Hold The Champagne, They're Just Getting Started
Stocks finished in the green for a third consecutive day on Monday as hope for a deal that would avert a debt default and reopen the government grew throughout the session. Things started off a bit on the rocky side however as the DJIA was down more than 100 points two minutes after the opening bell. It turns out that the optimism which had pushed stocks up on Friday had quickly reversed after the politicians failed to make any substantive progress over the weekend. And before investors could pour that first cup of coffee, there was a sea of red numbers scrolling wildly at the corner of Broad and Wall.
For those keeping score at home, the DJIA has advanced an eye-popping 825 points over the past week. The S&P 500 has moved up by 3.2 percent since last Wednesday's low and the NASDAQ closed out Monday's session just a whisker away from its highest close since the spring of 2000. And speaking of new highs, both the Russell 2000 (smallcaps) and the S&P 400 (midcaps) indices finished Monday's session at fresh all-time highs. So, it will suffice to say that the fear of what might happen to the country should Congress do the unthinkable isn't sending investors underneath their desks at the present time.
Despite all the fear mongering and the doom-and-gloom being espoused by the popular press, word that Senate Majority Leader Harry Reid was "optimistic that a deal would be reached this week" managed to turn traders' frowns upside down around mid-morning on Monday. Then the reports that the White House was scheduled to meet with Congressional leaders Monday afternoon gave the dip buyers a reason to get busy again and for shorts to continue to cover. In short, the market once again appeared to be running on "hopium."
The Latest Plan
Since the deadline clock continues to tick and time is running out, here's the latest on the debt/budget drama... On Sunday, Senate leaders (Harry Reid and Mitch McConnell) began working on plan in response to talks breaking down between White House and House Republicans. It was more of the same as Obama rejected the House proposal that would have raised the debt ceiling for 6 weeks in exchange for immediate negotiations on 2014 spending levels and a long-term deficit reduction deal.
The President's rejection was not terribly surprising since the House bill would not have reopened the government and also restricted the Treasury from using "extraordinary measures" to extend the debt ceiling deadline. However, on Monday, Senate Majority Leader Reid said that he was optimistic about a deal that he and Senate Minority Leader McConnell had been working on.
Perhaps the most encouraging development was the cancellation of a meeting between Obama, Biden, Boehner, Reid, McConnell, and Pelosi. At first, the algos knocked stocks back Monday as the headline that the meeting was being cancelled hit the wires. However, within minutes the indices recovered when it was announced that the reason for the cancellation was the Senators were making progress and needed more time.
Reading The Fine Print
At this stage, the market assumes that Senators Reid and McConnell will be able to broker a deal to raise the debt ceiling and reopen the government. In addition, since the plan is expected to be bipartisan in nature and originates in the Senate, it is further assumed that Speaker Boehner will bring such a measure to a vote in the House - and that it will pass.
However, before the champagne corks start to fly and the celebration begins, investors should read the fine print.
According to reports, the current plan being worked on by Reid and McConnell will be another "kick the can" type of solution and would only provide enough funding for the government to operate until January 15, 2014. The problem is January 15 is also the date when the second round of automatic "sequestration cuts" from the 2011 Budget Control Act kicks in. As such, the "solution" to the current problem actually sets up another round of "sequester" battles.
And given that this Congress can't seem to agree on anything - ever - it would appear that the current mess is likely to stick around for at least a couple more months. So, in short... here we go again.
Turning to this morning... Although earnings season is now rolling along, all eyes remain on the negotiations in Washington D.C. The bottom line is that traders expect a deal to get done today or tomorrow. However, if there is any further delay, the action could be swift and harsh. As such, this is no time to be asleep at the wheel.
Positions in stocks mentioned: none
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