Uncle Sam Has a Grudge Against These Industries

by Jim Woods | September 28, 2011 9:47 am

Uncle SamOn Friday, Sept. 23, executives from bankrupt solar firm Solyndra pleaded the Fifth in front of a Congressional oversight committee. The committee sought to probe how the company squandered a $535 million loan guarantee from the Department of Energy right before imploding. The episode has been one big embarrassment for President Barack Obama, as last year he touted Solyndra as a perfect example of a clean energy firm capable of creating high-tech, high-paying “green jobs.”

The Solyndra incident is a perfect example of government support for a company and/or industry gone wrong. It also clearly shows the damage that can be levied on taxpayers when the government tries to pick winners and fails. But perhaps more pernicious than the consequences of government support for a loser is when the government seemingly carries out a crusade against specific sectors of the economy, and even against specific companies.

Reviled and vilified industries such as big oil, tobacco and even restaurants all have come under scrutiny by the government in recent months, despite the fact that they sell legal products that consumers demand.

On the food front, the latest victim of government pressure is Darden Restaurants (NYSE:DRI[1]), which operates Red Lobster, Olive Garden and Longhorn Steakhouse, among others. Earlier this month, the company announced it would reduce calories and sodium in its meals for children. The move by Darden comes not as a response to changing tastes by its customers, but rather as a result of pressure from public health officials and consumer advocates to cut the calories and improve the nutritional value of meals for kids.

Evidence of this pressure can be found in first lady Michelle Obama’s pet project, “Let’s Move,” a program she fronts that’s designed to combat childhood obesity. In fact, Obama actually was present at Darden’s media event in Washington, D.C., when the company announced the change in its restaurants’ kid’s menus. “I hope that parents will take full advantage of these kinds of new options,” Michelle Obama said at the event.

Now if that isn’t subtle pressure from the government, I don’t know what is. Will this kind of pressure be a negative for Darden shares? Probably not. However, one needs to ask what business it is of the first lady to pressure companies to change what they serve to their clients. The same principle is at work in the tobacco industry.

Like it or not, cigarettes are a legal product that consumers want. But that hasn’t stopped the U.S. Food and Drug Administration from attempting to require tobacco makers to place stronger warnings and graphic pictures on the top half of cigarette packages. The feds want to compel cigarette makers to put on their packages pictures of diseased lungs, a body on an autopsy table and a man blowing cigarette smoke out of a tracheostomy hole in his neck. The FDA also wants to compel cigarette makers to add the phrase “smoking can kill you” to each pack’s label.

The tobacco industry is fighting back, and last week, a handful of companies urged a federal judge to block the implementation of those graphic warning labels. Five tobacco companies, including giants Reynolds American Inc. (NYSE:RAI[2]) and Lorillard Inc. (NYSE:LO[3]) have sued the FDA in U.S. District Court, arguing that the graphic images violate the First Amendment. Yet despite what appears to be a clear violation of a company’s right to package its product the way it sees fit, the feds consider cigarettes evil, hence the crusade against another product that people want.

Another industry targeted by the government is the oft-vilified oil industry. Recall that in May 2010, the Obama’s administration halted offshore exploration in waters deeper than 500 feet, its hasty response to the explosion and sinking of the BP-owned (NYSE:BP[4]) Deepwater Horizon drilling rig.

In February of this year, a New Orleans judge ruled that the Obama Administration acted in contempt[5] by continuing its deepwater-drilling moratorium even after the policy was struck down by a U.S. District Judge. In the ruling, the court said the Obama Interior Department acted with “determined disregard” by lifting and re-instituting a series of policy changes that restricted offshore drilling. The same court also ruled that enhanced drilling safety rules imposed by the Interior Department to permit companies to resume offshore exploration violated federal law.

It certainly seems as though this is a case of the feds jumping on an isolated incident and taking advantage of it to restrict and demonize an entire industry. But that shouldn’t surprise anyone, as politicians love to blame oil companies for jacking up the price of gasoline. They also love to talk about the record profits in the industry, as if those profits were somehow garnered at gunpoint rather than via customers choosing to fill up their SUVs.

The industries outlined here are just some of those the government seems to hold a grudge against. Fortunately for shareholders of oil, tobacco and restaurant stocks, this federal grudge hasn’t clobbered the performance of the biggest stocks in the industry. Maybe the feds will one day realize that these industries aren’t the enemy, and instead choose to focus the government’s energy on more important tasks like how to balance the federal budget, reform broken entitlement programs and help foster a climate where businesses want to start hiring again. But alas, I’m not holding my breath.

At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.

  1. DRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=DRI
  2. RAI: http://studio-5.financialcontent.com/investplace/quote?Symbol=RAI
  3. LO: http://studio-5.financialcontent.com/investplace/quote?Symbol=LO
  4. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  5. ruled that the Obama Administration acted in contempt: http://www.bloomberg.com/news/2011-02-03/u-s-administration-in-contempt-over-gulf-drill-ban-judge-rules.html

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