Thursday, January 21, 2010

Shorting The Massachusetts Results

. Thursday, January 21, 2010

By Michael Shulman*

Everyone is projecting changes in the economy, the market, the administration, life on Mars and the New York Yankees roster based on the election results in Massachusetts. The reality is less complicated - the election will make health care reform either very modest or nonexistent, restrain (a bit) the next stimulus package, make financial reform a bit more balanced but still a reality in 2010, and increase the odds the Republicans re-capture the House in the November elections. What are the consequences for investors of this happening?

• If health care reform legislation dies, the hospitals lose - more bad debts, less demand for services and a renewed focus on cost controls, via administrative actions, that restrain prices. The short: hospitals.

• If there is a modest health care package, the focus will be on voluntary cost control measures and federal regulation of insurers prohibiting the denial or exorbitant pricing of coverage based on pre-existing conditions. It may even include insurance exchanges. Bad news for insurance companies - and the first step in insurers becoming regulated utilities (not a bad thing). The short: insurers.

• There will be another stimulus once unemployment starts to climb again, March/April at the latest, and the double dip becomes obvious - maybe May/June. It is, after all, an election year. But it will be much more modest than the one passed last year and may even focus on the unemployed rather than unionized and state workers. This will restrain the deficit - good for bonds, good for the dollar, bad for gold - but will also hit corporate profits, as there will be less stimulus money sloshing around, hitting the overall market. The short: gold, the S&P 500.

• Financial reform will probably happen in 2010; even the Republicans favor some sort of regulation and populist resentment at the banks is going to be used by the Dems to put the Republicans in a box if they side too much on the side of the financially wicked. Obama may get his fee; Barney Frank is going to get much of what he wants; the banks are going to take the hit Main Street has wanted to see for a more than a year. The short: the big banks.

• A Republican re-capture of the House will lead to unspeakably divided government, true gridlock, often favored by Wall Street but a disaster given the current economic situation. I like divided government but the current House leadership is economically rigid, politically rigid, out of touch with the needs of the jobless and others on Main Street and bereft of any leadership that is able to work with Dems. In 2010, the prospect of the House turning red may boost the market temporarily and will certainly help the dollar and bonds and hurt gold. The short: gold.

Keep it simple when developing these theses and stick to what is real, not hype or hope. The economy is not recovering if you look at data, not words; the Republicans are not in steep ascent. If Victoria Kennedy had agreed to run she would have won in a landslide; Obama still has a 75% "personal" approval rating and his job and personal ratings are about the same as Reagan's after one year. Simply put, do not overreact.

*Michael Shulman is the Editor of ChangeWave Biotech Investor, a newsletter advisory service that follows life sciences and biotech stocks.

Micheal is the author of Sell Short:
A Simpler, Safer Way to Profit When Stocks Go Down.

Disclosure: None.





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