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Washington Gridlock - Good for Markets !

Election fever is rising with elections only about 6 weeks away. It's time to check out its potential impact on markets. Tea party backed nominee winning in couple of primaries - especially Christine O'Donnell in Delaware woke up GOP. This would only make GOP to become more conservative and give a slight hope  to democrats to revive their slumping election fortunes in Nov. Here are my predictions how elections results would turn out:


  • Republicans taking control of house by a slim single-digit minority
  • Democrats losing fee senate seats but keeping control of senate
  • Obama remains president (no elections till 2012)
This means that we will have a divided government in Washington similar to 1994. Is it good or bad when it comes to stock markets ?

I think divided government (aka Gridlock) would be good for stock markets for following reasons:
  • No one side would dominate and uni-laterally push their agenda. 
  • All three branches would have to work together when it comes to budget and any meaningful policy changes.
  • Extreme conservative or extreme liberal agendas would be push on back-burner since there is no chance of getting it done (no chance of something like Health-care reform getting passed)
  • Balance between budget cuts and tax-cuts
  • Centrist politicians would get their voices heard
  • In worst case, absolutely nothing would happen for next two years removing any uncertainty since "nothing" is certain than "something". As all investors know, markets don't like uncertainty and hence it would start pricing in "nothing" and go up
Since stock markets are always ahead of actual economy, they must have started pricing this as evident from upward movement in Sept (which is rare) !

Since I was studying possible election outcome, one sector caught my attention this week - this sector is my recommendation for this week - for profit education sector. This sector got punished in last few weeks due to possible new rules coming (gainful employment, loss of government aid). Here are 4 recommendations in this sector which could provide 50% returns in next 18-24 months
  1. Corinthian Colleges, Inc. (COCO) - Buy around $6
  2. Education Management Corp (EDMC)- Buy around $10-11
  3. Lincoln Educational Services Corporation (LINC) - Buy around $12-13
  4. And biggest of them Apollo (APOL) - Buy around $47-48
Even though markets are up and trading near high of recent trading range, there are quite a few
opportunities - but that's topic for next week !

Have a great weekend !

/Shyam

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