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Friday, March 29, 2024

Market Update: Stocks Surge As Expected On Debt Ceiling Resolution

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


On Monday I was on CNBC with Kelly Evans and Bill Griffith discussing the fact that the bill being prepped by Senate Leaders Mitch McConnell and Harry Reid, at that time, was unlikely to be brought to a vote in the House as it did not contain any “dollar for dollar” spending cuts. I made that case based on three separate conversations with House Republicans about their positioning.


This turned out to be precisely the case as the bill was not brought to the floor for a vote and the Republican controlled Congress attempted to bring a new bill to the floor. The problem, however, is that this bill lacked sufficient votes to the floor leaving Congressman John Boehner at an impasse.

I spoke with Congressman John Culberson on Wednesday morning as I hosted “The Edd Hendee” show on KSEV where we discussed the Republican’s Alamo Moment” (Skip To 27 min).

The bottom line of the discussion is as follows:

  1. John Boehner talked with Congress on passing a “clean” continuing resolution which was met with silence.
  2. He discussed doing away with the push to repeal the medical device tax which was again met with silence.
  3. Lastly, he discussed reopening the government which was met once again with silence.
  4. There issue is that there are enough Democratic and Moderate Republican votes to pass a “Clean CR” and block any other form of resolution at this point which creates the impasse.

House leader John Boehner must now decide whether to bring a vote up on a “Clean CR” knowing that it will pass with a majority of the conservative Republicans voting against it. This could likely become the primary issue that could lead to the unseating of John Boehner as House leader.

The other problem created by the passage of this particular “Clean CR,” which temporarily funds the government and raises the debt ceiling, is that it sets up is another “Debt Ceiling Debate/Government Shut Down Crisis” at the end of 2013 and into the beginning of 2014. These ongoing fights from year to year are becoming a tiresome distraction from the real job of focusing on the real fiscal and economic concerns currently weighing on the U.S.

However, in the meantime, as we addressed previously, the markets are set to soar to new highs based on the resolution of the near term “debt default fears” and the continued flood of liquidity provided courtesy of your friendly Federal Reserve.

The most interesting part of this entire debate/crisis that has ensued since the beginning of October is that if you had just returned from being “off planet” and looked at the markets there is NO evidence that the financial markets were ever concerned about a financial crisis.

 

 

As I stated to Congressman Culberson in our interview:

blockquote>

“IF there was indeed a real threat of default the gold would be soaring, interest rates would be spiking and the markets would be diving 15-20%…”

That simply has not been the case.

Despite the ongoing analyst rhetoric to the contrary there has been “no” indication that the financial markets were ever concerned in the least about a financial default. Of course, having witnessed the “antics” in Washington during the last debt ceiling debate in 2011, the markets were convinced that a deal would be reached in the “11th hour” which now seems to be the case.

IF the markets can break out this week to a weekly closing high, following the resolution of this issue, the markets are likely to make a run for 1800 as I wrote this past week in the newsletter:

“Assuming that a deal is reached [to resolve the shut down] I stated:

The Federal Reserve’s ongoing QE program has continued to increase excess liquidity in the financial markets. That liquidity provides a significant catalyst for a strong upward push should a resolution clear the way for the financial markets in the days ahead. If a deal is struck it would not be surprising to see the financial markets break out to new highs and approach 1800.

The 1800 level on the S&P 500 is something that I proposed back in August when I wrote “Could Stocks Be Ready To Melt Up?” stating:

‘The dotted red line shows the potential for a speculative push higher that would likely see the markets approaching 1800. However, at this level, valuation, interest rate relationships and earnings arguments are going to become much more difficult to justify…Therein lies the paradox.

The markets are rising not because of strength of the economy or improving fundamentals but because of the ‘hope’ of continued liquidity.

The chart below shows the Federal Reserve’s current balance sheet and the projected expansion of it at $85 billion per month through the end of 2013. Due to the fairly tight correlation between the markets and the Fed’s balance sheet I have extrapolated the market through year end.”

 

 

Of course, the next problem that we will ultimately have to address is specifically that ongoing decline in the underlying fundamentals as prices continue to be accelerated though excess liquidity. While the detachment of prices from the underlying fundamentals certainly can last longer than one would rationally expect the party does evenutally come to an end. However, that is an issue that we will discuss in another post.


Originally posted at Lance’s blog: STA Wealth Management

(c) STA Wealth Management
stawealth.com

 

 

 

 

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