Both Sides Will Bend on Debt Ceiling

 | Oct 10, 2013 | 9:30 AM EDT
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I rarely make my columns about politics. But since the main driver of the market right now is centered on the debt limit and budget talks, it seems appropriate to look at the political lay of the land and what it means for the markets.

First, some historical background on the debt limit. We have had slightly over 50 debt limit raises over the last four decades. Around half have been approved with no issues. The other half has been used as leverage to address other issues. Roughly 60% of the time this has occurred with Democrats controlling both houses of congress, 15% of the time when Republicans controlled both houses and the remaining 25% when control was split.

In 1990, the debt limit was held up numerous times by Democrats which held both the Senate and Congress at the time. This eventually resulted in President Bush breaking his infamous "Read my lips, no new taxes" pledge in a deal with congress that allowed the debt limit to rise. It also alienated his base, spawned a primary challenge and was one of the key factors in his failing to achieve re-election in 1992.

I believe both sides have miscalculated in regards to the budget and debt limit discussions this time around. The Republicans allowed the focus of their opposition to center around "defunding" the Affordable Care Act. It is true that the plurality of the public disapproves of these policies and over 55% supports delaying the implementation of "Obamacare" by a year. It is also true that the vast majority of the voting population does not want to shut down the government or risk government default to achieve these aims.

Defunding President Obama's signature legislative achievement was simply never going to happen with Democrats controlling the Senate and the president wielding a veto pen. This was a non-starter from the beginning and this effort has allowed the party to be tagged successfully as "radical" by the opposition.

Republicans finally appear to be coming to their senses and are shifting the argument back to the debt and deficit. This resonates better with the public and this shift also has a much better chance of accomplishing some face-saving measures to get past the budget and debt limit issues.

The president, on the other hand, rightly calculated that the media would largely take his side in this argument. In addition, he was also correct in assuming the public would place more blame on the Republicans than the Democrats as the partial government shutdown continued.

He wrongly assumed, however, that this wouldn't negatively affect his own popularity. An Associated Press Wednesday poll which showed the president with just a 37% job approval rate clearly revealed this. Voters seem to be going with a "Pox on both your houses" mindset in regards to the recent confrontation in Washington. This also gives the president an impetus to come to the negotiating table to move the conversation away from these issues and back to the economy, jobs and the rest of his second term agenda.

I believe both parties now have the incentives to come to a face saving-deal in the coming days to move past the issues which have dominated the market for the past week or so. We can then get back to the start of the earnings season and concentrate on picking stocks and sectors that should outperform the overall market; which will be most welcome.

If we do get one more dip before the politicians come to their senses, I would still add funds to some of the high-yield sectors that I have mentioned frequently in these columns over the past few weeks. With Janet "Queen of the Doves" Yellen officially nominated to be the next Federal Reserve chairman, easy money policies will remain firmly in place.

The commercial real estate investment trust space looks interesting. A REIT like Realty Income Corporation (O) looks compelling. It is one of the largest retail property public REITs on the market. It is down more than 30% from its recent highs as interest rates have posted a significant rise. At these levels, it yields 5.5%. It also appears to have some technical support at just under its current price of $39 a share.

I would also look at Marlin Midstream Partners (FISH). The midstream energy limited partnership just came public in July and is down from its IPO price. The company has attracted some significant insider buying, which is unusual for a recent IPO. It has a distribution yield of just below eight percent and earnings and revenues should increase at a rapid clip over the next year or two.

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