Bullish Breakout . . . In the U.S. Deficit

Conclusion:  The Federal Government released their budget numbers for January, and we continue to see expansion towards an all time high in the U.S. budget deficit.  The federal budget deficit is now expected to be $1.65 trillion for fiscal year 2011.

 

Position: Short Municipal Bonds via the etf MUB

 

The Treasury Department released its budget statement for the first four months of the fiscal year late last week and the results were indicative of a widening U.S. budget deficit.  In conjunction with this release, the White House took up its deficit estimates for fiscal year 2011 to ~-$1.65 trillion.  This puts the federal deficit squarely in the red zone of budget deficit-to-GDP of -10%.  In fact, based on our math and using the White House’s deficit projection for fiscal year 2011, budget deficit-to-GDP should be ~-10.9%, which is the highest level we’ve seen since World War II.

 

In the table below, we’ve compared key line items for the first four months of this fiscal year and the first four months of last fiscal year.  As always, we have normalized for TARP and 1-time payments.   There are a few year-over-year trends to highlight, which include:

  • On the outlays (or expenditures) side, Medicaid was up +7.9% and Net Interest on Public Debt was up +9.6%.  The latter point will be even more critical as debt expands to fund future deficits and interest rates continues to climb; 
  • The key positive for expenditures was  the decline in unemployment insurance payments, which declined (18.2%) year-over-year (albeit the savings was small relative to the entire deficit); and 
  • The primary positive change on the revenue side of the ledger was a +23.2% increase year-over-year on individual income tax revenue, which amounted to a net positive contribution of $72 billion for the period. 

Bullish Breakout . . . In the U.S. Deficit - 2

 

In aggregate, government outlays continue to accelerate, as they were up +6.6% on a year-over-year basis.  While revenues also expanded (up a healthy +9.4%, driven primarily by individual income tax receipts), it was not large enough growth from the smaller revenue base to narrow the year-over year budget deficit, which was up +1.9% to -$422 billion for the first four months of the fiscal year.

 

As we outlined in our conference call last week,Mayhem in Muni Bond Land,” one of our key short ideas as it relates to the burgeoning U.S. federal budget deficit are municipal bonds as an asset class.  The key implication of a larger-than-expected federal budget deficit is that there is less money available to offset state and local level budget deficits, which will require state and local governments to issue more debt to fund their operating budgets and capital expenditures.

 

The other key issue to consider is that as the federal budget deficit increases, the future supply of U.S. Treasuries will increase as well.  Naturally, a larger supply of Treasuries to be issued should demand a higher interest rate.  Since municipal debt, as outlined in the chart below, tracks the yields of U.S. Treasuries very closely, increasing supply in the Treasury market (and likely increasing yields) will be negative for the municipal debt market as well.

 

The last interesting point we wanted to highlight from the budget report relates to foreign aid.  According to the CBO:

 

“Those increases were partially offset by several large decreases, including a reduction of $2.4 billion in outlays for international security assistance, reflecting a delay in making most of the $3 billion in annual payments to Egypt and Israel for military aid.”

 

It is interesting to note the scale of these security payments, as well as the actual levers that the U.S. government can pull by delaying these payments.

 

Daryl G. Jones

Managing Director

 

Bullish Breakout . . . In the U.S. Deficit - 1


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more