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ARE WE THERE YET? AFTER weeks of incessant discussion and speculation, the market's (and the nation's) crucial week is upon us.
Tuesday, America's voters head to the polls for midterm Congressional elections which will determine tax, spending and other economic policies for the second half of President Obama's term. The following day, the Federal Reserve will announce its eagerly awaited plan for QE2, the second phase of quantitative easing, with the size of the purchase of Treasury securities the key unknown.
As for the elections Tuesday, democracy is a rather more uncertain process. Nevertheless, the Washington team at ISI Group consisting of Andy Laperriere, Roberto Perli and Melissa Loesberg constructed portfolios of stocks that ought to benefit from Republican and Democratic wins Tuesday.
In case of a GOP victory, the ISI team thinks UnitedHealth Group (UNH), Humana (HUM), Pfizer (PFE) and Gilead Sciences (GILD) should benefit as risks to these stocks diminish even though major changes to the health-care reform law are unlikely. Traditional defense companies should survive budget pressures better in a Republican Congress, benefitting the likes of Northrop Grumman (NOC), General Dynamics (GD), SAIC (SAI) and Corporate Office Properties (OFC.)
Other picks include energy companies such as Joy Global (JOYG), Peabody Energy (BTU), Shaw Group (SHAW) and Westport Innovations as Republicans would likely seek changes in various energy and environmental policies. In telecommunications, the ISI team would buy AT&T (T) and Verizon (VZ) and sell short Google (GOOG) as the GOP will fight the FCC's plans to regulate broadband.
Elsewhere, they think a GOP majority would probably mean cuts in discretionary spending and aid to states, which would hurt McGraw-Hill (MHP), Kindred Healthcare (KND) and GTSI (GTSI). Finally, Republican would likely work against passage of legislation aimed at for-profit education companies, a plus for Apollo Group (APOL) and Corinthian Colleges (COCO.)
Conversely, if the Democrats fare better-than-expected, the ISI team thinks high dividend-paying stocks and high-end retailers could be hurt by the prospects of higher tax rates, so they recommend selling Williams-Sonoma (WSM), Saks (SKS) and the iShares Dow Jones Select Dividend exchange-traded fund (DVY.) Meanwhile, they'd buy Wal-Mart Stores (WMT) as a beneficiary of continued transfer payments and Lincoln National (LNC) as a seller of life insurance policies to pay high estate taxes.
Democrats also would likely enact legislation that will raise the cost of offshore drilling, which would be negative for Apache (APA), Oceaneering International (OII), W&T Offshore (WTI) and Hornbeck Offshore Services (HOS.) The Dems also would likely crack down on hydraulic fracturing, which would hurt Nabors Industries (NBR), Patterson-UTI Energy (PTEN) and RPC (RES.)
But infrastructure spending could get a significant boost under the Democrats, perhaps under the reauthorization of the highway bill next year, ISI says. Possible beneficiaries would be Vulcan Materials (VMC), Granite Construction (GVA) and Caterpillar (CAT.) The Dems also would likely push for more subsidies and mandates for alternative energy, which would give a boost to Vesta Wind Systems (VWSYF), a Danish company traded on the Pink Sheets; Covanta Holding Corp. (CVA) and, of course, First Solar (FSLR.)
Finally, while the ISI DC denizens think while a bank tax is unlikely, they think the odds are slightly higher under the Dems, which would hurt JPMorgan Chase (JPM.) Finally, they note Obama pushed unspecified antitrust measures on insurers to lower medical malpractice premiums when he campaigned for president. ProAssurance (PRA) would be hurt should such a measure get passed by a Democrat-controlled Congress.
Clearly, the elections aren't make or break for these companies, but a factor on the margin for their futures. Indeed, the real winners or losers won't be apparent until well after Tuesday's ballots are counted.
E-mail: randall.forsyth@barrons.com
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