The Insightful Trader

Justices Enrich Admen and Kill Bank Tax

by on Jan.26, 2010, under Editorials

No, the Supreme Court hasn’t ruled lately on these two issues to my knowledge, at least not directly. But unless you’ve been living in a cave, you know that last Thursday, the 21st, the Court struck down longstanding restrictions on corporations’ political campaign spending. The headline highlights some likely results.

The Citizens United decision allows corporate (and union) donors to pay for ads that will run within 30 days of a Presidential primary or 60 days of a general election. Previously such spending was barred by the McCain-Feingold campaign finance reform law.

As political spending increases, its recipients in old media will benefit. I’ll tell you which companies are best positioned, but it’s too early to say just how much more they can make.

Some restrictions on campaign spending remain. Corporations cannot donate directly to candidates, though they can donate to issue oriented political action committees (PACs) that are at least nominally independent of candidates and their parties. Also, the sources of a PAC’s funding have to be disclosed.

A few numbers illustrate the new potential for political ad spending. A combined total of $5.3 billion was spent for the Congressional and Presidential elections of 2008. By way of contrast, Exxon (XOM) earned $45.2 billion in 2008 on that year’s record oil prices, and $13.2 billion for the first nine months of 2009. Goldman Sachs (GS) will pay out $16.2 billion for wages and salaries, or $498,000 per employee, and still record $13.4 billion in profit for 2009 after making these payouts. My point is, many major corporations can afford to break expenditure records on any given race if they care to.

And many of them have reason to care. For example, if  five votes on a congressional committee stand between you and, say, an arcane tax law change that would yield $40 million annually, what’s $15 million of campaign spending?  One heck of a good investment. Or, take environmental law. To pick an outsize but obvious hypothetical, even $100 million in campaign funds would be chump change for, say,  Chevron (CVX), if in return it got to extract a billion barrels of oil in the Alaska National Wildlife Refuge and earn profits, of, say, $10 per barrel.

But who needs hypotheticals? Last week the President proposed a tax on repurchase agreements, a form of collateralized lending used by large financial institutions. He also proposed bank size limits and talked about preventing banks from using federally insured deposits to finance speculative trading, the so called “Volcker rule.”

Citizens United gave banks new weapons to fight proposals like these. If, come election time, a tough bank regulation bill gets close to enactment (though it’s not likely to get too close, in my view), look for anti-regulatory commercials. They’ll be brought to you by PACs with names like “Depositors for a Sound Banking System.”

Having said all that there are two reasons why I could be wrong about the increase in campaign spending I expect. First,  interest groups already know how to exert influence while working within the pre Citizens United rules. Therefore, it’s possible that the new decision won’t change much.

Secondly, politicians understand the new, post Citizens United campaign economics and many of them will begin to censor themselves, even more than they already do. Expect even some of the bravest to pander to the money that talks on key issues, rather than face deep pocketed opposition. As former Treasury Secretary Paulson once said, “If you’ve got a bazooka and people know you’ve got it, you may not have to take it out.”

So, how to play this? Ad agencies and broadcasters should expect a noticeable, recurring revenue increase during election cycles. I don’t know how anyone could predict exactly how large a bump they will get, and what effect that bump will have on earnings per share, because we are in new territory here. If this type of play interests you, look for pure media companies with heavy domestic exposure and put them on a watchlist.

CBS (ticker symbol, also CBS) would be an obvious beneficiary of this trend; the other networks are part of large conglomerates. Therefore new political ad revenue at those broadcasters might not have much effect on parent company net income. If you want to stretch a point, however, you might also look at News Corporation (NWS), since its Fox News division contributes a disproportionate share of profits to NWS.

Among ad agencies, billboard owner Lamar Advertising (LAMR) would seem to be among the purest domestic plays that could benefit from increased political ads, but be forewarned, it is losing money due to the recession and has a leveraged balance sheet. Two ad majors, Interpublic Group (IPG) and Omnicom (OMC) would seem to be safer bets, but both of them generate around half of their revenues from abroad. IPG has more domestic exposure than OMC.

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