Sell Short
 

From the Wall Street Journal This Morning:


What Business
Should Expect
In Next Congress
Minimum-Wage Increase,
Drug Prices Top the Agenda;
New Hurdles for Free Trade
By DEBORAH SOLOMON and MICHAEL M. PHILLIPS
November 9, 2006; Page A1

WASHINGTON -- Democrats' election victory Tuesday ended a six-year partnership between a business-friendly White House and Congress that enacted free-trade agreements, cut taxes on corporations and investors and -- with the significant exception of the Sarbanes-Oxley corporate-reform bill -- avoided new regulations.

Now, the question is how far the Democrats, tempered by a Republican president and a closely divided Senate, can push the pendulum in the other direction.

The party has yet to spell out its entire legislative agenda, but its leaders are talking about quickly boosting the minimum wage, seeking to curb executive pay and pushing for higher taxes on business, particularly oil companies. Many stocks, especially health-care shares, took a hit early yesterday as investors weighed the new political uncertainties, but the market went on to finish higher (see related article.)


Rep. Charles Rangel, the New York Democrat who is expected to become chairman of the tax-writing House Ways and Means Committee, cites "ending tax shelters for companies that move American jobs overseas" as one of his main objectives. He is also expected to complicate the White House's efforts to further liberalize trade by demanding strong protections for labor in any trade deals.

California Rep. Nancy Pelosi, the probable new speaker of the House, has already called for ending "tax giveaways" to oil companies, negotiating with pharmaceutical companies for better drug prices for federal health programs and rolling back tax cuts for the wealthiest Americans.

Many political observers, however, doubt the Democrats can gain traction on more than a few of these issues, especially with business groups and their political allies keen to avoid losing any ground on trade and taxes.

Raising the minimum wage is one fight the Democrats are expected to win. That would be a victory for organized labor, which has pushed for an increase for years, but a defeat for the restaurant and retail industries and small-business owners, who argue it would hurt the economy by forcing them to hire fewer workers.

Mrs. Pelosi has promised to bring legislation to the floor within the first 24 hours of the new Congress to boost the minimum wage to $7.25 an hour from the current $5.15. The idea is popular with voters: Six states overwhelmingly passed ballot initiatives Tuesday to raise the minimum wage and tie future increases to inflation. Republicans may feel hard-pressed to oppose the move.

At a news conference yesterday, President Bush cited the minimum wage as "an area where we can ... find common ground."

On the trade front, businesses face the growing threat of protectionism. Several victorious Democrats campaigned as trade skeptics, arguing that U.S. manufacturers are being battered unfairly by companies in China and other low-wage countries with weaker environmental and labor protections. Trade watchers on both sides of the issue say President Bush will have a tough time winning a free hand from Congress to negotiate trade accords. The president's "fast track" authority -- under which Congress has to vote up or down on trade agreements, forgoing amendments -- expires in July, and a Democrat-led House is less likely to grant him such sweeping powers again.

Leo Gerard, president of the United Steelworkers union, told reporters yesterday that the coming showdown over Mr. Bush's fast-track authority is "the first battle that we're going to win."

U.S. trading partners are reluctant to negotiate new trade accords if they think Congress will change the terms before ratifying them, and the current Doha round of global trade talks is already considered to be in deep trouble. European Commission President José Manuel Barroso appealed yesterday to the new U.S. Congress to help revive the stalled talks.

The trade debate is particularly heated when it comes to China, with its fast-growing export industries. Lawmakers could take steps to press China to improve its enforcement of intellectual-property rights and other trade rules. Yesterday, Mr. Rangel, the New York Democrat, said the U.S. needs to "be angry as hell and try to protect American industry....We have to protect American jobs and American manufacturers."

Robert Portman, the former U.S. Trade Representative who now heads the White House budget office, says the Democrats could create "a real nervousness among people who invest in and look at our economy closely. The trade dynamic has been very good. Export-driven growth is important, and if we're not knocking down barriers to trade that's a concern."

Democratic control of the House also will end the Republican Party's drive to lower taxes and could frustrate President Bush's hopes of extending the reduced 15% tax rates on capital gains and dividends, which expire in 2010. Republicans' decade-long push to scrap estate taxes is also likely to be halted.

Democrats are expected to support some tax sweeteners for business, such as the research and development tax credit. Mr. Rangel also said one of his priorities is to ease the burden of the so-called alternative minimum tax, which is designed to keep wealthy taxpayers from taking so many deductions and credits they escape taxes altogether. Easing the burden of the AMT, which has begun to ensnare many middle-class families, could cost the government $1 trillion over 10 years, and many policy watchers expect Democrats to rescind tax breaks for corporations and the wealthy to help offset any tax cuts or new spending.

At the same time, Democrats have vowed to force pharmaceutical companies to charge less for drugs sold to Medicare beneficiaries -- an idea strongly opposed by the drug industry. Mrs. Pelosi is expected to push a bill to allow direct price negotiations between the government and the drug industry. Though such a measure might not clear the Senate or the White House, it could give Democrats traction to advance other ways of driving down drug prices, such as widening the availability of imported drugs.

Drug prices are also likely to be a major focus for investigations, reports and hearings by the new Democratic House committee chairmen, particularly California Rep. Henry Waxman, who will head the House Government Reform Committee. A favorite drug-industry benefit -- six months of exclusive marketing of medications in return for studies on their effects in children -- is up for renewal and likely to draw scrutiny from Mr. Waxman and others. In an interview, Mr. Waxman says his priorities will include "reducing the price of prescription drugs."

Similarly, investors who own stock in student-loan providers like Sallie Mae worry about Democratic campaign promises to significantly reduce student-loan interest rates and speculation that they'll promote the William D. Ford Federal Direct Loan Program, in which students borrow directly from the federal government, rather than banks. That direct-lending program competes with the other federal student-loan program, Federal Family Education Loan Program, in which students borrow through a middleman such as Sallie Mae. In 4 p.m. New York Stock Exchange composite trading, shares of SLM Corp. -- better known as Sallie Mae -- were down 4.8% at $47.21.

The Democrat takeover of the House is expected to put outsize executive pay back in the spotlight, with a push toward giving shareholders a vote to approve pay packages. Massachusetts Democrat Barney Frank, who is expected to head the House Financial Services Committee, says he will hold hearings on executive pay and plans to move forward on a bill he introduced last year.

However, Mr. Frank and other Democrats have been receptive to business efforts to review the Sarbanes-Oxley corporate-governance law and to have regulators adjust some of the more controversial provisions. Sen. Charles Schumer, a New York Democrat, has spoken recently about curbing some aspects of the law, which he says is driving business away from U.S. financial markets.

Mr. Frank also has a strong interest in affordable housing and his chairmanship could shift the odds in the three-year-old struggle to tighten regulation of mortgage giants Fannie Mae and Freddie Mac. The Bush administration's efforts to persuade Congress to force the companies to slash their mortgage holdings had already sputtered before the election, and Treasury Secretary Henry Paulson has been looking for possible compromises. Now almost any legislative language to rein in the two companies may be politically impossible to sell.

Fannie and Freddie shares gained 2.9% and 2%, respectively, to $61.25 and $71.23 yesterday in 4 p.m. Big Board trading.

Still, Mr. Frank is expected to push hard for the legislation to require Fannie and Freddie to use more of their resources for financing loans to low-income people. That may hurt the companies' profitability. And both parties still want to create a more powerful regulatory agency to oversee Fannie and Freddie in light of their violations of accounting rules in recent years.

Another industry that could both benefit and suffer from the Democratic takeover of the House is the auto industry. Democrats are likely to push for greater use of alternative fuels, which could hurt or help Detroit depending on how legislation is structured. The industry is sharply opposed to tougher fuel economy standards supported by Democrats. But domestic auto makers are bullish on the potential for ethanol to partly replace oil as a transportation fuel and would support efforts to build the ethanol infrastructure and production capacity.

More perilous for the industry is Democratic interest in addressing climate change by limiting carbon dioxide emissions. Automobiles are among the worst offenders, and car companies could be hurt by new taxes or regulations aimed at limiting carbon emissions.

President Bush is said to be interested in climate change as well, and he has repeatedly spoken in favor of alternative fuels, making them an area where potential exists for successful legislation.

--Kara Scannell, Brody Mullins, James R. Hagerty, Anna Wilde Mathews, Laura Meckler and Anne Marie Chaker contributed to this article.

Write to Deborah Solomon at deborah.solomon@wsj.com and Michael M. Phillips at michael.phillips@wsj.com

Re: Sell Short
 

[QUOTE]Originally posted by red-beard



From the Wall Street Journal This Morning:




thx

If you short, it should be because GDP has decelerated from 5% to 1% in 3 qtrs and is on its way to negative, not because of what you read in that article.

Wait till they start slashing rates on the lower GDP news and see how you feel about being short. This market is very very bulled up right now I would not want to stand in front of it. The volatility skew in the SPX is a joke right now.

Very true. It's a matter of principal. But is does affect certain industries like bars and nightclubs quite a bit(in states where the fed wage laws prevail).

One thing the article did not say:
the democrats are expected to increase taxes ands fees and tighten environmental restrictions for oil companies.
What's that? you think that's a good idea?
Cool, I'll remember that when you complain about all the gasoline price increases that are covering the higher cost of making gasoline.

if there is anyone on capitol hill that is actually stupid enough to believe that there is enough or ever will be enough ethanol to replace gasoline, then this country is is serious trouble. OK, we know it's in trouble already, but it will be in even worse trouble that we already knew about.

see my comments in this thread:

http://forums.pelicanparts.com/off-topic-discussions/267653-ethanol-e-85-verses-hybrids.html

True, I believe that is a state by state thing though. Even then many still base at min wage(at least around here).

:confused:

This sounds like something about which I ought to know more. Care to put it into more simple terms so that I can understand? Thank you.

I assume you’re talking about the volatility skew? I will give you an over view it’s a fairly complex concept.

All things being equal and not getting into the cost to carry issue on options assets if the SPX (s and p 500) was at 1400 the 1390 put and the 1410 call should roughly have the same value. In reality they never do, there is always more premium in the 1390 put because there are always natural hedgers in the market and always greater demand for the puts. This is what creates a skew in the prices of the puts vs. the calls. When that skew flattens out, meaning the puts are not trading at the same levels over the calls as they once where it’s an indication that there are a lot of bulls in the market. In fact the large options firms who do the real volume in these things are generally the ones who price the puts lower and lower (yet still above) the relative price of the calls. You can gauge their bullishness and the markets simply because they’re the ones that provide liquidity in the options and they don’t see the kinds of buyers who bid up the puts.

This is a very very very simple view of the volatility skew which is even flatter today.

I'm thinking this might have more to do with the coming troubles than the Democrats (from the latest Fortune Magazine).

http://forums.pelicanparts.com/uploa...1163694710.gif

Wall Street Journal also ran an article that showed that in the past 100 years, the stock market, on average, did better under Democratic presidents than Republican.

In general, the rule is this: if you're in big industry - vote Republican, as conservatives try to conserve and protect what already is; if you're in fields which haven't matured (research, start ups, etc.) vote Democratic, because they hold back the matured industries when they try to crush the upstarts. Neither view is right - only the balance and flow between the views produces the best America.

trader220, Thank you for taking the time to reply. That helps. Another request, please :) . What do you mean by this? Thank you.

quote:
--------------------------------------------------------------------------------

Originally posted by trader220
Wait till they start slashing rates on the lower GDP news and see how you feel about being short.

I am just speculating that inflation is in check and the lower GDP numbers will accelerate that time table in which the FED cuts rates which has short term Bullish effects on the markets...

In general until something changes in the big picture I would not be short here. But that’s just my opinion... the original opinion of the thread starter was to get short, I just don’t share that opinion.

I think if the shift in the market trend was going to occur on the Democrats winning so big we’d have already seen it start to happen. The SnP is now up 25 points in 3 days.

Thank you again. Yes, the market appears strong. I am trying to learn to grow my capital in ways other than through index funds, thus my questions. If you're in options, you're twice the woman I am. :)

*And Thank You! Wayne Dempsey for this forum. I frequently stop by for a visit.

Woman? That’s not nice...

I run a small hedge fund. We execute our own statistical based model which is market neutral. Prior to where I am now I spent 10 years trading currency options institutionally and 6 years as an independent market maker trading equity and index options on several exchanges.

I am not really in the financial advisory business and I don’t do and have never been in sales or individual money management.

Just like with Porsches I am always happy to discuss the markets and especially options.

Regards

HOWARD

"HiBeam" is a female from over on the R1100S forum.
A looker, too...so I hear.
Sorry 'Beam. ;)

Well that explains at lot... no offense taken.

The WSJ just is not what it used to be.