Defense, Drug, Energy Stocks Might Gain From a Republican Win
By Jeff Bliss
Washington, Nov. 4 (Bloomberg) -- Defense, drug and energy stocks, along with businesses seeking tax cuts, may benefit under a Congress controlled by Republicans, corporate analysts said.
A shift of the Senate into Republican hands in tomorrow's election would remove Democratic committee chairmen pushing to curb tax cuts or holding hearings on rising drug prices. They'd be replaced by Republicans pressing for more oil exploration, higher defense budgets and limits on clean-air rules and lawsuit damage awards.
Among the companies that could benefit are power plant owners such as Duke Energy Corp., oil companies such as Exxon Mobil Corp. and Sunoco Inc., arms makers including Lockheed Martin Corp., Boeing Co. and Raytheon Co. and drug makers such as Merck & Co., Pfizer Inc. and Eli Lilly & Co.
``You would see a relief rally, for example in the drug sector,'' said Andy Laperriere, managing director at International Strategy & Investment.
Jon Jacobs, a fixed income analyst at IDEAglobal Inc., a New York research firm, said a Republican Congress would initially trigger rises in equities and the dollar. Treasuries would suffer, he said, as investors move cash into stock markets, anticipating bigger returns.
Tight Races
Polls and other soundings around the country indicate that many key elections for Senate and House will be close. In the departing Congress, Republicans held a 15-vote majority in the House and Democrats a one-vote edge in the Senate.
Any advance of companies' agenda might collide with the limits imposed by Senate rules, analysts said. The most optimistic predictions for Republican gains at the polls fall short of the 60 votes the party needs to end floor debate and proceed with most Senate votes.
``Unless they can round up 60 votes, the Senate is likely to have the same gridlock as this year,'' said Ira Loss, an analyst at Washington Analysis who covers government health policy for institutional investors.
Still, the party in control can choose topics for hearings and decide which proposals make the legislative docket.
``If you have unified party government, at least you can control the agenda and control what everyone's talking about,'' said James Thurber, a political scientist at American University.
Republican control could boost drug makers trying to head off Democratic proposals for adding prescription drug coverage to the Medicare health insurance program, and military contractors that may be in line for additional defense spending backed by Republicans.
Impact of Iraq
Energy companies would get a boost from Republican control if the Senate gave final approval to $33.5 billion in tax breaks and subsidies for oil, gas and other traditional energy producers. Democrats oppose the measure.
Democratic strategists including James Carville rejoiced earlier this year at revelations about wrongdoing at the now- bankrupt Enron Corp. and WorldCom Inc., saying corporate accounting scandals would enrage voters and sweep out Republicans.
Now, the possibility of a war against Iraq and threats of terrorism at home have kept voters from focusing as much on their usual priority, the economy, surveys have shown.
Laperriere's firm says there is a 40 percent chance Republicans will win the House and Senate, a 35 percent chance voters will maintain a split and a 20 percent probability Democrats will gain a majority in both houses.
A split Congress would continue the current political leadership for an additional two years. Disagreements between a Republican-led House and Democrat-controlled Senate on federal spending probably would contribute to rising budget deficits, and a split on approving Bush's new Department of Homeland Security, according to political analysts.
YouBet.com's Battle
Companies such as YouBet.com, a Los Angeles-based company that lets Internet customers place bets, has been fighting Republican efforts to regulate such businesses, while Democrats have avoided imposing rules on Internet companies.
A Republican takeover would oust Vermont Senator Jim Jeffords as chairman of the Senate Environment and Public Works Committee, and insert James Inhofe from the oil state of Oklahoma.
Jeffords' committee approved a bill that would force Southern Co., Duke Energy and other power plant owners to cut some emissions as much as 90 percent. Inhofe says the bill would saddle power plants with more restrictions without guaranteeing a reduction in global warming.
While not speculating on the impact of a Republican Congress, Duke Energy spokesman Peter Sheffield said in the next Congress the company ``would hope for any clean-air legislation that took a flexible, market-based approach for the regulation of emissions.''
On the tax front, a Republican-run Congress will try to heed the president's call for making permanent his $1.35 trillion cut in personal income taxes, which was enacted last year, said Kevin Sheridan, spokesman for the Republican National Committee. The cuts are due to expire in 2011.
Dividends Tax Rate
Republicans have said they'll also press for other unspecified cuts in taxes for individuals and corporations, and analysts see a cut in the tax rate on dividends as a likely proposal.
The process of passing a budget bill is key to Republican plans for tax cuts. Special budget rules allow tax legislation to avoid Senate filibusters and pass with a simple majority.
Any investor enthusiasm for a Republican sweep would likely be tempered by concern about the impact of additional government spending on the federal deficit. The Congressional Budget Office forecasts a $145 billion deficit for the current fiscal year. Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., predicts $350 billion.
Andrew Parmentier, a policy analyst at Friedman Billings Ramsey & Co., calls the prospect of big tax cuts ``a pipe dream.''
``The fiscal picture doesn't allow for wholesale tax breaks,'' he said.
Lawsuit Damages
In a Republican Senate, committee investigations of corporate accounting might be toned down, and Democrats would lose their subpoena powers.
``What worries Wall Street analysts isn't necessarily a bill,'' Parmentier said. ``It's the hearings.''
Bush has long favored legislation to limit punitive damage awards in liability cases, while Democrats oppose enacting limits. Punitive damages in the U.S. ``are utterly unpredictable,'' said Steve Hantler, assistant general counsel at DaimlerChrysler AG.
``We would be hopeful of advancing common-sense legal reform'' under a Republican-controlled Congress, said Roger Hannay, chief executive of closely held Hannay Reels Inc., a maker of hose and cable reels.
The Westerlo, New York, company spends ``tens of thousands of dollars'' a year on liability litigation, he said, and wants Congress to limit punitive damages and frivolous lawsuits.
Carlton Carl, a spokesman for the Association of Trial Lawyers of America, sees no threat.
``They still aren't going to get the 60 votes need to limit people's rights, especially in a time when Americans are asking for more corporate accountability
Market Data 
Markets 
AI
