Daily Gains Letter

U.S. government shutdown

The Sector That Will Bounce Back Once the Government Shutdown Is Over

By for Daily Gains Letter | Oct 8, 2013

Sector Bounce Back Government Shutdown OverThe U.S. government shutdown has turned some federal agencies into ghost towns, like NASA (with 97% of its workforce furloughed), the Department of Housing and Urban Development (96%), and the Department of Education (94%). Still, some agencies, like the Departments of Defense and Homeland Security—with just 18% and 14% of their staff on furlough, respectively—are considered more essential than others.

That said, those Department of Defense numbers may be a little misleading; military and contractor personnel were not affected by the U.S. government shutdown. Half of the Department of Defense’s civilian population of roughly 400,000 were furloughed without pay on October 1.

As a result, companies doing business with the Department of Defense will feel an immediate pinch to their bottom line. That’s in part because of civilian Department of Defense personnel performing audits and certifying military products and services—which they can’t do if they’re not working. An extended furlough also means government acquisition personnel cannot keep the military lifecycle going.

In light of the fact that roughly 10% of the manufacturing workforce in the U.S. is engaged in some form of defense production, the U.S. government shutdown could impact the U.S. economy on a larger scale than some imagine.

That said, the impact of the U.S. government shutdown on defense stocks will vary from company to company, depending on funding and other regulations. While smaller defense stocks tend to rely on government contracts for a larger percentage of their revenue than the biggest defense contractors, that doesn’t mean either will escape the U.S. government shutdown unscathed.

For example, The Boeing Company (NYSE/BA) warned that deliveries of some of its … Read More

Forget the Debt Ceiling and Government Shutdown; This Is the Issue Investors Should Focus On

By for Daily Gains Letter | Oct 7, 2013

Investors Should Focus OnThe odds of a slowdown in the U.S. economy are stacking higher each day. Investors need to be very cautious and tread the waters carefully, as a slowdown in the U.S. economy will mean more misery to come—and what we see now may become worse.

In the midst of the U.S. government shutdown and the approaching debt ceiling issue, a lot has changed in the background. The major financial news channels are fixated on issues where past occurrences were eventually resolved. We have seen politicians come to a decision about the debt ceiling before, most recently in 2011, and this isn’t the first U.S. government shutdown; the government was able to come to a consensus before, and this time will be no different.

Moving away from all the current noise, when I look at the numbers, I see a rough road ahead for the U.S. economy.

Yes, I understand that we saw the U.S. economy increase at an annual rate of 2.5% in the second quarter of this year, but I have to ask if the third or fourth quarter is going to be the same.

In its September projections, the Federal Reserve expected the U.S. economy to grow between two percent and 2.3%. These predictions were revised lower from the previous projections in June, when it anticipated the U.S. economy would grow by 2.3% to 2.6%. Note that the lower bound projections in June have become the upper bound. (Source: “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2013,” Federal Reserve web site, September 18, 2013.)

We also see companies in the U.S. economy … Read More

How to Play the Rebound in Oil Pipeline Stocks

By for Daily Gains Letter | Oct 4, 2013

Rebound in Oil Pipeline StocksThe idea of nearly one million U.S. federal employees (read: consumers) being furloughed and not getting paid has sent oil prices tumbling to a three-month low, hovering near $100.00 a barrel.

The reach of the U.S. government shutdown goes well beyond those furloughed; it also affects those who rely on government services. Permitting and leasing for oil and gas drilling is at a halt, with 81% of all employees in the Department of Interior (which encompasses the Bureau of Land Management) on furlough. (Source: Ackerman, A., “Which Government Workers Are Affected by Shutdown?,” Wall Street Journal web site, October 2, 2013.)

Investors are also fearful that even a temporary furlough will dampen an already tepid economic recovery and drive the demand for oil and gas lower. And they should be afraid, as fourth-quarter U.S. growth is projected to decline 0.2 percentage points for every week that the U.S. government shutdown continues.

But that’s only one in a number of factors that are putting pressure on oil prices. On Wednesday, U.S. commercial crude oil inventory numbers came in at 5.5 million barrels, well above the forecasted 2.4 million barrels.

On top of that, improving relations in the Middle East, the resumption of full oil production in Libya, an easing of Western sanctions on crude oil exports from Iran, and a relatively quiet U.S. hurricane season could weigh on oil prices even longer.

However, once the U.S. government shutdown is in the rearview mirror, oil prices should start to recover. But in the meantime, while oil prices are trending lower, the price of some pipeline stocks have been breaking out.

Light Crude Oil Chart

Chart courtesy … Read More

Exclusive: Every Time the Government Shut Down, S&P 500 Was Higher Two Years Later

By for Daily Gains Letter | Oct 3, 2013

S&P 500 Was Higher Two Years LaterThe U.S. government shutdown has highlighted two unavoidable and predictable events. The first is pretty obvious, the other maybe not so much.

For starters, the U.S. government shutdown means as many as 800,000 of the country’s 2.1 million federal workers could end up being furloughed (temporary, non-duty, non-pay status). Not surprisingly, members of Congress—those paid by taxpayers to determine their fate—will continue to pull in a hefty salary.

Thanks to their unpopularity, U.S. government shutdowns don’t last very long. The last U.S. government shutdown took place between December 15, 1995 and January 6, 1996—a span of 21 days, the longest on record.

The first U.S. government shutdown occurred back in 1976, during the Ford administration, and lasted 10 days. During the Carter years, U.S. government shutdowns averaged 11 days. And the six shutdowns that occurred during President Regan’s two-term tenure averaged about two days.

No matter how long it lasts, it’s more than a simple economic and financial inconvenience. Aside from the 800,000 federal workers who unfortunately take an immediate and direct hit, it has the potential to negatively impact the vast majority of Americans on many, many levels.

Sadly, Congress knows how a U.S. government shutdown will affect its citizens and continues to act with moral impunity—compromising only after the fact, all the while congratulating each other for doing what they were voted in to do.

Since history has a tendency of repeating itself in Washington, Wall Street knows all too well how a government shutdown will affect the markets. It’s calling the U.S. government’s bluff, and is happy for the buying opportunity.

Despite the fact that the S&P … Read More