Sequestration is the series of $85 billion worth of spending cut that’ll ripple across the U.S. government starting on March 1.
In his latest note to clients, Bianco continues to reiterate his stock market bullishness in the face of the sequester:
At 1520, the S&P is 5% from our 1600 yearend target. However, we maintain our tactical call that the next 5%+ price move is most likely UP. Earnings season was good (see pages 3-7 for our S&P 500 EPS Tracker) but attention will now turn to the March 1 sequester. We do not fear sequestration. It will lower the deficit and sideline the risk of a US credit rating downgrade or bond market dislocations. If new legislation delays or replaces sequestration with only token 2013 cuts, then we would likely advise positioning for a 5%+ S&P dip that hits Financials and Energy the most.
As you can see in the chart below, his most optimistic scenario is trimmed sequestration, which relatively makes sense.
However, what’s more counter-intuitive is his call that stocks would still go up with the full sequester.
Photo: Deutsche Bank
“Don’t fear sequestration, significant spending cuts are desired for stocks,” he wrote in a note last month. “Another can-kick invites new risks, whereas sequestration will prevent US credit rating downgrades and keep the Fed accommodative.”
Another gutsy call from Bianco.
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