By Caroline Valetkevitch
NEW YORK Feb 24 U.S. investors face another
Washington-imposed deadline on government spending cuts this
week, but it's not generating the same level of fear as two
months ago when the "fiscal cliff" loomed large.
Investors in sectors most likely to be affected by the cuts,
such as defense, seem untroubled that the budget talks could
send stocks tumbling.
Talks on the U.S. budget crisis began again last week
leading up to the March 1 deadline for the so-called
sequestration when $85 billion in automatic federal spending
cuts are scheduled to take effect.
"It's at this point a political hot button in Washington but
a very low level investor concern," said Fred Dickson, chief
market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.
The fight pits President Barack Obama and fellow Democrats
against congressional Republicans.
Stocks rallied in early January after a compromise
temporarily avoided the fiscal cliff, and the Standard & Poor's
500 index has risen 6.3 percent since the start of the
But the benchmark index lost steam this week, posting its
first week of losses since the start of the year. Minutes on
Wednesday from the last Federal Reserve meeting, which suggested
the central bank may slow or stop its stimulus policy sooner
than expected, provided the catalyst.
National elections in Italy on Sunday and Monday could also
add to investor concern. Most investors expect a government
headed by Pier Luigi Bersani to win and continue with reforms to
tackle Italy's debt problems. However, a
resurgence by former leader Silvio Berlusconi has raised doubts.
"Europe has been in the last six months less of a topic for
the stock market, but the problems haven't gone away. This may
bring back investor attention to that," said Kim Forrest, a
senior equity research analyst at Fort Pitt Capital Group in
OPTIONS BULLS TARGET GAINS
The spending cuts, if they go ahead, could hit the defense
industry particularly hard.
Yet in the options market, bulls were targeting gains in
Lockheed Martin Corp, the Pentagon's biggest supplier.
Calls on the stock far outpaced puts, suggesting that many
investors anticipate the stock to move higher. Overall options
volume on the stock was 2.8 times the daily average with 17,000
calls and 3,360 puts traded, according to options analytics firm
"The upside call buying in Lockheed solidifies the idea that
option investors are not pricing in a lot of downside risk in
most defense stocks from the likely impact of sequestration,"
said Jared Woodard, a founder of research and advisory firm
condoroptions.com in Forest, Virginia.
The stock ended 0.6 percent higher at $88.12 on Friday.
If lawmakers fail to reach an agreement on reducing the U.S.
budget deficit in the next few days, a sequester would include
significant cuts in defense spending. Companies such as General
Dynamics Corp and Smith & Wesson Holding Corp
could be affected.
General Dynamics Corp shares rose 1.2 percent to $67.32 and
Smith & Wesson added 4.6 percent to $9.18 on Friday.
EYES ON GDP DATA, APPLE
The latest data on fourth-quarter U.S. gross domestic
product is expected on Thursday, and some analysts predict an
upward revision following trade data that showed America's
deficit shrank in December to its narrowest in nearly three
U.S. GDP unexpectedly contracted in the fourth quarter,
according to an earlier government estimate, but analysts said
there was no reason for panic, given that consumer spending and
business investment picked up.
Investors will be looking for any hints of changes in the
Fed's policy of monetary easing when Fed Chairman Ben Bernanke
speaks before congressional committees on Tuesday and Wednesday.
Shares of Apple will be watched closely this week
when the company's annual stockholders' meeting is held.
On Friday, a U.S. judge handed outspoken hedge fund manager
David Einhorn a victory in his battle with the iPhone maker,
blocking the company from moving forward with a shareholder vote
on a controversial proposal to limit the company's ability to
issue preferred stock.
Wall Street Week Ahead moves every Sunday. Questions on this
one can be sent to caroline.valetkevitch(at)thomsonreuters.com