This chart overlays the current S&P 500 (think blue line) on top of the S&P 500 during the Debt Ceiling debacle of 2011. My thinking is that, with the same body in charge of resolving the issue as was in charge then, it makes sense that markets might follow the same path. One tenet of technical analysis is that history repeats. One tenet of Congress seems to be that it’s dysfunctional. July 31, 2011, was when Congress approved the debt ceiling increase, so I thought it was appropriate to center that with January 2, 2013, when we will be–in some form or other–past the edge of the cliff. Those dates are shown by the dashed orange line. A few days later in 2011, S&P downgraded U.S. Treasuries; that’s the vertical, dashed red line. So far, the current market path seems uncannily like 2011′s. Hopefully, the similarity ends soon.
Posts Tagged ‘debt ceiling’
The Credit Default Swap market is where one goes to buy insurance against a bond default. There is now more than a handful of companies whose default insurance premiums are less than that of the U.S. government. Here is just a sampling–ordered from most safe to least safe, but all safer than the U.S.:
- Baxter, Intl.
- United Parcel Service
- Raytheon (interesting, considering who pays them)
- Norfolk Southern
- Wal-Mart Stores
- Consolidated Edison
- John Deere
Effectively, the market has appraised the risk of default for these companies and has judged them to have less credit risk than the U.S. government, which has the ability to levy taxes, confiscate things–including companies and countries.
Tower Private Advisors
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.
- First, the U.S. government does not face any solvency problem, and there is absolutely no funding pressure on the U.S. Treasury market. This debt ceiling crisis is entirely man-made and politically driven, and has been greatly intensified by the looming 2012 presidential election.
- Second, what would happen to financial markets in the event that the gridlock drags beyond the August 2 deadline? … The arithmetic suggests that in the event the gridlock drags behind next week’s deadline, the U.S. government will have absolutely no problem honoring its interest payment obligations. This is the key reason why bond yields are still sitting at less than 3% despite all the default talk.
- Third, in the case of no deal being reached after the deadline, the U.S. government will have to cut back on its ordinary payment obligations. This could represent a serious fiscal constraint to the economy at a time when growth is anemic. Hence, the debt-ceiling crisis would prove to be more of a shock to the stock market than the bond market in the near term.
- Finally…this crisis will prove to be a temporary irritation to financial markets. Investors should resist any knee-jerk reaction to short-term events or negative news.
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.
Tower Private Advisors
- Debt ceiling
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