Trader Talk

The Election & Your Portfolio: A Primer

Not paying attention to the elections and how it might affect your portfolio? Shame on you! Here's a brief primer.

1) Healthcare.
Few issues are more contentious, but there seems to be remarkably little difference between Obama, Clinton and McCain here.

The big issue is government negotiation of drug prices for Medicare: Dems very much in favor, and got 54 Senate votes last time it was voted on in 2007; they will need 60 to break a filibuster. Right now the Dems have 51 seats, and will almost certainly pick up an extra three or four. That could put them in a position to negotiate.

Look at Humana , which has a large percentage of the market for Medicare subsidies and reported excellent earnings the other day. Dems say it's time to reduce the Medicare subsidy. A bill to reduce Medicare subsidies got through the House. Again, the focus will be on the Senate.

What would a President McCain do? Sounds like he would support some type of price controls on drugs, and also some support for reimportation of prescription drugs.

That's another hot-button healthcare issue: reimportation of drugs, from Canada and elsewhere. This is probably a done deal, the question is would reimportation come just from Canada, or other countries as well? Canada's price differences with ours are minimal, but it could be significant elsewhere. But this raises questions of quality control.

2) Tobacco.
If Dems win, they will certainly attempt to raise tobacco taxes to fund healthcare. This of course creates the bizarre situation that healthcare will be partly dependent on the continuation of smoking, but I digress.

One side story here is Altria. In 2001 Altria made a strategic decision to be regulated by the FDA, under the theory that it would help the public image and provide other advantages. It fought for a bill to regulate the tobacco industry. There are currently 214 sponsors for the bill in the House, and it appears to have bipartisan support in the House and Senate.

This regulatory bill could be signed into law under a Democratic sweep.

Why would Altria do this? First, it would solidify their 50 percent market share. Why?

Because it would limited market opportunities of competitors and place limits on advertising. Essentially, it consolidates the competition. RJ Reynolds will also probably merge with smokeless tobacco companies.

Second, it would limit legal liability -- many of the lawsuits would be minimized.

3) Energy.
The Dems have $16 billion in solar and wind subsidies, they want to fund it by raising taxes on oil companies and getting rid of tax breaks like the Domestic Activities Production Tax Credit (if you produce 100 percent of your output in the U.S., you pay a lower tax -- Dems want to eliminate this for oil companies).

Would a President McCain sign a tax increase on oil companies as part of a larger energy bill? I think he would.

4) Fannie Mae / Freddie Mac.
This is an old and tired story. Yes, investment portfolio limits will go up if the Democrats come to power.

5) Trade/Protectionism.
Dems are not going to put up tarriffs and have a trade war, they will try to enforce existing trade agreements. For example, the WTO has rules, one of which is the government cannot subsidize their domestic manufacturers.

The labor unions will be pushing to clamp down on that activity abroad, particularly in China. China has been a blatant violator: look at what is happening with Rio Tinto, where the Chinese government has been subsidizing Aluminum Corp. of China's purchase of 9 percent of Rio Tinto's stock in hopes of acting as a spoiler to the BHP Billiton bid for Rio Tinto.

The real beneficiary will be U.S. Steel, because their production is here.

Questions?  Comments?