The Republican Party is looking to make big gains in the midterms. Which stocks would benefit from a strong GOP showing? I ask Motley Fool Income Investor advisor James Early.
Mac Greer: OK James, the Center for Responsive Politics says that commercial banks and investment firms are now giving more to Republicans than Democrats. So Wall Street now seems to be betting on the GOP. Who do you expect to be the stock market winners and losers if Republicans win big in the midterms?
James Early: It will be good for Wall Street's usual suspects: Citigroup (NYSE: C ) , Goldman Sachs (NYSE: GS ) , Morgan Stanley, and JPMorgan. What's striking about the just-passed financial reform law is how much lead time there is before many provisions kick in and how much discretion is left to various regulators. With the backstop of a Republican Congress, more coin flips will go banks' way. A second beneficiary is dividend stocks, if Republicans can stall the tax vote long enough.
Greer: I know in the wake of the financial crisis, you've been skeptical of financial stocks. And by skeptical, I mean "avoiding like the plague." Are you changing your tune?
Early: Not a bit. Financials are sitting on worse assets than appears thanks to a weird accounting rule change in 2009 called FAS 157-4. In a nutshell, FAS 157-4 reversed a lot of prior momentum toward more transparent mark-to-market accounting by letting banks value certain assets using their own models if the market prices of those assets seemed "disorderly." As long as payments on these assets (typically loans) are being made, banks have great liberty in how to value them, so it's not surprising that they're happy to modify loan terms to levels that keep sketchy borrowers afloat. It's called "extend and pretend."
So there's a lot that needs to wash through the system before I'd consider most again. But for someone with a shorter-term focus and more risk tolerance, yes, more Republicans are going to mean more good news for financials.
Greer: And I know from our previous conversation on financial reform that if push came to shove, and if you had to pick one Wall Street bank to invest in, you'd buy Goldman.
Early: Yep. But I'd much rather wait a few years. Once the economy recovers, I'd consider investing in well-run banks that operate outside the Wall Street fizz, such as US Bancorp (NYSE: USB ) and BB&T. And abroad I like Canada's Bank of Nova Scotia (NYSE: BNS ) . Canada on the whole has played things a lot safer than we have financially.
Greer: And what stocks do you see benefiting if the Democrats pull an upset and keep the House?
Early: An unexpected winner might be infrastructure stocks, should we see any further stimulus. And frankly, we need more infrastructure spending anyway. I'm talking everything from roads and bridges to energy transmission to sewage pipes. Did you know some municipalities still have wooden sewage pipes, like the ancient Romans did? Anyway, there's a cornucopia of stocks that exploit this trend: Fluor (NYSE: FLR ) , an engineering and construction company, Cemex (NYSE: CX ) , a Mexican cement company, and URS (NYSE: URS ) , which does a lot of construction consulting and management for the federal government, are a few along these lines.
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