Sunday, October 28, 2012

Fiscal Cliff Future Fallouts

The election is finally less than two weeks away. The “fiscal cliff” is only about two months away. The federal fiscal year has just begun, and many companies and agencies are feeling good.  The jobs report next month will look great with many companies getting in some quick hiring now that the federal fiscal year has turned over and new budgets are out.
But will it all hold up? Will the presidential election change things? And how will the fiscal cliff impact you and your portfolio?
Here’s some food for thought: Democrats like to create jobs within the federal government. Republicans like to create jobs with military spending (the jobs come both within the military and in civilian contracts with the military). There is a well defined line between federal and military jobs. The biggest difference is that federal jobs don’t directly help the overall economy (but they do help the government and community), and it only creates a finite number of jobs.
Military sector jobs not only help the military, they help foster research, inventions, development, and improvements from the commercial sector, and help the economy. Not all military spending goes to bullets and bombs. Much of it goes to create new technology that starts out as a need for the military, and gets adapted for civilian use. Case in point- the internet (regardless of what Al Gore may have told you), microwaves, cargo pants, and duct tape. U.S. defense contractors are concerned about future and on-going operations due to uncertainty over military budget cuts promised by President Obama in his campaign, and federal spending cuts under the sequestration (“fiscal cliff”).
The largest defense contractor is Lockheed Martin (NYSE: LMT). The company researches, designs, develops, manufactures, integrates, operates and sustains advanced technology systems, products and services. It serves customers in domestic and international defense and civil markets. Lockheed will be vulnerable to cuts because of its role in large projects such as the Joint Strike Fighter. The company employs over 100,000 people worldwide.
Lockheed’s CEO, Bob Stevens, said in a call with reporters about the company’s third quarter earnings that the Pentagon had indicated no impact on contracts was expected on Jan. 2 when the cuts would come into force, unless Congress drops the move during its lame duck session. The government advises that contracts would likely not be affected for at least three months (or one fiscal quarter) after that.
Joining the club of CEO’s concerned about sequestration is W. James McNerney of Boeing (NYSE: BA). In September he said that the threat of tax increases and spending cuts “throw cold water on long term planning.” Considering the contractor employs more than 150,000 people across the United States and in 70 countries, it is not good news to hear it is hesitant to hire.
Like all other CEO’s, Northrop Grumman’s Wes Bush is against sequestration. However, on an earnings call in July he told investors, “I want to be clear that we will be ready to address the environment should [sequestration cuts] occur ... we’re going to be ready.”

Active duty military personnel will be exempt from many of the budget cuts, and the Department of Defense will be able to move funds in order to keep critical readiness activities running. However, the cuts do not exempt new equipment and facilities, such as the ones contractors like Boeing and Northrop Grumman provide. Sequestration would mean the layoff of more than 100,000 Defense employees. The Pentagon’s ability to award new contracts will also be seriously limited and reduced, which will effect contractors down the road (3-4 years).

The fiscal cliff would hurt many businesses and put thousands of people out of work. Can the upcoming elections prevent this disaster?
Here are some scenarios-
First, Congress has to be able to work together, and much of the Congress will be “lame duck.” Motivation should be high regardless of re-election, one would hope, but even the most motivated of employees and/or elected officials have trouble with productivity around the holidays. And much of the required work will happen around the holidays.
If President Obama is re-elected, he will have to contend with re-elected Republicans who will be out to make a very strong point. The possibility of unity and cooperation will be a pipe dream, as Republicans set out to send a clear message to the president.
If President Obama is not re-elected the situation is still muddy and complicated. First, a lame duck administration has nothing to lose. Historically, previous administrations have included the incoming administration on important events. This administration has yet to show a penchant for following previous examples. Will a lame duck administration and a lame duck Congress pull together? Or leave the mess for the new party to deal with?
If the fiscal cliff is not averted and President Obama is re-elected, there will be massive cutbacks, layoffs, and much higher taxes. And all the money men on Wall Street will see it coming, and pull back their money in advance, leading us down the path to a massive crash. And that's before the crushing taxes hit! This is the “taxmageddon” scenario so many people have feared. (My recommendation- withdraw all your savings, move to a tropical island, and live off of $3 a day. It may be your only hope.) Also say goodbye to dividend stocks  in the defense industry for several years.
The Washington, DC area will specifically be very hard hit with no turnover in political jobs, while thousands in the defense sector become unemployed. Expect the DC area housing market to take a very hard hit.
If the fiscal cliff is not averted and Governor Romney is elected, there is slightly more hope. There will still be higher taxes, cutbacks, and layoffs due to sequestration. However, Romney promises to make several changes on “Day One” that would alleviate tax burdens on many individuals. The defense sector will also be able to breathe easier, knowing that Romney intends to increase spending, and not make cutbacks on them.
The Washington, DC area will see the typical election turnover in political jobs, and under Romney, not as many defense employees will face long-term unemployment.
If sequestration is avoided and Romney is elected, the defense sector can throw a party. More spending, more jobs, and more contracts mean better stocks. And Washington, DC will suddenly be a great place to find a job with lowered taxes, more spending, and less fear of layoffs.
There is one positive note if sequestration occurs- federal income taxes will likely get delayed a few weeks as the IRS and lawmakers work to quickly rewrite and disseminate the changes to the tax code.

No comments:

Post a Comment

Your comments are always welcome here!