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Article posted on 09/2/10
Author: Veronica L. Freidman

Small Business Holdbacks Blamed
on Washington Partisan Politics

In business today an interesting bundle of facts come to light, and although it may be blogged by many, has become enough of a trend to address here on your favorite site for Day Trends. CNBC staff writer Jeff Cox notably and eloquently points out that small businesses seem directionless due to a hot bed of political unrest in Washington these days.

"Businesses--especially smaller businesses, independent businesses--they don't know what their cost structures are going to be because of government-imposed changes," David Kotok, founder of Cumberland Advisors, said on CNBC this week. "Half the US economy's holding back because of this great uncertainty that's coming from Washington."

In a mid-term election year with just 9 weeks left to go and the Senate majority up for grabs, investors too are holding back. Pros cite several reasons for lack of confidence: the Bush tax cuts, possible repeal of the health care reform bill, and the growing deficit. Several market index are basically moving sideways with little or no change throughout the Summer of Recovery.

"Why are we stuck in this range? It's not the (economic growth) issue," says Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh. "It's the issue of what's going to happen in November with the election and what's going to happen with the Bush tax cuts. You've got all this uncertainty, and when there's more uncertainty, people get more uncomfortable with equities."

Keith Springer, president of Capital Financial Advisory Services, predicts a strong rally if the Republicans manage to take control of at least one branch of the congressional chambers. Much like the kind of gridlock that held Washington in check in the mid 1990s, when President Clinton battled a Republican Congress. When the GOP wrested control from the Democrats in the 1994 mid-term elections, the previously moribund S&P 500 gained 34 percent in 1995, another 20 percent in 1996, 31 percent in 1997, 27 percent in 1998 and 19.5 percent in 1999 before hitting a wall in 2000.

"There's a push-pull in the market right now where nobody wants to go through the pain of what we need to get the economy back in shape," Springer said. "But at the same time nobody wants to stop spending money to make it better."

The Fed is the watchdog everyone is watching, looking for direction. Kotok adds about this strategy, "The Fed does not do these trades in isolation. The rest of the world is watching, trading, investing, swapping, hedging and attempting to front-run the Fed's tsunami every single minute."

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