No Plan for Default: Ignoring It Does Not Make It Go Away

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(Article by Andrew Dominguez. Data sourced from Finviz and Business Insider.)

In the face of oncoming danger, an ostrich is said to bury its heads in the sand. Unfortunately for many a member of the species, this is not an effective strategy – ignoring a threat does not make it any less real.

Could investors be exhibiting ostrich-like behavior? 

According to Natsuko Waki’s analysis on Reuters, investors are largely unprepared for the possibly approaching US debt default. Although a default is currently considered a low probability or “tail risk” event, its likelihood increases each day the political impasse continues.

"The main scenario of most investors is they will reach an agreement, I don't think investors are prepared. It's hard to prepare for such a tail risk… It's like preparing for a nuclear fallout. Risk cannot be insured. Normal risk can be insured but insuring this sort of tail risk is something that is not possible," Alessandro Bee of Sarasin told Reuters.

In her article, Waki gathers optimistic outlooks from numerous stakeholders. She cites a recent Bank of America poll that revealed that fund managers did not consider a US debt default a top concern. She also points to the fact that US Treasury yields are “near all-time lows, supporting the view that investors are not panicking.”

She also relates the seeming cool of Japanese Finance Minister Yoshihiko Noda and People’s Bank of China adviser Xia Bin. The Japanese and Chinese central banks hold a combined $3.3 trillion of US government bonds, reports Waki.

A source of calmness is the fact that no one is quite sure how a default would play out.

“Our view is the U.S. will go into some kind of technical default but they are unlikely to go into technical default on government traded debt obligations. They are more likely to default on other government payments such as defense contractors or social security obligations,” according to Percival Stanion of Baring Asset Management (via Reuters).

If that turns out to be true, then government bonds might actually look safer than some stocks after a default.

To help you in your research on the best course of action to take given the current uncertainty, here is a list of companies with a significant portion of their revenues linked to government spending (via Business Insider). 

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List sorted by percentage of sales to government. Originally compiled on July 18, 2011.

1. Affymetrix Inc. (AFFX): Biotechnology industry with a market cap of $4.08B. Government spending comprises 100% of its sales. Share prices are down 10.0% year-to-date.

2. Aeroflex Holding Corp. (ARX): Heavy Construction industry with a market cap of $958.27M. Government spending comprises 96% of its sales. Share prices are down 8.69% year-to-date.

3. Bruker Corporation (BRKR): Communication Equipment industry with a market cap of $5.52B. Government spending comprises 85% of its sales. Share prices are down 3.26% year-to-date.

4. FLIR Systems, Inc. (FLIR): Aerospace/Defense Products & Services industry with a market cap of $4.60B. Government spending comprises 80% of its sales. Share prices are down 2.83% year-to-date.

5. Granite Construction Incorporated (GVA): Biotechnology industry with a market cap of $9.17B. Government spending comprises 80% of its sales. Share prices are up 17.57% year-to-date.

6. Human Genome Sciences Inc. (HGSI): Technical Services industry with a market cap of $1.44B. Government spending comprises 71% of its sales. Share prices are down 7.66% year-to-date.

7. Harris Corp. (HRS): Scientific & Technical Instruments industry with a market cap of $478.69M. Government spending comprises 70% of its sales. Share prices are up 34.99% year-to-date.

8. Illumina Inc. (ILMN): Technical Services industry with a market cap of $3.48B. Government spending comprises 70% of its sales. Share prices are up 6.37% year-to-date.

9. Tetra Tech Inc. (TTEK): Scientific & Technical Instruments industry with a market cap of $3.40B. Government spending comprises 69% of its sales. Share prices are up 23.49% year-to-date.

10. URS Corporation (URS): Integrated Circuits Semiconductor industry with a market cap of $1.22B. Government spending comprises 50% of its sales. Share prices are down 12.34% year-to-date.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


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