We lost some ground yesterday in the market and there is broad concern growing about the quality of the recovery and the Federal Reserve’s effort. The Durable Goods data yesterday wasn’t just bad, it was horrible. Now there is growing concern with the debt ceiling as the new Treasury Secretary is requesting that we raise the debt ceiling QUICKLY or face dire circumstances. In the last 5 years, nothing has really changed, except that the mountain of debt is getting bigger. The trillion dollar question is how big does it get before the dam breaks? The sea of political turmoil is rising as September approaches.
The most frustrating issue for me is that we are seeing some great new technology, some international growth, and some significantly better operated businesses since the Great Recession started. However, we are bogged down in never ending political turmoil that could just bring any possible boom to a halt. Ironically, it is NOT business or the weak economic growth that is stalling the economic recovery, it is Washington that is stirring up the political turmoil pot.
Taper? We have an unknown Taper situation that will have huge ramifications in the bond market, mortgage market, and on interest rates. It will trickle into the emerging market, which has seen huge investments from the US. A Taper would slow the economy just from the interest rate increase alone. Now, I have not been all for the entire QE policy from the get go, but rather am all for STOPPING it entirely, combined with some strict government spending reductions. I know it will be painful in the short-term, but it will be far better in the long-term. However, there is no doubt that a taper now will have short-term impacts, like it or not.
Who’s Next? The rumors generated late yesterday are that Larry Summers is now the front runner. I am still not buying into the rumors for several reasons.
A. The Democrats hate him, for the most part.
B. He has been vocally critical about QE.
C. He will definitely rock the boat and bring more volatility and uncertainty.
I still believe that Janet Yellen is the logical choice. If Summers does get the nod, we will be in for a tumultuous confirmation hearing – with both Democrats and Republicans trying to block the appointment. Once through that gauntlet, if he makes it, we can expect the Federal Reserve to become a very active, vocal, and volatile institution. No one wants that.
It looks like we are about to embark on our third Middle East conflict. President Obama had drawn a line in the sand and it seems that it was crossed. However, if one listens to international news there are some conflicting reports as to WHO actually used chemical weapons, or if they were even used to begin with. Some reports have it that the Rebels (who are sponsored by the Muslim Brotherhood and Al Qaeda) were able to obtain chemical weapons from Iran and used them to try to draw in foreign support against the Syrian government. The UN inspectors have not even been able to confirm if chemical weapons have been used at all. I think we really don’t know WHAT is going on there and the chemical weapons, if used, could have been used by either-side. The only thing the heightened chemical rhetoric has done is back the U.S. into a corner in which we HAVE to act. Expect a bombing to happen in the near future and that could bring some more political turmoil with Russia and China, who have remained more supportive of the government.
It would be the fourth time in which the U.S. has supported rebels in an action against a government in less than 2 years. Twice in Egypt; first, against a government we supported and then against the new democratically elected government. Then, against the government of Libya and now against the government in Syria. That’s three Middle Eastern, legitimate governments in which we are supporting rebel actions against (openly) and the majority of those rebels are supported and made up of the very enemies we are fighting in Afghanistan.
The conflict has pushed oil prices higher and the rumors of an upcoming bombing or attack by the U.S. in Syria has sent oil prices up another $2 dollars this morning. Our intervention in the Middle East has a direct impact on us as consumers. Expect gas, energy, and heating oil prices to rise as we head into the cooler fall months.
We have had 5 years of pretty much uncontrolled deficit spending (over a trillion per year and for four years not a single budget was passed). The Debt Ceiling raged over a year ago and rather than get solved, that can was kicked down the road. It was then kicked again two more times, the latest at the beginning of this year. Neither side wants to do what is necessary and thus they pass short-term resolutions to kick it down the road or just raise it again.
Based on the deficit spending rate, we will AGAIN run out of money in October, unless Congress can agree to, yet again, either offer an extension or RAISE the limit. We have been bumping up against the limit of $16.7 trillion since May, but through some accounting shenanigans, have been able to push it off a while. Well, it is getting very close to where we just can’t ignore it.
Jack Lew, the new Treasury Secretary, commented yesterday that the President should not and will not negotiate over the debt limit. The concern is over the Republicans attempt to defund Obamacare through negotiating the deficit and debt limits. Obama said he won’t back down. This will no doubt get very nasty and I would not be surprised to see us get to that 11th hour again and either have a short-term government shut-down or another can-kick. I am starting to wonder, with all the stupidity in Washington, if just shutting it down for a while is not the worst thing. It happened in Belgium and they went on for well over a year without a Federal government, the local/state governments just took over. Of course, that won’t happen in the U.S.
Unfortunately, investors and traders need to spend MORE time focusing on government intervention, policies, regulations, more war, Federal Reserve uncertainty and everything BUT companies, earnings, business growth and the real economy.
Expect volatility in September.
Support & Resistance
We closed just below 15,000 and today it looks like we will open sharply lower on concerns out of Syria and the Debt Ceiling as the next wild card. I still believe that we won’t get a taper and that could put a floor in the market.
NDX 3050 – 3150
Apple is still hanging in the $500 dollar area and we could get some early excitement as Apple announced its trade-in plan for next month. September 10th is the big rumored launched date and we will see if Tim Cook can deliver on all the buzz and excitement. He has some big shoes to fill. If it is a gold iPhone and a cheaper version, those shoes will look massive as Steve Jobs rolls over in his grave.
We could test this as early as this morning, I would watch the close – but the political turmoil could just push this index lower. Watch the VIX; it is up to 15 and I think could hit 17 today.
RUT 1000 – 1010
This is the lower support range and if the RUT remains strong in here it might be reflecting that there is NO taper coming. I just can’t see how they would, at this point, with such a Keynesian and Socialistic Administration and Federal Reserve.
Here is a good article about the Fed’s QE program which goes into whether it was successful. I recommend reading it and I think you will see it addresses many of the issues I have been hammering on.