Last Week in Brief.

September 23, 2013

Stocks finished higher for the third straight week. Investors celebrated the Fed's decision to continue force feeding the U.S. economy through bond purchases and record-low interest rates.
The Good...
Addition by subtraction?
That would be my description of how John Q. Public won when Fed Chair candidate Larry Summers withdrew his nomination. Summers is way too political and hands on for the post. The Fed needs a pilot. Someone to silently sit in the cockpit and fly. Summers would have been more like Andy Warhol. Hands on. Creating works of art for all to see. And very self-promotional.
He screwed up Harvard's endowment. Fought with half the Obama White House. But, he promises to be a passive, forward-looking Fed chief? Enough already.
Moving on, the Federal Open Market Committee (FOMC) decided to continue buying $85B in Treasuries each month. So, no tapering. Not yet.
I recently provided Investor's Business Daily with a tactic for taking advantage of low gold prices and continuing low rates. Check it out.
While this is good for markets in the short term, we worry about the long-term effects. At some point, this economy will have to live without a respirator.
True, we enjoy watching the market respond positively to the news. But, I've one big, fundamental problem: the average economic expansion lasts four to five years. We're four years in. If the economy begins to turn down, and the Fed is ALREADY buying bonds, and ALREADY has interest rates at all-time lows, then what ammunition will the Fed have to deploy?
In addition, last week saw existing home sales continuing to improve, even in the face of higher mortgage rates. We believe that a primary reason for the Fed inaction last week was to continue to enable the nascent housing recovery to gain strength.
Finally, sea container counts and global shipping indicators continue to be bullish. This has long been a powerful signal as to the strength, or lack thereof, within the global economy.
The Bad...
Immigration reform appears dead for the year.
Building permits, an important housing indicator, largely disappointed.
And, the GOP dominated House passed a continuing resolution that eliminates funding for Obamacare. As this has no chance of being approved by Harry Reid's Senate, this is likely the initial foray into an oncoming government shutdown...
The Ugly...
Yes, I said it. GOVERNMENT SHUTDOWN. One week from tonight.
It has been four years since the Congress passed an actual budget. Federal spending authority stems from the "continuing resolutions" (CR) passed every so often. If there is no CR passed before October 1st (next Tuesday), the Federal government shuts down.
The U.S. has the odd policy of setting a debt ceiling/limit, even as the obligated spending has added to the deficit for years. Traditionally, Congress would authorize payments of previously authorized obligations, and the opposing party would symbolically object. Then Senator Obama did exactly that in 2008, knowing his opposition would not be decisive (see the headline quote atop today's missive). All of which underscores the gamesmanship occurring in D.C. At your expense.
As Stan Collender points out in his astute blog:
"My reading of the tea leaves is that there are only two ways to avoid a shutdown at this point: If everyone in Washington stops being fierce partisans and starts acting rationally, or if one side totally capitulates to the other.
Because the first is so unlikely that it borders being absurd and the second is so unlikely that it approaches being ridiculous, it's time to stop talking about if and start talking about what happens when a shutdown will occur."
Translation? Even though our political duopolists have had eight months with which to contend with this problem, they've once again acted like a freshman during exam week. Procrastinating until the last possible minute.
As of next Tuesday at midnight, your Federal government will cease to fully operate. The shutdown will likely last a week. The impact on stocks will be negative, though we don't council the sale of all equities. Largely because the trend is still bullish and, once D.C. gets its act together, the market will likely rise into year-end in spite of the clowns in the capital.
Weekly Results...
Major markets finished higher last week. The DJIA rose 0.49%, the S&P 500 gained 1.30%, and the Nasdaq added 1.41%. Small cap stocks climbed 1.79%. And the 10-year Treasury bond yield fell 15 basis points to 2.73%. Gold fell 0.04% per ounce.

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