“Sequester” is a nasty sounding word. When I close my eyes and say “sequester,” I think of a rotting hut in the desert, infested with rodents and insects and disease. It is “sequestered” from all humans and animals.
In Washington, “sequester” refers to a deal cut between D’s and R’s in 2011. Every January,
Federal spending levels are lowered across the Board. The thinking at the time was that D’s would object to social spending cuts, R’s would object to Defense spending cuts, and thus sequester would never occur.
WRONG!!!!
This logic did not consider the hatred of all spending by the Tea-publicans. They embraced sequester as their own—defense cuts and all. Sequester 1 went into effect in January 2013. Sequester 2 occurs as of January 15, 2014.
Logic indicates that Defense Stocks would have been hurt greatly by Sequester 1. But so far this is not the case. Many defense contractors are up about twice as much as the major indices this year. However, Sequester 2 is bigger than Sequester 1. Defense stocks have just announced a strong, high priced lobbying effort to take on Congress and change Sequester 2.
Thus, sequester is a key part of the DC budget battle. R’s are saying they will reduce Sequester 2 (or at least make it more flexible) in exchange for Entitlement cuts by the D’s.
This logic assumes that the D’s will be totally unwilling to endure the severe spending cuts in Sequester 2.
However, this R strategy ignores the nature of Sequester 2, which is almost all defense spending cuts. Most social programs are exempt from Sequester 2. The R position is likely just an opening offer. However, to think that D’s will cut entitlements in exchange for defense spending cuts is naïve at best, another tragic miscalculation at the worst.
For example, in the 2012 campaign, Romney’s proposed budget increased defense spending, Obama’s cut defense spending.
As it now stands, the battle over Sequester 2 could possibly even align this way:
For Sequester 2: Tea-publicans + far left D’s who would LOVE to cut defense spending
Against Sequester 2: Moderate D’s, many pro-defense R’s (like John McCain) and Defense Contractors.
What a crazy, mixed up alignment. D’s working WITH defense contractors! Tea-publicans and far lefties sharing a goal!
But that’s very possible how it will line up.
As indicated above, Defense stocks have done very well despite Sequester 1. However, if Sequester 2 comes about, their future is far less rosy. For this reason, some are selling these stocks and even shorting them. I don’t know if this is the right decision or not. But I do know that Defense stocks—more than most others—will be affected greatly by Budget Battle II, coming in January.
Follow me on Twitter @USKOTM.