Skepticism Over a Long Shutdown
As I write this, the United States government is in its third day of an increasingly worrisome shutdown. In labor disputes, employees are sometimes locked out until a dispute is resolved. Such a dispute, like most disputes, is between the parties involved, ending when they reach an agreement. In this case, the federal employees sent home and others damaged by the shutdown are not direct parties to the dispute. The blockage comes from a faction in the House of Representatives, who appear not to be suffering at all. The greatest damage is to the country.
This impasse is irrational but stock market behavior is often also irrational. John Maynard Keynes, a very successful investment manager as well as an economist, cautioned, “The market can stay irrational longer than you can remain solvent.” The market’s behavior recently seemed irrational to many, as stocks remained remarkably stable as the U.S; government began to shutter its doors.
This shows the stock market’s ability to anticipate developments, particularly well-publicized events. As often happens, stocks went up on the initial news before drifting down in the absence of any news of progress toward a resolution of the political deadlock. The intense media focus on this political quarrel is likely to melt resistance, particularly if voter reaction prods a solution.
This suggests settlement within a few days. If this is accomplished, the damage that is developing to the U.S. economy could be made up in the first quarter of 2014. The greater damage lies in the approaching debt ceiling. This has often been an issue for demagoguery since 1917 when Congress created it as a funding measure for sending the doughboys to fight in France.
Although often the subject of political showboating, the “ceiling” serves little purpose, as it provides no limits on spending, but only on paying for obligations previously approved. The only other democratic country that has such a “ceiling” is Denmark, which has been routinely adjusted. So has ours, 74 times since 1962.
The U.S. government has shut down on 18 occasions since 1976 on varied funding issues. The economy always bounced back from these shutdowns but a failure to raise the debt ceiling would cripple the economy and send the country back into recession. U.S. government bonds are the benchmark for the all nations and a failure to make even one interest payment would destroy their reputation, throwing the global economy into a catastrophic slump.
The consequences would be such a financial disaster that willful failure by elected officials to avoid a default would border on treason. Fortunately, the stakes are so high that it is virtually unthinkable that this will take place. Until resolved, the stock market will be subject to unusual uncertainty. I sold several positions in anticipation of prospective buying opportunities tin larger blue chip stocks like Amgen (AMGN-$111), Apple (AAPL-$483), Bristol-Myers (BMY-$46), General Electric (GE-$24), Google (GOOG-$878), IBM (IBM-$183), Intel (INTC-$23) and Visa (V-$189).
Only several months ago, Europe and Asian economies were still suffering from recession while the U.S. was leading a recovery. These positions reversed and overseas stocks in my portfolios are all doing well. These include: ARM Holdings (U.K.) (ARMH-$48), AVG Tech. (Netherlands) (AVG-$23), Chicago Bridge & Iron (Netherlands) (CBI-$70), Diageo (U.K.) (DEO-$126), Jazz Pharm. (Ireland) (JAZZ-$90), Novo-Nordisk (Denmark) (NVO-$167) and Toyota (Japan) (TM-$127).
Even the Italian economy is looking up and I am adding Luxottica (LUX-$52), the Milan-based global provider of luxury and sports glasses and sunglasses. It dominates its sector with almost $10 billion sales. Its own brands include Ray-Ban and Oakley and licensed brands include Anne Klein, Burberry, Chanel, Coach, DKNY, Polo, Prada, Tiffany and Versace. Its stores include LensCrafters, Pearle Vision, Sears Optical and Sunglass Hut. Earnings this year will be around $1.85, up around 18% from last year with similar growth expected in 2014. It yields 1.2%.
The stock market has been justly accused of occasional “irrational exuberance.” We are certainly not in that stage now as investors watchfully wait for political irrationality to decline. Successful investors are accustomed to dealing with sporadic market irrationality. The country has also survived irrational political behavior and will weather this storm. Still, I am reminded of the reply attributed to Mahatma Gandhi when asked what he thought of Western civilization, “I think it would be a very good idea.”
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/