BOSTON (TheStreet) -- A slide in U.S. stocks, more debt downgrades and higher borrowing costs await investors if the so-called Super Committee fails to reach a bipartisan agreement on deficit cuts, says Jeffrey Sica, head of Morristown, N.J.-based Sica Wealth Management.
Sica, whose firm manages about $1 billion, already expected the committee to fail when it was formed after the rancorous debt-ceiling debate in August. He's put his money where his mouth is: The professional investor cut his equity exposure to zero and is betting on a decline in stocks and Treasuries while maintaining a high level of cash.
Super Committee Co-Chair John Kerry (D-Mass.)
"That's the only place that's safe to be right now," Sica says. "Anyone who thinks otherwise is fooling themselves or trying to take the market short-term, which has risks of its own. You're guessing on the direction day by day, and I wouldn't want to be in that position."
Sica, a former managing director for Wells Fargo, says the Super Committee was created as an "illusion of progress." Today is the deadline for the Congressional Budget Office to receive information on $1.2 trillion in proposed cuts from the Super Committee, whose deadline for reaching a deal is Wednesday.
"The government does not have the answer," he says. "They have completely failed in their ability to contain our deficit and they have undermined the average investor who had faith in the market."
Sica lays out a doomsday-like scenario for investors after this latest political debacle: The U.S. deficit has increased by $500 billion since the formation of the Super Committee three months ago. While gross domestic product in the U.S. may be increasing by more than 2%, the debt-to-GDP ratio is climbing at a faster rate.
"As long as they keep raising the debt ceiling, if they don't get GDP numbers that consistently exceed expectations, there's no relevance," Sica says. "You would need to see astronomical growth in GDP." Investors will get the first revision to third-quarter GDP on Tuesday, with economists predicting a 2.4% annualized rate.
Ballooning debt means credit-rating agencies
will downgrade U.S. debt to AA+ from AAA, much like
Standard & Poor's
did in August. If the debt-to-GDP ratio grows to 120% as Sica predicts, it would make an economic recovery highly unlikely for the next three years.
"It creates a very strong possibility of a prolonged recession that will be very difficult to dig out of," Sica says. "The compounding effect is very evident now."
For equity investors, the future looks bleak. Sica argues double-A+ ratings on U.S. debt could be cut further as the debt-to-GDP ratio expands and the U.S. loses its ability to print money. The U.S. is increasingly resembling the eurozone, he says, with the result being a 15% to 20% decline in stocks through the end of this year. So much for a Santa Claus rally that many are predicting.
"This will create a very poor investment environment," Sica says. "I expect a very bad 2012."
For that reason, Sica has completely sold out of equity positions for his clients. In May, his firm had about 15% exposure to equities. Instead, Sica has been sitting on cash, with short positions on U.S. Treasuries and the stock market.
"You have to let the capitulation take over and then begin to buy things at bargain basement prices," he says. "If you come in and try to bargain-hunt, you will get your head handed to you like what we saw in October. "
Even low price-to-earnings ratios are misleading, Sica says.
"There is such a significant voice of market cheerleaders who focus on the P/E ratios," he says. "They're fine to look at when you don't have a catastrophic background to contend with. If there are so many unknowns that could ultimately destroy economies, there is no way that a stock is priced appropriately."
Sica says his firm's portfolios are essentially cash and short-oriented. He is currently in the
ProShares Short S&P 500
ProShares Short QQQ
ETF and the
ProShares UltraShort Euro
ETF. Those have generated returns, Sica says, even though he's only about 15% short.
And while Sica acknowledges there is still a rally in U.S. Treasuries, it's short-lived. That's why he's been buying the
ProShares UltraShort 20+ Year Treasury
ETF. Although the ETF is off by 50% this year, Sica calls it a timely investment.
"At first we were hedging, because we had some Treasury exposure," Sica says. "It hasn't been performing well, but it does represent what I think is a value to those of us who believe yields cannot continue to decline forever. It has been abysmal so far because of this flight to safety. The U.S. Treasury can't just keep printing money and our buyers cannot continue to buy them."
Even if some resolution to the Super Committee's challenge surfaces, Sica expects more of the same for the next three years, making all the worry over this current election cycle moot.
"No matter what happens with the election cycle, you inherit these problems," Sica says. "Look at the Spanish elections this weekend. It was the biggest non-event thing you could imagine. In the U.S., whatever transpires with the election, if they don't make significant progress leading up to that election, it's going to be another three years to unravel this mess."
-- Written by Robert Holmes in Boston
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