Debt-ceiling debate floors stocks

Minnesota companies are among those whose share prices have gone south while Congress wrestles with the national debt.

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Traders worked Thursday on the floor of the New York Stock Exchange.

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WASHINGTON - Minnesota's biggest companies have kept quiet this week about how the debt-ceiling debate is hurting them. But as Congress remains deadlocked and a possible U.S. default looms, share prices spoke for themselves.

Collectively, the Star Tribune 100, Minnesota's 100 largest publicly traded companies, have lost $21.2 billion in market value this week. While it's impossible to determine exactly what portion of the decline is linked to the debt/deficit deadlock, most economists and financial analysts agree that the impasse has cost investors money.

"There are some concerns about the broader economy baked in [the stock market decline]," said Russell Price, a senior economist with Minnesota-based Ameriprise Financial Inc. "But certainly the debt/deficit debate is not helping. Businesses are scared and holding back. People are scared. When people are scared, they don't spend."

Stock prices for the vast majority of the state's biggest companies fell this week amid unresolved discussions about how to raise the debt ceiling by Tuesday, when the Treasury Department says the U.S. will no longer have enough money to pay all of its financial obligations.

Down 5 percent through Thursday, the Star Tribune 100 index is on its way to its worst week since it lost 6 percent in early May 2010. Eighty-nine of the companies in the local index have lost market value during the week. Of those, the 10 largest public companies in Minnesota by market cap have lost approximately $16.3 billion.

Sometimes no bad news

Some companies, such as 3M, lost value based on disappointing earnings reports. But others, such as UnitedHealth Group, the state's largest company, saw its market cap sink $3 billion and its share price dropped 5.4 percent when the company had no negative news and has enjoyed strong profit performance.

Asked whether the company blamed the debt/deficit debate for the pullback in share price, a UnitedHealth spokesman said, "We don't comment on share price movements." A dozen other Star Tribune 100 companies either declined comment or did not respond to requests for comment.

While they may not talk publicly, Minnesota businesses are worried, said David Olson, president of the state Chamber of Commerce. "Our members are very nervous," Olson said. "I've talked to people who are taking money out of [stocks in] their 401(k)s and putting it into cash."

Although the Minnesota chamber usually limits itself to state issues, Olson signed letters this week by the U.S. Chamber of Commerce and the National Association of Manufacturers. Each letter urged the House of Representatives to pass a debt ceiling/deficit reduction bill.

"If this gets resolved, you'll see a spring back in [stock] prices," said Bill Stevens of Stevens Foster Investment Advisors in Bloomington.

But the Obama administration doesn't see resolution until at least the weekend and perhaps not until Tuesday's deadline. White House adviser David Plouffe predicted a "stalemate" after Thursday night, when the House was expected to narrowly pass a debt/deficit plan that the Senate is expected to immediately reject.

"The Senate's obviously going to try to work on a compromise," Plouffe said. "And hopefully over the weekend we'll see a breakthrough."

As the clock ticks down, some experts now say that any fix will not allow the country to avoid a downgrade in its credit rating. That's because the only solutions still being discussed do not include enough deficit reduction to satisfy all three of the major rating agencies.

"We'll probably see a downgrade, but not a default," said Brian Jacobsen, Wells Fargo's chief financial strategist.

Jacobsen believes Congress will make a deal this weekend or by Monday. But he also thinks the Tuesday deadline for a deal can be breached without too much pain.

Effect of a downgrade

Ameriprise's Price says a credit downgrade by only one of the three major rating agencies would not significantly increase the country's borrowing costs, but if two or all three agencies downgrade the country's rating, interest payments on newly issued Treasury bonds could rise to a point that the national debt goes up even further, and the stock market and the economy slump in response.

University of Minnesota economics professor V.V. Chari was "hesitant to attribute much of the stock market move to the debt discussion," but said the economy needs "a long-term deal" to recover.

Congress' refusal to compromise on a debt/deficit deal has left investment advisers in a pinch. They don't want to take clients from stock and bonds to cash, fearing that a wholesale sell-off would drive down share prices before their clients could escape. The stock market remains fundamentally sound, and many companies are showing good earnings and business fundamentals, analysts say.

Yet the introduction of politics into the market has been poison, especially the attempt by each of the major parties to make the other look bad. Stevens of Stevens Foster Financial Advisors isn't really sure where to go with his clients' money.

"All the rules of economics go out the window when you bring politics into it," he said. "Things go crazy. The dynamics change when you are not trying to win, but to make someone else lose.

"This is like the old television show 'The Twilight Zone.' I keep waiting for Rod Serling to step out from behind the curtain."

Jim Spencer • 202-408-2752 • jim.spencer@startribune.com Patrick Kennedy • 612-673-7926 • pkennedy@startribune.com

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