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What Does the Democratic Victory Mean for Stocks?

(Headlines - scroll down for full stories)
1. What Does the Democratic Victory Mean for Stocks?
2. China’s Trade Surplus Rises to Another Record
3. Consumers Tighten Purse Strings
4. Chavez: We’ll Work to Keep Oil Above $50

1. What Does the Democratic Victory Mean for Stocks?

Stocks retreated this morning as it became clear that the Democrats had picked up a significant win in the House, and could possibly control the Senate as well.

It’s too soon to tell if the change in power will end the record rally that we’ve seen in the Dow Jones industrials, but we can make some speculations on what sectors will benefit from the Democratic win and which will lose.

The Winners

Winner #1: Biotechs. Voters in Missouri approved a measure that will guarantee federally approved stem cell research in the state. Companies involved in stem cell research will likely get a boost as more states adopt favorable guidelines.

Winner #2: Housing? It seems strange that the beleaguered housing sector could be a beneficiary in the Democratic victory, but some analysts say that Democrats will broaden access to homeownership for Americans. And that could be good news for a sector that’s practically been beaten to within an inch of its life.

Winner #3: Alternative Energy. Democrats will likely increase funding and incentives for alternative energy producers to quell the impact of high oil prices and to throw a Band-Aid at global warming. The major winners will be ethanol, wind energy, and bio-fuels companies.

The Losers

Loser #1: Big Pharma. Democrats have pledged to overhaul the current Prescription Drug Plan enacted by Republicans a couple of years ago, and that could mean a tumble in profits for traditional pharmaceutical companies.

Loser #2: Defense. Spending on the war in Iraq is likely to face cuts as the Democrats try to fix the ballooning federal deficit. The Democrats are generally more butter than guns when it comes to governing, and defense companies could take it on the chin.

Loser #3: Big Oil. Democrats, including soon-to-be Speaker of the House Nancy Pelosi, have said that they plan to roll back many tax breaks and financial incentives given to the nation’s largest energy companies. Big Oil has been raking in record profits as oil prices climbed, but now they’re likely to feel the pinch.

That leaves just one category.

Undecided: The Economy. Time will tell if the Democrats succeed in rolling back the tax cuts passed when the Republicans were firmly in control. If that happens, the economy could face further slowdown as the stimulus for growth is taken away.

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2. China’s Trade Surplus Rises to Another Record

China’s trade surplus reached a new record high of $23.8 billion in October as imports slowed and exports surged.

China’s trade surplus soared an amazing 55.6 percent from September’s surplus of $15.3 billion, according to China’s custom bureau. Exports of goods jumped 29.6 percent while imports rose just 14.7 percent, the slowest pace in 15 months.

The record surplus this month brings China’s trade surplus to $133.6 billion for the year through October. That’s almost a third higher than for all of 2005, reports Bloomberg.

China reported yesterday that its foreign reserves have swelled to $1 trillion. That’s significant because it means that if China decided to sell off any of its reserves by dumping say U.S. dollars on the market and buying gold instead, the dollar’s value would likely tumble.

So, the news today that China is bringing in that much more cash into its coffers is cause to worry. Members of the U.S. government are trying to persuade Beijing to allow the yuan to appreciate further against the dollar so that China’s exports will be more expensive and the trade gap will narrow. Currently, the yuan is only allowed to appreciate 0.3 percent per day against a basket of currencies.

In addition, some members of the U.S. government blame the artificially low yuan as the reason for American job losses, particularly in the manufacturing sector. Cheap imports from China result in lower sales for U.S.-produced goods, which in turn leads to layoffs of U.S. jobs. The issue has been largely bi-partisan, so yesterday’s change in power in the U.S. Congress will likely have no bearing on the political posturing.

“The main issue facing China today is the external imbalance,” Jonathan Anderson, chief Asia economist at UBS AG in Hong Kong, tells Bloomberg. “The authorities should increasingly be focusing on the exchange rate, allowing the currency to resume appreciation going into 2007.”

In response to the news, the yuan gained ground against the dollar. The yuan has risen 3.1 percent against the dollar since China moved to the basket of currencies and de-pegged from the dollar, says Bloomberg. The yuan has fallen 2.8 percent against the euro.

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3. Consumers Tighten Purse Strings

Consumer borrowing fell in September by the largest amount since the recession of the early 1990s, weakened by a huge drop in auto loans.

The Federal Reserve reported Tuesday that consumer borrowing declined at an annual rate of 0.6 percent in September, compared with a 4.6 percent rate of increase in August. Borrowing fell by $1.2 billion in September the biggest drop since a $1.78 billion decrease in April 1992.

It was the first decline since March, when borrowing marked a far milder decrease of 0.24 percent.

Borrowing for auto loans slipped at an annual rate of 3.2 percent in September, reversed from an increase of 3.5 percent the previous month, the report showed. September loans in that category dropped by $4.05 billion, the largest fall since the $4.81 billion decline in October 1991.

The overall economy has lost momentum due to the housing slump. The struggling auto industry slashed jobs last month, as did companies involved in home-building, furniture making, and real-estate dealing.

By contrast, the Fed report showed that borrowing in the category that includes credit cards rose at an annual rate of 4.0 percent in September. That was more anemic than the gain of 6.7 percent in August.

Both of those increases were below the double-digit gains in May and June, months in which economists believe consumers were using their credit cards as a way to cope with soaring energy prices.

© 2006 Associated Press.

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4. Chavez: We’ll Work to Keep Oil Above $50

Venezuela will work to prevent oil prices from falling below $50 per barrel, President Hugo Chavez said Wednesday.

Venezuela, the fourth largest supplier of oil to the United States, has been a consistent OPEC price hawk and at times has called for a $60 minimum for international oil prices.

"Today were are determined to prevent the price [of oil] from falling below the floor of $50, and we will keep [prices] there," Chavez said during a press conference with foreign correspondents.

It was not clear if he was referring to international oil prices or to Venezuela's crude oil basket, which last week closed at $49.38.

A day earlier Energy Minister Rafael Ramirez told reporters that $60 per barrel was a fair price for crude produced in the United States.

Oil prices Wednesday climbed close to $60 per barrel on falling U.S. fuel inventories and discussions of a possible OPEC cut.

© 2006 Reuters.

Editor's Note:

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Editor's Notes:

• Get a copy of our FREE special report "99 Stocks to Sell Now." We are urging all our FIR subscribers to dump these dogs now. If you own just one of these stocks your portfolio could be a lot riskier than you think. Get your FREE copy today.
  
  
• Warren Buffett is betting billions that the dollar will crash.
  
  
• Hedge Fund Investing has tripled subscribers' money with just one trade!
  
  
• Financial Intelligence Report told subscribers to prepare for falling oil prices. That forecast was dead on. Find out where oil prices are headed now.
  
  
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