Friday 22 July 2011

American Soap Opera.

I am sitting in front of my crystal ball and for good measure I have put on the magical cap which I borrowed from Harry Potter. Now that Euro has been saved (except for the occasional country default and bomb explosions), we need to save the US of A. I am sure both the Republicans and Democrats are trying hard and they are being ably assisted by the tea party activists and trade union activists to help them in this difficult endeavor.

My borrowed cap is telling me to think what will happen if the debt limit is not raised. But the answer to that is a no brainer. President Obama will stop sending the Social Security checks and blame it on unreasonable Republicans. Democrats will win both the houses in the next vote and Mr. Obama will be assured of his second term. Our friends the Republicans have really backed themselves into the corner and they realize that. Even Mr. Speaker realizes that. So Mr.Boehner said " he will instead focus on talks with Senate leaders on a way to raise the federal debt ceiling to avoid a default on U.S. obligations." (Bloomberg) And  President said  that he is confident of the deal. In any case, they won’t let the top 0.01% suffer any loss on their investments but all action will of course be done in the name of the ordinary Americans!

So I think, in all possibilities, we shall see the debt deal  early next week, by the 27th of July at the latest. Till that time SPX will haw and hem; it may or may not drop 10-15 points, if at all (I am hoping, rather praying for it to drop to get an entry), bears will pile on shorts and Zero Hedge will have a field day predicting the end of USA.  After that we should have a monster rally in last two or three days of the week, which might take SPX beyond its old highs of March. Bear stops will be eliminated, Zero Hedge will still shout about moral bankruptcy in the absence of an actual one, and the bulls will gloat.

That is when we should exit from our longs which we entered last Monday. It will be a case of buy the rumour, sell the news. Next week has the potential to be a real winner if we can be patient and not be afraid in the face of negative news from MSM. After all, they and their masters have one simple agenda: buy low, sell high.

Coming back to debt ceiling debate, even when it gets done, it will not hide the fact that America spends more than it earns and there is no growth except Government spending. Let us go over the basic concept of GDP.  GDP = C + I + G + Net export, where C is consumer spending, I is investment by business and G is spending by Government. Consumer spending cannot grow when there is no real wage growth and unemployment is at such a high level. Moreover increases in the cost of gas and food are taking their toll on discretionary spending.  Businesses are not investing locally because all the local jobs have been sent to China, and political leadership has no vision of growth. Have you seen and encountered the bureaucracy that is killing the small business? Actually the small business in USA is just surviving on the sheer willpower of its owners, and in spite of the Government regulations, which ironically are supposed to be for the benefit of America.  Net Exports are negative. So the only factor that is growing in the equation is Government spending. And that is coming from borrowing. All this does is to increase the bureaucracy and red-tape at different levels of Government, which kills productivity. The end of the story does not look good.

If America borrows and spends, it will not have any growth and burrow its way deeper into this mess. If on the other hand America cuts spending, it will have problems because more jobs will be lost. Go figure…

As I wrote last night, today was “take the dog to walk” kind of day. SPX closed little higher by 1 point and DOW closed little lower by 43 points. It was like sitting in a rocking chair, being busy but not going anywhere. Only index that did show some action was Nasdaq. In fact NDX (Nasdaq 100) broke its long term resistance and closed well over 1 % higher. QQQ is looking good. Look at Apple to understand what happens when a stock breaks its long term resistance. I think next week QQQ will develop two legs. So far it has not participated in this rally, in-spite of huge gains from Apple and Google.

On Monday we might get one last opportunity to get a foot in the coming sharp rally. As my friend Cobra said : “Seasonality was mostly bearish for all the recent Mondays but very bullish for the most last trading weeks of each month since the August 2010.”.

So here we are, starting our weekend with another grand political drama of no substance. (Think, otherwise why they should declare the collapse of the debt talk after the close of the stock market) It is all about winning political points and appeasing the base. Vive l'Amérique.

Enjoy your weekend!

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