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Government Shutdown/Debt Limit - Issues and Timelines for Investors

Discussion in 'TSLA Investor Discussions' started by CapitalistOppressor, Sep 28, 2013.

  1. CapitalistOppressor

    CapitalistOppressor Active Member

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    #1 CapitalistOppressor, Sep 28, 2013
    Last edited: Sep 28, 2013
    Ok, I logged into TMC today to write something up on this issue, but I dipped into the short term investors thread and saw that some folks have already been discussing this issue. Still, its a major issue that probably deserves it's own thread.

    First of all, lets be clear. A traditional government shutdown (just like grandma used to make) is all but inevitable now. Ted Cruz and Mike Lee are coordinating with strong Tea Party minded conservatives in the House to engineer a shutdown, and today leadership (Boehner, et.al.) stepped out of the way and agreed to another CR with an Obamacare defund component.

    Near Term Volatility

    What's important to realize from a calendar standpoint is that the only way for the Senate to act on this new CR would be with unanimous consent, and Cruz has already indicated that he will block it unless the Democrats agree to accept the new CR in toto. This will not happen, so the Senate will not even be able to vote on the measure before the government shuts down on Tuesday.

    I don't possess a crystal ball, but it seems to me that there is a strong risk of downside volatility on Monday/Tuesday after the market has had a chance to digest today's news and come to the conclusion that a shutdown is now inevitable. Once it does that, it will also need to reckon with how far apart the parties are and start pricing in the possibility that the shutdown could be extended and have real impacts on the economy. Furthermore, there has been some question as to whether Republicans will agree to pay back pay to Federal workers when this is all concluded, which could cause this shutdown to be more damaging than past ones.

    Will They Hold the Line?

    Moving past the immediate effects on Monday and Tuesday, if either party does not blink the next event that might force action will be on October 15th when paychecks for members of the military (and other employees) will be delayed if the situation is not resolved. If both sides are still holding firm at this point, the risk of catastrophe will go up rather dramatically because we'll be hard up against the parallel debt limit deadline which is October 17th.

    From some friends of mine who are Democratic staffers on the Hill, I've been hearing that Democrats are hoping to force mainstream Republicans to pass a clean CR and debt limit increase by the 15th, and will be applying pressure in the media centered around that date as a point of decision. Their expectation is that Republicans who aren't committed to Cruz, but who don't want to be seen blocking this initial shutdown strategy, will side with Democrats under the cover of the need to pay troops who are still fighting in Afghanistan.

    If Democrats adopt this media strategy, expectations in the investment community for a resolution by the 15th will also start to build. So if there isn't an agreement by the 15th, and if the market has managed to stay steady in the face of the shutdown, a non-agreement by the 15th seems also certain to cause a big move downwards in the face of a potential default on the 18th that will start to seem very real.

    Is it Time to Buy a Gun?

    In the unfortunate event that there is not an agreement by the 18th, the U.S. seems highly likely to begin defaulting on obligations, though the expectation (which is more of a hope than a reality) is that the Treasury will be able to prioritize some of the 100 million+ payments that they make every month so that they are able to continue servicing bond holders and important constituencies. This would still be a technical default, and the reality of the situation is that many, many contractors of various types would not get paid.

    The loss to the real economy would be equivalent to ~4% of GDP, just in terms of hard cash that will stop flowing. The potential chaos in financial markets, or the potential for particularly severe multipliers as consumers react to the mess and pull back represent a huge steaming pile of question marks that nobody has the answer to.

    An important issue that I have yet to see be addressed by anyone in the media is whether a government shutdown right now might actually push back the date when the we default. The October 17th date is obviously based on the notion that the government is operating normally, but I'm pretty sure that if the discretionary side of the government is shut down on the 1st, that could add several days, or even a week, to the timeline that has been discussed by the Treasury.

    It's not clear to me that the media will clue into this unless one side (or both) decide to advertise the fact that a shutdown will push back the drop dead date. Or I could just be wrong, and a shutdown will not produce "savings" that would delay a default. Still, my guess is that there is fairly substantial wiggle room around the 17th in the case of a shutdown (in fact there is probably a bit of wiggle room even in the current estimate). Still, even an extra week is not a lot of time.

    What about TSLA?

    These are all just meta-level events that will have little impact on Tesla until we get to the point where we have to start dusting off our "How to Cook A Human" recipes. If the real economy ends up being damaged enough to affect sales of the Model S, our portfolios will have long since gone into a state of free-fall.

    So the risk for TSLA carnage is all in the near term, starting Monday and accelerating as we approach the debt ceiling on the 17th. I strongly suggest you think hard and this weekend about what your strategy is going forward, but for my part I've already positioned myself to take advantage of a big move down.

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  2. mynameisjim

    mynameisjim Member

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    Is starting Monday morning too late to try to protect my investments from a downward fall?
     
  3. ggr

    ggr Roadster R80 537, SigS P85 29

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    The last time there was a big bluff-counterbluff argument about the debt ceiling, there were some people who wrote that the President could just authorize an increase by himself. I wonder if this has been researched in the meantime, and if it will be brought into play?
     
  4. stopcrazypp

    stopcrazypp Well-Known Member

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    I read the same thing, that having the government shutdown happen may be less risky than it not happening, because it allows an out for some of the Republicans on the fence when it comes time for the debt ceiling issue (which has much worse consequences).
     
  5. CapitalistOppressor

    CapitalistOppressor Active Member

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    Who knows? I could easily be wrong about all of this. I made a lot of money playing debt limit volatility in December, but Tesla has been on a roll lately, and in my brief (last 10 pages) perusal of the short term thread, someone mentioned European buyers coming into the market for TSLA at a time when there is a shortage of sellers (ie, we are all long TSLA).

    That thesis makes a lot of sense to me, and if true they might support the price as those of us in the U.S. who are panicking about the debt limit pull the ripcord.

    So I might end up losing a lot of money on my bet that TSLA is going to fall in the next couple of weeks. The shutdown might only end up lasting till the end of the week before enough Republicans decide that they have enough political cover to cut a deal with the Democrats. If the Europeans push the price upwards under those conditions then those of us who are "protecting" our investment will have lost a great deal of money.

    - - - Updated - - -

    I would hope he does.

    That said, from a bargaining standpoint he has (IMHO) little incentive to say he'll step in to fix things until we are past the official drop dead date.

    Otherwise, he'll reduce the pressure on the Republicans and essentially be taking ownership of the whole fiasco, while also making it more likely that he doesn't get a deal. And once he actually attempts to assert constitutional authority to issue debt the Republicans will take him to court and when the Treasury tries to issue new debt investors will probably have to charge additional risk premia against the possibility of an adverse decision from the U.S. Supreme Court.

    That court case could take months or years to happen, so the U.S. will be out tens of billions of $$ in additional interest payments even if the president gets 5 votes from the Supremes.

    So if Obama will refuse to even admit he can act until he is forced to, we'll all still get to see what the market does when it see's the U.S. breach the debt limit. And once Obama does act, there will be a lag between when he asks Treasury to make the debt sales, and when they'll raise the cash they need. Until that happens, the U.S. will be missing millions of payments and be in at least technical default. And if any of those missed payments are to bond holders, that will just open up a whole other can of worms.

    The stock market might snap back with an Obama announcement under those conditions, but I really doubt it would snap all the way back to a happy place, and whatever gains there are might be short lived depending on the reality of whatever it is that Obama attempts.

    - - - Updated - - -

    Yes, Ezra Klein and many others today have been saying that a shutdown right now is a good thing. Count me in that camp. Rational Republicans need "to show some spine" if they are going to stave off a Tea Party primary. A shutdown is a relatively painless (to the real economy) way to do it compared to a debt limit breach.

    - - - Updated - - -

    I should add one more possibility. The Senate is going to set this latest bill (assuming the House passes it) aside on Monday morning. As the deadline looms, there isn't anything that would prevent the House from taking up the Senate bill and passing it at the last minute. It would be a total cave by the Republicans, so I don't put much stock in the notion. But it is procedurally possible, and we know most Republicans probably don't want a shutdown.
     
  6. sleepyhead

    sleepyhead Active Member

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    CO - thanks for taking your time to post this and I agree that there are a lot of risks, but it is impossible to tell if TSLA will go down.

    TSLA is at the top of the channel once again so that favors a pullback; I have a feeling that we will hear from Goldman in the next week or so as well.

    There is also a possibility that Elon tweets something for the end of the quarter to get TSLA past $200.

    All I am trying to say is that you never know. Going into the "Syria" weekend I was scared that I will lose a lot of money in my portfolio, but for some reason I didn't hedge and figured that I will ride it out, since the S&P was already down 5% leading into that weekend and my portfolio survived that downturn (so no point in selling at the bottom). The next week actually turned out to be one of the best weeks for my portfolio and I am glad that I did not hedge (even though I felt that I should).

    The markets have been down in the last 6 out of 7 trading, but my portfolio was up 6 out of the last 7 (or maybe even all 7 days). Therefore, once again I am glad that I did not hedge.

    In the end you never know what is going to happen.

    I would love to hear your strategy, what kind of options are you buying and selling? Please keep us informed as the story unfolds and what it means for the markets. Thanks.
     
  7. gym7rjm

    gym7rjm Member

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    What's a good way to short the overall market?

    I've done a little reading about the SPXS ETF or buying puts on the SPXL. Considering the debt ceiling and shutdown, are there any better options to short the market?
     
  8. sleepyhead

    sleepyhead Active Member

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    The markets have been down the last 6 out of 7 days and the global economic indicators have been really good lately.

    So, I actually feel like the markets will rally over the next two weeks because of this. But it really is 50/50. I don't see this government shutdown as a surefire way to make money by buying puts. I am not trying to dissuade you from buying puts, rather I am just giving my opinion on the market in the near future to stir discussion.

    Take a look at the SPY puts as well.
     
  9. drinkerofkoolaid

    drinkerofkoolaid Active Member

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    #9 drinkerofkoolaid, Sep 28, 2013
    Last edited: Sep 28, 2013
    Past US government shutdowns haven't caused the stock market to melt down | Star Tribune

    The only reasons I'm a bit concerned about the overall market is the VIX being at a very low level, and the media does appear to be downplaying the impact of a government shutdown. Maybe I'm being overly optimistic, but I don't think either party wants to see, or is going to allow a default to occur. Secondly, Tesla is not a heavily owned stock. The stocks that would be the most affected by a spurt of Panic Selling are those that are heavily owned by Mutual Funds, who may be forced to sell if retail investors begin to panic. I'd be more concerned that the rise in Tesla is due to window dressing, and that profit taking may occur on Tuesday. The Falcon 9 launches on Sunday or Monday. This combined with window dressing may provide us with a cushion on Monday.
     
  10. CapitalistOppressor

    CapitalistOppressor Active Member

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    That article is self refuting at multiple points -

    Really?

    Umm.. but...

    Didn't you just mention -

    What was that about an "average" shutdown??? ...

    But didn't you mention this??

    WTF?? What's the "average" decline in the stock market excluding those "many" shutdowns that occurred over a weekend??

    Oh, and as to the rest of the methodology. Including all of the days that the government was "shut down" is lame in the extreme. By definition that includes the final day or two when a deal is in sight and being voted on. A time when you can expect the market to be snapping back hard.
     
  11. bonnie

    bonnie Oil is for sissies.

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    So what I'm taking from all this is 1) I'm not going to gamble my long position, but rather ride it down if necessary and back up again, and, 2) make sure I have plenty of cash available to take advantage of any buying opportunities that may present in the next couple of weeks.
     
  12. aznt1217

    aznt1217 Active Member

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    Reminds me of the period of the financial crisis and apple. It did just fine, took a very short term hit which was a great opportunity. The real question is whether or not the market priced in a government shut down already. We've been down the past couple of days. I'm prepared for a dip as well and am waiting to enter in options, but TSLA should be fine if people hold out long enough.

    As always though, great mega post. I thoroughly enjoy these.
     
  13. CapitalistOppressor

    CapitalistOppressor Active Member

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    This is an excellent strategy to pursue :)
     
  14. gym7rjm

    gym7rjm Member

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    Thanks for the info. I'm still sitting on the fence about shorting any etf's. Haven't done something like that, so it might be better to just stick to something I know more about... tsla.

    On Friday I bought a few 180 puts for cheap seeing that we are trading at the top of the channel, the gov issues being a bonus. I sold several of my shorter term calls last week after the DB upgrade, guess I pulled the trigger too early on that, but happy with the gains. Looking for a pullback like everyone else on here to make a good Q3 play.
     
  15. Convert2013

    Convert2013 Member

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    Now this what I've been doing all along. Simple Accumulation :)
     
  16. bonnie

    bonnie Oil is for sissies.

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    Yes, as have many of us. But I think it will be particularly easy for some to panic over the thought of a gov't shutdown or think that this might be a good time to sell their long position and then buy back in when it dips. And it might not. So after reading through everything in the thread, it was clear that the long term strategy was still the long term strategy. No drama. Life is much more stress free that way.
     
  17. Mitthrawnuruodo

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    Good post. Ive been super busy with work this week but I didn't like all I saw on Friday, looking at the news and the VIX, so I put about 2% of my portfolio on Monthly uvxy calls. I also sold the majority of my 'conservative' holdings which were in NDAQ. I am really overextended on SCTY but there was good news on a deal they struck yesterday that should keep me safe and give me time to sell some this week If I deem it prudent. As for Tesla, I have no worries at all. The mass market still doesnt get this stock. Once they realize what this car is going to do in Europe, and we hear more news about Model X, Gen III, maybe a new factory in Europe or Asia, the stock will be at $300+ after another couple earnings calls. All my opinion of course, but as I say bring the naysayers, we had it all right here on TMC.
     
  18. brianman

    brianman Burrito Founder

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    It's always risky trying to summarize bonnie but I'll try anyway...
     
  19. justdoit

    justdoit Member

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    Thanks for the post CO. This was my concern all week, so even when we had dipped down to low 180's and even to around 178 I was tempted to buy but decided to hold off until this stuff was taken care of. But of course TSLA just seemed immune from it all and continued to rise up. The only thing that makes me think that there is a chance for a dip this week is that the volume seemed fairly low the past week.

    I'm pretty sure a last minute deal will be reached and things will be fine till the 15th. I did hedge a little by buying Oct 4 puts and selling some uncovered Dec and Jan calls. At the first sign of any dip I'll probably get rid of all of those and move to a much more bullish position. And if things keep dropping, I'll keep becoming more bullish :)
     
  20. Royal TS(LA)

    Royal TS(LA) Member

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    @CapitalistOppressor

    What, in your personal opinion, is the worst scenario that could happen and how badly could TSLA be affected by it?
     

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