Closing Market Report

Star-Bulletin news services

Saturday, November 6, 2004

Be careful about investing
based on political hopes

NEW YORK » The market may have been sighing in relief over the quick resolution of the presidential race, but investors should be careful about rushing into sectors they think might do well during the second Bush administration: All may not be as it seems.

The same fundamental issues that have been pressuring the market will remain into President Bush's second term, analysts warn. A record budget deficit makes further tax incentives for consumers unlikely, an enormous trade deficit is pressuring the U.S. dollar and energy prices remain at uncomfortably high levels. Terrorism is still a concern, corporate earnings are decelerating and interest rates are on the rise, with another hike expected when the Federal Reserve meets Wednesday.

On a sector basis, although several industries pressured by the prospect of a victory by Democrat John Kerry popped higher after the election -- including pharmaceuticals and defense -- their longer term outlooks remain more questionable. In addition, analysts say the belief that brokerage and financial stocks are bound to benefit from an administration push to privatize Social Security is at best premature, and at worst mistaken.

"I wouldn't be putting any money into brokerage stocks right now based on the idea they're all going to do super-well because of the privatization of Social Security," said Richard A. Dickson, senior market strategist at Lowry's Research Reports in Palm Beach, Fla.

"First of all, there's no guarantee it will happen. Secondly, if it does, it's years away. And third, if it does happen, we don't know what form it will take," Dickson said. "If it's as simple as buying Treasury bonds for these accounts directly from the Federal Reserve, brokerage houses will be left out of it anyway. There are just too many 'ifs' surrounding it to say, 'Oh, definitely, buy the brokerages."'

Market watchers say pharmaceutical companies have a difficult road ahead. Some face litigation due to product recalls and greater regulatory scrutiny, and with few new drugs in development and patent expirations closing in, there may be little to boost earnings over the longer term. In addition, the Bush administration may wind up taking a page from the Kerry campaign's playbook by allowing the reimportation of cheaper prescription drugs from Canada.

"Our feeling is that these major pharmaceuticals are going to face issues no matter who's in office," said Sam Stovall, chief investment strategist with Standard & Poor's. "Over time, when the fundamentals reassert themselves, valuations might start to look attractive, but the pipelines still look thin. In general, I don't think I want to be buying a lot of pharma names. As a matter of fact, we have a majority of them ranked as 'avoid."'

The same is true of a majority of defense stocks, Stovall said, another area that many people think stands to benefit in Bush's second term. By most calculations, these stocks are already trading above their fair market value. What typically drives defense shares higher is "not whether the president is a flag-waving hawk, but how much the defense budget goes up," Stovall said. For just this reason, aerospace stocks performed poorly during the Reagan years.

Now, after four years of increased military spending, with a formidable deficit looming and the president starting to focus more on social issues at home, a significant build in the defense budget seems unlikely, said Jon B. Kutler, chief executive of Jefferies Quarterdeck, a division of Jefferies & Co. that provides investment banking services to aerospace and defense companies.

"I think the near-term, knee-jerk reaction is always that a Republican administration is good for defense," Kutler said. "This situation is a little bit different, however, because of the dramatic buildup we've already had over the last four years. I think it is equally likely that now that the election is over, there will be more pressure on other issues, which will not permit similar gains over the next several years."

In general, however, trying to predict how the market will react to presidential politics is a dangerous proposition, said Dickson, of Lowry's, because inevitably, "the law of unintended consequences comes into play."

"Think back: Who was talking about commodity prices and commodity-based stocks in 2000? We were still talking about tech stocks. ... You just can't know what will happen," Dickson said. "Projecting into the future what this president will do or will not do, I think, really limits your options. I'd rather look at where growth is likely to take place, where there are signs of momentum. That, to me, is the more important thing."

A cautionary tale is available in two stocks that might have looked politically promising when Bush won his first term.

Enron Corp. had been the biggest corporate contributor to Bush's political career, and its stock was soaring. A year later, the company collapsed in scandal and bankruptcy.

Another seemingly sure bet back then was Halliburton Co., the company Vice President Dick Cheney used to run. At that time its shares were trading at about $40 on the New York Stock Exchange. Two years later, the stock had dropped as low as $10, and only now has recovered to about $37.

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by Financials.com


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