Sequester Schemester—your Weekly Update

Is there reason to be concerned about the “sequester” in regard to the markets? We’ve done our homework, and this week’s update takes a serious look at the issue.

There is a lot to say, but we’ve taken pains to be brief—just the “meat.”

As always, we’re including last week’s market movements for your review, which seem roundly positive in spite of what seems to be a high level of uncertainty in the world at present.

Feel free to pass this along to friends or business associates you think might find it helpful! We will continue to keep you informed as always.

All the best,
Lee and Jeremy


This Week’s Quote:

“Never put off till tomorrow what may be done day after tomorrow just as well.”
― Mark Twain

So what is this thing called “sequestration”, and should we fear it? So far, the markets have roundly ignored both sequestration and the noise coming out of Washington. But we’re not absolutely sure markets will fully avoid some impact.

First, what is it? Last year’s compromise agreed to by both Republicans and Democrats in order to lessen the (then) impending the tax increases also postponed automatic budget cuts that were required by 2011’s Budget Act until later this week. Sequestration.

With the United States national debt at approximately $16 trillion, and annual deficit spending in the neighborhood of $1 trillion, there can be little question that action was, and is, needed. However, “ sequestration” is like taking a meat cleaver to trim your nails. It might hurt: 4,5,6,7
• The cuts for 2013 total $85.3 billion4
• $42.7 billion decrease in discretionary defense funds this year.
• $26.5 billion decrease in discretionary non-defense funds this year.
• $11.2 billion decrease in Medicare spending this year.
• $5.0 billion decrease in other areas this year.
• Cuts totaling almost $1.2 trillion,5 over the next ten years.
• Unemployment benefits will go down by 9.4%.
• The price of some types of food may go up.
• Furloughed airport workers may mean longer lines at airports.
• The Bipartisan Policy Center estimates up to 1 million jobs could be lost.

Estimates range, but job losses along with belt-tightening that many Americans may face means the economy could decline by 0.7% in 20136 from an already slow pace projected to be just 2%. For us math majors, that’s an anemic growth rate of just 1.3% .

We think some form of sequestration will happen. However, we think that Congress is likely to make changes after sequestration starts but before the full effects are felt. Why?

Congress faces running out of money to fund government operations for the rest of the 2013 fiscal year on March 27. Left unchecked, that opens the possibility of a government shutdown, like that of the mid 90’s.8 Meaning, in our view, more furloughs and a greater loss of government services. Congress is good at kicking the can down the road.

So we believe action is likely. We believe it will be another “compromise of necessity” which makes minor efforts at solving the problem and further delays the inevitable. We also believe the markets will be a bit volatile in the process. Yet we believe that the fundamentals of good corporate earnings, a robust consumer, and other positive elements prevail for now and equities markets stay generally positive. Time will tell.

It’s times like this when it pays to have a solid financial advisory firm in our opinion, and a solid, well thought out wealth management plan that contemplates changing conditions. We are delighted to chat with you about your plan and your holdings!

1 Andrew Taylor and Julie Pace, “John Boehner: Budget Cut Burden Lies with Democrats,” The Huffington Post, February 13, 2013. http://www.huffingtonpost.com/2013/02/13/john-boehner-budget_n_2682656.html?utm_hp_ref=politics
2 “The Debt to the Penny and Who Holds It,” TreasuryDirect, accessed February 19, 2013. http://www.treasurydirect.gov/NP/BPDLogin?application=np
3 “Federal Budget for FY13,” usgovernmentspending.com, accessed February 19, 2013. http://www.usgovernmentspending.com/federal_budget_fy13
4 “The Sequester: Mechanics and Impact,” Bipartisan Policy Center, accessed February 21, 2013. http://bipartisanpolicy.org/sites/default/files/Sequester%20Overview.pdf
5 “Sequestration Reports,” Congressional Budget Office, accessed February 19, 2013. http://www.cbo.gov/latest/Budget/Sequestration-Reports
6 Steve Bell, “Now It’s Time for Sequester Anxiety,” Bipartisan Policy Center, January 29, 2013. http://bipartisanpolicy.org/blog/2013/01/now-it%E2%80%99s-time-sequester-anxiety
7 Jennifer Liberto, “7 spending cuts you’ll really feel,” CNN, February 21, 2013. http://money.cnn.com/2013/02/21/news/economy/federal-budget-cuts/index.html
8 Erik Wasson, “House and Senate working quietly to avoid government shutdown,” The Hill, January 6, 2013. http://thehill.com/blogs/on-the-money/budget/275703-house-and-senate-work-quietly-to-avoid-government-shutdown


Market Week: February 25, 2013

The Markets

Equities spent Friday trying to recover from downdrafts earlier in the week. The Dow industrials managed to squeak back to 14,000, but the other domestic indices reacted more strongly to Fed discussions of how to wind down its bond-buying program. It was the first down week for the S&P 500 so far this year.

Last Week's Headlines

• Stay tuned: The March meeting of the Federal Open Market Committee will focus on when and how to wind down the Fed's purchases of $85 billion worth of bonds each month. Minutes of the most recent meeting suggested that committee members are divided on how to ease out of quantitative easing without disrupting the economy. Staff members will report on the potential impact of various options, including varying the size of bond purchases from meeting to meeting and selling existing holdings gradually.
• New residential home construction fell 8.5% in January, though housing starts were still 23.6% higher than in January 2012. The Commerce Department also said building permits for single-family homes were up 1.9% for the month, while permits for buildings with 5 or more units were up 1%.
• Wholesale prices were up 0.2% in January. The Bureau of Labor Statistics said roughly 75% of the increase could be accounted for by a 0.7% increase in food prices, especially the 39% jump in the cost of vegetables. The January figure put the wholesale inflation rate for the last 12 months at 1.4%. The BLS also said raw materials were up 0.8% for the month. Meanwhile, the BLS said consumer prices were unchanged in January; increases in housing and apparel costs offset a 1.7% drop in energy prices, leaving the annual inflation rate at 1.6%.
• The FBI said it is joining a Securities and Exchange Commission investigation of possible insider trading related to Berkshire Hathaway's recently announced intent to buy H.J. Heinz Co. A U.S. court approved continuation of an SEC-requested emergency freeze on assets in a Swiss trading account; the account's unidentified owner allegedly bought a substantial amount of Heinz call options the day before the acquisition plans were announced.
• Sales of existing homes were up 0.4% in January, and were more than 9% ahead of last January. The National Association of Realtors® said tight inventory helped drive the median price for home resales up 12.3% from January 2012; the number of homes for sale fell almost 5% during the month and was at its lowest level since April 2005. The NAR said the inventory shortage is beginning to create a seller's market in much of the country.
• The European Commission (the eurozone's executive body) forecast a 0.3% contraction in the eurozone during 2013, and only 0.1% growth for the entire European Union. However, the EC forecasts 1.6% EU growth in 2014, with 1.4% growth in the euro area.
Eye on the Week Ahead

A steady stream of economic data will likely be overshadowed by the approach of the sequestered budget cuts. Unless Congress surprises the country with a last-minute plan for avoiding them, the $85 billion in cuts for 2013 are scheduled to begin taking effect on Friday.

Key dates and data releases: new home sales, home prices (2/26); durable goods orders (2/27); 2nd estimate of Q4 GDP (2/28); personal income/spending, U.S. manufacturing, construction spending (3/1).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Jeremy L. Davis, CFP®, ChFC® and J. Leland "Lee" Davis are Registered Representatives of and Securities and Advisory Services offered through, Cetera Advisors LLC, Member FINRA/SIPC. Cetera is under separate ownership from any other entity.California License #0780210 (J. Leland Davis)

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013