We have been inundated with the obvious question of the week: What are the implications for investors based on the strong Democratic showing in the Congressional mid-terms elections on Tuesday (November 7, 2006)? For the most—the results are a non-starter. Republican support has been failing almost since the 2004 Presidential elections closed. Had the Democrats not “gained” there would have been basis for an active discussion and for investors to immediately refocus their investment strategy. This Congress and, in particular the next President, will need to look toward the growing influence of new world market forces. For example, the increasing economic power of countries such as China and India and the alliances forged with oil producing nations will directly impact the U.S. energy market and Congress (Republican or Democratic) would be very short-sighted to ignore the “real and present” domestic ramifications.

The energy industry is especially vulnerable political shifts and we would not be so cavalier about a Democratic sweep. The Dow Jones Utility Average advanced on the week to 449.83, up from 445.76 from the previous Friday, re-election close. The lack of reaction in the otherwise sensitive energy sector arguably suggests that the market had anticipated a Democratic win. It is difficult for either the GOP or Democrats to claim a decisive victory since voters have produced a lame-duck Congress—leaving energy policy somewhat adrift (the worst of all possible scenarios for investors—mediocrity). Even Pharmaceutical companies, not typically thought to fare well under the Democrats, were little flustered by the election results and managed to stage a respectable rebound.

Enough political commentary, the Dow rose 19.05 points for the week, closing above 12000 as the uncertainty and skepticism have been laid to rest. Bonds prices fell, with the 30-year Treasury Bond offering a 4.69% yield little changed from a month ago. Easing in the borrowing costs is inherently a “positive” for the capital intensive and fixed income surrogate nature of energy companies. President Bush even attempted a “save” by calling for stepped-up efforts in ethanol technology—preempting a Democratic triumph for the environmental and conservation groups. We suspect that Energy will enjoy a respite while the winners remain preoccupied on diving up the recently gained political spoils. This was not Energy’s week and we suspect, the sector could be several quarters, if not 2, perhaps 3 years from reaching the radar screen. Hopefully by then, the United States might notice that Europe is in, and has been in a state of panic over future energy supply and prices.

EUROPE

The United States should be looking to Europe for hardcore lessons learned in the energy industry—just this week, the European Union was calling for oversight of the unbundled “generation” and “delivery” systems. The EU Commonwealth has gained significant market power, thereby diffusing the benefits envisioned by the unbundling of services—which to the United States is in the process of advancing. It does seem curious that Europe has pursued the deregulation path only to find itself right back into a monopoly industry structure.

This ironic twist of fate is leading European regulators to call for stricter controls over the energy sector—contrary to the U.S. position, which for the past decade has been advocating less regulation. Could it be that this industry is economically destined to become a monopoly whether politicians choose to characterize it as deregulated or not? The answer seems like an obvious yes to us. Until such time as profitability can be established in a regulated and or deregulated format we believe companies in this sector are destined to retain their high interest rate sensitivity and correlation. Expansion in the P/E multiple, which currently stands at 19, is near the sector’s historical top and a breakout from this level still requires paradigm shift in fundamentals which does not appear to be on the horizon.