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
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.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.