Two More Market Catalysts From D.C.

 | May 23, 2013 | 6:00 PM EDT
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While we strain to figure out what the Fed was trying to say on Wednesday, here are a couple of investment catalysts from Washington to ponder as the market (predictably) recovers.

As I mentioned late last week, IT outsourcers Cognizant (CTSH), Wipro (WIT),Tata (TCL) and Infosys (INFY) have all fallen by double digits since investors detected a "now" signal from Washington on immigration reform around April 10. Although these stocks rose from their lows, they're down again, presumably in response to reports that the Senate Judiciary Committee has passed a modified version of the "Gang of Eight's" bipartisan bill, complete with restrictive language regarding companies that hire foreign/H1-b employees, the outsourcer's specialty.

What gets forgotten, however, is that prospects for reform legislation may actually be dropping, even while the media trumpet Wednesday's news, in no small part because the Obama administration's recent problems have emboldened Republicans. Except for Wednesday, immigration has been crowded off the page by the unfolding IRS scandal.

For this and other reasons, conservatives are now not as worried about being blamed for blocking immigration reform. They're assembling a bill of their own -- without language penalizing the outsourcers -- in the House, and they're increasingly confident they'll have strong anti-Obamacare and economic growth messages to base their re-election campaigns on in the November 2014 midterm elections.

As a result, my colleague Loren Smith now says the odds of passage of an immigration reform bill have slipped below a tossup. More importantly, given House Republicans' likely better standing to force modifications in the Senate bill, he says the combined odds of no bill or no bill with anti-IT provisions may now be as high as three in four.

Sometimes Washington, with the help of the media, is misunderstood. And this, in our view, could be one of those moments.

In another story, tobacco companies' long run as consumer staple stalwarts may be challenged by Food and Drug Administration tobacco office head Mitch Zeller. Zeller, the new director for the FDA's Center for Tobacco Products, may be on the verge of striking his first blow -- and it could involve menthol cigarettes, electronic cigarettes, fruit-flavored cigars and other smoking products.

While there has long been a focus on menthol (where Lorillard (LO) dominates), a ban anytime soon seems highly unlikely, my tobacco-savvy friend Rob Smith points out. The Congressional Black Caucus, which has a history of being back-and-forth on restrictions on menthol cigarettes, might oppose such regulation, and even the White House's Office of Management and Budget (OMB) might stall any related regulation.

As for flavored cigars, there's not much of an investment play, although any related action from the FDA would be watched nervously to see if it might be a gateway move that could one day threaten premium cigar manufacturers. This could include Scandinavian Tobacco Group, which owns Cohiba, Macanudo, Partagas and others.

Perhaps ironically, according to Rob, smokeless e-cigarettes, which are designed to help cessation of smoking -- an area that is also dominated by Lorillard and Reynolds American (RAI) -- might be at risk. The FDA has had to fight in the courts to assert regulation over the products, first as a drug-device combo (which was overturned) and, perhaps any day now, in a Plan B, deeming authority over them as tobacco products.

Federal regulation could actually prove mixed to positive for Lorillard and Reynolds, since complying with new standards might weed out smaller competitors. Nevertheless, there's been at least some suspense as to whether the FDA might force the manufacturers to temporarily remove post-2007 e-cigarettes from the market while they apply for certification. Thus, any announcement that allows the more modern e-cigs to stay on the shelves (while applications are being considered) might be viewed as a relief and positive.

I guess the message here is, while you're betting on the bull to take the averages back, don't bet that it has lost its appetite for smokes, or even smokeless, anytime soon.

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