Saturday, February 13, 2010

Storm Clouds Gathering in Washington Threaten to Rain on Wall Street’s Parade

Crowd gathering on Wall Street after the 1929 ...Image via Wikipedia

The political climate in Washington has become progressively more hostile. President
Obama unveiled plans to impose a special tax on big banks two weeks ago, and last week
he proposed an overhaul of financial regulations with new restrictions on the size and
scope of activity for large banks. Ronald Reagan, our 40th President and famous political
philosopher, may have captured the White House’s attitude best when he said,
“Government’s view of the economy could be summed up in a few short phrases: If it
moves, tax it. If it keeps moving, regulate it.
And if it stops moving, subsidize it.”

It appears to us that President Obama’s proposals would intensify the financial sector’s
problems because they would lower profits, increase uncertainty and lessen credit
availability without benefiting economic growth. The wave of anti-Wall Street sentiment
sweeping through the White House and the halls of Congress is deeply distressing to
investors. As detailed in this report, stocks have traditionally reacted violently to the type
of anti-business rhetoric flowing from Washington and the odds of a politically driven bear
market are rising.

Although erratic stock market performance is likely to continue as a result of this political
uncertainty, we maintain our positive perspective. Profit trends seem to support our
optimistic strategy. Fourth quarter earnings reports have exceeded elevated expectations by
a huge margin, corporations are raising guidance for the second straight reporting season
(see chart below) and we believe S&P 500 profits could increase an additional 20% in the
next four quarters. As a consequence of strong profit performance, companies are
generating extraordinary amounts of surplus cash, which is increasingly being used to
repurchase shares and to make acquisitions. MORE RESEARCH
Storm Clouds Gathering in Washington Threaten to Rain on Wall Street s Parade

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