- Federal, state and local budgets are under increased pressure to cut spending. "With the 2010 federal deficit at more than $1.4 trillion or 10% of GDP and federal debt expected to rise to greater than 70% of GDP by 2012, there is clear concern that governments will need to exercise fiscally responsible behavior. Indeed, federal, state and local governments may be forced at some point in time by capital markets to cut spending in order to stem the current imbalance and there are ramifications to various industries that benefit from fiscal largesse."
- Indirect and direct exposures to these potential spending cuts exist. "While direct recipients of directed government dollars are easy to identify, indirect exposure in industries away from infrastructure, defense and health care could lead to more sales compression than investors may be considering. For example, while most investors may think of any reduction in the food stamps program as having only a minimal impact on food retailers, cuts to welfare or social security would create issues for more retailers than is currently acknowledged."
- Health Care and Defense obviously rely on government expenditures. "While most investors are focused on the potential impact on industries such as Health Care and Defense, there are other industries that do not immediately come to mind as being impacted. President Obama demanded that all programs be on the table when he created the Commission on Deficit Reduction. Thus, education, highway funding, scientific research, welfare and many other programs are potentially on the chopping block, which would affect many end markets."
- Headlines may be focused on cuts that may not generate the largest impact. "The news media may focus on items like the attempt to trim $100 billion from the Department of Defense budget over the next five years. Yet there seems to be little consideration that these cuts are more about cutting inefficiencies as opposed to decreasing R&D and weapons procurement budgets, and some of this may already be discounted in defense stock prices."
- Specific companies have meaningful exposures even if the industry does not necessarily. "After polling CIRA’s analysts for US government exposure within their coverage universes, it is clear that some companies have meaningful exposures that are not in-line with the industry average. Companies like PLCM, DELL and XRX within Tech Hardware, CSC within Business IT Services, AMGN in Biotech and OFC jn REITs, have substantive government sales exposure."
- Least appreciated exposures may present even greater risk. "Investors often perceive danger inaccurately by hedging the companies with the exposure considered at risk, while leaving themselves open to hits where the exposures are not as obvious. Hence, some deeper analysis is needed to protect portfolios from any potential government budget axes."
- Indirect and direct exposures to these potential spending cuts exist. "While direct recipients of directed government dollars are easy to identify, indirect exposure in industries away from infrastructure, defense and health care could lead to more sales compression than investors may be considering. For example, while most investors may think of any reduction in the food stamps program as having only a minimal impact on food retailers, cuts to welfare or social security would create issues for more retailers than is currently acknowledged."
- Health Care and Defense obviously rely on government expenditures. "While most investors are focused on the potential impact on industries such as Health Care and Defense, there are other industries that do not immediately come to mind as being impacted. President Obama demanded that all programs be on the table when he created the Commission on Deficit Reduction. Thus, education, highway funding, scientific research, welfare and many other programs are potentially on the chopping block, which would affect many end markets."
- Headlines may be focused on cuts that may not generate the largest impact. "The news media may focus on items like the attempt to trim $100 billion from the Department of Defense budget over the next five years. Yet there seems to be little consideration that these cuts are more about cutting inefficiencies as opposed to decreasing R&D and weapons procurement budgets, and some of this may already be discounted in defense stock prices."
- Specific companies have meaningful exposures even if the industry does not necessarily. "After polling CIRA’s analysts for US government exposure within their coverage universes, it is clear that some companies have meaningful exposures that are not in-line with the industry average. Companies like PLCM, DELL and XRX within Tech Hardware, CSC within Business IT Services, AMGN in Biotech and OFC jn REITs, have substantive government sales exposure."
- Least appreciated exposures may present even greater risk. "Investors often perceive danger inaccurately by hedging the companies with the exposure considered at risk, while leaving themselves open to hits where the exposures are not as obvious. Hence, some deeper analysis is needed to protect portfolios from any potential government budget axes."
Citigroup_Equity_Strategy_20100902
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