Trading The Not So Super Committee

Includes: FSLR, LMT, PFE, STP, VXX
by: Michael Shulman

The not so super committee did - as expected - nothing. Sequestration – automatic budget cuts supposed to take place in 2013 and never will – will soon be the law of the land until Congress changes it next year. If I were not a citizen I would be gleeful knowing Comedy Central has good material to work with for months, not weeks, in addition to the increasingly banal grist provided by the Republican debate mill. For people who invest in and trade the market, at least there is clarity. The current record of zero leadership, zero compromise, zero integrity, zero concern for the country is intact in Washington.

Oh yes, this is tradable. This is investible for though the process that has failed and the process that will raise political obfuscation to never before seen heights in 2012 there are losers and losers in the lack of agreement on a debt ceiling. And one winner.

In 2012, some meaningless cuts will be put in place to set up sound bites for commercials run by the parties in the buildup to the November elections. This does not change anything in the real world as the cuts that were mandated for the super committee were themselves meaningless - $1.2 trillion over a 10-year period is less than 3% of projected expenditures. But another year of this wrangling will put wasteful spending more and more in the spotlight .. the kind that is wasteful if you are a Democrat, wasteful if you are a Republican. I also believe that due to a real world recession, the federal government will hit its debt ceiling again before the election. That will be fun, won’t it? And the issue of debts and deficits and waste will scream out even louder.

From this debate, here are some losers, if not immediately, over a 1-3 year period.

  • Ridiculously wasteful military programs, rather than wasteful military programs, which are pretty all of them. I believe most military programs are necessary but grossly over-funded as politicians wrap themselves in the flag and the uniform most of them never wore as they really wrap their arms around contributor dollars. The first big target will be the F-35 program – Air Force officials are already planning to buy more of their older airframes knowing the F-35 is going to get whacked, as it should - and that means Lockheed Martin (NYSE:LMT). Yes, some of this is priced into the stock – but not all.
  • Ridiculously wasteful Medicare spending. We spend twice as much on Medicare as we should, relative to the more successful healthcare programs in those supposedly decadent European countries which have better healthcare outcomes and much lower costs. I believe – I am in the radical minority here – the more shameful provisions of Medicare Part D will be put on the table, such as the government being prohibited by law from negotiating prices. As elimination of this provision is debated (and eventually defeated) the Big Pharma outfits, unable to gin up new products, just new commercials about illnesses you and nobody else ever knew they had, will stop increasing prices. They did it during the Hillarycare debate and they did it again during the Obamacare debate. Add in the Lipitor patent expiration ($10 billion plus in 2011 sales) coming at the end of this month and I see Pfizer (NYSE:PFE) waving good bye to its overly large dividend and stock price in the coming year, not necessarily in that order, I think the dividend will be cut in 2013.
  • Ridiculously wasteful and ineffective renewable energy programs are going to be savaged. At least our ridiculously expensive bombs blow people up and ridiculously expensive Medicare program saves lives. All the renewable energy programs do is save jobs at companies with no reason to live – in our economy – except for their promises, not their realities. Two names with great downside potential are First Solar (NASDAQ:FSLR), the big kid on the block, and Suntech Power (NYSE:STP), not much left to short there but take a look anyway.

The winner? The market itself. The market wants to go up – desperately. Lemmings posing as money managers are looking around and wondering how they are going to justify another year – after a decade - of stagnation and losses in their portfolios. The market is going to take any news that is not negative as a positive – here, in Europe, from inflated and fraudulent Chinese economic statistics, whatever, wherever, whenever. That being said, this will be pure trading, not investing, which means the VIX will be at levels far higher than in other modestly rising markets. When trading the VIX think of the ETF, the VXX.