Play Your Local Stocks for a Bush or Kerry Win

Editor's note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on . He's also a regular contributor to RealMoney ,'s subscription site. If you'd like to see all of Jon Markman's RealMoney commentary, click here for information about a free trial.

The stock market and the presidential election appear to be on a collision course for November, as both sides of each are stalemated. President Bush and Sen. Kerry are essentially tied in the battle for the White House, just as bulls and bears are tied in the battle for control of the market.

A major test for both comes this week. The presidential candidates meet in Miami Thursday for a debate that could make or break their campaigns to sway undecided voters. Meanwhile, corporate CEOs meet with their staffs to exhort quarter-ending purchase orders from undecided customers.

The interesting thing now is that the two efforts are so intricately intertwined. A wide range of companies are likely to do better or worse from 2005 through 2008, depending on which candidate wins.

The national scale of both efforts can be rather daunting to analyze. So this week I'd like to reprise two earlier columns -- " Baffled By the Global Economy? Go Local" from May 13 and " Stocks That Swing With Bush or Kerry" from Sept. 2 -- by trying to narrow the dual election/earnings seasons down to a local scale.

For an assist this time, I am leaning on analysis from International Strategy & Investment Group in New York. Not long ago, ISIG deftly divided the two races into a Bush Index and a Kerry Index. The company assigned weights to sectors to denote how much they might gain or lose in the event of the respective candidates' victory. In my version, I will show how the two races look from the perspective of an investor in the state of Washington.

Bush Index

Sector: Pharmaceuticals
Washington angle: ZymoGenetics ( ZGEN), Dendreon ( DNDN) and Icos ( ICOS)

ISI Group analysts contend the drug sector has by far the greatest stake in the election outcome because the next president will direct the rules that determine how the new Medicare drug benefit is implemented. The Bush administration is considered far more friendly to Big Pharma than a Kerry administration might be. Bush would also attempt to fight off drug reimportation, which would slash drugmakers' profits, as well as Congress-dictated drug price controls.

ZymoGenetics and Icos are biotechnology companies dependent on the prospect for high drug prices in their partnerships with large drugmakers. The former has marketed its key products, aimed at diabetes and blood coagulation therapies, through Novo Nordisk ( NVO). The latter has marketed its key product, the erectile dysfunction therapy Cialis, through Eli Lilly ( LLY). Dendreon is a biotech focused on cancer; its lead product candidate, Provenge, aimed at prostate cancer, is in phase III clinical trials.

Sector: Defense
Washington angle: Boeing ( BA) and Esterline Technologies ( ESL)

Boeing has moved its headquarters to Chicago, but its aircraft manufacturing plants still provide a large percentage of the state's employment. Spending on jet fighters and satellites will rise in either candidate's administration, but it figures to gain more from Bush. Esterline makes avionics, controls and sensors for military and commercial aircraft, as well as electronic warfare modules and components for tank and mortar ordnance.

Sector: Utilities
Washington angle: Avista ( AVE) and Puget Energy ( PSD)

Republican members of Congress and a second Bush administration are expected to try to repeal the Public Utility Holding Company Act, which has governed electric companies for 70 years, as part of an energy bill in a second term. Advocates say unleashed utilities would be freer to compete with international utilities, spend less on pesky regulation compliance and improve profitability through opportunistic mergers.

Additionally, a continuation of new, lower taxes on dividends would underpin the appeal of investments in these high-yielding stocks. Spokane-based Avista generates and transmits electricity and transports natural gas; it yields 2.9%. Puget Energy, based in Bellevue, is in the same business and yields 4.5%.

Sector: Multiline insurance
Washington angle: Safeco ( SAFC)

ISI analysts say that if tort reform is pursued in a second term, that would help insurers like Seattle-based Safeco that are exposed to a wide variety of individual and business claims.

Sector: Paper
Washington angle: Longview Fibre ( LFB), Potlatch ( PCH) and Weyerhaeuser ( WY)

Most U.S. paper companies used asbestos extensively in their mills and are thus subject to expensive litigation from workers who contracted lung disease. These companies could gain a great deal if Bush wins and the GOP obtains more seats in the Senate, where legislation on reducing asbestos-liability awards has been bottled up for years.

Kerry Index

Sector: Pharmaceuticals
Washington angle: Short sales of ZymoGenetics and Icos

ISI analysts contend that a Kerry administration may attempt to use regulatory authority to undermine the private-sector delivery of the Medicare drug benefit and also attempt to amend the act, allowing the government to negotiate prices. Kerry also supports a broad drug-reimportation bill and slaps Big Pharma around in his stump speeches.

Sector: Utilities
Washington angle: Short sales of Avista and Puget Energy

It's the opposite of the Bush story. The potential for a Kerry-era repeal of lower dividend tax rates would hurt the appeal of all high-yielding companies. At the same time you could see tougher emissions requirements that would boost spending with no revenue offset. ISI points out that a goal to produce 20% of energy from renewable sources by 2020, as has been proposed, would also require an increase in R&D spending without an offset of higher revenue.

Sector: Cars and trucks
Washington angle: Short sale of Paccar ( PCAR)

It's that do-gooder streak again. A Kerry administration is likely to push for higher fuel economy standards, which could cut into the profits of a company like Paccar, which makes Kenworth and Peterbilt trucks.

Sector: Banking
Washington angle: Washington Federal ( WFSL) and Washington Mutual ( WM)

If Kerry wins but the Democrats are unable to pick up enough seats in Congress to obtain voting dominance, then we may see the best of all worlds: absolute legislative stalemate. This was one of the secrets of the great 1990s boom, as a Republican Congress butted heads with a Democratic White House, allowing few important bills to pass.

This would allow the natural economic cycle to work with a minimum of government intervention, permitting an increase in jobs and higher income for which both parties would claim credit. Banks and savings and loans would benefit from a rise in the savings rate and, probably, a continuation in the trend toward wider home ownership.

Sector: Retail
Washington angle: Nordstrom ( JWN), Costco ( COST) and Starbucks ( SBUX)

Same as above. A stalemate in legislation would forestall any acts of Congress aimed at raising taxes significantly, and generally lead to market forces permitting an increase in consumer spending. Retailers across the spectrum -- from value-oriented Costco to luxury-oriented Nordstrom and devil-may-care Starbucks -- would benefit.

Sector: Technology
Washington angle: Microsoft ( MSFT)

A Kerry administration is expected to be more hawkish than a Bush administration on intellectual property rights. That's a matter close to the hearts of Hollywood and Silicon Valley, where companies wish to protect their copyrights and patents for as long as possible -- preferably forever. Microsoft is one of the largest patent-holders in the world, and it would probably benefit from an administration more focused on strengthening intellectual property rights.

I'll track these two indices over the next six weeks and the next four years and let you know how they turn out.

All Politics Is Local
The Bush and Kerry portfolios for Washington state
Company Industry Sept. 24 Close % Change YTD to Sept. 24 Long/Short
Bush Portfolio
ZymoGenetics (ZGEN:Nasdaq) Drugs $17.98 16% Long
Icos (ICOS:Nasdaq) Drugs 23.7 -42.6 Long
Dendreon (DNDN:Nasdaq) Drugs 8.98 11.4 Long
Boeing (BA:NYSE) Defense 53.14 26.1 Long
Esterline Technologies (ESL:NYSE) Defense 30.36 13.8 Long
Avista (AVA:NYSE) Utilities 18.1 -0.1 Long
Puget Energy (PSD:NYSE) Utilities 22 -7.4 Long
Safeco (SAFC:Nasdaq) Insurance 46.2 18.7 Long
Longview Fibre (LFB:NYSE) Paper 14.71 19.1 Long
Potlatch (PCH:NYSE) Paper 45.41 30.6 Long
Weyerhaeuser (WY:NYSE) Lumber 63.76 -0.4 Long
Kerry Portfolio
ZymoGenetics (ZGEN:Nasdaq) Drugs $17.98 16% Short
Icos (ICOS:Nasdaq) Drugs 23.7 -42.6 Short
Avista (AVA:NYSE) Utilities 18.1 -0.1 Short
Puget Energy (PSD:NYSE) Utilities 22 -7.4 Short
Paccar (PCAR:Nasdaq) Trucks 67.69 19.2 Short
Washington Federal (WFSL:Nasdaq) Banks 25.08 -2.8 Long
Washington Mutual (WM:NYSE) Banks 39.17 -2.4 Long
Nordstrom (JWN:NYSE) Retail 39.58 15.4 Long
Costco Wholesale (COST:Nasdaq) Retail 41.35 11.2 Long
Starbucks (SBUX:Nasdaq) Retail 45.04 35.8 Long
Microsoft (MSFT:Nasdaq) Software 27.29 -0.3 Long
Source: MSN Money

Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. At the time of publication, Markman was long Microsoft and Starbucks. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at; please write COMMENT in the subject line.

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