The verdict from traders and the punditry is in: The bungling Washington politicians have merely "kicked the can" and we must all revisit the same problems in 90 days.
The prevailing sentiment is extremely negative. The Yahoo Finance polls are not a scientific sample, but they are a reflection of attentive investors. In asking how pleased people were with the deal, 82% said "not pleased at all" and another 6% were not far behind.
The punditry is well aware of this. They all using the "Jack Reacher" principle. (For more information on how this fits many investment problems, see here. Author Lee Child, who never visited many of the places he describes, learned that it was best to cater to reader perceptions. Write about their image of Nebraska, not the real place!)
The result is that we have the usual parade of pseudo-experts who know absolutely nothing about the US political process, but are willing to opine with great confidence. This is, no doubt, the way to attract clients when on TV. Most are predicting that we will soon have another crisis. They investment implication – especially from the bond guys who have nothing else to sell – is that stocks are dangerous.
For my much smaller and more discerning audience, I suggest that this presents an opportunity. We all know that being a contrarian works. You want to be on the other side of a crowded trade.
With this in mind, here is why we should have some optimism about the next round of the shutdown/debt ceiling saga.
- GOP leadership does not want another shutdown. Senate Minority Leader Mitch McConnell is quoted as follows:
"One of my favorite old Kentucky sayings is there's no education in the second kick of a mule. The first kick of a mule was when we shut the government down in the mid-1990s and the second kick was over the last 16 days," he said. "There is no education in the second kick of a mule. There will not be a government shutdown.
"I think we have fully now acquainted our new members with what a losing strategy that is," he added.
The GOP will also not include ObamaCare in the next round of negotiations.
- The leading players have changed. In the upcoming discussions we will see more moderate voices featured. On the Senate side, Susan Collins of Maine will have a bigger role. On the House side, Paul Ryan of Wisconsin is the rising GOP star. You can also expect to see less of the most visible Democratic partisans. I am not suggesting that these participants do not have strong viewpoints or a lack of will. The difference is that they are willing to compromise and deal.
- Speaker Boehner has already violated the "Hastert Rule" (requiring a majority of the GOP to bring a bill to the floor) on this occasion. We know where he stands. This is the direct result of the strong political influence of mainstream GOP business interests – a theme I have frequently cited. This means that a deal will not be blocked by the conservative/Tea Party wing in the House.
- The analogies to past efforts, super-committees, etc., are erroneous. Sen. McCain was interviewed this morning on CNBC and said that this would be a different process and there would not be another shutdown.
We should not expect any "grand bargain" that will have a major solution to future commitments – including both less spending and more revenue. The partisans have already weighed in. Harry Reid says "no deal" to increasing defense at the expense of social security. Ted Cruz will not rule out another shutdown.
Fair enough. We need some major changes on spending, entitlements, and revenues, but these will not occur during an election year.
Here are the themes that I am following:
- There is no reason to reduce allocations to stocks. The perma-bear community has been on a mission – recommending selling in every month of the year. Now that the "sell in May, buy in October" rule is in effect, look for them to find a reason that those who have missed the rally still should not buy.
- If negotiations reduce sequestration rules, defense stocks may benefit. These might include names like LMT and UTX.
- Health insurance stocks might rebound. Reduced attacks on ObamaCare might help various health names like UNH, WLP, and ESRX, my favorites in the group.
It is far too early for firm conclusions, but I basically see plenty of opportunity in the 4th quarter. These are themes that I am acting upon now, but I will also monitor future developments.