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Investors: Remember the Sequester!

October 03, 2013 | About:
It's that time again in Washington... The stakes are high. The clock is ticking down. The politicians are getting anxious. And the level of adjectives being espoused in and around the nation's capital is escalating rapidly.

The President of the United States told CNBC Wednesday afternoon that investors should be genuinely worried this time around. This, of course, prompted a handful of analysts to suggest that Obama might actually prefer to see some angst in the markets in order to pressure Congress to take action.

The Commander-in-Chief also used the term "exasperated" to describe his emotions toward Tea-Party Republicans and said that their "reflexive hostility to civil negotiations," threaten the health of both the government and the overall economy. Then the President threw out the word "irresponsible," just for good measure, of course.

Erskine Bowles says while the government shutdown is painful, a debt default would be "catastrophic."

House Minority Leader Nancy Pelosi also got into the act yesterday as she warned that the combination of a government shutdown and failure to increase the country's debt ceiling - an action that could trigger the country's first-ever default - would be “beyond cataclysmic.” (By the way, what is the next level after cataclysmic?)

The "Fat Cat Bankers" Weigh In

CEOs from major financial institutions met with the President Wednesday and reportedly warned the White House of "adverse consequences" if the government remains closed and/or if Congress fails to raise the debt ceiling. Pretty flowery language indeed coming from a bunch of bankers, don't you think?

Speaking of "fat cat bankers," Goldman Sachs CEO Lloyd Blankfein had perhaps the quote of the day saying, "You can re-litigate these policy issues in a political forum, but they shouldn't use the threat of causing the U.S. to fail on its ... obligations to repay on its debt as a cudgel." For the record, the word cudgel means "a short thick stick used as a weapon." (And yes, a Google search was necessary to decipher the quote.)

Phrases Of The Day

While the term was not evident in of the popular press stories Wednesday, it appears that "brinkmanship" could actually be the word of the day. According to Wikipedia: "Brinkmanship (also brinksmanship) is the practice of pushing dangerous events to the verge of — or to the brink of — disaster in order to achieve the most advantageous outcome. It occurs in international politics, foreign policy, labor relations, and (in contemporary settings) military strategy involving the threatened use of nuclear weapons." Except for the part relating to nuclear war, the rest of that definition sounds about right.

Treasury Secretary Jack Lew used the adjective "extraordinary" to describe the steps his department was taking to deal with the task of paying the government's bills while staying under the debt ceiling at the same time. And although there is still plenty of time left, Mr. Lew has given fair warning that the government will not be able to pay its bills after Oct. 17.

Algorithms Doing as They're Told

Word that the President was going to meet with Congressional leaders prompted traders and their computers to hope for the best at the end of Wednesday's session. However, once House Speaker John Boehner informed the press after the meeting that the president, "reiterated one more time tonight that he will not negotiate" the algorithms went the other way in a hurry during the after-hours session. As such, the bears argue that Mr. Obama may indeed get what he is looking for in terms of a nasty, emotional sell-off on Wall Street.

Haven't We Seen This Movie Before?

While there is oftentimes no telling what the traders and their computers will do today, tomorrow, or the next day, it is important to remember that we've actually seen this movie before. In short, do you recall all the hullabaloo surrounding "the sequester?"

Think back to all the hysterics that occurred before Thanksgiving last year and then just before New Year's. Each time it looked like a deal was out of reach, stocks tanked. And then every time hope that a solution was achievable, stocks rallied. So it went for weeks and weeks. Until in the end, the professional politicians screwed around so long that they actually missed the deadline. Boom, "the sequester" was triggered. The horror!

Remember, The Hero Doesn't Die!

However, recall that although the deadline for "the sequester" had been blown, nothing really happened. A deal got done. Not at the eleventh hour, not at the twelfth hour, and not even at the thirteenth hour. But eventually the deal did finally get sealed. And do you recall what happened to the stock market at that time? The S&P 500 surged 4.2 percent in two days. Then the market went on to rally a total of 9.2 percent before the bears could string together even three consecutive down days.

The point is this. Even if the politicians bicker, fight, claw and scratch their way past the Oct. 17 deadline, the U.S. government will NOT automatically default on its debt. Thus, when a deal is eventually reached stocks will likely rally, and rally furiously.

Thus, the real battle cry that investors should be using right now is "Remember the sequester!"

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.

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