Enter: Debate Over the Debt Limit

George Brooks |

George Brooks equitesThe plunge in commodity prices last week clearly tempers the potential intensity of a correction in stock prices, as it goes a long way to take runaway inflation out of the picture, at least for now.

That leaves us with the economy, politics and a seasonal transition , namely the end of the “best six months” for investing, (generally Nov. 1 to May 1, but this time around it was Sept. 1 to May 1).

Brooksie’s Daily Stock Market blog
-an edge before the market opens

Monday, May 9, 2011 9:23 am EDT

DJIA: 12,638.74
S&P500: 1340.20
Nasdaq Comp.: 2827.56
Russell 2000: 833.34

The plunge in commodities will cause Wall Street’s strategists to go back to the drawing board, and my feeling is the result will be bullish, but maybe not for several months.

Standing in its way will be the fear that Congress will be unable to agree on deficit control measures and therefore not raise the debt ceiling. So far, angst about this issue has not adversely impacted the stock market, but the deadline for action is getting closer.

The government will hit its debt limit at $14,29 trillion on May 16, but realistically, raising the limit can be extended until August 2. Expect the debate in Congress to get ugly and tensions in the investment community to mount between May 16 and August. Just the prospect of default is enough to unnerve financial markets.

I suspect there are enough reasonable representatives in Congress to strike a compromise, but rhetoric preceding that will suggest otherwise. A decision NOT to raise the debt limit, something that has been done many times over the years, would be disastrous. Fortunately, neither party can ramrod a one-sided deal through, so compromise is the likely outcome.

We continue to get mixed signals from the Fed. With commodity prices soaring recently it was difficult to accept the assurances from most Fed members that inflation was merely “transitory,” i.e. “No sweat.”

FR Bank New York’s William C. Dudley, announced Friday that the U.S recovery is still falling short of the Fed’s goals of a more robust economic recovery with a much lower unemployment rate, and this in spite of Friday’s good Employment Situation report.

Last week commodity prices fell out of bed, did it know something ?

Crude oil prices plunged 15% in face of bin Laden’s death and a rebounding U.S. dollar. Oil’s decline can be expected to continue if the dollar rises further.

Bloomberg reports that the GSCI Total Return Index of 24 commodities dropped 11% last week, led by gas oilo, corn silver and sugar. Silver dropped 27% as the CME raised margin rates.

Thursday we get the Producer Price Index and Friday the Consumer Price Index through April 11. Expect them to show sharp increases, but bear in mind future reports will show smaller increases, if not declines.

I don’t see enough short-term positives to power a meaningful rise in the stock market from here. At best, we get a “traders’ market,” potentially lucrative for the nimble afoot capable of exploiting sharp, but short, rallies.

George Brooks
sensiblesleuth@gmail.com

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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