I was initially excited that we would have legislation to break some of the gridlock operating a public company, and then I started talking to smart guys who know how the wheels turn, and started asking questions. It struck me that I should focus on the portfolio stocks I think will move in 2017 that will be affected by other legislation – the gears of consumer protection move slow – and they will move too slowly here to impact the stocks I watch.
Just a few thoughts on the legislative process, from a macro and micro perspective:
1) At a high level, the path of a bill becoming law is a marathon, not a sprint.
It’s important to appreciate just how imposing a gauntlet our national legislative system is. This isn’t a criticism by any means, and we concur with the process. It should be a very big deal for a law to actually get passed. Call it constructive bureaucracy. It ensures that those bills that actually get to be laws have not done so through frivolous or impetuous means – or just because a president thinks it ought to be.
It can routinely take 9 months to a year for a bill to eventually make it to the President’s desk for his signature, and it’s not uncommon for the period to be measured in years… There is drafting, committee discussion and redrafting before it’s even considered for a vote.
We examined the proceedings of the just ended 114th Congressional session (Jan 2015 – Jan 2017). The sheer numbers are daunting. There were 12,063 bills introduced over the past two years. Of these, only 661 (5.5%) ever got to a vote in the House or Senate. And of these, only 329 (2.7%) actually became law. So 19 out of 20 bills never even make it out of committee.
photo attribute from Wikipedia
2) We think there will be few, if any, Wholesale Rollbacks of Existing Regulations including Dodd Frank.
We have examined the President’s executive order entitled, “Reducing Regulation and Controlling Regulatory Costs,” and our conclusion is that is a vaguely worded document that is more likely to bog down the legislative and regulatory process as opposed to streamlining it as the President intends. The specific wording is fascinating. In Section 1, for example, the order demands that “for every one new regulation
issued, at least two prior regulations be identified for
elimination, and that the cost of planned regulations be
prudently managed and controlled through a budgeting
process.”
This differs, perhaps subtly but not dismissively, from the president’s claim that two regulations will simply be eliminated for every one new regulation enacted. We envision federal agencies spending an inordinate amount of time debating and identifying regulations to be offered at the sacrificial altar, while their regular dockets continue to pile up. Call it destructive bureaucracy.
Jody Freeman, the Archibald Cox Professor of Law at Harvard Law School, is a recognized expert on both administrative and environmental law who has written extensively on federal agency regulation. She called the president’s executive order “arbitrary” and “not implementable” in a published email correspondence with Vox Media. The order is “primarily an instrument for hassling the agencies and slowing the regulatory process.” We concur with Professor Freeman and other legal scholars who believe that this order will only serve to increase the already burdensome levels of bureaucracy that the President is trying to relieve.
Lastly, we should note that a president, by executive order, cannot repeal an existing law by himself. Also, any actions mandated by an executive order must be done within the structured guidelines of existing law. This is a critical distinction and one that investors should note. We can see Dodd Frank being revised in part, but any changes won’t happen in the near term, will happen in piecemeal and won’t impact the segments of the market that we’re focused on and that we believe you should be focused on as well.
So, What Should Be on Your Radar?
We believe that, insofar as the President is successful in bringing about legislation or changes to legislation that impact our public markets, those changes are more likely to be centered on the ultra large cap, highly visible end of the spectrum. We don’t believe that he is all that concerned with what happens with companies below a few billion dollars – and that’s where the clear opportunities are.
Bayer’s $57 billion announced acquisition of Monsanto is a good example of the president’s focus. The president has said that he supports the transaction, one that may become a watermark for this administration. Will Bayer in fact continue to invest in American jobs as they claim? 21,000 Monsanto employees would like to know.
Will there be changes in the tax code to incent companies like these to encourage investment and job creation here? The impact of legislation – or the lack thereof – may fuel a rotation out of these large cap conglomerates into the smaller cap segments that we’ll be focused on every day for at least the rest of this year.
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Application Software
There continues to be immense opportunity for companies in the application software space as our society continues to become more mobile and more interconnected. We will be focused on those companies with strong growth prospects in the micro and small cap arenas. While companies like Snap garner the spotlight, we’ll be looking at companies that are well positioned for growth in less mature markets.
Biotechnology
While we don’t believe the FDA’s process will be dramatically streamlined under this administration, we do continue to see signs that the key agency is committed to fast-tracking therapeutics that can have meaningful impact in the near term to saving lives and improving outcomes for those who are afflicted with truly threatening diseases. We will be looking at companies in these key market segments that we think are best positioned for growth through clinical development and licensing opportunities.
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