The Daily Dose: Don't Underestimate the Shutdown Ripples

 | Oct 02, 2013 | 10:00 AM EDT
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You know the government is shut when: a producer friend tells you they are sad to be broadcasting a story about shuttered zoo cameras. These are crazy times, and here's just one example of the many bricks that are kicked out of place when a system fails to function as it was designed to do.

On Twitter, folks thought I was insane when I suggested a prolonged government shutdown would begin to cause pockets of social unrest in towns and cities, even though this entire ordeal is a "federal thing." But please respect the message from the shuttered Panda Cam as the debt limited is reached on Oct. 17. A technical default on our obligations is in no way priced in, and it has never occurred before -- so anyone who implies this should be egged or bashed as a pump-and-dumper.

Deep Thoughts for the Day

Markets may not always move rationally, but they do move at lightning speed. My sense is that the market's pop on Monday reflected the perception that of the government shutdown will be short-lived, and that this will lead to a positive outcome regarding the debt ceiling (whose deadline is Oct. 17).

Approach that rationale with caution, however, as D.C. has just reestablished a key precedent: an inability to agree on its basic functioning. Before midnight on that day, the market had remained obsessed with the notion that Washington would achieve a final-hour deal to avert a shutdown. After all, market players have spent years getting trained to think along those lines.

This aside, for a glance at whether fear is rising about the debt-ceiling issue, look no further than the interest-rate-sensitive homebuilder stocks. If no actual debt-ceiling agreement is reached by Oct. 17, or if we see concern regarding this, I believe rates are likely to spike regardless of the Fed's backstop. This is ironic, as the credibility and the very foundation of the Fed could be tested by fiscal matters. Aren't they supposed to be separated?

Interesting Data

Here is how I am piecing things together in this weird start to the week. (It doesn't even sound right to say, "the government is closed.")

First, an initial crack has appeared in the "buy the eurozone" thesis. For one thing, the September purchasing managers index for the region dipped 0.3 to 51.1 vs. the prior month. In addition, Unilever (UN) issued its first profit warning since 2004 and Siemens (SI) is sending out pink slips.

Is a new negative-surprise trend ahead? Is it an odd coincidence that these developments are coming at the end of a quarter? Are adjustments being made following disappointing quarters that had not matched the market's optimism on the pace of recovery? These are the questions that have to be asked, because the "smart money" is still holding Europe on to names -- and, believe me, being on the wrong side of the unwind trade will be painful.

Second, there are three faces of death underneath the ostensible September awesomeness from the Institute for Supply Management manufacturing index: imports were at -3, new orders were at -2.7 and exports came in at -3.5. These are all new developments, and they've been overlooked.

In the Trenches: Chat with a Restaurant Executive

On Tuesday I chatted with a restaurant company you have all heard of. The stock is rocking, and I wanted to learn more.

Well, a key takeaway I am hearing from many of these restaurant companies is that deflation is shaping up to lead as an earnings driver for the group in 2014, instead of guest traffic and average check. We're being asked to pay up for stocks in that sector -- and I would much prefer to pay up to own growth driven by solid, consistent traffic and menu-price increases that stick, each as a function of a healthy U.S. economy. Remember, deflation could easily reverse into inflation amid a shock that hurts, say, corn supplies.

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