It has been my view throughout the past two weeks that:
1. there would be a last-minute compromise over the debt ceiling;
2. the market weakness (last week) over the mystery of uncertainty in Washington, D.C., should be purchased; and
3. the history and euphoria (this week) of an agreement should be sold.While the animal spirits have anticipated a resolution and have lifted the S&P 500 by 70 handles, or by 4.5%, since last Wednesday, it remains my view that stocks have topped for the year and that stocks should now be sold. Yesterday stocks soared. This morning, two other asset classes soared -- namely gold (up $35 an ounce) and bonds (the ProShares UltraShort 20+ Year Treasury (TBT) dropped by $2 a share as the 10-year yield fell by 5 basis points, to 2.62%) -- signaling slowing economic growth and the prospects for a weakening in corporate sales/profits. Meanwhile, today the U.S. dollar is taking its worse licking in a month and is moving back toward the February 2013 lows. Below are some of the reasons behind my negative market outlook.
Hope and Can-Kicking Rule the DayMarket participants might have been somewhat naive in yesterday's celebration, as it is clear that last night's agreement again failed to incorporate any tax or entitlement reform as part of the package to a debt-ceiling extension and a clean continuing resolution. More importantly, it is not likely that the extra time bought will be used productively to achieve a grand bargain in 2014. With our snollygoster government officials simply kicking the can down the road and failing to address our growing debt problem, a normalization in interest rates coupled with U.S. demographics (the aging of our population will lift entitlement spending dramatically) will likely bring the problem back into investors' focus sooner than later.
Wash, Rinse, Repeat in Early 2014Indeed, it is unlikely that there will ever be a grand bargain with the animosity between the two parties. (Note: On CNBC's "Squawk Box" this morning, Grover Norquist basically ruled out a Grand Bargain in his fixed view on "not a penny of new revenues." The Democrats appear just as intransigent in view.) More political partisanship lies ahead - indeed, the schism between the Republicans and Democrats will likely deepen as we move ever closer to the important elections in November 2014, especially with the House of Representatives up for grabs.
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