The Street Still Doesn't Believe Default Will Happen

George Brooks |

Barack Obama Kent Conrad John SprattIf the debt ceiling is going to be raised before the presumed August 2 deadline, it will have to be acted upon by the 27th after which it goes to the Senate and on to President Obama for his signature.

Going back a couple months, I targeted Friday July 29 or Monday August 1 as a big buying opportunity and picked DJIA 10,700 – 10,830 (S&P500: 1150) as levels the market could briefly hit in a selling climax.

So far, that forecast has been wrong. Depending on how this plays out, we could still get a selling climax, ergo attractive buying opportunity.

This morning the U.S. stock index futures are down and foreign bond markets roiled.

But the futures only suggest a 120-point drop in the DJIA at the open, child’s play when you look back on 2008. The Street still believes a deal will be struck.

Without a more pronounced, fear-based sell off from current levels, a rally following the announcement of a “deal” stands to be less attractive.

Brooksie’s Daily Stock Market blog: An edge before the market opens.

Monday July 25, 2011 9:23 am EDT

DJIA: 12,681.62
S&P 500: 1345.02
Nasdaq Comp.: 2858.83
Russell 2000: 841.82

This crisis is real, but it differs from the ones in 2008 and early 2009 when daily disclosures of the “unthinkable” pummeled stock prices relentlessly.

This one is “Made in America” more specifically made in the U.S. House of Representative, more specifically yet made by 60 freshmen Tea Party members of the House.

It could vanish in a heartbeat.

As ugly and scary as fear of default gets, the crisis could go away with a few words out of Washington.

Possibilities:

President Obama could cave in to Republican demands for legislation he would otherwise veto and thereby avoid default.

Congress could come up with a plan that is more acceptable to both parties and avoid default

Then too, President Obama and mainstream Democrats and Republicans may decide the office of the presidency shouldn’t be coerced (blackmailed ) into accepting any legislation and opt for default forcing concessions on the part of the Tea Party which wasn’t sent to Washington to unravel the world’s financial system.

Resorting to Section 4 of the 14th Amendment is a remote possibility to facilitate an increase in the debt ceiling, but unlikely.

This whole concept of holding the office of the Presidency hostage is dangerous stuff.

It would set a dangerous precedent, one that the Republicans wouldn’t want to be confronted with in the future when they hold the presidency.

Default alone is bad enough, but this kind of heavy handed, uncompromising behavior suggests to Americans and foreign countries that the United States cannot be trusted, that given leverage, anything can happen and it can be effected by a small number of people within its government.

The RESULT – CONFIDENCE begins to erode, it gains momentum, yardsticks for measuring value are questioned, institutional investors no longer use declines to buy stocks, hedge funds sell short, leveraged quants pile on, investors panic. What’s to stop them ?

The bedrock of our nation’s strength is trust, faith, and confidence that our system of government is the greatest on earth and we are the world leaders suddenly vanishes and…… We CRASH with all the horrors that accompany a CRASH – civil unrest, incomes from all sources stopped, hospitals close, Social Security checks stop coming, all those deplorable government services terminated, and it goes on and on. It’s unsafe for the very wealthy to leave home.

THIS IS WHY IT WON’T HAPPEN.

Somebody in D.C. is going to be taken to the woodshed for a little talk.

Does any reasonable person think the BIG money is going to let a handful of untested, untried, disrespectful, unknown newbies wreck their life ? Does anyone who does their homework think the Tea Party’s party is blameless for a major part of the mess we are in ?

Conclusion: Our government is at risk of coming apart at the seams. The system works, but not if it is recklessly “gamed.” That is what is at stake here. Pure and simple, it is a matter of CONFIDENCE in our system of government. Without that, it’s all up for grabs.

There are some lines you just do not cross – holding the office of the President hostage for ideological purposes is one of them. This is not about the deficit so much as it is about 2012. If it was about the deficit, there would have been an outrage during the prior administration when two unfunded wars, a medicare Rx plan, tax cuts ( that didn’t produce jobs) and economic policies that led to the great recession/bear market doubled the national debt (with the help of 7 increases in the debt limit).

I still have hope reason will triumph over obstructive politics.

PS:

A SUPER CONGRESS in the offing ?

No, I’m not kidding. I read it in huffingtonpost.com Saturday. Of course, we are to believe this would be a non-confrontational love fest among its 12 members with a wonderful outpouring of solutions – stay tuned.

Recent Headlines :
“Ugly ! Nevertheless, the Outlook Can Change Quickly” (June 20 – DJIA 12,004)
“No Time For Napping” – (June 21 DJIA: 12,080)
“No Hope in Sight ? Don’t Bet on IT ! Prepare for Opportunity” - (June 22, DJIA: 12,190)
“Countdown to Opportunity – Start Preparing !” - (June 23 DJIA 12,109)
“ BIG Money Nibbling – Stocks Beginning to Look Attractive – Negatives can Vanish” (June 24 DJIA:
12.050)
“Institutions Showing Interest – Not Reaching Yet” (June 27 DJIA: 11,934)
“Will Q2 Earnings Reports and Congressional Action on Debt Ceiling” (June 28 DJIA 12,043)
“ Don’t Buy News on Greek Vote – Spike to Be Short-Lived” (June 29 DJIA: 12,188)
“Again: Debt Ceiling Approval and Q2 Earnings Catalysts” (June 30 DJIA: 12,261)
“Enjoy the Fourth ! Prepare for Fireworks in Weeks Following” (July 1 DJIA: 12,414)
“Did Someone Blink ?” (July 5 DJIA 12,582)
“A Pause is Needed Here to Digest Recent Gains, Q2 Earnings Ready to Take Center Stage” (July 6
DJIA 12,569
“Whoa !” (July 8, DJIA: 12,719.49)
“July Could Be a Pivotal Month” (July 11, 2011, DJIA: 12,657
“Watch This One Closely – Very Closely” (July 12, 2011 – DJIA: 12,505)
“Default is Un-American” ( July 14, 2011 – DJIA: 12,491.11 )
“Breakthrough This Weekend ? – a Risky Bet ( July 15 – DJIA:12,479)
“Has the Stock Market Discounted Default ? (July 18, 2011- DJIA: 12,479 )
“Alert – Decision on Debt Ceiling May Come Before August 2” (July 19 – DJIA:12,385)
“3:35pm BULLETIN – Breakthrough on Debt Ceiling Imminent” (July 19, DJIA 12,586)
“Showdown ! American Public Says ‘NO’ to Default” (July 20 – DJIA: 12,587)
“Senate to Rescue – Short-Term Fix fro Debt Ceiling to Pave way for Long-Term Solutions
(July 21 – DJIA 12,571)
“All Eyes Now on Congress to Find a Way to Avoid a Catastrophic Devault” (July 22 DJIA: 12,724 )j

George Brooks
sensiblesleuth@gmail.com
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The writer of Brooksie’s Daily Stock Market blog, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk

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