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High Stakes Histrionics

Sun, Jul 31, 6:35 PM ET, by ilene, Sabrient.com

Stock World Weekly: High Stakes Histrionics

Excerpt from this week’s Stock World Weekly (sign up for a free trial here)

Tea Party Takes Off

Wrangling on Capitol Hill over raising the debt ceiling dominated the financial news again this week. From the televised speeches of Obama and Boehner, to the hard-line tactics of the Tea Party, to the pitiful cobbled-together agreement the House put together late Friday – which was rejected by the Senate almost immediately upon delivery – there has been no shortage of grandstanding, posturing or spouting of rhetoric.

With the August 2 deadline fast approaching, the tone and intensity of the political debate grew ever more shrill. Obama faced bitter opposition from his own party regarding planned cuts in the budget, while Speaker of the House John Boehner found himself dealing with a de-facto mutiny from within his own ranks, as Tea Party leaders openly rebelled against Boehner's leadership. (Tea Party Leader Suggests To Fox News That Boehner Should Step Down Over Debt Talks)

Critical of the Tea Party merriment, Henry Blodget observed, "Sarah Palin is apparently enjoying the Washington debt-ceiling clusterf*** from her perch in Alaska. She just weighed in on Facebook with a veiled threat against tea-party candidates who vote to raise the debt ceiling. (Translation: C’mon, y'all, let’s make America default.) And right now, those Tea Party candidates are making life miserable for House Speaker John Boehner, who is about to see his spending plan shot down by folks in his own party. And Mrs. Palin isn’t helping.

"In her remarks, the possible 2012 presidential candidate invoked her patented 'we the little people' shtick and tossed in a threat about 'contested primaries.' The latter is presumably a reminder to the Tea Partiers that if they sell out on the debt-ceiling, their careers in DC will be short. (Sarah Palin Eggs On Tea Partiers — Threatens To Get Them Fired If They Vote To Raise Debt Ceiling)

The stock market reacted poorly to the debt ceiling drama. David Waddell, president at Waddell & Associates, opined, "The politicians seem further apart than they were a few days ago, but we're even closer to the deadline. Investors are at the point where they are saying 'take me to cash.' Politicians are really taking it to the pain threshold, where the everyman investor has just about had enough." (Markets Swoon on Debt Fear)

Mish Shedlock commented on Boehner's exercise in futility: "Questions abound. Was there any point to this? If so, what was it? Since everyone knew his plan would be rejected in the Senate, why bother?

"The only conceivable answer is to save face, but how much face could possibly have been saved when Boehner had to twist the arms of every Republican to narrowly pass his gaseous proposal?

"As long as his proposal was going to be rejected anyway, Boehner would have been better served to come up with a rock-solid plan that Republicans would have loved to sign. If Boehner wanted to make a statement, that would have done it. Instead, Boehner came out looking like a limp dishrag." (Great Divide; Boehner Rams Through Bill that Senate Quickly Rejects; Obama's Idle Threats and Fear Mongering)

Dr. Michael Hudson thinks the whole debate is a phony exercise in misdirection. He wrote, "You know that the debt kerfuffle is as melodramatically staged as a World Wrestling Federation exhibition when Mr. Obama makes the blatantly empty threat that if Congress does not "tackle the tough challenges of entitlement and tax reform," there won't be money to pay Social Security checks next month…

"Of course the government will have enough money to pay the monthly Social Security checks. The Social Security administration has its own savings in Treasury bills. I realize that lawyers (such as Mr. Obama and indeed most American presidents) rarely understand economics. But this is a legal issue. Mr. Obama certainly must know that Social Security is solvent, with liquid securities to pay for many decades to come. Yet Mr. Obama has put Social Security at the very top of his hit list!

"The most reasonable explanation for his empty threat is that he is trying to panic the elderly into hoping that somehow the budget deal he seems to have up his sleeve can save them. The reality, of course, is that they are being led to economic slaughter. (And not a word of correction reminding the President of financial reality from Rubinomics Treasury Secretary Geithner, neoliberal Fed Chairman Bernanke or anyone else in the Wall Street Democrat administration, formerly known as the Democratic Leadership Council.)

"It is a con. Mr. Obama has come to bury Social Security, Medicare and Medicaid, not to save them. This was clear from the outset of his administration when he appointed his Deficit Reduction Commission, headed by avowed enemies of Social Security Republican Senator Alan Simpson of Wyoming, and President Clinton's Rubinomics chief of staff Erskine Bowles. Mr. Obama's more recent choice of Republicans and Blue Dog Democrats be delegated by Congress to rewrite the tax code on a bipartisan manner so that it cannot be challenged is a ploy to pass a tax 'reform' that democratically elected representatives never could be expected to do." (Debt Ceiling Set For Progressive Repealing)

Bloomberg's Caroline Baum also thinks the threats of nonpayment and default are scare tactics. She argues, "The Treasury is not going to default in August, nor in subsequent months for that matter. An estimated $172.4 billion of tax revenue next month is more than enough to cover the $29 billion of August interest payments. For fiscal 2011, which ends Sept. 30, the Treasury is expected to take in revenue of $2.2 trillion, while only $214 billion is needed to service the debt.

"And even if it lacks the authority for new borrowing, the Treasury can continue to roll over existing debt.

"Instead of dangling the default threat every chance they get, Obama and Geithner should be telling the world that the U.S. has every intention, and the resources, to meet its debt obligations. They should shout it from the rooftops, put a banner on the Treasury Direct website, and use the Sunday talk shows to reassure investors, not frighten them.

The administration's stated desire to remove the uncertainty hanging over the economy flies in the face of their saber-rattling. Why, one might even conclude that they are perish the thought playing politics with the debt ceiling!" (Obama, Geithner May Regret Threats of Default)

In his article "The Two Most Exquisite Ironies Of The Debt Ceiling Fight," Stan Collender of Capital Gains and Games wrote, "On the one hand, much of Wall Street is insisting that the whole fight is political theater and that Congress and the White house will work something out. On the other hand, congressional Republicans are insisting that Wall Street won’t react negatively if a deal doesn’t get done…

"On the (other) hand, congressional Republicans are using the debt ceiling as a weapon to force the White House to accede to their wishes on spending cuts. On the other hand, the GOP in the House and Senate insists that not raising the debt ceiling will have no impact.

"So…We say that not raising the debt ceiling won’t have an impact that we have to worry about but you had better be worried because it’s going to hurt come August 3."

Robert Reich takes a harsh view of the Republican theatrics. In response to a friend's question about what will happen when the U.S. runs out of money, he wrote, "It was only then I realized how effective Republicans lies have been. That we're calling it a "budget crisis" and worrying that if we don't "solve" it we can't pay our nation's bills is testament to how successful Republicans have been distorting the truth.

"The federal budget deficit has no economic relationship to the debt limit. Republicans have linked the two, and the Administration has played along, but they are entirely separate. Republicans are using what would otherwise be a routine, legally technical vote to raise the debt limit as a means of holding the nation hostage to their own political goal of shrinking the size of the federal government…

"Repeat after me: The federal deficit is not the nation's biggest problem. The anemic recovery, huge unemployment, falling wages, and declining home prices are bigger problems. We don't have a budget crisis. We have a jobs and growth crisis.

"The GOP has manufactured a budget crisis out of the Republicans' extortionate demands over raising the debt limit. They have succeeded in hoodwinking the public, including my friend." (Don't Fall for the GOP Lie: There is No Budget Crisis. There's a Job and Growth Crisis.)

Looking ahead to next week, Lee Adler of the Wall Street Examiner observed, "The market faced a big test this week with a ton of new supply settling on Friday July 29 and Monday August 1, and stocks took the brunt of it. The bidding at the Treasury auctions remained strong. Investors feel confident that they will be repaid with interest. They are not the least bit worried about a credit downgrade. Nor should they be in the short run. There simply is no alternative to the Treasury market to absorb investible funds. Everything in this world is relative and in that respect, investors still believe that the US is a better bet than anywhere else.

"What happens in mid August when the next round of big Treasury auctions would normally be must remain a mystery for now. If there's no deal on the debt ceiling there will be economic chaos, but there will also be a shortage of Treasury supply that could result in increased bidding for the available paper. How that would turn out, I just don't know. The charts certainly aren't providing any guidance, because nobody in the market knows or has a strong enough conviction to result in a trend signal.

"If there is a budget ceiling deal, I'm pretty sure that would be bearish because then the government could go on pounding the market with massive rounds of new supply every two weeks. In the absence of Fed support, and given the ongoing trend of reduced foreign central bank support, that would be problematic. Any spending cuts would result in reduced economic activity and reduced tax collections. There would be fewer dollars recycled around the world. The demand for Treasuries would probably begin to recede relative to the supply. Bond yields would rise. A self reinforcing contractionary spiral could be set in motion."

At the finishing of this week's newsletter, Zero Hedge reported "ABC Reports Tentative Debt Ceiling Deal Reached Between GOP And Obama: This could very well be another red herring like the NYT article from two weeks ago that proved to be a dud, but for what it’s worth according to ABC’s Jonathan Karl, the White House and the GOP have just reached a tentative deal… In other words, virtually the same as the Boehner deal in the actual cuts, which will likely be back-end loaded (we expect about $10-20 billion in 2012 cuts), but the Democrats get what they want in that it will not require a second debt ceiling hike before Obama’s reelection as $2.8 trillion should last well into 2013. As for “future cuts,” well, that’s easily what Congress is so very good at. Indefinite future cuts that is."

We go into the new week with a "wait and see" attitude. It seems reasonable to expect weakness in stocks if debt ceiling issue remains unresolved. Should a budget deal be agreed on, we might see a relief rally. However, as Lee Adler notes, if a deal is made, new Treasury supply will soak up considerable liquidity in the system. If there is a good selloff, Phil is apt to take some bearish winners off the table and add some bullish bets to get more neutral. We have some trade ideas below, some short and some long, and we will continue to watch as events unfold next week.

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SDI Glossary: "Bond" Definition
SDI Glossary: "Debt" Definition
SDI Glossary: "price" Definition
SDI Glossary: "Leader" Definition
SDI Glossary: "Stock" Definition
This Article's Word Cloud:   August   Boehner   Debt   House   Obama   Party   Republicans   Security   Senate   Social   Street   There   They   Treasury   Wall   about   administration   been   billion   budget   ceiling   come   could   crisis   cuts   deal   debt   default   economic   from   hand   have   just   market   next   should   some   supply   that   their   there   they   this   threat   week   what   when   will   with   would

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