Will Congress the Raise Debt Ceiling Before August 2?

George Brooks  |

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

Friday, June 10, 2011 9:23 am EDT

DJIA: 12,124.36
S&P 500: 1289.00
Nasdaq Comp.: 2684.57
Russell 2000: 792.64

I think investors should be alert to the possibility Congress will raise the nation’s debt ceiling ahead of the August 2 deadline.

I am getting a feeling that some very, very powerful people have told Congress to cut the ideological crap, nail down a framework for addressing the nation’s increasing national debt, and RAISE the DEBT CEILING before some very disruptive, destructive, and irretrievable things happen here and abroad.

Too much is at stake for posturing for 2012.

Reportedly, the message sent to Washington by the mid-term elections in2010 was to do a job, not run for reelection, or the White House, i.e., get to work, or there will be no 2013 for anyone who doesn’t.

Based on what I am seeing, suddenly, key people in Washington have begun to back peddle, soften their rhetoric and MMA tough talk. I am reading more comments from both sides now about making progress toward reaching common ground.

Two things have to happen to stabilize stock prices before a meaningful turn upward.

The BIG money must be able to look out and see an end to the current softness in the economy and a continuation (and broadening) in its recovery.

Congress must raise the debt ceiling, pursuant to at least a preliminary bipartisan agreement on reducing increases in the national debt going forward.

I headlined my June 6 blog, “Big Buying Opportunity Possibly July 29 or August 1 Trading Opportunities in Interim,” based on my assumption that Congressional approval of the debt ceiling would go right down to the August 2 deadline, that the market may plunge until then to the DJIA 10,700 – 10,830 (S&P: 1150) area, before rebounding with an announcement of an approval.

It is possible, I noted, that the BIG money will anticipate an accord and buy in advance, running stock prices up before the announcement.

That scenario can still play out, but I am getting the feeling from statements I read from the key players here that a decision must be made before then.

The first debt limit was set in 1917, and has been raised without fail every time since. It has been raised 74 times in the last 50 years. Raising it, enables our government to meet existing commitments, not new ones.

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Failure to raise it, means certain obligations cannot be paid. Since this has never happened, no one knows what tricks the government can pull out of its hat to buy time, keep paying some of its most critical bills until Congress raises it.

Reportedly, Social Security, Medicare, military paychecks, and certain benefits would be in jeopardy.

Failure could set in motion a falling domino affect here and abroad, disrupting global financial markets still struggling to recover from the worst economic and financial turmoil since the 1930s.

But failure to address spiraling governmental spending would have an equally adverse impact here and abroad, so the only logical conclusion here is that Congress must get the job done – PRONTO !

Both issues must be addressed, but holding the debt ceiling hostage is a dangerous game to play, and it shouldn’t surprise anyone if Congress is hearing about it from people who swing a very big bat.

Today: Yesterday’s rally ran into a wall around DJIA 12,180 (S&P 500: 1290). The market was due for a technical bounce, often six down days in a row leads to it. Volume was light and would need to pick up if any upside traction is to be gained. Looks like the “Sell in May and go away” people are still having their way – for now.

However, a declining market can be a coiling spring if it is driven by negatives that can be resolved over night. Best not to get caught napping. Best to know what one wants to own before a rebound snaps up all the attractive prices.

George Brooks

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily 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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