by Joe Shea
November 4, 2010
MOURNING IN AMERICA
ANGEL FIRE, N.M., Nov. 6, 2010 -- Last night's election results have been "discounted" in the truest sense by not just Wall Street but by most foreign stock markets. It is a good refresher course in the fact that markets are usually anticipatory.
For many years Coca-Cola stock would go up in late winter and early spring, if early forecasts for good weather and a good economy were predicted for the summer. Sun, fun, picnics, parties, drink more soda pop.
Similarly, International Paper would rise on back-to-school indicators of perhaps a good consumer holiday spending season.
Why? More gifts, more sales, more packaging, more boxes, more gift wrap, more paper.
This is the retail equivalent of "buy on rumor, sell on news," or "sell the sizzle, not the steak."
Republican election success, regaining control of the House of Representatives, 17 additional state legislatures, and more than 10 governor's chairs was already assumed by institutional investors.
Ironically, possible gridlock in Congress - with little likely economic improvement in the next two years - could be positive for U.S.-based transnational equities.
A lower dollar makes U.S. goods relatively cheap overseas. Developing nations which were not caught in mortgage funding scandals are chugging along with infrastructure repairs and development, and a growing middle class that craves USA style products and services.
So KFC generates longer and longer lines in China. Its owner YUM Brands sees no limit to the Chinese culinary and financial appetite for original recipe or extra crispy profits. Caterpillar benefits from front end loaders, bull dozers, and back hoes for new highways, aqueducts, canals, hospitals, schools, and harbors around the world.
Heinz puts its ketchup on restaurant tables in Rio and Riyadh, J & J Baby Shampoo graces shelves in Zurich and Zagreb, and Microsoft software is sold in French, Farsi, Spanish, Swahili, Creole and Serbo-Croatian.
For conservative investors it is often difficult to be a contrarian, yet the upside potential of a bit of risk is often the riskiest strategy of all.
The world will still view the United States as a safe haven, and buy our bonds. The Treasury will swap, replace, refund, and refinance the growing national debt at lower real interest rate levels, much as a homeowner with equity and fairly good credit might refinance that 6 percent fixed mortgage for 3.99 percent.
So, while headlines will debate the ultimate consequences of health care, financial services, mortgage, and environmental reform, don't be surprised if the next two years return diversified equity portfolios to pre 2000 highs.
Mark Scheinbaum is Chief Economist at Boca Raton, Fla.-based Kaplan & Co. Securities