ANALYSIS-Wall Street sees more gridlock after election
31 Oct 2006 20:44:08 GMT Source: Reuters
By Ellen Freilich NEW YORK, Oct 31 (Reuters) - A Democrat-controlled Congress could spell trouble for Wal-Mart, student loan provider Sallie Mae and a few big pharmaceutical firms, but it will also be likely to reinforce investor-friendly gridlock in the capital. "If Democrats win the House or both the House and the Senate, this would be a positive political backdrop for both the equity and bond markets since it would likely produce legislative gridlock," said David Rosenberg, North American economist at Merrill Lynch. "Specifically, it would be positive for bonds since the Democrats tend to be more fiscally-minded than the Republicans. Democrats would likely reduce spending and oppose any extension of the Bush tax cuts." Democrats hope to win crucial U.S. House of Representatives races in the Northeast and Midwest where more than two dozen Republican incumbents are fighting for their political lives. Democrats must gain 15 House seats and six Senate seats to seize power in each chamber. All 435 House seats and 33 of 100 Senate seats are at stake on Tuesday. Control of Congress and its powerful committees could make a difference to investors in sectors such as managed health care and big pharmaceuticals, analysts said. Those industries would be affected by any changes in reimbursement formulas and in the prices government medical programs pay for drugs. Wal-Mart Stores Inc. <WMT.N> should expect unsympathetic "tobacco industry" treatment, including "a sustained campaign designed to make the company sue for peace with the unions," said Tom Gallagher, analyst at International Strategy and Investment. Sallie Mae Corp. <SLM.N> could take a hit because Democratic House leaders have promised a House vote to cut interest rates on student loans in half during their first week in the majority, he added. On the other hand, a Democratic majority in either house of Congress would likely derail legislation aimed at reining in Fannie Mae <FNM.N> and Freddie Mac <FRE.N> because Democrats are expected to be more concerned about preserving the roles the companies play in making home homeownership affordable. "So-called GSE reform, which is how the Republicans characterize it, will surely be out the window and as a result, shares of Fannie Mae and Freddie Mac have performed better as the elections have come into focus," said Charles Lieberman, chief investment officer at Advisors Capital Management LLC in Paramus, New Jersey. A Democratic Congress could also dim prospects for extending some investor-friendly tax provisions that will expire in several years. "Some of the preferred treatment for dividends and capital gains, even the tax rates themselves ... it will be hard for the Republicans to make those permanent," said Dana Johnson, chief economist at Comerica in Detroit, Michigan. GRIDLOCK IS GOOD? Still, financial markets are likely to register little reaction to a shift in power in Congress, analysts said. "Fiscal policy is not a major driver of bond markets the world over," said Andrew Milligan, investment director and head of global strategy at Standard Life Investments in Edinburgh. "It comes well behind bigger issues like the business cycle." No matter which party is in control, legislation "is a secondary or tertiary influence on the economy and monetary policy, so what's going on in Congress is of secondary importance to most investors," said William Sullivan, chief economist at JVB Financial Group. And what lawmakers in the new Congress could actually accomplish is another question. "President Bush could easily use his veto pen more freely," noted Merrill Lynch's Rosenberg, so Democrats would have to secure his support or overcome his veto with a two-thirds vote in both the House and the Senate to pass legislation. On the other side of the aisle, the ability of Republicans to push through their programs "will be weakened because Bush, himself, will increasingly become a lame duck and there will be fewer Republicans in Congress," Lieberman said. "There's gridlock to a significant extent already today and it will become even more entrenched," he said.
