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Joint Select Committee on Deficit Reduction

11/14/2011
On August 2, the passage of the Budget Control Act of 2011 created the Joint Select Committee on Deficit Reduction, otherwise known as the “Super Committee.”
 
The committee is made up of 12 members of Congress – six from the House, six from the Senate. Senate Majority Leader Harry Reid selected three Senate Democrats, Speaker John Boehner selected three House Republicans, House Minority Leader Nancy Pelosi selected three House Democrats, and Senate Minority Leader Mitch McConnell selected the final three, Senate Republicans.
 
The Committee comprises the following:
 
Co-Chairs:           Senator Patty Murray, Washington (D)
                                Congressman Jeb Hensarling, Texas (R)
 
Republicans:      Senator Jon Kyl, Arizona
                                Senator Rob Portman, Ohio
                                Senator Pat Toomey, Pennsylvania
                                Congressman Fred Upton, Michigan
                                Congressman Dave Camp, Michigan
 
Democrats:         Senator John Kerry, Massachusetts
                                Senator Max Baucus, Montana
                                Congressman Xavier Becerra, California
                                Congressman Jim Clyburn, South Carolina
                                Congressman Chris Van Hollen, Maryland
 
•   The Super Committee’s mandate is to reduce $1.5 trillion from the Federal deficit over the next 10 years.
•   The deadline to reach a bi-partisan agreement on their mandate is Wednesday, November 23, 2011.
•   A deadline extension beyond November 23 requires the difficult passage of an actual law by both chambers of Congress. 
•   The consequence of failing to meet the November 23 deadline is the triggering of $1.2 trillion in automatic spending cuts beginning January 2, 2013.
•   The majority of spending cuts (known as “sequester”) that would begin on January 2, 2013, come from the Defense budget.
•   Successful legislation must be approved by both a Senate and House vote no later than December 23.
 
Keep in mind, within these negotiations, the year-end expiration of the payroll tax cut and emergency unemployment are being considered for extensions. Investors should view those two possible extensions as the most impactful to the near-term price direction of the markets.
 
 
MY EXPECTATION         
 
First, I do not expect any credit rating action by Moody’s, S&P, or Fitch, whether an agreement is reached or not. Failure to reach an agreement triggers “sequester,” which would assuage the rating agencies not to downgrade the U.S. short- or long-term ratings. However, successful passage of a $1.5 trillion agreement does not go far enough to reverse the August 5 S&P downgrade of the U.S. long-term credit rating to AA+.
 
Whether by maturing or just plain old “getting older,” I find that not much surprises me anymore. However, in this instance, given the late July fiasco to adopt the Budget Control Act, I would be very surprised if we end up “in sequester.” I expect the Committee will deliver a watered down agreement without significant concessions on either entitlement spending or increased tax revenue. Those two major partisan issues will be left to be debated throughout the 2012 presidential campaign.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.