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Asbestos litigation reform is on the tip of the spear with which the Bush administration wishes to punish the nation's trial lawyers in its second term. But it has run into substantial opposition in Congress and in the nation's courtrooms.

This is important to investors because several of last year's best-performing stocks advanced strictly on the strength of conviction that Republicans would succeed in advancing their pro-business agenda. Any developments that would stymie those hopes will therefore sicken the shares of several key industrial companies, as well as other firms on the fringe.

As a measure of how critical Republican legislative firepower is to the success of some of these companies, consider that as the broad market rose 4% in November following the GOP sweep, flooring maker Congoleum ( CGM) rose 14%, packager Crown Holdings ( CCK) went up 11.8%, container maker Owens-Illinois ( OI) climbed 16.4%, oilfield services provider McDermott International ( MDR) gained 24.7%, chemical maker W.R. Grace ( GRA) jumped 28%, gypsum wallboard maker USG ( USG) added 47% and building materials maker Owens-Corning ( OWENQ), traded on the Bulletin Board while in bankruptcy, rose about 800%, jumping from 54 cents a share to $4.85 between Election Day and Nov. 30.

So far this year, investors' enthusiasm has cooled a bit as combatants failed to show much progress in finalizing a $140 billion settlement formula in their first hearing in Congress and a contentious hearing over the asbestos liability of bankrupt insulation maker Owens-Corning began in Philadelphia. Let's look at where it all stands.

A Debate With a Very Long History

First, keep in mind that this debate goes back a long way. The U.S. Environmental Protection Agency banned the use of asbestos in 1989 due to its carcinogenic properties. But that was after tens of thousands of workers had been exposed to it for a generation or more. The effects of that exposure can take a long time -- even decades -- to harm individuals, which accounts for why the litigation has stretched out so long.

Attorneys for affected workers have gone after every company that used asbestos in its products or that purchased other companies that used asbestos. The Rand Corp.'s Institute for Civil Justice says 730,000 people have filed asbestos injury claims to date, costing more than $70 billion and driving 70 companies into bankruptcy, The Sacramento Bee reported.

The lawyers reserved special enmity for those that clearly ignored the health risks after they became known. In the Owens-Corning bankruptcy case, for instance, company attorneys admitted the company first began stamping a health warning on cartons containing asbestos products (but not on the products themselves) in 1966, which was many years after the dangers became well known.

Owens-Corning's situation is emblematic, as the hearing will determine whether the company owes anywhere from $2 billion to $16 billion -- a huge range -- to asbestos victims. The company made insulation called Kaylo that was used widely in shipyards, steel mills and refineries. It doesn't take much exposure to the heat-resistant fiber to cause a fatal lung cancer called mesothelioma. Yet testimony in the trial, reported in the Toledo Blade, indicated that construction workers routinely shaped and sawed Kaylo without knowing the dangers of it. "It showered asbestos fibers all over the place," a plaintiffs' attorney said.

Tens of thousands of workers in the nation's heartland and urban centers have a stake in this debate, which revved up on Jan. 11 at a Senate Judiciary Committee hearing. Stakeholders on all sides are being heard, including Senate-appointed mediator Judge Edward Becker, and it appears that issues have narrowed. But analysts say it appears stakeholders are far from a consensus even though Sen. Arlen Specter, R-Pa., the new chairman of the Judiciary Committee, hopes to get a bill to the Senate floor early in February.

Nobody Is Giving Ground

Although the Republican majority has compromised on a few key issues, both trial attorneys and labor unions so far have failed to give any ground. No Democrats appear ready to support the reform bill, including the most important Senate Democrats involved in the issue -- Carl Levin and Debbie Stabenow from heavily industrialized Michigan. Last year, only one Democrat, Sen. Dianne Feinstein of California, supported the Republican bill, formally called the Fairness in Asbestos Injury Resolution Act.

And of course, there is no guarantee that conservative Republicans will support an expensive bailout of industry and insurers at a time of record budget deficits, either. Budget hawks object both to the extreme current cost and the fact that the trust fund envisioned by Specter could drag taxpayers deeper into the mess due to a borrowing authority.

According to an analysis by the political team at ISI Group in New York, here are the hot-button issues that investors should care about:

Fund value. Democrats and Republicans agreed last year on a $140 billion fund, but the number could go higher. About $90 billion would come from defendant companies, $46 billion from insurers, $4 billion from existing trusts and the rest -- well, that's from you and me. Unions insist the fund needs to be $149 billion, and insurers complain their share is too big.

Payout timeline. The money is supposed to last for 30 years, but there's a battle over how much should be paid out by 2010. Unions want $60 billion paid in the first five years; the mediator has proposed $40 billion.

Award values. There are 10 categories of victims who would be due money from the trust. People with mild asbestosis and pleural disease would get $20,000 to $35,000; those with severe asbestosis, $300,000 to $400,000; people with disabling asbestosis, $750,000 to $850,000; those with lung cancer, $250,000 to $1 million, depending on the situation; and people with full-blown mesothelioma, $1.075 million.

The main category of debate is so-called Level 7, which is made up of smokers and ex-smokers with the lowest form of lung cancer who may not have contracted their disease strictly from asbestos. Republicans want to give these folks $150,000 to $200,000; Democrats want to give them $500,000.

End of fund. Democrats want to retain victims' right to sue if the fund is depleted quickly and can't pay its obligations.

Current lawsuits. Companies want new and pending suits to stop as soon as the trust fund starts, while attorneys and unions want trials to continue until the fund actually starts paying awards. Another big sticking point is when to stop litigation already in progress.

Insurance contribution. Insurers have been squawking over the formula used to determine their share of the fund. In typical congressional fashion, the current bill defers this question to a commission that would be set up post-passage.

A Touch More Than a 50-50 Chance

The chance of a bill passing this year is just a little better than 50/50. Yet if there is a hint that a business-friendly compromise is being struck with key Senate Democrats on board, the wheezy band of asbestos stocks will fly again. Speculators will use the November run-up as a template for figuring out which of the group has the most sensitivity to a positive outcome, with the ones in bankruptcy -- USG, Owens Corning and W.R. Grace -- at the top of the list both for risk and potential.

Key Asbestos-Related Stocks
These could be in danger of giving back their big gains of the past year
Company Industry Jan. 14 Close Price/Sales Ratio % Rise, 1/14/04-1/14/05
Owens Corning (OWENQ:OTC) Building materials $3.75 N/A 557.89%
W.R. Grace (GRA:NYSE) Specialty chemicals 13.17 0.40 263.81
Congoleum (CGM:Amex) Rubber & plastics 5.89 0.22 246.47
USG (USG:NYSE) Building materials 35.49 0.36 94.57
Owens-Illinois (OI:NYSE) Packaging & containers 21.24 0.49 71.98
McDermott International (MDR:NYSE) Oil & gas services 18.65 0.61 62.32
Crown Holdings (CCK:NYSE) Packaging 12.95 0.30 41.07
Source: MSN Money

McDermott International, which has only its Babcock & Wilcox subsidiary in bankruptcy court over asbestos claims, will also be sensitive to congressional action. But it should prove a less risky choice right now because it's benefiting from an improvement in the fortunes of its offshore energy construction and power systems engineering businesses.

I'll stay on top of developments over the rest of the year and report back to you.


Please note that due to factors including low market capitalization and/or insufficient public float, we consider Congoleum to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
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 he held no positions in the stocks mentioned in this article. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; please write COMMENT in the subject line.