Shorting the Tea Party Activists

by: Michael Shulman

I have been waiting to write something like this for a long time. Shorting willful ignorance and mindless hyperbole is something I could do all day long if it paid the bills. And if you think I am going to get left of center politically, forget about it - stay tuned and in the not too distant future I will be writing how to short the Congressional Black Caucus or maybe Paul Krugman.

The Tea Party people ran amuck last week in Washington at a confab of conservative activists. Their level of rationality and the quality of their discourse was characterized by the remarks, intelligence and perspicacity of their closing speaker Glenn Beck, the same Glenn Beck who let a Holocaust denier speak unquestioned for an hour on his show late in 2008, showing he has much in common with the president of Iran. As with Ahmadinejad, the shrill screams of the Tea Party do attract attention and can have an impact, and this can make investors money.

• Tea Party guys are not typical Republicans nor are they typical independents. They are a bastion of the prototypical "angry white man" - even the African-American Tea Party activities fit this description - and in one voice shout down all government spending, in another congratulate their kid for grades attained at a publicly funded university. They claim their freedom is being impaired by Uncle Sam as they cash their government crop subsidy checks. They are old fashion populists - call them "angry without a cause" - and they will fade, as all populist movements in the US have for two centuries or more, but they will make a lot of noise and wreak some havoc before they go away. Just as the first President Bush lost to Clinton because of the populists who voted for H. Ross Perot.

• Independents are increasingly deciding elections and they are in a serious anti-incumbent mood. They are driving John McCain nuts in Arizona. Independents are allowed to vote and he is the incumbent. Combine the anti-incumbent mood with the agenda of independents - comity in Washington that leads to real change, more transparency and responsiveness in government - and incumbents have a problems.

• Tea Party plus independents mean Republicans are going to have to drift right during primaries and then pay the price during the elections in November. I spoke with a Tea Party type, a candidate for a Congressional seat in a conservative district in Virginia, a few weeks ago during inauguration weekend in Richmond for the new governor of Virginia. He is as mad at the mainstream Republican candidate endorsed by the party - a candidate already to the right as the rest of the Republican Party - as he is at Democrats. He is going to push the party's candidate to the right during the primary, and still lose, and every word uttered during the winner's move to the right is going to be repeated by his Democratic opponent during the general election. And that is going to make the election close - and in many, less conservative districts, push the election to the Democrat.

What does this all mean to investors? The November elections are going to create even more muddle than we have now.

• The election in November, now being priced into the market as a Republican rout that has a good chance of giving them the House and perhaps, maybe, a fighting chance at taking the Senate, is not going to go that way. Why?

• First, Republican candidates, including a few Tea Party guys who make it through their primary, are going too far to the right of center for most independents, people who typically do not vote a lot in mid-term elections but this year promises to be different.

• Second, Republican incumbents running against strong Democrats are going to feel the wrath of the anti-incumbent voting public as much as the Dems. Most of them pre-date Obama, meaning they helped double the national debt, fight two wars without paying for them, enact tax cuts without paying for them, and brought earmarks to a new level. Tea Party rhetoric is hitting these incumbents, right now.

• Third, the Dems are far better organized and will have more money than the Republicans who will be forced to spend a lot of money fending off Tea Party activists during the primaries.

• Bottom line: more Republicans in the House, more in the Senate, the Dems probably retaining control of both houses by a hair, which gives more power to the left and right wing of each party.

And that means gridlock in the face of 20% unemployment - the unemployed, the underemployed, the discouraged and the workforce dropouts - $1.5 trillion in toxic assets still on bank balance sheets, a massive structural deficit, two wars plus Iran and a health care system that is a joke. Where are the opportunities for investors? On the short side.

• This kind of mess in DC will prolong the stagnation economy or exacerbate the double dip (I am a double dip guy). Less consumer spending, less business spending, little growth and lower corporate profits - especially given very rosy Wall Street expectations - in the second half of the year and in 2011, all mean lower stock prices for stocks driven by earnings.

• Believe it or not, some people on Wall Street confident of a Republican victory believe the Bush tax cuts will be extended. I find that so funny I want to develop a stand up routine for HBO. One Wall Street rocket scientist told me "the Dems won't have the votes to rescind those tax cuts, the Republicans will filibuster." I then reminded him the tax cuts expire and new ones have to be voted on. He moved to the other end of the bar. The increase in taxes - especially capital gains taxes - will prompt some selling in the second half of the year and make Wall Street grumpy. More bad news for stocks.

• Gridlock means no solution for structural deficits and the increasing national debt and that means rising interest rates. As interest rates rise, bond prices fall. There are many ways to short bonds for individual investors, mainly through ETFs and puts on ETFs.

• With rising interest rates, banks margins will fall - they will be borrowing from the real world, not the Fed, to fund their operations - and their profits will fall. Add a slowing economy and the second half of the year and all of next year are going to be grim for the banks and for bank stocks. Again, there are ETFs and ETFs with puts if you want to short the banks.