7/26/11…when did compromise become a dirty word?

Bloomberg Top Stories:


*Soros to End Four Decades as Hedge Fund Leader by Returning Investor Cash

*Dollar Weakens, Default Risk Rises as U.S. Debates Debt Limit; Stocks Drop

*Economic Growth Dwindles in U.K. Even With Record Low BOE Interest Rates!!!

*Societe Generale Undermined by Greek Debt Crisis in Recovery from Kerviel

*Deutsche Bank Reduces Peripheral Europe Risk, Takes Writedowns on Greece

*Credit-Default Swaps on U.S. Debt INVERT for First Time – trust the GOP!

*Treasury May Have Enough Cash to Extend Aug. 2 Deadline for a U.S. Default

*Dealers Cut Corporate Bond Holdings as Clients Seek Safety

*Obama Urges U.S. Debt-Ceiling Deal With Warning of ‘Deep’ Economic Crisis  


Volume was steady at a weak 3.2B shares while Big Board volume rose slightly to 763 million shares from 738 million…lowest since 4/15! Meanwhile the VIX surged to close at 19.35 from 17.52 and once again above the 40, 50, and 200 day moving averages all clustered at 18.33-18.63 and again major support.


It was an ugly day as traders tried to sort out the myths and facts of the debt crisis. The Dow fell 0.7% vs -0.3%, Transports -0.3% vs -0.1%, and the S&P 500 fell 0.6% vs +0.1%. The Nasdaq Composite was also off 0.6% vs +0.9% while the 100 was -0.6% vs +1.1%, while the Russell 2000 was the big loser -1.1% vs +0.7%. These changes belie the real impact. New 52 week highs plunged to 106 vs 192 vs 262, while new lows rose to 77 from 50. Advance/Declines which were slightly negative Friday were -4:1 on the NYSE and -3.3:1 on Nasdaq, while Breadth was -3.5x on NYSE and -2.5x on Nasdaq. Bonds ended the session about where they began with the 10 year -3/8 and the 30 yr -7/8/


Overnight European equities are slightly weaker while Asia ex-India is rallying: UK’s FTSE +0.1% vs -0.2%; French CAC 40 -0.5% vs -0.1%; German DAX flat for two days; Nikkei +0.5% vs -0.8%; Hang Seng +1.3% vs -0.7%; Korean Kospi +0.9% vs -1%; Indian SENSEX -1.9% vs +0.8%. U.S. Futures are back to little range after swinging wildly overnight: DOW +6; SPX +2.60; NDQ +3.50. Gold is $1613.90 -.50 in an inside session after hitting another record high of $1626.30 Monday, while Crude is $99.71 +.51, the 50 day is support at $97.45. U.S. treasuries are stable but have taken out support: 10 year 3.00% +1/64; 30 year 4.31% +1/8.


…without compromise this great country would never have survived after the Revolutionary War. These were BIG compromises on states rights, slavery, whether to have a navy or even an army. Since then the nation thrived by virtue of compromise with the only blemish being the Civil War, a sad fact in our history.

Candidates and legislators turned up the rhetoric but then quietly agreed to compromise…and the debt ceiling was never the issue as it shouldn’t have been as it merely authorizes paying what these same fools voted on…much of which was instigated, along with two ‘temporary’ tax cuts that only benefitted the top 2% of taxpayers. This along with ridiculous subsidies of all sorts should be repealed but the mantra is ‘we have a mandate’ and that is to cut spending alone to balance the budget.


As TB has said several times, this is a gross misinterpretation of the mandate – just as the Democrats did three years ago. This, however, does not matter to the minority which has the swing votes and will blackmail, extort, cajole or whatever it takes to get there way…the consequences be damned.


Comparing Obama’s theme last night with Speaker Boehner’s is important. Obama addressed the debt ceiling with some reference to the budget blaming both parties for the problem. Boehner began by accusing Obama of blaming them…and if it was his reference to the intransigence of the freshman congressmen, what does this say of Boehner’s leadership? Boehner spoke of the deficit glossing over the significance of a default on the debt (default does not have to be actual but a violation of the covenants which include the full faith and credit of the U.S. being pledged to pay and now this is being called into question). As Obama correctly pointed out, it is possible to pay the debt but have to cut back on other payments…such as to government contractors, employees, etc. Does the GOP not think that there would be serious economic consequences to this? …and for what? To preserve the ‘temporary’ tax breaks for those who have benefitted most over the past THREE DECADES.


Note that Obama, as always stressed that if your income is less than $250,000 you will not see a tax cut and in fact might have a tax holiday, while Boehner implied that all Americans would be taxed more…more than implied by using the collective ‘your’ to elicit support.


One reason mandates are misunderstood is that the reasons people voted for the candidates is not black and white…in many cases it is simply disillusionment with the current government, not simply balancing the budget.


A top story today by two analysts from Wall Street firms declares that the government can continue to operate, perhaps for weeks after the Aug. 2. date. That may well be true but as they say it takes away the credit card from the treasury. Years ago two First Boston (now gone) analysts argued that investors should sell the AAA Washington Public Power Supply System bonds and swap them into the A rated ones on the basis that the government guarantee would apply to them both. TB balked at this but two portfolio managers he knew took the advice. The A rated bonds defaulted on a judge’s ruling and both lost their jobs. This is what happens when analysts try decipher data and come up with the wrong conclusion.


Will this be the legacy of the tea party? Is Obama correct when he says that a six month extension will merely allow the extortion to continue again…and in a presidential election year…and after all, does anyone doubt that this is driving the debate?


We are likely to see the credit rating cut to Aa/AA without meaningful budget cuts and if the extension is a mere six months that is a given. Face it, we are not and have not been AAA for years…only the fact that we are the world’s reserve currency has allowed us to keep that rating. The basis for that rating is now in question however as we now appear to be willing to spend but not pay for our expenditures.


This could all be solved with a compromise…but that would require revenue increases and that is not going to happen due to freshmen Congressmen who say they have to do what they were elected to do. They were elected to govern…to lead…and that sometimes implies doing not all that your constituents expect…but after all, isn’t getting what constituents want what created the earmarks and entitlements that we are now saddled with?


TB has been asked by some: if not now, when? The solution is for sensible people to sit down out of the limelight and work out realistic changes to the budget, not to go public every day with rhetorical blather. They should do just that and accomplish what they are being paid to do.


This is a very sad time for America. The GOP is demanding draconian cuts on the people who have been most affected by the financial crisis at no cost to those who benefitted and in some cases caused it. This when true unemployment exceeds 16% and one in five is on food stamps…the poverty level for a family of four is $22,350…how many of you think that even $40,000 is a good wage where you can save?


TB believes it is time to let your Congressmen know what you think. You decide.


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Have a great day…and good luck!




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