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Stock World Weekly: Deadlocked

Here’s the latest Stock World Weekly. Click on this link to read the full SWW: "Deadlocked" and sign in with your PSW user name and password.  (Or sign up for a FREE trial to Stock World Weekly.) 

 Excerpts reviewing the week and looking ahead

U.S. Debt Ceiling Deadlock

One line of reasoning from the “no tax hikes” crowd is the inaccurate premise that the very wealthy, the top 0.1%, are job creators. If they’re the “job creators,” it might be in the public interest to protect them from excessive taxation – thereby allowing these top 0.1% to spend money on creating jobs. This is incorrect. The overwhelming majority of U.S. jobs are ‘created’ by ordinary Americans when they spend their paychecks. Consumer spending drives about 70% of our GDP. When average Americans are struggling with high unemployment, which recently popped back up to 9.2%, they are reluctant to spend money on anything beyond basic necessities. The broader U6 unemployment number – which includes the underemployed and “discouraged workers” – is 16.2%.

Meanwhile, U.S. companies are not stepping up hiring due to weakness in the economy – there is no demand. As Paul Ashworth of Capital Economics wrote, “Businesses aren’t confident enough, and the longer this goes on, the harder it is to convince them that they should be.”  (Dearth of Demand Seen Behind Weak Hiring)

Let Them Eat Cake 

Russ Winter of Winter Watch at the Wall Street Examiner discussed the gap between what people think corporations pay in taxes, versus what they really spend. For example, Microsoft “lowers its effective tax rate a full 7% by taking foreign income to $19.2 billion from $15.4 billion, and lowering US income (and expenses) from $9.6 billion to $8.9 billion. Today MSFT is effectively a 68% foreign operation. In return it gets all the benefits of stimulus and minimizes the costs of supporting the US system…

Mark Kreiger writes a spot on piece regarding the high end luxury bubble that includes this gem - ‘The social crisis facing the country as a result of the most egregious plundering in modern American history will spell the end of the ‘high end’ theme. Buying into this trend now is like getting long Marie Antoinette’s unsevered head in 1792.’”

One fear regarding a U.S. default is that creditors will demand higher interest in return for issuing new debt. Considering how enormous the U.S. debt load currently is (roughly $14.5Tn), higher interest rates would add a crippling burden to an already high burden. This leads to the question of how the markets would react if the U.S. defaults on its debt obligations. 

Debt Ceiling & the Markets

Analyzing market action last week and next, Lee Adler of the Wall Street Examiner submits,

“Last week I worried about the possibility of a short squeeze in Treasuries if there’s no deal on the debt ceiling, because of the temporary lack of supply during the period where the Treasury is unable to issue new debt. I dismissed that outcome as unlikely. Now, having seen the markets rally in the face of all this nonsense, I’ll rate it as a tossup. For sure, the Treasury will make the interest payments and will redeem maturing bonds, and that will reassure investors, regardless of any action by the hated ratings agencies. I would not want to be short the Treasury market until it becomes a little clearer how this drama will unfold. It just doesn’t look like a good bet to me right now. In fact, in spite of the consensus bearishness on Treasuries, the charts suggest that my concern of a continuation of the rally may not be crazy at all. Sorry, Russ [Winter].

“Going into the end of next week, bears will face a huge test. The Treasury has a lot of paper to sell. Most of the new paper will settle on Monday, 

August 1. On Thursday, July 28, a sizable paydown will put cash back in investors’ pockets. Continuing fears over the European situation may drive ongoing capital flight out of European paper and European banks into shark infested U.S. pool. So what will happen to all that cash?

“If Monday’s settlement is accompanied by no noticeable disruption to stocks or bonds, then that could be a sign that a perversely bullish scenario could be playing out. If bonds crack but stocks hold up, then the “stocks as safe haven” thesis would be gaining currency. That could be grounds for an upside breakout and an extended run in U.S. equities. If both stocks and bonds sell off, that could be great news for precious metals… (Why Not Having Debt Ceiling Deal May Be Bullish – Are Stocks The New Safe Haven?)…

Job CreatorsFor the latest update on the debt negotiations before this newsletter concludes, Zero Hedge predicts: “With 23 hours left until the Asian open (or, more importantly, 19 hours until FX trading resumes) and with today’s round of talks now officially over after a one hour meeting in Boehner’s office with congressional leaders achieving nothing, it is becoming clear that the final debt ceiling outcome will be "no change" in spending or taxing habits and a temporary hike in the debt ceiling, so that the soap opera can be repeated again every three months…and again…and again…and so forth for an ‘extended period of time’ as ‘transitory solutions’ become the new grand consensus. At least we now know the phrase for complete, impotent incompetence on the Hill is: ‘Two tiered approach’ which is how Nancy Pelosi called the last minute attempt at compromise." (Good News: It’s Almost Over After Pelosi Says Congress Looking At "Two-Tiered" Deal)

We have several option trade ideas for the coming week, two shorts (GMCR and oil) and two longs (PLX and SONC). These plays can be revised using stock strategies rather than option strategies, for those so inclined. See the inset boxes on this page (for the full newsletter, sign up for a free trial here).  Have a great week!

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  1. Lotsa ink and endless talking heads to keep the bored, the fanatics on the left and right, the bloogers and their respondees, ‘experts’, eCONomists, and clueless citizens glued to this fight to the death.  Gladiators and lions, hurtling at one another, fangs bared, snarling and bloody.
    IF no one else will say it, then I will:   There will be no default. 
    Now let’s get serious and move on to something genuinely disastrous:  Joe Cassano, Dick Fuld, Chris Cox, Chris Dodd, Barney Frank, Franklin Raines, Ken Lewis, Angelo "the Tan" Godzillo, Lou Ranieri, Hank Paulson, AIG’s Greenberg, Jimmy Cayne, Bob Rubin, Bill Clinton, George Bush, The Bernank, Timmay, Kaskari, Orszag, Gensler, etc ad nauseum—-all these people are doing Sunday Brunch at exclusive clubs all over the world, while they should be in a Prisoners’ Mess hall eating porridge.
    Nice that their accomplices in government have managed time after time to create new false crises to get our minds off of their criminal, avaricious, gluttonous, unethical, immoral, and self-dealing behavior.  While the 90% of the people have had to move giant steps backwards these sons of bitches have only increased their take of the economic pie.
    Well, the Flipster doesn’t forget.  And one day they will all pay for their rapacious violation of our treasure.  Count on it.

  2.  Do you have a plan?