loans for housing will be high on the Democratic agenda.
2. Both Fannie Mae and Freddie Mac have shown themselves to be adroit politically. In my opinion, however, they have been irresponsible in their creation, management and accounting of derivatives.
3. We can expect research stocks connected with high tech gene mapping to do well as more money goes to the National Institutes of Health.
4. We can expect natural gas companies to get funding, and coal companies could be penalized as there will be lobbying for cleaner air.

We can expect a focus on alternative energy sources and new taxes on U.S. oil companies. This is bearish for U.S. oil stocks and bullish for Canadian and other foreign oil stocks.

1 YEAR OIL SERVICE HOLDERS TRUST CHART