The Government That Cried Wolf

Treasury Secretary, Jack Lew, is warning us that the government will run out of money on Monday. Maybe, by rearranging the deck chairs on the Titanic, he can continue crucial payments, like Social Security and veterans benefits, through October 16. After that, we are officially broke. Bills for what the government has already spent will go unpaid. Welcome to the deadbeat nation.

How have the Republicans responded? By having a senator read Dr. Seuss?s Green Eggs and Ham, a popular children?s book, into the Congressional Record. With news like this, you?d think stocks and other risk assets would be well on their way to zero. Investors have every reason to despair.

Except that they?re not.

Too many traders have seen this movie before. The markets don?t believe it for a second. The 10 year Treasury yield, the specific securities we are about to default on, are actually rising in price in the run up to this disaster, with yields falling a stunning 40 basis points in two weeks. Stocks continue to maintain incredibly lofty heights, a mere 2.4% down from their all time highs.

When the public pronouncements of politicians and the markets contradict each other, I?ll go with the markets every time. Washington has cried wolf once too often.

In the wake of the last debt ceiling crisis two years ago, stocks cratered by a gut churning 25% in two months. Then ensued one of the greatest bull runs of all time, with the S&P 500 (SPY) rising an amazing 640 points, or 60%.

In fact, selling short President Obama has proven highly expensive. Those who bailed in the aftermath of his two election wins missed out on enormous upside stock gains. Traders have since learned the new language of Washington DC: government shutdown means ?BUY.?

The Democrats know that time is on their side and are astutely playing their hand accordingly. They know that the last time the Republicans chained the entrance to the Statue of Liberty they took a big hit in the following midterm elections. So, an offer of a repeat performance is being welcomed by the left with open arms.

The Democrats also know that they are winning the demographics battle. Ever year they pick up 3 million new voters through no effort of their own. Some 2 million young voters turn 21 every year, and 80% of these vote Democratic, when they show up. Another 1 million newly naturalized legal immigrants join the voter rolls, 90% of them back Obama, and they all show up, since citizenship is such a hard fought prize.

That means Democrats will gain some substantial percentage of 12 million votes nationally by 2016. This explains why so many conservatives were honestly shocked by the 2012 Romney loss, fueling the Internet with endless conspiracy theories. Their party was using four-year-old voter data.

If Romney had run in 2008, he would have won. And who have they got to run against Hillary Clinton in the next election, who is leading in the polls with a 60% margin among Republican women?

I?m afraid that if the Republicans continue their current behavior, they will go the route of the Whig Party, which faded into history in 1856. This would be a sad thing, as I support the two party system.

So many across the political spectrum see the Tea Party antics as a giant waste of time, and disrespectful of our democracy. While the Democratic Party is moving towards the middle, the Republicans are moving further to the right.

The most egregious shenanigans in the House and the Senate committed by Republicans are all about proving ideological purity, so they can win primaries against even more conservative contenders, who then blow national elections. The final legacy of the Tea Party may well be that they delivered a Senate to the Democrats when it should have been Republican.

The movement towards an effective one party state would come with considerable costs. The flood of deregulation unleashed by Ronald Reagan in the early 1980?s is still paying huge dividends. I much prefer paying $500 than $4,000 for a trip to Tokyo for my kids. I like no longer having to deal with only AT&T to make my long distance calls, which are now mostly free. They used to cost a fortune. Having 1,000 channels to watch on TV certainly gives me more choices than the original three.

Too bad the deregulators didn?t quit when they were ahead. Only eight years after the repeal of the Glass-Steagall Act eliminated barriers between broking and investment banking, every major financial institution in the US was de facto bankrupt. They are still crawling out of the hole, thanks to a massive government bailout.

I?m sure by now I have lost half of my subscribers, the right leaning half, so I?ll move on before I lose the rest.

What?s the bottom line on all of this? The theatrics in Washington are presenting a mere speed bump in one of the greatest bull markets of all time. The move in the main stock indices is just about to become the fourth largest upward on the books, as it is on the verge of surpassing the tremendous 1942-1946 bull run.

Imagine that! The outlook for public listed companies in the US is now so outrageously positive that it is having a greater impact on share prices than winning WWII! Wow, and double wow! For more reasons why we are in the midst of the greatest bull market of out lifetimes, please click the titles to read ?Why US Stocks Are Dirt Cheap? and ?My 2013 Stock Market Outlook?.
So use the 3%-7% dip we get this time around to scale into your favorite long positions one more time. That is the only entry point the market has permitted since November. We may have to wait all the way until April, 2014 to find a better entry point than that.

That?s what I?m doing.

SPX 9-24-13

Obama Shorting Obama Has Proved Expensive