Budget, Fannie-Freddie Reform Could Boost Defense, Medical, Housing

 | Nov 01, 2013 | 5:30 PM EDT
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As I wrote earlier, as markets face the holiday season, Washington will offer mixed bag answers to key policy questions, but (for some) possibly hopeful tidings.  In this post, I'd point to a coming spotlight on defense contractors and medical tools stocks (leveraged to the National Institutes of Health budget) as well as homebuilders and mortgage lenders, insurers and servicers.

Sequester Relief?  

Suffice it to say that the best bet might be on a nothing done by the 29-member budget conference that began this week, then a last-minute deal to keep the government funded after Jan. 15.  

To be sure, there's a chance for early success, as both sides have gone in seeking to lower expectations from anything close to even a mini "grand bargain." But the more likely failure of House and Senate budget negotiators to reach agreement by the targeted date of Dec. 13 -- due to the GOP's gag reflex over tax hikes and Democrats' to entitlement cuts -- will bring eerie memories of the 2011 supercommittee that failed famously two years ago.  

In any event, once we near the prospect of another government shutdown -- which Republicans, this time, are foresworn to avoid -- the better than even odds of a modest swap of near- and long-term spending cuts could buck up the markets, perhaps by Martin Luther King Day, Jan. 20.

And benefiting perhaps the most might be defense names - Raytheon (RTN), Lockheed Martin (LMT), General Dynamics (GD), Northrop Grumman (NOC), Huntington Ingalls Industries (HII), L-3 Communications (LLL) as well and medical tools stocks -- Illumina (ILMN), Pacific Biosciences of California (PACB), Thermo Fisher Scientific (TMO).

Loosening Regulation for the Housing GSEs

Separately, even though the intense politics surrounding how to regulate and reform Fannie and Freddie led to defeat in Senate Majority Leader Harry Reid's (D-Nev.) first attempt to force a vote on Rep. Mel Watt's (D-N.C.) nomination to head the Federal Housing Finance Agency, the White House has apparently now settled on a multi-layered strategy to replace acting FHFA Director Ed DeMarco by as early as Valentine's and no later than Memorial Day. These range from a second floor vote on Watt in coming weeks -- perhaps even boosted by Reid's "nuclear option" to change Senate rules to preclude filibusters on presidential appointments -- to a recess appointment (of Watt) in early January, an appointment of a substitute acting director sometime after, or the nomination of an alternative candidate, such as Moody's economist Mark Zandi,  if all else fails later still.

In other words, the tenure of DeMarco, who has served admirably while resisting Democratic calls for loosening the reins on the government-sponsored entities, may soon be set to fade. 

And this could queue Fannie and Freddie to avoid reduced conforming loan caps, provide principal forgiveness, or liberalize terms of the Home Affordable Refinance Program while subtly softening underwriting standards that have arguably put home buying out of reach for underwater borrowers and would-be first time homeowners. 

Not that much can be done to de-zombie the now officially dead refi wave, but a perceived slower pace toward throttling the GSEs might nevertheless boost sentiment.

Meanwhile, I'd argue that the negative effect of Watt's notional confirmation on GSE reform legislation might net out as a particular positive for shareholders in Fannie-Freddie common and preferreds, although that, too, is worthy of later reflection.

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