As the deadline approaches for reaching an agreement on a budget plan that could raise the debt ceiling, the rhetoric persists in Washington and is affecting global markets on almost a daily basis. On the one hand the President, albeit with some Democratic detractors, wants to raise "revenue" to reduce the deficit which he tripled. "Revenue" is another word for taxes and the Republicans won’t buy it.
In the last two years the deficit, thanks to rampant spending, has increased immeasurably and now the President wants to raise taxes to offset his spending. I have to agree with the Republicans on this one. In a weak economy, which I insist we are in thanks to the burgeoning unemployment situation, one does not raise taxes on those who have jobs and can contribute to the economy by virtue of their spending. If consumers do not spend on products, then the producers of those products must lay off additional workers. The present level of unemployment can only be reversed by allowing consumers to keep more of their earnings. Even some Democrats agree, and that is creating a problem for the President.
Raising the debt ceiling is equivalent to using up all the credit on your credit card, and then asking the credit card company to increase your limit because you can’t make the payments on your other credit cards. In my opinion, such an action is tantamount to financial suicide. The $14 trillion debt on the books now represents a large part of the U.S. GDP and if the credit agencies downgrade the U.S. credit rating, the amount of interest necessary to keep the country going will overextend the U.S. ability to meet its requirements. What part of "you can’t keep spending money you don’t have" does the President not understand?
I would agree, to some extent, that those earning more than $1 million per year should be asked to pay more in taxes, but to include those earning $250,000 a year in the millionaire and billionaire group is just plain wrong. If the President had emphasized those making a million or more should pay additional taxes I don’t think anyone would disagree. Now for some actual information...
Interest Rates: September Treasury bonds closed at 12601, up 7/32nds as money continued to seek the safe haven of U.S. treasuries. The debate in Washington over raising the debt ceiling remains a concern for investors but not so much as the continuing debt crisis in Europe. More countries were added to the sovereign debt situation as Moody’s Advisory downgraded Ireland including that country with Portugal and Greece. Italy has been named as potentially problematic as has Spain. We continue to suggest that the creation of a single currency for a wide variety of countries with varying economic condition was a mistake. We expect the treasuries to remain in a wide price range as various elements such as mentioned above play out on almost a daily basis. If and when an agreement is reached to raise the debt ceiling, the treasury market will sell off on a short term basis as money flows to equities. However, should default occur, which seems to us to be highly unlikely, interest rates will skyrocket and prices collapse. For the time being the ongoing global economic problems will support prices and continue to pressure yields. We favor the former suggesting that an "eleventh hour" agreement will be reached on raising the debt ceiling, hopefully under the Republican plan which does not include tax rate hikes which the President likes to call "revenue’ increase.
Stock Indices: The Dow Jones Industrials closed at 12479.73, up 42.61, up 0.34% on Friday but for the week lost 1.4%. The S&P 500 closed at 1316.14, up 7.27, or 0.56% on Friday but for the week lost 2.1% The Nasdaq closed at 2789.80, up 27.13 points or 0.98% but also posted a weekly loss of 2.5%. The ongoing debate between President Obama and Republicans in Congress on how to reduce the 14 Trillion dollar budget deficit continues to fester with no real compromise in sight. The President wants to raise "revenues" and the Republics want to curtail spending without raising taxes. The debate prompted Moody’s to indicate it would reduce the U.S.’s credit rating should a default develop, something we do not think will occur. Who will "blink" remains the question. Stay alert and consider implementing hedge strategies for holders of large equity positions.
Currencies: The September U.S. dollar index closed at 7542.5, down 13.7 points on expectations that the Eurozone countries will solve their debt crisis. I do not believe that is the case as the European banks may balk at the increased number of countries falling into the crisis category. Stay with the dollar.
Energies: August crude oil closed at $97.24 per barrel, up $1.55 tied to the selling in the dollar Friday. Fed Chairman Bernanke’s statement during congressional testimony that "more economic stimuls will be forthcoming, if needed, but nothing is imminent" gave rise to speculation that something would be done to shore up the U.S. economy and that would be positive for energy prices. We continue to believe that there is nothing left for the Fed to do that would accomplish that and create jobs, which we view as necessary for any economic recovery. Add to put positions in crude on any further rally. Our expectation for prices to deteriorate to the $80-85 level per barrel remains intact.
Copper: September copper closed at $4.41 per pound, up 3c on short covering and a forecast for stronger Chinese 3rd quarter demand for the metal. We believe that demand will not materialize as China is continuing to fight inflation and that would curtail any new demand for copper. The Shanghai futures exchange reported an increase in deliverable stocks of 109,461 tons, a weekly gain of 19,963 tonnes. The LME reported copper stocks unchanged at 462,025 tonnes. Add to put positions on any further price gains which could be prompted by "positive" economic data.
Next page: What's expected for gold?