Investment Connections Newsletter

May 16, 2023

Hello Gauchos! We hope the spring quarter is treating you well. Investment Connections is back again to keep you updated with the financial markets and help you navigate through volatile times. A lot has happened since we last got in touch so let's jump in! 

Below you'll find: 

  • Meeting this Wednesday 05/17 from 5pm - 6pm at North Hall 1105 with guest speaker Jason Valdez, Managing Director of Samuel A. Ramirez & Co.

  • Free food and beverages will be provided

  • Last weeks market performance

  • Earnings for the week ahead

  • Opinion Article: On the Brink: Understanding the Implications of a Potential US Government Default by Ishanjit Gondara

Earnings 

Home Depot ($HD): Set to report earnings before the opening bell on Tuesday, The upcoming earnings date is derived from an algorithm based on a company's historical reporting dates. The consensus EPS forecast for the quarter is $3.80. The consensus estimates revenue at $38.60 B.

Target Corp ($TGT): Set to report earnings before the opening bell on Wednesday. The consensus EPS forecast for the quarter is $1.74. The consensus estimates revenue at $25.36 B.

Walmart Inc. ($WMT): Set to report earnings before the opening bell on Thursday. The consensus EPS forecast for the quarter is $1.32. The consensus estimates revenue at $148.47 B.

Deere & Company ($DE): Set to report earnings before the opening bell on Friday. The consensus EPS forecast for the quarter is $8.50. The consensus estimates revenue at $14.83 B.

On the Brink:

Understanding the Implications of a Potential US Government Default

By Ishanjit Gondara, President

The ongoing uncertainty around a potential US government default could significantly increase volatility for equities. This topic has been the subject of various discussions and analyses, and we've gathered some key points to help elucidate the issue.

Despite reaching the debt ceiling on January 19th, the US government has managed to maintain operations, employing two critical strategies:

  • Extraordinary Measures: The Treasury has swapped out several nonmarketable treasuries in specific funds with IOUs, creating an additional buffer of approximately $300 billion. This measure was initially implemented in February and has been mostly exhausted, but not entirely.

  • Cash on Hand: The government started the year with a balance of $500 billion. This fund was reduced to $100 billion before the tax deadline but has since rebounded to $300 billion due to tax receipts.

The looming "X date" when both these buffers run dry is a cause for concern. Treasury Secretary Janet Yellen has projected this date as June 1st, a more immediate deadline than the late July forecast by some analysts. Yellen's early deadline likely serves as a catalyst to initiate party negotiations and avoid any potential risk.

One of the main contributors to this predicament is lower-than-expected tax receipts, down about 30-40% year over year. This shortfall is partly due to lower tax gain realization and the extension of the tax deadline in California to October due to weather-related disasters.

In the unfortunate event of a default and a subsequent lapse of one or two weeks past the "X date," the government would be unable to meet its daily obligations, most of which are automated. Measures prepared by the Federal Open Market Committee (FOMC) in 2011 and 2013 offer insight into potential responses:

  • Delay payments until enough cash from incoming taxes accumulates to cover a full day's obligations, then repeat the process.

  • Prioritize debt service payments over other claims.

  • Delay the largest payments, which include military contracts and social security payments.

While the potential for default exists, it's important to recognize the unique nature of this situation. A typical default occurs due to an inability to pay. However, the Federal Government does have the funds, but the political process to access them might be time-consuming. This distinction from a traditional default is crucial.

Despite the negative press, most economists view the probability of default as very low. In fact, according to a Bloomberg report, the heightened market sensitivity could be a positive sign, prompting lawmakers to act more decisively.

As the debt ceiling debate continues, it's important to remember that there are options for those concerned about volatility. For instance, traded money market funds are currently yielding over 4.5%.

Some of the members had the following question which we will try to answer but as always, don't take this as investment advice!

  • Would a default impact Fed’s decision in any way?

Yes, it will have an inverse relationship with default. If we do default, a scenario for recession makes most likely and the safe landing narrative goes out the window. So the Feds are very likely to cut rates this year contradicting their plans to hold rates high until mid-2024. 

  • Will long/short dollar be an ideal asset allocation?

The dollar still seems to be holding higher after its rally last year so it would it make more sense to have more exposure to foreign currency. From an asset allocation perspective, long-duration bonds will benefit from a flight to quality. 

Stay informed, disciplined, and diversified as we navigate these uncertain times.