SEQUESTER is coming next week creating mounting fear among investors. Fear is actually a good thing for markets which have become abnormally complacent lately. Perhaps this is the healthy shakeout we need before trading higher.
President Obama met with Speaker Boehner and Senator McConnell yesterday about a possible deal to avoid the SEQUESTER. There was no deal. And it doesn’t look like there will be. Unless Congress acts within 7 days, $85 Billion in across-the-board spending cuts will occur this year, and another $1.1 Trillion over the course of the decade. The sequester focuses on government agencies, which includes the Department of Defense. The idea of sequester was created in the final hour of the debt ceiling in the summer of 2011, which seems in some ways a lifetime ago. It was the classic “kick-the can down the road” ploy which has been Washington’s play book for years. It was supposed to buy some time, so that a comprehensive deal could be hashed out.
Originally, sequestration was to be triggered January 1st as part of the Fiscal Cliff. The last minute tax deal, which merely sidestepped the cliff, pushed sequestration out to March 1, which bought more time for a smarter, comprehensive deal. Again, it hasn’t happened, so here we are again facing another made-in-Washington crisis. Although this one is seemingly a mini-crisis, if that’s possible. Because the cuts are well under 1% of our total GDP, it should not have a pronounced impact on our economy. And there will be plenty of time to cut a deal and fix it, which is what most of our sources believe: a bipartisan deal in the Spring. But the psychological impact could be ugly. Cuts in defense might be perceived around the globe as a weakness in US military strength.
Jobs will be lost among civilian contract workers for publicly-traded defense companies that depend on government contracts. Frank Kendall, the Under Secretary of Defense for Acquisition, has already authorized the Pentagon’s purchasers and program managers to start talking to suppliers about the plans for implementing $46B of automatic cost reductions, which are due to take effect next Friday.
In order to ignore the SEQUESTER blues, we highly recommend you curl up with a huge tub of popcorn and watch the Academy Awards on Sunday. We picked ARGO as best picture bearing in mind we are professional stock-pickers but only amateur flick-pickers! Enjoy!
By: Mike Frazier