Tower Private Advisors
- Markets expecting some Federal Reserve help?
- Important Greek elections coming up
Capital Markets Recap
There isn’t much to talk about today, other than the elephant in the room, the debt ceiling debacle. The stories, news, and research continue to roll in, but we have a good group of what we like to call strategic partners, but which, in truth, are no more than mercenaries. They give us their opinions, models, and figures in exchange for a lot of money. They’re no more partners with us than your dentist is with you. No pay, no partner. Still, it sounds better. Any way, BCA Research published its weekly Global Investment Strategy piece and had these things to say, amongst others, about the debt ceiling, but not before having this to say,
The dispiriting squabble over the U.S. debt ceiling is certainly not inspiring confidence, and is casting a shadow over equity markets. Unfortunately, there is little insight we can offer on how this debate will evolve, as no one knows what is really going on behind closed doors. Nevertheless, it looks as if the stock market may begin to lose patience as the political gridlock drags on. From an investment viewpoint, a few comments surrounding the debt ceiling fiasco are in order.
We believe that’s the correct response for our clients and have advised accordingly. But here’s what’s troubling about that. I get the sense that most folks are saying that, most advisors are talking people off the ledge. That means there’s reluctantly-patient money in the market. In terms of downside, naturally, if there’s a positive resolution–if things play out like BCA envisions–there’s little downside, but probably a lot of upside. On the other hand, if things go badly, there is a lot of money in the market that didn’t want to be there, but that wants out–and yesterday.
So while one might assign probabilities to the various scenarios, below, as follows…
….one also has to consider the outcomes in those scenarios, which might be as follows.
So that’s a bit worrisome. Financial advisors seem to generally be telling their clients that either the Everything’s fine or Delay scenarios are most likely and, indeed, they probably are. But if we’re wrong…
Here’s how I would characterize our view toward risk markets presently.
And to simplify immensely, here is a major hurdle in each time span.
And here is the biggest risk to that vision, namely, what we had expected to be long-term issues become short-term issues.
No need to put away the sharp objects, however. Don’t worry; be happy. Here is a look at the most popular searches on Google today. Notice, there are no searches for “bomb shelter,” or “dehydrated food,” or “assault rifle.” Relax.
The ECB is fiddling while Rome burns–that wasn’t far from the truth this past Monday, when Italian markets hit the skids. In Washington there appears to be some fiddling, too, although perhaps the better word picture would be the theoretical unstoppable force meeting the immovable object.
Anyway, here is our view on these two hot-button items.
Our position for now remains that we are bullish in the short term (i.e. weeks) while bearish in the intermediate (months) and longer term (years.) We are, however, like a long-tailed cat in a room of rocking chairs with respect toward peripheral Europe (aka the PIIGS), while believing that any problems related to the debt ceiling would be short lived.
We are, however, lining up the nuclear option for portfolios in the event these events continue to heat up. The Europe thing is going to come to a head, it’s a matter of when—not if—and, increasingly, it’s not a question of will the Euro Zone be in existence in five years (it will), but what will it look like.
Regarding the potential for a U.S. default, we still do not see it showing up in the places most likely to reflect it; namely, in interest rates and Credit Default Swaps (CDS). The 10-year Treasury note’s yield took another drop today (to 2.94%). That amounts to the low for the year (2.86% on 6/24 is the low.) The CDS market is where one goes to insure against a default by an issuer, including sovereign governments, like the U.S. There, the action in U.S. debt is very subdued. The mathematical odds of a U.S. default—based solely on CDS pricing—is 1.06% on one-year debt.
When I think about the Debt Ceiling issue—and default—it reminds me a lot of Y2K, when we all woke up on New Years Day—or had stayed awake to be sure—and found that the lights still came on. The market didn’t leap ahead the next day, nor had it sold off in advance. (We all know, though, that corporations had been on a Y2K-related technology spending boom, the end of which spelled the bursting of the technology bubble a few months later.) The markets tend to do pretty well dealing with problems that have a specific date, so that leaves us fairly sanguine, albeit nervous, on this subject.
Graig P. Stettner, CFA, CMT
Vice President & Portfolio Manager
Tower Private Advisors