"We are encouraged by recent legislation to sever the issue of spending cuts from the debt ceiling," writes Bianco in his latest note to clients. "A higher debt ceiling side-lines the tail risk of default on debt or entitlement payments and puts the focus on a new spending cut agreement or following through with
And despite the major cuts that would come with sequestration, Bianco thinks those cuts would be better than the alternative.
"Don’t fear sequestration, significant spending cuts are desired for stocks," he wrote. "Another can-kick invites new risks, whereas sequestration will prevent US credit rating downgrades and keep the Fed accommodative."
It's interesting to note that Bianco believes a "can kick" would generate higher earnings this year. But sequestration would be better for stocks:
Deutsche Bank
More of Bianco's commentary:
The best negotiated outcome trims the $70b sequestration for 2013 to ~$50b but maintains $1.2t in cuts over 9 years and opens more of the budget to cuts. Full sequestration would pressure defense and some healthcare company profits, but our 2013E EPS of $108 should be able to withstand it given good 4Q results. Plus PE should expand on lower deficit.
We see the main threat to stocks as being the failure to put through spending cuts by either repealing or again delaying sequestration which triggers a rating downgrade and causes bond yields to rise. This could cause the S&P 500 to dip 5-10% to 1350-1425. Downside could be greater if long-term yields surge and threaten credit markets and the housing recovery. Likely S&P target 1525 (1400 if long-term yields jump).
The next
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