Friday, October 11, 2013

Histrionics of US Politics: Markets in Buying Orgy on Hopes of Debt Ceiling Deal

US stocks went into a frenzied jubilation today on hopes of a deal by the US congress and President Obama on the debt ceiling-shutdown-Obamacare impasse.

From Bloomberg:
U.S. stocks jumped, with benchmark indexes rallying the most since January, as lawmakers moved toward an agreement to increase the debt ceiling and avoid a default….

Investors reacted to a House Republican proposal for a short-term increase in the debt ceiling that would reduce the prospects for a U.S. default. The plan would push the lapse of U.S. borrowing authority to Nov. 22 from Oct. 17. It wouldn’t end the 10-day-old partial shutdown of the federal government.

President Barack Obama would support a short increase in the U.S. debt limit with no “partisan strings attached,” though he prefers a longer extension, Jay Carney, the White House press secretary, said today. The proposal could come up for a vote on the House floor as soon as tomorrow.

U.S. Treasury Secretary Jacob J. Lew warned Congress today that “uncertainty” over the debt limit is starting to stress financial markets and trying to time an increase to the last minute “could be very dangerous.”
Yet rising CDS (default risks) will be used as political leverage to justify the call for raising the debt ceiling. (Have the CDS markets been stage managed?)

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Americans have been deeply hooked on entitlements. More than 70% of Federal Spending has been due to dependency programs and growing.

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This means that despite the hullabaloo in the US Congress, which really is just a vaudeville, as congress people will fear the wrath of losing political power and privileges from entitlement dependent-parasitical voters, eventually the debt ceiling will be raised. (charts from the Heritage Foundation).

Like actions of central banks led by the US Federal Reserve, America’s welfare state will be pushed to the brink of a crisis or will fall into a crisis first, before real reforms will be made.

In the world of politics, cost-benefit tradeoffs has been reduced to short term expediencies.
And the fear of the wrath of the public which means losing political power have become a potent force in the shaping of the supposed deal…the American public has been putting the blame on the GOP (Republicans).

From Gallup:
With the Republican-controlled House of Representatives engaged in a tense, government-shuttering budgetary standoff against a Democratic president and Senate, the Republican Party is now viewed favorably by 28% of Americans, down from 38% in September. This is the lowest favorable rating measured for either party since Gallup began asking this question in 1992.
Republican and Democratic Party Favorables, 1992-2013
The Democratic Party also has a public image problem -- although not on the same elephantine scale as that of the Republican Party -- with 43% viewing the Democratic Party favorably, down four percentage points from last month.
Pieces of the jigsaw puzzle falling into its rightful places.

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Most of the so-called fear over a UST default  has been felt in the short end of the curve as shown by the 1 month, 6 month and 1 year USTs. Today’s gigantic stock market seem to have only put a dent on the recent spike.

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However, the fear has not been evident in the longer end of the curve or when US stocks went up, bonds fell (yields surged) and when US stocks fell, bonds rallied (yields declined) as shown by the 10 year and 30 year USTs

Today’s rally seem to have only rekindled the bond vigilantes.

Notice too that US stocks have become hostaged to politics as measured by the Dow Industrial's recent performance.

The fears from the FED's “Taper” supposedly prompted for a selloff in May-June. This was reversed when Fed officials went into media blitz to cushion on Taper fears. 

The Syrian crisis, speculation over Bernanke's replacement and bond vigilantes remerged to haunt the Dow which plummeted to September lows.

The discounting of the taper, Larry Summer's withdrawal and the surprise FED’s "untaper" sends the Dow to new highs. 

Then the lows from the shutdown-debt ceiling-Obamacare stalemate.

Funny, how stockmarkets have seemingly been transformed into puppets or instruments of governments.

2 comments:

theyenguy said...

World Stocks, VT, and Global Industrial Producer, FXR, rose, as President Obama announced dovish banking insider Janet Yellen as his choice for Federal Reserve Chair, and as lawmakers moved toward an agreement to increase the debt ceiling and avoid a default, causing risk assets and financial stocks to rise strongly; these included the following sectors:

200% volatility, XIV 9.6%

Solar, TAN 5.7

Biotechnology, IBB 5.5

Nasdaq Internet, PNQI 3.0

The Too Big To Fail Banks, RWW 2.8

Aerospace, PPA 2.8

Media, PBS 2.8

Internet Retail, FDN 2.7

Investment Bankers, KCE 2.7

Pharmaceuticals, PJP 2.6

Stock Brokers, IAI 2.6

IPOs, FPX 2.5

Small Cap Pure Value, RZV 2.5


Of note, Resorts and Casinos, BJK, rose 1.7%, to a new rally high.


Nations rising strongly included

Thailand, THD, 4.4%

Philippines, EPHE, 4.3

Indonesia, IDX, 3.5 and IDXJ 3.2

India, INP, 3.3 and SCIN 4.0

Turkey, TUR, 2.8

Mexico, EWW, 3.0

Argentina, ARGT, 2.6


The Interest Rate on the US Ten Year Government Bond, ^TNX, rose to 2.68%, and the Steepner ETF, STPP, rose strongly as the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, steepened. A steepening yield curve suggests that bond vigilantes are once again obtaining a strong hold over interest rates, in their war on the world central banks; and that they are once again calling US Government Bonds, GOVT, lower, on the monetization of debt by the US Federal Reserve.


Junk Bonds, JNK, rose taking Aggregate Credit, AGG, higher.


Currency traders, sold the Japanese Yen, FXY, causing the chart of EUR/JPY to rally strongly to 132.86, and the chart of AUD/JPY to rally strongly to 92.02. Of note, the Chinese Yuan, CYB, rose strongly to a new rally high.


Oil, USO, rose 1.5%. Gold, GLD, traded 1.5% lower and and Silver, SLV, traded 1.1% lower. Spot Gold, $GOLD, closed at 1,286, with strong support lower at $1,275.


The October 10, 2013, rally in stocks on the announcement of Janet Yellen as Obama’s choice for Federal Reserve Chairperson, and on hopes of an accord to avoid US Default, presented the short selling opportunity of a lifetime, as in a bull market, one buys in dips, and in a bear market, one sells into pips.


One could sell short the 40 ETFs/ETNs, XIV, FDN, CARZ, PBS, IBB, RZV, PSCI, FPX, IAI, XTN, SMH, XRT, PJP, PSP, TAN, RXI, FLM, PNQI, WOOD, EUFN, RWW, FXR, BJK, IST, SLX, PPA, GNW, EIRL, GREK, EWY, EWP, YAO, TUR, ARGT, EPHE, SCIN, THD, EGPT, EWZS, UJB.

seen in this Finviz Screener, for great future reward as these are high beta risk averse ETFs



And one could use the 8 ETFs/ETNs, OFF, STPP, UUP, XVZ, GLD, FSG, JGBS, YCS, seen in this Finviz Screener, as the basis for one’s margin account, as these will increase in value with rapidly growing financial instability, as carry trades unwind, and as the Interest Rate on the US Ten Year Note, ^TNX, rises.

Anonymous said...

Yes a big rise, be it for minutes, hours or days once it announced, followed by a fall in many markets.