Sell the News - 01/20/10

1/20/2010 7:59 AM EST

I would not be surprised to see both health care stocks and the major market indices sell off over the short term.

I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's worth; banks are going bust; shopkeepers keep a gun under the counter; punks are running wild in the street, and there's nobody anywhere who seems to know what to do, and there's no end to it. We know the air is unfit to breathe and our food is unfit to eat. And we sit watching our TVs while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that's the way it's supposed to be!

We all know things are bad -- worse than bad -- they're crazy.

-- Howard Beale (Peter Finch), Network

I fully recognize that the crowd usually outsmarts the remnants and that the momentum in health care stocks and in the overall market has been strong.

The conventional view is that the Massachusetts election result will kill health reform and, thus, is bullish for health care stocks and for the market as a whole, but, for several reasons, I think that the crowd could prove mistaken on this one. I would not be surprised to see both health care stocks and the major market indices sell off over the short term.

A Scott Brown Senate win was growing more likely over the course of the past week -- just look at the trends of betting on Intrade, which increasingly showed a wider and wider margin. This was not unnoticed by investors in health care stocks; the group has already ripped in anticipation of a Democratic loss, and so have the overall markets lifted.

The health care legislation and reform can't die -- it can be modified -- or the Democratic party will have a problem for a long period of time. Moreover, it is unclear whether the Democratic Senate plurality (of 60 votes) will ultimately be a health care game-changer; it might just be a time out. The Democrats won't go down easily and shouldn't be underestimated. I am fairly certain that last night's defeat will not change the President's agenda, nor will it likely push Obama toward the center or in a major course correction. In fact, the Massachusetts Republican Senate win could conceivably result in administration policy initiatives that are much more punitive toward those who are seen as being privileged relative to the ("oppressed") masses (e.g., banks, brokerages and the wealthy).

It's like everything everywhere is going crazy, so we don't go out any more. We sit in the house, and slowly the world we're living in is getting smaller, and all we say is, "Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials, and I won't say anything. Just leave us alone."

-- Howard Beale, Network

The Massachusetts Senatorial race was not necessarily a referendum against the administration's policies (health care being one of them); it's broader than that. The populist uproar is geared toward the incumbent, toward anyone in power. It does not run on party lines, nor is it focused on health care. It is the zeitgeist of dissatisfaction, a sign of the times. Maybe it's a function of high unemployment or the electorate ticked off at the wealthy and the largest institutions (especially of a banking kind). This dissatisfaction was expressed in the Democratic tsunami that brought Obama the Presidency, and it was seen yesterday in the Massachusetts Senatorial election that brought Brown the Senate seat. In other words, the mood of the country has been changing for a while, and it is being reflected in a very negative view toward those who have not suffered from high unemployment or from wayward derivative bets (and still got paid). And, as I have written before, this will lead to policies that are arguably needed but, generally speaking, are valuation deflating.

Well, I'm not going to leave you alone. I want you to get mad!

I don't want you to protest. I don't want you to riot. I don't want you to write to your Congressman, because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street.

All I know is that first, you've got to get mad.

-- Howard Beale, Network

While I recognize that historically political gridlock is generally seen as a market positive, it might not be this time as the nation needs sound direction and leadership, not legislative inertia. Given the complexity and scope of our country's fiscal problems, obstruction and the perception of continued divisive and partisan political agendas and the lack of an overall governmental community (which could thwart desperately necessary legislative solutions) might quickly be seen as a negative.

You've gotta say, "I'm a human being, goddammit! My life has value!" So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell, "I'm as mad as hell, and I'm not going to take this anymore!!!"

-- Howard Beale, Network

In summary, last night's Massachusetts election was a Howard Beale moment, and on so many levels, it's different this time.