A Shutdown Strategy

 | Oct 04, 2013 | 1:00 PM EDT  | Comments
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aeg

Today is day four of the dreaded government shutdown. Indices fell around 1% across the board Thursday as worries escalated that Washington would continue to drag out the debt limit and budget talks a bit longer. Investors will not be receiving the monthly jobs report issued by the Bureau of Labor Statistics today and will have to make do with the ADP monthly jobs report issued Wednesday, which came in slightly below expectations and contained a minor downward adjustment to the previous month's estimated jobs number.

As the president continues to make speeches excoriating Republicans, and Republicans continue to press for goals that are non-achievable (defunding the Affordable Care Act), there seems to be at least some movement by both parties for face-saving to avoid a government default. Unfortunately, whatever comes out of the process will not address the towering national debt or ignite economic growth. This is not going to be a quick process, and the markets should remain volatile for at least another week.

One possible face-saving olive branch might be the repeal of the 2.3% medical device tax contained within the Affordable Care Act. This would be a significant win for the profits of these firms as the tax is applied to sales and not earnings, which would affect earnings 5% to 25% depending on the profit margins of the individual medical device manufacturer.

This has a decent shot of happening as over three quarters of the Senate have come out previously in support and it could be packaged as a job saving effort. This tax repeal obviously would be good for the medical device sector. Medtronic (MDT) is worth a look. The stock is selling at about 13x forward earnings and pays a 2.1% dividend yield.

One silver lining around all the political acrimony emanating from Washington is that the need to start to taper by the Federal Reserve has more than likely been pushed off for at least a few months. This should be beneficial to emerging markets and to the high-yield sectors in domestic equities. I will continue to allocate more of my cash position to the energy limited partnerships and real estate investment trusts (REITs) that have been highlighted in these columns numerous times over the last month or so on any pullbacks, like we saw in the market on Thursday.

In addition, with the exception of Italy, European governments are showing more harmonious behavior currently than here domestically. The eurozone also posted its strongest economic growth in two years in the recently completed quarter. I am starting to shift some allocation to Europe as it looks like it has at least hit bottom, if not turned around.

One foreign stock I still favor is Aegon (AEG), a large insurer based in the Netherlands. It reminds me of where our bank and insurance stocks were back in 2009 as it sells at a fraction of its previous peak highs and below 60% of book value. It pays a more than 3% dividend, which should grow significantly in coming years as conditions improve. Finally, more than two thirds of its business comes from North America, which I do not believe is reflected properly in the stock price.

That is my take on the current mess in Washington. It should be a volatile week or two before investors can go back to the usual stock-picking and columnists can spend more time analyzing stocks rather than reading the latest political tea leaves.

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