Market Week: Debt Ceiling Deal Approaches(?)

Posted by Michael Bradley, CFA on August 1, 2011 ·  


A much weaker than expected number from the Institute for Supply Manufacturing (ISM) for last month seems to be responsible for pushing down the market ahead of a vote on the deal negotiated in Washington on the debt ceiling.

The deal will see cuts in health care and defense spending, which is likely to impact sales at our portfolio holdings Lockeed Martin (LMT) and UnitedHealth (UNH) and is, at present, being reflected in their stock prices.

There is considerable frustration on the part of progressives with regards to this budget deal; primarily because of the lack of tax increases reported. But, it’s easy to forget that substantial rate increases come in 2013 in the form of the expiration of the Bush tax cuts and the new medicare taxes that will be applied to both ordinary income and capital gains taxes. This is likely to be where the debate shifts in the coming months.

We remain selectively bullish on stocks, bearish on bonds and neutral on commodities in this environment.

Please don’t hesitate to call. Best, Mike

 

 

Market Week: August 1, 2011

The Markets

 

Weak economic numbers and the debt ceiling standoff put steady downward pressure on equities. However, in the face of Tuesday’s deadline, Treasuries showed a reassuring resilience, though spreads between short-term and long-term Treasury debt narrowed. Yields on T-bills with durations of six months or less jumped while the 10-year benchmark yield actually fell, suggesting that investors were more confident about the long term than the short term. The uncertainty also dented the dollar and sent gold to yet another record.

Market/Index

 2010 Close Prior Week As of 7/29 Week Change YTD Change

DJIA

 11577.51 12681.16 12143.24 -4.24% 4.89%

NASDAQ

 2652.87 2858.83 2756.38 -3.58% 3.90%

S&P 500

 1257.64 1345.02 1292.28 -3.92% 2.75%

Russell 2000

 783.65 841.82 797.03 -5.32% 1.71%

Global Dow

 2087.44 2154.76 2088.82 -3.06% .07%

Fed. Funds

 .25% .25% .25% 0 bps 0 bps

10-year Treasuries

 3.30% 2.99% 2.82% -17 bps -48 bp

 

Last Week’s Headlines

 

  • Down to the wire: After partisan votes in both houses of Congress tried the patience of the country and the world, the weekend seemed to promise light at the end of the tunnel. Though no legislation had been signed or even passed by both houses of Congress, leaders announced that with roughly 48 hours to go before the August 2 deadline for an increase in the Treasury’s borrowing authority, they had reached an agreement to submit to their respective members. The agreement would increase the debt ceiling by roughly $2 trillion–enough to get through 2012–and cut roughly $900 billion from discretionary spending over ten years. A new bipartisan congressional committee would have until Thanksgiving to recommend an additional $1.5 trillion in deficit reduction measures. Failure to approve those measures would trigger additional automatic budget cuts in such areas as defense and Medicare provider payments.
  • Economic growth during the second quarter was a scant 1.3%, according to the initial estimate from the Bureau of Economic Analysis. Even more discouraging was the downward revision to the estimate for Q1. It put the figure at 0.4%–essentially flat, and substantially lower than the earlier 1.9% figure. What growth there was in Q2 was fueled by exports, nonresidential fixed and private inventory investment, and federal spending; higher imports and cuts in state and local government spending acted as a drag.
  • May brought higher home prices in the 20 cities tracked by the S&P/Case-Shiller index. Prices rose 1% from the month before, though they were down 4.5% from last year. Meanwhile, the Department of Commerce said June new home sales were down 1% from May, though they were up 1.6% from June 2010.
  • Hurt by fewer orders for cars and planes, durable goods orders fell 2.1% in June, according to the Department of Commerce. It was the second decline in the last three months.

 

Eye on the Week Ahead

 

Assuming debt-ceiling legislation can be passed in the hours leading up to midnight Tuesday, investors will watch Treasury auctions scheduled for Wednesday for any signs of weaker demand. Bond rating agencies will be under scrutiny for their assessments of the proposed deficit reduction measures. Once the shouting is over, corporate earnings may have more impact, and Friday’s jobs report may once again focus attention on the world outside Washington.

Key dates and data releases: manufacturing, construction spending (8/1); auto sales, personal income/spending, deadline for increase in debt ceiling (8/2); factory orders, U.S. services, Treasury auctions of 3-year, 10-year, and 30-year securities (8/3); unemployment/payrolls (8/5).

Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. Equities data reflect price change, not total return.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

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