Join        Login             Stock Quote

Sequester, One Step Back And Two Steps Forward

 January 03, 2013 03:53 PM

(By Mani) The fiscal cliff deal winding its way through Congress promises to delay automatic defense cuts until March 1, 2013, giving Washington a bit more time to avert sequestration.

Yet the details of the patch and the way it was passed suggest prospects for a lasting deal are slim. It seems the easiest path to overturning sequestration would have been to include it in a broader fiscal deal that used incremental revenue (i.e. Taxes) to offset sequestration cuts.

With the revenue fisticuffs presumably concluded, sequestration will apparently be tackled in the context of a February debt ceiling showdown in which Republicans promise to keep the focus squarely on spending cuts.

"Asking to restore already cut funds will be like waving a first class boarding pass on an economy-only flight. We expect defense stocks to come under sustained pressure in the coming days as the dimensions of the challenge are better understood," Oppenheimer analyst Yair Reiner said in a client note.

[Related -The April 29 Gold Triangle Breakout Update]

Though the Senate deal delays sequestration by two months, defense doesn't get a free ride. Half of the $24 billion price tag for the delay will come by cutting discretionary spending, including to defense.

In effect, Congress is letting half the sequestration go through, though under a different name and a slightly different budgetary paradigm. Tellingly, the bill appears to deal with sequestration almost as an afterthought, in the final three and half pages of a 158 page law.

"The section that deals with sequestration is like a caboose attached with a shoelace," Reiner said.

[Related -Sell In May, But It Is A Presidential Election Year]

The key question, when the two-month sequester delay is up, and the debt ceiling is reached, is who will pay to attach the caboose more securely. With the first fiscal cliff averted, Republicans will presumably nix any attempt to pay down the sequester with additional revenue.

Democrats, meanwhile, will resist attempts to offset sequestration with spending cuts elsewhere. A solution may be lurking, but it isn't obvious where.

In the final weeks of December, markets were hoping that a grand bargain being negotiated by President Obama and Boehner might replace sequestration with a much smaller and more orderly set of defense cuts. However, that optimism appears to have been misplaced.

"It looks to us increasingly unlikely that sequestration can be substantially averted," Reiner noted.

The difficult political calculus could put substantial pressure on the defense group in the days ahead while investors have been factoring sequestration as a low- to moderate size risk.

"Factoring it in as a higher- probability risk means sizing the addressable long-term DoD market as 5-10% smaller than previously believed," Reiner added.



Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageTackling China's Debt Problem: Can Debt-Equity Conversions Help?

China’s high and rising corporate debt problem and how best to address it has received much attention read on...

article imageWill Job Growth Kill The Bear-Market Signal For Stocks?

It’s all about jobs now. Actually, it’s always been about jobs. But the stakes are even higher—perhaps more read on...

article imageAutomating Ourselves To Unemployment

In this current era of central planning, malincentives abound. We raced to frack as fast we could for the read on...

article imageFed: Waiting For June… Or Godot?

The Federal Reserve left interest rates unchanged yesterday, as widely expected. But the possibility of a read on...

Popular Articles

Daily Sector Scan
Partner Center

Related Articles:

Why We're So Unhealthy
More Articles on: Politics

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.