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Here's the Key: The Government Deadline Isn't Really the Deadline
Posted by: Dave and Donald Moenning (IP Logged)
Date: October 17, 2013 10:38AM
Although the action on Capitol Hill appears has certainly been frenzied, the stock market continues to yawn.
Yes, it is true that the intraday volatility did pick up in earnest on Tuesday as the algorithms pushed and pulled the major indices in a rather violent fashion after each and every headline, comment, and/or rumor out of Washington. But with the S&P 500 (SPY) still just a stone's throw from its recent all-time high, traders don't appear to be worried.
The chart below shows the closing prices of the S&P 500 on a weekly basis since the first quarter of 2009. The first thing to notice is the most recent price resides in the upper right hand corner of the graph, which, in and of itself is a good thing.
S&P 500 Weekly
The second takeaway from this chart is the fact that the current reaction in the S&P 500 is nothing compared to the last two times Congress acted like infants in front of the entire world. Note that the 2011 edition of the budget battle created a very negative reaction in stocks. In fact, the S&P 500 fell nearly 20 percent during the ordeal. However, to be fair, the crisis in Europe also lent a hand in terms of the overall bearish mood.
The next oval on the chart shows how the market reacted to all the drama and worry over the "sequester." While not nearly as nasty as the first go-round, the 2012 encounter with the games congressional leaders play still resulted in a correction of almost 8 percent on the S&P 500.
However, this time around the S&P has barely budged as the S&P shed just four percent from the most recent high. In short, it appears that traders have seen this movie before and know that the hero doesn't die in the end.
At the same time though, the bears have been suggesting that this time it may indeed be different. This time the Tea Party has cover. This time, the Democrats feel like they are winning. And this time Boehner may have lost control. Thus, the glass-is-half-empty crowd suggests that investors may be entirely too complacent about what is about to happen.
In short, the bear camp reminds us that a default by the U.S. government would be insert-your-favorite-adjective-here.
The Real Deadline
But... As you might suspect, the team on the other sideline have a different view. While no one disputes the fact that the U.S. government defaulting on its debt would be a disaster of epic proportions for financial assets. However, according to the Bipartisan Policy Center, the real deadline for when the U.S. runs out of money isn't Oct. 17. No, the BPC says the serious financial problems for Treasury start to show up between Oct. 22 and Nov. 1.
The BPC says that the U.S. Treasury currently has about $40 billion in total cash on hand and available extraordinary measures and declining fast. BPC notes that the U.S. faces debt rollovers of $120 billion on Oct. 17 and $93 billion on Oct. 24. Then there are $12 billion of Social Security benefits due on Oct. 23, $6 billion on interest due on Oct. 31, and over $55 billion in major payments is due on Nov. 1.
Yet, it is also worth noting that the quarterly tax revenues will start coming into the Treasury coffers shortly.
But a Deal Would Definitely Be Helpful
The bottom line is each day that passes without a deal makes the situation worse.
Just Tuesday, the U.S. was "Fitchslapped" as the "AAA" rating of the U.S. was put on Ratings Watch Negative by Fitch Ratings. Fitch noted that although they continue to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.
Fitch summed up the situation nicely with the following: "The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This "faith" is a key reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns."
While this may qualify as restating the obvious, the key is that it would be better for the credit rating of the country, the economy itself, and just about every American if lawmakers could just cut to the chase and get a darn deal done.
Mr. David Moenning is a full-time professional money manager and is the President and Chief Investment Strategist at Heritage Capital Management. He focuses on stock market risk management, stock analysis, stock trading, market news and research. Click here to claim a free copy of Dave's Special Report on changes in the current market.
Stocks Discussed: SPY,
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