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Editor's note: Below, Tom Clancy discusses the recent influx of issuance from the US Treasury and offers some bullish stock ideas.
US Treasury Issuance
I welcomed my first son to the world this weekend, and it is appropriate that as I cast an eye on the markets after some time away, that I am looking at the checks our government is writing that it expects him and his sisters to cover in the future. Nick Colas of ConvergEx had a note out this morning highlighting the daily Treasury issuance, and how the market structure has changed. Pre-crisis, Colas points out that the Treasury was issuing $15-$18 billion per month of Treasury paper to the public, with another $25 billion issued to government trust fund (like Social Security), totaling $40 billion per month. During the crisis that issuance spiked $167 billion per month, and has since declined to more stable levels of $53 billion in May. Colas also points out that the debt ceiling has been suspended until March 2015, so there is effectively no cap on issuance at the moment.
Colas' point is that at the current rate of $65 billion per month, QE is currently buying back more than the current issuance of the Treasury, which is keeping interest rates on new and existing debt low while reducing volatility. My reflections extend further into the future than Colas covered, but with the expected underfunding of Social Security's Disability Trust Fund to manifest in late 2016, the amount of intra-government purchases will begin declining and, absent QE, the public will be expected to take down an increasing amount of the monthly issuance.
For the US economy to grow, it requires an increasing amount of new debt to be issued, which essentially borrows expected future income into existence to be spent now. The market for US debt is likely to become increasingly volatile in the future as the government becomes increasingly dependent on the market to absorb its debt and thus gives the market more power to set rates. This is not a matter to concern ourselves with today, but it should be a consideration for investors making investment decisions with time horizons of three years and beyond. Not only is the economy in uncharted territory with monetary policy, but even if it were to return to "normal," the market structure would be vastly different. It remains to be seen how this evolves from both a fiscal and monetary standpoint, but the resolution will have a significant impact on the cost of funds and strength of the dollar, which impact corporate finances as well as investment fundamentals.
Bullish Stock Plays
Where is the market in the chip cycle? I have been looking at the semiconductor sector more closely in recent weeks, and several management teams have commented that lead times are extending, which signals tight inventories. In addition, there are high hopes that China's LTE buildout will drive demand for wireless infrastructure and handsets, but the timing of delivery on these orders is increasingly uncertain. From my chair it looks like the market is in the latter stages of the chip cycle, with industrial-oriented suppliers in a better position to benefit from both increasing content (as seen in autos) and an improving macro-economic environment. I am looking at Microchip
(NASDAQ:MCHP) and Altera
(NASDAQ:ALTR) as ways to play increasing content in industrial applications, while Xilinx's
(NASDAQ:XLNX) programmable logic is well positioned to benefit in the short term from China wireless orders. I don't have positions in any of these names yet as I try to reconcile order timing and exposure, but this is where I am looking.
No positions in stocks mentioned.
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