What the Stocks Tell Us About Sequester

 | Feb 25, 2013 | 12:00 PM EST
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The betting line is NO sequester. That's right, despite the four-days-to-Armageddon rap, the stocks that are going-higher, notably the defense stocks, would indicate a deal could happen even as we "know" one isn't in the works.

Last Wednesday, the Philly defense index hit a new high. Not only that, but the stocks that performed so strongly last year, notability Huntington Ingalls (HII), the big ship maker, and Raytheon (RTN) and Northrup Grumman (NOC) all bucked the downturn this past week and rallied.

It is especially significant that Huntington Ingalls, up an astounding 38.55% last year, is up again in 2013, rallying 3.71%. It's interesting because, despite protestations that the USS Harry Truman will not be able to be deployed to the Gulf because of sequestration, it will be the shipyards that build the smaller ships -- Huntington Ingalls -- that would have to be hurt in the end.

How big is sequestration as a factor in the economy anyway? Larry Kudlow, budget maven extraordinaire, is, as usual, the man in the know and the impact is incredibly small according to him. First, it's $44 billion that's taken out, not the endlessly reported $80 billion plus. Second, that's 0.25% of the nation's GDP and the budget is STILL rising.

Let's not forget the sequestration doesn't kill anything, even as Larry wishes, and so do I, that something be shut down. Isn't there a program we can do without, including a big military program? How about foreign aid? How about our endless defense of Germany and Japan? How about how we are still geared toward fighting the Russians, post-World-War-II style?

Nope, nada.

I am adamant that that there should be no increases in taxes (been there, did that) except for the need to end the loophole that turns hedge fund ordinary income, the high rate, into capital gains, the low rate. That's just ridiculous and everyone in the industry knows it, but the hedge funds have more influence in Washington than they have with companies they own, David Einhorn not withstanding.

Plus, despite the scaremongering by the White House, many of the cuts seem like they simply create inconvenience through government worker furlough. Air transit delays, national park closures, food inspection slowdowns. Sometimes I wish they would just post the furloughs all at once, so I knew which days not to travel and not to go to the national parks on those trips, so I can be sure not to schedule vacations that week and I can stay home and eat packaged foods while I watch Netflix (NFLX).

I say the Democrats should demand hedge fund managers pay regular ordinary income taxes on what is ordinary income, something I know from my hedge fund days, in return for a deal to cut some programs for real. But in the interim, the stocks are saying be more worried about Ben Bernanke's testimony on the Hill, Tuesday at 10 a.m. ET than anything else coming from Congress.

I am going with the stocks. They tend, at least over the intermediate term, to be dead right.

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