(ANF) - Abercrombie & Fitch - pollution control industry will benefit - How Democratic Wins Affect the Market, With Zacks Investment Research

From possible changes in negotiating drug prices for Medicare to possible future governmental regulations, we were interested in finding out how the shift in congressional power toward the Democratic Party will affect the overall stock market. Zacks writer Mark Vickery spoke with Senior Market Analyst Charles Rotblut, CFA and Director of Equity Research Dirk van Dijk, CFA for their impressions. MV: We have nearly all of the mid-term election results in. What are your initial thoughts? CR: Right now [Wednesday] we’re having sort of a “sell on the news” reaction, as people were expecting Democrats to win the House. There is a little uncertainty in the Senate with Virginia still undecided, and that looks to be a definite recount situation. Obviously, the balance of power in the Senate rests on how this comes out. DvD: I agree, and I think Virginia could be going on for a long time. Because if the Senate goes Republican or winds up 50/50, then Dick Cheney will be spending a lot of time on Capitol Hill, where he will break all ties. But if Jim Webb can hang on to win in Virginia, we might see a very different story. MV: Which industries do you expect will be the big winners and losers? DvD: I think the pollution control industry will benefit from a lot more emphasis on issues like global warming than we had previously. Also, if we get a minimum wage increase passed, one really obvious beneficiary will be the teen retailers, like Abercrombie & Fitch (ANF). Because although quite a few heads of households are working at or near minimum wage, an awful lot are also suburban kids. For them, this is purely discretionary income that will go get spent at the mall. As far as losers, I see tougher times ahead for the pharmaceuticals industry. We are likely to see a big effort to make the federal government able to negotiate prices for the new Medicare prescription drug plan, which could save the government tens of billions of dollars over the next several years. This will come right out of the hide of companies like Pfizer (PFE) and Eli Lilly (LLY). CR: Democrats are likely to try and change laws to have more drugs imported from Canada. We’re already seeing a trend going on with major insurance HMOs pushing for the increased use of generics, and we’ve seen all kinds of brand-name prescription drugs come off-patent and cause increased competition from the generic drug companies. But some of these reactions we’re seeing in the market actually reflect underlying trends already going on outside the political spectrum; attributing them purely to politics might just be an easy place to lay the blame for a stock that might be declining. MV: How do you see the energy industry being affected by the changes to congressional power? CR: Certainly you should see some type of change – or at least a push for a change – in energy policy. This should have a net benefit for companies more focused on alternative fuels. But even if we see more of a push toward more environmentally friendly policy, it’s important to remember that the underlying factors supporting oil remain. Nigeria is still having problems, the Mid-East is still uncertain, and even with the Democrats in control of one or both houses of Congress, the simple fact is that the Bush administration still controls Iraq policy to large extent. And a lot of what’s going on in Iraq is out of U.S. control completely. So macro factors affecting oil should keep prices high, which is a net benefit for oil companies. DvD: I don’t expect we’ll see on the energy front anything like a windfall profits tax, but an awful lot of special tax breaks that energy companies have gotten in the past might be taken away. Will the Democrats be able to do that over Bush’s veto or maybe graft it onto some much larger packages, which would require some serious negotiation? At the margin, we might see some of that happen, but I don’t expect anything really radical like a windfall profits tax on the energy industry. Oh, and I think ANWAR is dead, too, by the way. MV: Are you expecting increased federal regulations with the increase in Democratic power? DvD: Again, anything like that would have to get past a presidential veto. But what we do have is an awful lot of regulations already on the books that have been totally unenforced, because those who have been put in charge of enforcement really have no desire to enforce them. Take the mine safety industry, for instance – a top lobbyist for the mining industry heads that up. People like that might get their feet held to the fire, and they might decide that it’s just easier to do their jobs. So I don’t think there will be any new regulations written, but we should see a lot more oversight of the Administration. CR: I think it’s likely we’ll actually see less regulation – really less laws, period – because I expect more gridlock in Congress, simply because there is likely to be more partisan bickering. We should keep in mind that we have a Bush White House that, from an ideological standpoint, is very much opposed to a Democratic Congress. I also think that Democrats coming in and trying to change too much too soon might suffer a backlash. For the Senate, regardless which side ends up in control, it’s going to be very evenly split. Also, new people elected to Congress tend to be more moderates than ideologues, on either side of the aisle. MV: Any other passing thoughts on what the affects of the midterm elections might be? CR: The question for the Democrats is, “Now that they’ve regained some power, what will they do with it?” I think they will need to choose their steps carefully to give themselves the best opportunity to win back the presidency in two years. This will be mixed in with the inklings of some Democrats who want to take advantage of their new power and get their agenda across. But my guess is we’re going to see mostly stagnation coming out of government instead of new policy. It should be interesting to see how things play out in the next couple years. DvD: With the decision on who controls the Senate still out, the Democrats currently have about one-sixth of the power in Washington. They could double that if they take over the Senate, and at that point I think you might see a little more advancement of the Democratic agenda. But without it, I think they’ve got enough power to block the Administration’s policies, but not enough to advance much of their own. Perhaps they’ll be able to better position themselves in 2008, but I don’t think they can just run roughshod and pass a whole laundry list of things they’d love to see get done. Realistically, they can only prevent those things the Administration wants that the Democrats are horrified by. Dirk van Dijk, CFA is the Director of Zacks Equity Research. Charles Rotblut, CFA is the Senior Market Analyst for www.zacks.com. About Zacks Analyst Interviews Zacks Equity Research employs 50 stock analysts who are experts in the industries they cover. In these articles you will discover our analyst's insights on key industries in the news along with their favorite stocks to buy and sell now. Zacks Equity Research Home Page | Blog Home| VitalStocks Home