ETF Plays If CEOs Win Over Washington

by on October 26, 2012 | ETFs Mentioned:

Late Wednesday night, the Chief Executives from more than 80 different mega-U.S. corporations came together to tackle a seemingly impossible task – call the Congress to action, specifically to reduce the astronomical federal deficit. The campaign, aptly dubbed “Fix the Debt,” aims to pressure Washington to push forward a simple, yet economically sound fiscal plan; raise tax revenues and cut spending. Is it possible that Wall Street is actually supporting a plan that sounds strikingly similar to Mr. Obama’s proposal? Has the ultimate business man Romney lost one of his biggest supporters? Not quite. A closer look at Fix the Debt’s proposal reveals that Wall Street’s CEOs have quite a different plan in mind. Remember, the devil is in the details [see 101 ETF Lessons Every Advisor Should Learn].

First, and foremost, CEOs who signed the manifesto make it crystal clear that tax increases are inevitable, no matter which candidate takes home the victory come November. Mark Bertolini, CEO of Aetna, pointed out, “There is no possible way; you can do the arithmetic a million different ways (to avoid raising taxes). You can’t tax your way to fix this problem, and you can’t cut entitlements enough to fix this problem.” But unlike Obama’s plan, the crafty CEOs do not endorse only raising marginal income-tax rates for the top 2% of taxpayers. Instead they propose an overhaul of the tax policy (which Romney also endorses) in an effort to create a compromise between the two sides of the political spectrum.

A Mixed Bag of “Fix The Debt” Economics

While no specific plan has been laid out, the CEOs pointed out several steps they think the Congress should take:

Reform Medicare and Medicaid, improve efficiency in the overall health care system and limit future cost growth;

Strengthen Social Security, so that it is solvent and will be there for future beneficiaries; and

Include comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues and reduces the deficit.

The CEOs’ statement went on to say that the infamous bipartisan Simpson-Bowles Commission – which deemed that every $3 in spending cuts should be coupled with a $1 tax increase - should be used as an “effective framework” for this new fiscal policy. The emphasis here is that there needs to be a well-defined balance between tax hikes and spending cuts, with the emphasis, of course, on more aggressive budget cuts to quell the uproar that would inevitably happen if there were only tax increases on the ultra-rich [see also Third Time's A Charm? Best ETF Plays For QE3].

From Wall Street To Washington: ETFs To Play

Should the CEOs of Wall Street successfully convince Congress to make a bipartisan fiscal policy that would effectively cut down our nations debt, investors will want to keep an eye on several asset classes that could be impacted by such a monumental plan [see Free Report: How To Pick The Right ETF Every Time]:

  • U.S. Treasuries: This, of course, is an obvious pick, but it’s an important one. If the Congress is able to reduce the federal deficit, demand for U.S. Treasuries would surge since investors would be willing to pay a higher price tag for the debt of a nation that is essentially cash-flow positive. There are roughly 52 Treasury-specific ETFs available on the market that span across a wide array of maturities and positions, including the short-term SHY and the leveraged LBND.
  • U.S. Dollar: Following a similar thought process, the U.S. dollar would become much more valuable if our debt piles were substantially diminished. Whether or not this uptick would counteract the inevitable inflation that would come with the continuation of the Fed’s money-printing stimulus package is certainly debatable. A nice short-term option for bullish investors is the PowerShares DB US Dollar Index Bullish Fund (UUP) [see also King Dollar ETFdb Portfolio].
  • Precious Metals: Should Congress steer the economy away from the “fiscal cliff,” investors would likely shed their precious metals holdings, specifically position in everyone’s favorite safe haven – gold. Popular leveraged short gold ETFs include GLL, DZZ and DGZ.

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Disclosure: No positions at time of writing.