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A drawn-out debt drama

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by Peter Switzer

Here we go again — another week of this debt drama, which always carries the threat of financial and economic Armageddon. Fair dinkum, the Yanks are drama queens. They drag out every major event that could have serious monetary consequences such that it eventually degenerates into something that more resembles a soap opera!

Back in November, there was a whole lot of political posturing over QE2 but eventually the silly US politicians got on board. The same stupid political games are being played with this deficit and debt ceiling impasse and the markets have suffered.

The latest is that the Republicans who run the House of Reps have a plan which they say represents them not getting all of what they want but they have not budged on allowing President Obama to raise taxes. Meanwhile the Senate, which is run by the Democrats, have now come up with a plan that does not raise taxes either and so there’s progress.

Both sides have come up with an agreement before the 2 August deadline because after that public servants will face no pay! Effectively, the US government will shut down and you can bet on a serious slump of the stock market.

Right now, the people who short stock markets are making their mushrooms — not hay — as the sun, metaphorically speaking, isn’t shining.

(For those pondering what I’m talking about, mushrooms are cultivated in the dark, so it is kind of the opposite of hay, which needs sunlight to grow.)

But I digress.

Bottom line

The bottom line for me gets down to a belief and an expert view.

The belief is that good sense will prevail — yes, even with US politicians — and a debt/deficit deal will be passed this week. This would follow the largely improved Euro-debt rescue plan that received the thumbs up from the smarties down at Macquarie Bank.

Now, provided my belief turns out to be warranted, then we have to look at the respective stock market and RBS Morgans chief economist, Michael Knox, insists both Wall Street and the local market are cheap.

He told me last night on my SWITZER program that our market is 500 points cheap and off what his fair value calculations are telling him.

That means if we can ignore the European debt drama, which has more resembled a B-grade foreign film — recall Mr Strauss-Kahn’s antics in New York — and then forget about the US debt soap opera, and we see some improvement in the mini-series saga on whether the US will go into recession again, then we might just have a blockbuster ending to 2011.

God knows we believers in good quality shares deserve a break.

Market lower

One final point: yesterday our market was down 1.58 per cent but the Yanks only lost 0.56 per cent. Martin Lakos from Macquarie thinks our bigger sell-off was because the Canadian pension fund trying to buy Transurban is now selling down its stake. This would have seen local institutions sell off shares to cash up to buy more of Transurban, which could have exaggerated the fears over the US debt debacle.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Tuesday, July 26, 2011

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