Deregulation is happening right now, and while it means lots of changes for certain industries, it could also lead to a financial impact or job change for you.
Regulations often limit how much and how fast an industry can grow. Remove the regulations, and some of these industries will experience a new wave of growth or for some companies, dramatic losses as new competitors can more easily enter the space.
The two primary factors that gutted America’s manufacturing sector are poor trade agreements and excessive government regulation. The new administration has begun reworking trade deals to bring back U.S. companies. President Trump issued an executive order requiring agencies to strike down two regulations any time they want to implement a new one. That creates slow, long-term deregulation, but also prevents them from inserting new regulations without any real thought about the picture as a whole. And, more immediate deregulation will likely benefit profit-loss ledgers this year, and that may be the key to smart 2017 investments.
Banks Look Like Short-Term Winners
Investors may have been hesitant to put money behind lending institutions after the mortgage crisis and government bailout. A lot of people lost money when the bubble burst and the Dodd-Frank backlash legislation not only brought banks to heel, but also curbed their profit-making abilities. However, the Trump Administration has begun to roll back some of the regs considered overzealous.
Since the November election, bank stocks have been skyrocketing and lending-leader Goldman Sachs has enjoyed an unprecedented 37 percent increase. Building on potential bank profits, new Treasury Secretary Steven Mnuchin has gone on the record in favor of scrolling back limits on their ability to explore high-risk, high-reward actions with their own money. That move should send stocks into warp speed. Whether the industry ruins itself again remains to be seen. But buying up bank stock appears to be a short-term, no-brainer in the current deregulation climate. Take a look at JPMorgan Chase, Bank of America, SoftBank and Morgan Stanley and do what big banks did to Americans, take their money and dump them.
Drug Companies Could Catch Financial Flu
At the heart of the Affordable Care Act (ACA) debate is Big Pharma. Under the ACA, drug companies did not have to negotiate with the government to get paid by programs such as Medicare. That price-fixing allowed them to bilk taxpayers and drive up corporate profits. As Congress wrestles with a potential repeal-and-replace bill, the Trump Administration has made drug pricing a cornerstone issue. It’s unlikely the ACA would be replaced with anything less than free-market pricing of prescription medications.
In Big Pharma’s defense, onerous U.S. FDA regulations costs force them to shell out more than $2.5 billion to bring a drug to market. With that, drug companies can get a product monopoly for several years. Pulling back on the high cost of FDA regulations will also be on the table as Congress tries to manage the future of health care.
Even if Pharma gets a reduction on FDA costs, the growing awareness that they hike prices on Americans has grown roots. They’re likely to take a political and financial hit if repeal and replace happens because they are front and center in the excessive cost debate. Steer clear of giants like Merck & Co., Johnson & Johnson and Pfizer until after the health care dust settles.
Big Oil Pipes in Profits
The administration cleared a path for the Dakota Access Pipeline to move forward; additionally, the proposed Keystone XL pipeline is expected to follow, using American-made steel. The upside for the oil companies is that it cuts the cost of transporting each barrel of crude oil from $15 to $8. When you’re talking about hundreds of millions of barrels, that’s a huge savings. Will those saving be passed on to consumers? Unlikely. That means the Dakota parent companies — Bakken Holdings Company, Energy Transfer Partners, Sunoco Logistic Partners LP and Phillips — are about to become huge deregulation winners. Once Keystone XL advances, its parent company, TransCanada, should get a stock boost. Also, look for a consumer confidence stock bump in U.S. Steel.
Solar Has Seen Sunnier Days
Solar, on the other hand, will take nothing but hits in deregulation. Some will be large, others small and the winners are unlikely to be household names.
Tesla has become the sustainable company on everyone’s lips. Despite being a media darling for its proposed exciting car innovations, CFO Jason Wheeler abruptly resigned. There’s talk that the company has dwindling cash reserves and its stock has been slipping. Why?
One of the recent blunders may have been Tesla’s acquisition of SolarCity, a seemingly strong home solar panel installer with an aggressive sales team. Its success was based on long-term homeowner lease contracts and government rebates. But lesser-known competitors such as SunRun have undercut the giants. SunRun pitches solar programs that require no buy-in and guarantee homeowners a percentage of energy savings on monthly bills.
Anyone who does the math on a solar panel system quickly discovers the negative costs to buying one. So, the companies willing to forgo up-front payments and inch out profits on a monthly, per-home basis are where the smart, small money resides.
Although Tesla got a big stock boost when it bought SolarCity, the move has hindered an already strained cash flow that could result in Tesla’s stock taking a deep plunge. If the Congress and the president decide to deregulate the solar industry by removing government rebate enticements and sending it to the free market, giants like Tesla could become unsustainable.
Deregulation will definitely create other investment winners and losers. Check on emerging industries’ reliance on regulations and incentives as indicators. Established sectors that took a step back during the last 10-15 years because of Draconian regulations are likely to get a big bounce. Regulation changes may provide a once in a lifetime investment opportunity… if you choose wisely.