Remember when a federal budget deficit of $237.2 billion in a year would have been considered bad news? Well that was the budget deficit for just the month of October. That's right, the federal government took in $164.8 billion and spent $402 billion in the month of October. The budget deficit does vary greatly from month to month and October is normally a deficit month, but this is far higher than anything we have ever seen before. In fact only there have been only 8 other times where monthly deficit topped $100 billion. The 2 times we have been close to this level for a month were in February ($175 billion) and May ($166 billion) of this year. The high number in May was due to the stimulus checks. The trailing 12-month total deficit is now at $618 billion, shattering the old record of $455 billion set in April of 2004. The general fund deficit was much worse, since the combined deficit includes about $200 billion a year in social security surplus (added to the trust fund). The social security numbers were not broken out in today's report. Right now it is clear that the economy needs the stimulus, so running a deficit is not a terrible thing. However, it is money that we have to borrow. And pay interest on. It represents a claim that we or our children will have to pay back. With most other world governments likely to be running deficits and major recent governmental buyers like the Gulf Oil states and China likely having a reduced appetite for our bonds, we could be facing higher long-term interest rates in the near future. If the government needs are financed domestically, it will mean that much less capital available for the rest of the economy. A rise in long-term rates would prolong the housing downturn and prevent it from eventually recovering. Stay away from the home building stocks like Lennar (LEN), D.H. Horton (DHI) and The Ryland Group?(RYL). The financials would also be hurt in such a scenario, so avoid names like Morgan Stanley (MS), Goldman Sachs (GS) and Bank of America (BAC). Major Drug stocks would not be affected by such a scenario, and would be a good place to hide out. Pfizer (PFE), Johnson & Johnson (JNJ), Abbott Laboratories (ABT) and Bristol-Myers Squibb (BMY) all look interesting at these levels.
