The obvious and tautological answer is: everyone.

The equally lame answer is might be: any entity, corporate, personal or otherwise, that relies on the full faith and credit of the United States of America.

That is a sobering thought and likely true after a fashion but it isn't terribly helpful for those of us forced to live and invest in a country that is happily playing Russian roulette with its credit rating.

More practically speaking, how can we think of preparing for a government default or, perhaps more likely, a protracted fight over the debt ceiling and what and how the US allocates its budget?

It is a good question and one that is strangely avoided by a lot of the press and financial commentators. "Hoping it doesn't happen" doesn't seem like much of a strategy however.

Obviously, everyone is exposed to the risk of this catastrophe and there is nowhere to hide but that doesn't mean that some companies, sectors or even classes of businesses are not more vulnerable than others.

At a high level, there are a few structural ways of looking at this:

1. A very general and simple sorting between companies based on their size.

2. A focus on different classes of companies that primarily sell to the government.

3. Individual companies that are heavily exposed to the government for one reason or another.

Let us start with the easier and most simple point based around company size at the index level.

It doesn't get a lot of press in the "home of free markets" but a rather uncomfortable number of US companies are heavily reliant on the US government. Even more disconcerting and unrecognized is how many of these businesses are very large. In fact, they are among the largest in the whole economy.

The big getting bigger is a theme of ours at present and there is an extremely high correlation between being a big company and being able to get meaningful revenue from the US government, at any level - municipal, state or, the big one, federal.

Therefore, only the truly biggest companies have the ability to wait out the long application cycles, the lawyers to handle the paperwork and, above all, have the ability to satisfy the endless requirements and jump through the many bureaucratic hoops erected before you can secure a government contract. Thereafter you are on easy street but getting through the door takes great patience and, above all, time.

A small, lean company simply isn't capable nor can it justify the effort despite the huge potential payoff down the road. The cost benefit calculus is clear: a smaller firm can't devote the amount of attention and capital that would be required. They could easily go bankrupt before that payday comes true and what would you then say to your investors or employees?

There is also a chicken and egg problem. How can the government risk valuable taypayer funds on a company that has never attempted X when it might not be around in a few years? That fear of political disgrace creates a powerful structural incentive towards bigness that is very hard to overcome no matter how many small business programs or incubators government's launch.

This is a rather significant structural issue that we won't dwell on here but considering what follows you might want to keep this big vs small dichotomy front of mind.

Now, we have argued a few times that "big is in" as well as the fact that the US is turning heavily to an industrial policy that, at its core, represents the government "picking winners" but also simply spending a lot of money.

Most of that capital will likely flow to the largest US companies, in other words. However, the fight over debt ceiling obviously complicates that story, at least over the short term. If the government can't pay its bills - or even simply has to delay them - then that is very bad for company's who rely on government contracts for their bottom line.

We mention all of this as a way of pointing out that a prolonged struggle over the debt ceiling this summer could challenge the structural bias towards "big." Small cap companies might outperform the market for a bit despite the prevailing winds blowing in the other direction.

Practically speaking something like the Russell 2000 index of smaller companies vs S&P 500. The latter is really only the largest US companies and many of them, directly or indirectly, have a large portion of their business from the US government.

The second thing to say is that there are whole sectors of the economy that are typically very dependent on the government.

It is important to distinguish between those like finance companies that depend on the US government to effectively regulate their sector (i.e.: prevent bank runs) and responsibly steward the US currency and credit rating on the one hand. And companies like defense or healthcare companies that source a large portion of their sales directly from the US government on the other.

Of the two, both would suffer but banks primarily depend on the private sector. Some other sectors do not have that luxury.

It is very probably that healthcare, utilities, materials and other like minded companies would underperform in any sort of real sustained debt ceiling drama. The most likely ETFs are probably those full of defense companies.

We have written positively about defense companies this year and last year and there is no denying that a serious problem with the US debt ceiling, default or simply ongoing uncertainty, will play havoc with their income. However, we do still believe that while the pace of US spending growth may come down in the months ahead, most of these cuts will not fall on defense companies. That is what makes it so hard because defense spending is the single largest part of the budget that is not entitlements which makes it an obvious area to target. Vladimir Putin and the killing fields of eastern Ukraine make that very difficult if not impossible.

Depending on your approach could easily remove these sectors from your portfolio for a time. Or you could add to them expecting that the debt ceiling problem will be resolved in the near future.

Lastly, there are individual companies that are heavily exposed to US government.

There are numerous examples and some of them might surprise you. There are any number of firms that rely on government revenue

For instance, Huntington Ingalls Industries (recently renamed HII Corporate) makes nearly 100% of its revenues from the US Government. Its primary business activity is building aircraft carriers and other military ships. Very few of those being sold to Jill Six Pack....

Huntington Ingalls isn't alone however. Numerous other defense companies are very vulnerable. For instance Lockheed Martin, General Dynamics, Northrop Grumman, and Raytheon are all large defense conglomerates that are highly exposed to the US government.

It isn't just defense companies however.

There are all manner of companies that depend on the US Federal Government. Utility companies, water companies, consultancies.

Booz Hamilton, a 100-year old consultancy somehow makes over 97% of revenue from contracts in which the end client is an agency or department of the US government.

All of these companies will likely really struggle - in the market and in real life - if the fight over government spending continues.

So, what are the options as an investor (let us put aside what your options might be as an American who relies on the good credit of your country....)?

It really depends on what your risk appetite is and what you think could be possible going forward:

• The first option: if you think that the debt ceiling debacle will be nasty and very protracted is you can remove the sectors that you dislike from your portfolio and wait for a resolution before adding them back in. You may still lose money but you will lose less money and we can pretend that that feels better.

• The second option is, if you believe as many do that there will be a compromise forced by markets and the looming deadline, you can wait patiently like an alligator in a pond for the volatility to come and then BUY the sectors that you think will be temporary cheap before rebounding strongly.

• Third, if you are attracted to the idea that this will be "much ado about nothing" then you could a) stay invested and b) buy into some of the Treasury bills that are expiring around the deadline in June (or July) and capture some extra yield (see below)

• Fourth, there is the "do nothing and hope for the best." This is obviously the option for nearly everyone, no matter who they are. This is both understandable though we would caution that it could take some time (see below).

• Fifth and last, it could be simply time to add in some bonds to your portfolio further out the curve. We have argued that interest rates could head higher still from here but between the slowing growth, bank failures and debt ceiling brinkmanship, we are getting very close to where Fixed Income could be very attractive. It could be time.

For context, the last time the debt ceiling got truly nasty, the US credit rating was downgraded the S&P 500 fell by 19% and took 4 months to recover the losses.

For now, (1 month) Treasury Bills are making new high as the threat of a banking crisis recedes and investors get nervous about holding government issue paper around the deadline.

More positively, last time, US bonds yields rallied in price (came down in yield) even as the US screwed around with its own credit rating. Something nonsensical to keep in mind in the weeks ahead.

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