'Now' vs.'Not Now' in Washington

 | Jun 20, 2013 | 4:00 PM EDT
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One of my favorite adages is that there are two speeds in Washington: "now" and "not now." Correctly discerning which applies to immigration reform, the farm bill, the internet sales tax legislation, Fannie-Freddie reform and a notional budget deal could be a worthy alpha project. This is particularly true for investors now wary of Fed tapering and otherwise biding time as markets ponder a more meaningful correction.

 The view at my firm holds that the farm bill (at 60% odds) probably has the best chance of any of these measures or efforts, while government-sponsored enterprise reform (at 20% tops for this Congress) has the least.

That would suggest that firms ranging from Kraft (KRFT), Dean Foods (DF), Caterpillar (CAT) and Wal-Mart (WMT) could benefit from a combination of reauthorized food stamp funding (almost 80% of the farm bill's spending), a boost to overall farm income and/or reduced input costs. The latter would perhaps be dependent upon the success of a dairy reform agenda emanating from House Republicans.

Meanwhile, "not now" on GSE reform might continue to bode well for shares of Fannie-Freddie junior preferreds (FNMAS, FNMAT and FMCKJ). That is because any such measure legislated today might permanently unplug and replace Fannie and Freddie. Nothing done could sustain into 2014, or beyond, the backdrop which has allowed investors to "assume a ladder" regarding a future role for the enterprises within a transformed housing finance regime.

Some would rank Immigration reform as a higher prospect than a Farm Bill, as Sen. Marco Rubio's (R., Fla.) and the Gang of Eight's "Border Security, Economic Opportunity, and Immigration Modernization Act " (S. 744) appears likely to pass the Senate before the July 4 break, The Congressional Budget Office just scored it as cutting 2014-2023 deficits by $197 billion.

But almost halfway through the year, even as the Senate appears about to pass the G8's path to citizenship and border security language -- which is abhorrent to many conservatives -- there is another wrinkle. House Speaker John Boehner (R-OH) signaled this week that he will refuse to bring up a bill that won't win support from a majority of the GOP caucus.

What that tells you is that Republicans are sufficiently confident in their ability to successfully base their campaigns on opposition to Obamacare and proposals to spur economic growth. And they are still concerned enough about how their political base might react to the Senate proposal that they think they can survive any blame for failing to compromise with the Democrats on immigration legislation.

As I first noted in this space several weeks ago, this could relieve concerns that have weighed down IT outsourcers such as Cognizant, Infosys and Wipro, in particular. In other words, "not now" could be a welcome catalyst for this group that has largely missed the 2013 rally.

As for legislation to allow states to collect internet sales taxes, another key development occurred this week when anti-tax activists staged coordinated revolts against the "Marketplace Fairness Act."

While the bill has seemed to be gaining some bipartisan momentum in the Senate, resistance from House conservatives, fanned by anti-tax groups this week, bodes poorly for action any time soon. This could represent the absence of a hoped-for positive for big box retailers like Wal-mart, Home Depot (HD) and Target (TGT), while a victory of sorts for eBay (EBAY).

Finally, I remain a contrarian optimist on prospects for a budget deal in either late 2013 or early 2014, albeit giving odds still below a tossup (say at 40-45% tops). The two sides might just as easily hold off in forging this kind of mini-grand bargain until as late as 2015. But, in any event, the timing could have huge significance for defense stocks in particular.

My colleague Byron Callan notes that stocks like Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon (RTN), General Dynamics (GDF), L-3 Communications (LLL) and Huntington Ingalls (HII) have done well in 2013, despite sequester concerns. That is thanks in part to focus on their dividends. They could now be ripe for profit-taking over the next one to four months, he reckons, as the Department of Defense provides granularity on FY14 cuts set forth in its Strategic Choices and Management Review.  

If a deal were to emerge by year's end -- avoiding the worst-case Pentagon reduction of $52 billion in 2014-15 -- that sell-off could be cut short, and the stocks might then rally.

Byron notes that further interest rate rises could also pressure the group, as it will make dividend yields less attractive ("and these are not growth stocks.") Office of Management and Budget projections assume a 2.0% rate on the T-Note for 2013, he adds. But if we spike to over 3% amid tapering by year-end, and then look headed to 4% for 2014, that could place marginally more pressure on defense via higher interest payments.

Still, hanging in for the potential second half 2013 transition could prove less challenging, or more rewarding, if you can figure out whether a budget deal might have a chance of proving "now", rather than later, after all.

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