What If America Shatters Its Debt Ceiling?
The global economic consequences could be severe.
In October, America may risk running out of cash!
Treasury Secretary Jacob Lew recently urged Congress to lift the federal debt limit before October 17. Secretary Lew claims that if nothing is done by that date, the Treasury will have only about $30 billion in available cash to pay down as much as $60 billion in daily net expenditures. The nonpartisan Congressional Budget Office has a slightly different opinion: it believes that the government will run out of free cash sometime between October 22 and November 1 if a stalemate persists on Capitol Hill.
Many Americans may confuse the impasse over the debt ceiling with the sparring over the federal budget, which has made headlines all September. October 1 was set as a deadline for Congress to pass a stopgap funding measure to avoid possible shutdowns of certain federal agencies. The debt ceiling could be breached in mid-October. Technically speaking, the debt limit was already hit on May 19, with the Treasury Department taking what Secretary Lew calls “extraordinary measures” to keep enough cash on hand, such as dipping into exchange-rate funds.
America has never defaulted on its debt before; what would happen if it did?
No one particularly wants to find out. “Any delay in raising the debt ceiling would have dire economic consequences,” respected Moody’s Analytics economist Mark Zandi testified in front of Congress last week. “Consumer, business and investor confidence would be hit hard, putting stock, bond and other financial markets into turmoil.”
If the debt ceiling shatters, the Bipartisan Policy Center estimates that America would have enough cash on hand to pay 68% of its debt through the end of October. It would have to borrow to meet the $42 billion in Social Security and Medicare payments due in November.
Global markets might get a systemic shock if America defaulted on bond payments. Investors might have one of their core assumptions upended – the assumption that Treasuries are the safest investment on earth.
Couldn’t the government just partially pay its debts for a while?
Could the Treasury pay off $30 billion in select debts each day and let other debts linger? This approach – known as prioritization – sounds reasonable, but it may not be doable.
The Washington Post reports that Treasury Department computers receive upward of 2 million invoices per day. Software confirms the math on them and greenlights the payment for each one of them, and this all happens dozens of times per second. According to the BPC, the federal government makes almost 100 million different monthly payments on its debt this way. Secretary Lew dismisses the approach; as he wrote in a letter to House Speaker John Boehner, “Any plan to prioritize some payments over others is simply default by another name.”
Aren’t there some “end runs” the Treasury could make around the problem?
In the (very) short term, the Treasury could simply let invoices pile up and delay payments for a particular day until it had enough cash to pay every debt obligation for that day. Or, the Office of Management & Budget could tell assorted federal agencies to slow down the rate of invoices headed to the Treasury, informing them that they would have to wait until later in the year to spend certain monies allocated to them (this is called “apportionment”).2
Two beyond-the-left-field-fence fixes have also been suggested: the possibility of President Obama declaring the debt ceiling unconstitutional under the 14th Amendment, and the idea to mint a $1 trillion coin.
Section 4 of the 14th Amendment says that “The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” In 2011, White House legal advisers told President Obama that this 1868 reference to the repayment of Civil War liabilities had dubious value as a tool to lift the debt limit.3
Georgia lawyer Carlos Mucha gained fame in 2012 by proposing that the Treasury authorize the U.S. Mint to make a $1 trillion platinum coin which could be deposited at the Federal Reserve. Once deposited, Mucha claimed, the Fed could credit the federal government’s account for $1 trillion and everything would be solved. An obscure passage in the 1997 Omnibus Consolidated Appropriations Act supposedly provides a rationale for this; according to its author, Rep. Mike Castle (R-DE), the passage was written to help coin collectors. In January, Treasury Department spokesperson Anthony Coley told the Washington Post that “neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.”
The world waits & watches…
As we get into October, the debt limit will become more and more of a global concern – one that will hopefully fade through negotiation and compromise. If our market indicator status changes, we will update you on what action(s) to take with current positions and how to proceed. Stay tuned for more…
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This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Picking Home Run Stocks
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In the world of investing, the rule of 72 is very helpful to figure out how long it will take you to double your money. To figure out how long it will take an investment to double take 72 and divide it by the rate of return to obtain the approximate number of years required for doubling. For example if you get a 10% rate of return, it will take approximately 7.2 years for your investment to double. Get a 20% return and it takes a little over 3 years.
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Many investors not only care but how much they earn when they invest, but they are also concerned with where they are investing. In other words, they want to ensure their investment strategy lines with their values. If you are morally, socially or environmentally conscious, screening where you invest may be the cornerstone of your investment plan.
Many investors simply haven’t thought about merging their personal beliefs with their investment strategies because they may not even be aware of where and how their money is invested. Yet how we invest or don’t invest our money can be a significant statement of our beliefs and personal principles. Let’s say you are strongly opposed to abortion or pornography, there are tools to make sure you are not investing in any company that contributes to those industries.
Investing with your values and convictions can definitely affect your rate of return (positive and negatively). It really boils down to your asset allocation, which investments you choose, and how those investments perform. In my extensive research I have found that morally and social screening does not impact performance as much as it would appear. For example, many faith-based investors who choose to screen their investments weed out 15-20% of the eligible companies traded on Wall Street, yet are still left with thousands of choices. If they get poor returns, it is more a reflection of poor management rather than any perceived limitation caused by the screens.
The choice is yours when it comes to whether you should morally or socially screen your portfolio. You must decide for yourself if investing according to your convictions is important and what are you willing to sacrifice in order to make that happen. It takes time, money, and effort to research and make sure your investments match your values. For some it is well worth the cost. For some, it is not that important in the grand scheme of life.
If you’d like to take a closer look at how your money is invested, it makes sense to start with a list of causes and concerns that may affect your moral decisions.
For example investors may be concerned with the following issues:
These hot buttons are the most common examples of issues that generate strong emotional responses. If any of these issues are of concern to you, I strongly advise that you begin to consider the implications of investing in companies that violate your internal moral compass. There are tools and research available to help you eliminate or minimize your involvement in these hot buttons.
Here is a question to ponder: Would you purposely invest money in companies involved in any of the areas listed on the hot-button list? After taking some time to examine this list of hot buttons, what issues, if any, most resonated with you? Are there any areas in which you wish to avoid investing in your financial life? If any of these issues ignite strong emotional responses, is your passion strong enough that you want to do something about it?
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Company: SouFun Holdings
Ticker Symbol: SFUN
Action: Buy up to $90
3-5-14… Added another swing trade to SFUN. This has been a good stock to swing trade for us.
12/22/13 Analysis… Adding another 10% swing to SFUN. China is looking strong. I am targeting a 20% gain.
Adding another 10% swing to SFUN. China is looking strong. I am targeting a 20% gain. It operates a real estate Internet portal, and a home furnishing and improvement Website in the People’s Republic of China. The company offers marketing services on its Websites, primarily through advertisements, to real estate developers in the marketing phase of new property developments, as well as to real estate agencies; and suppliers of home furnishing and improvement, and other home-related products and services. It also provides basic listing services that enable customers to post information of their products and services on Websites, and special listing services, which offer customized marketing programs involving online listings and offline themed events to real estate agents, brokers, developers, and property owners and managers; and suppliers of home furnishing and improvement and other home-related products and services. In addition, the company, through its jiatx.com Website, provides an online transaction platform and related e-commerce services to home furnishing and improvement vendors. Further, it offers subscription-based access to the information database and research reports, and total Web solution services. This will have a 20% stop loss.
5-Point Stock Inspection on SFUN:
Financial Strength: Positive
Valuation: Positive – Buy up to $80
Risk: Moderate risk trade
Earnings Trend: Positive
Profit Target: 20-25%
I will reestablish a 10% position in SouFun Holdings Limited (SFUN) as a play on China and its housing market. Now that it is back around $50 and with earnings coming early November, this could easily reach new highs (above $60). This is a buy up to $53. My price target is a 20-25% gain. SouFun is a real estate Internet portal and home furnishing and improvement website in China. SouFun obtains its advertisements from online real estate advertisers. It has built a large and active community of users who are attracted by the comprehensive real estate, home furnishing and improvement content available on its portal which form the foundation of the Company’s service offerings. SouFun maintains many offices in order to focus on local market needs and covers many cities providing real estate-related content, search services, marketing and listing services in China. SouFun Holdings Limited is headquartered in Beijing, China. I will place a 20% stop loss on this one.
9/24/13 Analysis.. I am adding a 10% speculative trade on Chinese housing by adding SouFun Holdings Limited (SFUN) with a buy up to $51. This has bullish option activity on October and November $50 calls. It operates a real estate Internet portal, and a home furnishing and improvement Website in the People’s Republic of China. The company offers marketing services on its Websites, primarily through advertisements, to real estate developers in the marketing phase of new property developments, as well as to real estate agencies; and suppliers of home furnishing and improvement, and other home-related products and services. It also provides basic listing services that enable customers to post information of their products and services on Websites, and special listing services, which offer customized marketing programs involving online listings and offline themed events to real estate agents, brokers, developers, and property owners and managers; and suppliers of home furnishing and improvement and other home-related products and services. In addition, the company, through its jiatx.com Website, provides an online transaction platform and related e-commerce services to home furnishing and improvement vendors. Further, it offers subscription-based access to the information database and research reports, and total Web solution services. This will have a 20% stop loss.
Company: Vipshop Holdings
Ticker Symbol: VIPS
Action: Buy up to $155
Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People’s Republic of China. It offers a range of branded discount products, including apparel for women, men, and children; fashion goods; cosmetics; home goods and other lifestyle products; footwear; sportswear and sporting goods; luxury goods; and gifts and miscellaneous products. The company provides its branded products through its Website vipshop.com, as well as its cellular phone application. Vipshop Holdings Limited was founded in 2008 and is headquartered in Guangzhou, the People’s Republic of China.
The stock closed at $150.79 on Friday, March 14, 2014 . The chart is looking good as the stock is trading above the 20, 50 and 200 day moving average. The support is at the 20 day MA, at $136.06 and next support is at $122.24. I feel the stock is ready to make another move higher, and my price target is $160-170 in the next 60-90 days. There is significant upside and downside risk. Use a stop loss of 5-8% below your entry price.
See annotated chart below:
12/10/13 Update: Stop still in at $71. Stock got dangerously low on rumor of fraud. I have not found a substantiated source for why this was released and how the rumor was brushed off so quickly. I may raise my stop if I can uncover some new info from my sources.
11-18-13: I am adding another swing to VipShop (VIPS). This is a buy up to $90. Vipshop Holdings Ltd. is an online discount retailer for brands. The Company offers branded products to consumers in China through flash sales on its vipshop.com website. It offers a wide selection of various famous branded discount products including apparel for women, men and children, fashion goods, cosmetics, home goods and other lifestyle products, through its website. I will keep it on a shorter leash.
5-Point Stock Inspection on VIPS:
Financial Strength: Positive
Valuation: Positive – Buy up to $90
Earnings Trend: Positive
Price Target: $108 (20%+ gain)
9/24/13 Analysis.. I am adding a 10% allocation to Vipshop Holdings Limited (VIPS) with a buy up to $60. This is a continued momentum trade with a high-risk rating. I am using a 20% stop. The call option buying in Oct and Nov is very bullish and this Chinese stock has seen a good amount of upside recently. Vipshop operates as an online discount retailer for various brands in the People’s Republic of China. It offers a range of branded discount products, including apparel for women, men, and children; fashion goods; cosmetics; home goods and other lifestyle products; footwear; sportswear and sporting goods; luxury goods; and gifts and miscellaneous products. The company provides its branded products through its Website vipshop.com, as well as its cellular phone application. Vipshop Holdings Limited was founded in 2008 and is headquartered in Guangzhou, the People’s Republic of China.