The Weekly View: Why We Are Not Raising Cash
Comment of the Day

October 01 2013

Commentary by David Fuller

The Weekly View: Why We Are Not Raising Cash

My thanks to Rod Smyth, Bill Ryder and Ken Liu for their in-form strategy letter, published by RiverFront. It is posted in the Subscriber's Area but here is a brief sample, referring to a list showing US Government Shutdowns Since 1976
None of these prior episodes produced chaos in the financial markets or prolonged speculation of default. Compromise has always occurred, and the president has typically had the upper hand because he and the Treasury have significant latitude regarding who and what will get cut. Equally, no president wants to preside over a default, which is incentive for President Obama not to push Congress too far. Thus, even if a default occurs, we believe it will be short-lived and more of a good long-term entry point for stocks. If we are wrong and default leads to serious financial instability, then a 2014 recession becomes possible. In this case, we have prepared a risk-management plan.

David Fuller's view Speaking as one who has been monitoring Wall Street and other markets throughout the USA's 17 previous partial government shutdowns since 1976, I agree that they are not shock and disaster factors, at least not on their own. Inevitably, partial shutdowns do not reflect favourably on political governance, either nationally or internationally on a relative basis, but equity investors are usually more concerned about corporate governance.

Nevertheless, there are a number of other factors to consider. Wall Street valuations, on average, are somewhat high at present. The US economy is gradually and erratically recovering but the growth in corporate profits, on average, has slowed. Moreover, there is the additional hurdle of the US debt ceiling on 17th October.

On a more positive note, US stock market indices are in overall upward trends, albeit somewhat overextended as you can see from this sample of the Russell 2000 (weekly & daily), which has just reached a new all-time high. Additionally, monetary conditions are decidedly accommodative and that is the most important story. Furthermore, the temporary partial government shutdown and debt ceiling uncertainty all but guarantee that QE tapering will not commence this month, as James Bullard had suggested following the September decision not to taper.

My conclusion is that while October may test investors' nerves, the US will remain firmer than most other stock markets, at least while uptrends for its indices remain so consistent.

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