Europe has focused the blow dried bandits who populate the airwaves into Europe – they are all now experts on European financial institutions, public finances and politics. (See my recent article on “The Italian Debt Job.”)
Of course when one otherwise accomplished anchor was told German banks are leveraged more than Lehman Brothers was when that company went down there was a near panicked look and then a shocked “really?” Since the person making the comment was a serious guy – Jim Grant of Grant’s Interest Rate Observer, the comment held weight.
This in-depth coverage of the Super Committee is no better, with some pundits actually believing there will be a compromise, some even believing something that is material with an impact will come out of the Committee.
Even if the Super Committee pulled off the $1.2 trillion dollar deal, this will reduce projected spending less than 3% over ten years. If the economy does not recover next year (it will not) – and grows slower than forecast (it will), spending goes up, taxes miss projections, the entire thing is an exercise in political legerdemain and economic futility. Four trillion dollars worth of cuts are still less than 10% of spending and do not end structural deficits.
This is not opinion, I pride myself on being a political agnostic in public, and this is second grade math.
My point? Pundits and the media combined with Wall Street’s need to be blissfully ignorant until the five seconds before a trader makes a trade or a hedge fund plugs in a black box means the Street may not like it when the Super Committee fails or does what it appears it may do, kick the can down the road until next year with a compromise on a percentage increase in taxes versus decrease in spending, the detail left to 2012. This, at least, would be in character.
What to do?
Be aware – the Super Committee debate on spending versus taxes is going to be all we hear from elected officials in 2012, the debate on jobs versus taxes and regulation is all we will hear from candidates next year. All of it, when scrutinized, will be mathematically impossible and leave the nation and the markets in limbo until January of 2013.
It is even possible the debate will continue until 2016 or 2017 when the Medicare Trust Fund runs out of money and there is a need to tap general revenues to pay Medicare bills, double what other nations pay to care for their elderly – better than we do. Then the fun really starts.
The issue for investors and traders is to be prepared for market reaction to a Super Committee failure with a nimble trade or two.
On the long side, think flight to safety and precious metals and gold and a great gold miner, Newmont Mining Corp. (NEM). Undervalued, good chart, modest dividend, well managed, huge reserves, and my favorite in the sector. Buy it and write come calls or just sell some puts.
Or be more specific on the bearish side – -who gets whacked with budget cuts and/or sequestration? The Pentagon.
What is the most ridiculous program at the Pentagon, other than the $300 million spent on military bands (more than the State Department spends on all their personnel deployed overseas), likely to take a hit? The F-35 – a four-humped camel deigned to dance the waltz and drop bombs at the same time.
The top brass agree, quietly, and just ordered a whole bunch of upgrades to existing airframes such as the F-18. Lockheed Martin (LMT) makes the F-35, so as an investor I would look to go short on LMT, maybe buying longer term puts. I disagree with many analysts who think F-35 cuts are already in the stock price.
I may be wrong but you should be prepared.
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