August 2 Deadline Not Really a Deadline

Perhaps I should consider wandering off on another vacation soon because in short, if you liked Monday, you’re probably going to love the rest of the week. While I have taken an oath to never, ever drag the dusty crystal ball up from the crawl space under the house, I am of the mind that there isn’t likely to be much in the way of upside action until the two parties in Washington come to an agreement. And with Senator Corker today making it clear that the August 2nd deadline isn’t really a deadline, well, I guess we’re stuck playing the waiting game for a while.

Speaking of deadlines, raise your hand if you feel used and abused by both House Speaker Boehner and Treasury Secretary Geithner. Frankly, I’ve become accustomed to Mr. Geithner saying whatever comes into his head without any real regard for what market watchers might think. But when both Geithner and Boehner called for a Sunday night deadline (before the open of the Asian markets), I actually thought they were serious. Silly me. (And by the way, can I have my Sunday evening back now?)

Also on the topic of deadlines, Wall Streeters have been busy with their calculators and one bank suggested Monday that August 10th is a more realistic date when the U.S. might have to start getting creative with its checkbook. Another report noted that the U.S. Treasury has been taking in more money than it really needs recently, just in case a scenario such as we’re seeing now played out.

However, it is important to note that just because there might be a net shortfall in the budget, doesn’t mean that the U.S. is going to default on anything. Remember, the United States Treasury takes in an enormous amount of money each month and since politicians are nothing if not creative, we might be able to squeeze by for a couple more weeks without telling bondholders that they aren’t going to get paid.

The point this morning is that there really is no hard and fast deadline for Congress and the White House to strike a deal. But it is also worth noting that the rating agencies have warned that a downgrade of the U.S. sovereign debt rating could happen in the not-too distant future if the powers-that-be don’t get serious about dealing with the deficit. Remember, it was only a few days ago that Standard & Poor’s threatened to cut the U.S. debt rating if a meaningful deficit reduction plan wasn’t agreed to in the near-term.

While stocks did fall on Monday, there is one positive that can be taken away from the action. Up until the time when two parties starting holding up signs, pointing fingers, and calling their opponents names again, the market had held up fairly well. It seems that even the fast-money didn’t really believe that U.S. lawmakers would be dumb enough to make a mess of this situation. The bottom line seems to be that since everybody knows what’s at stake, nobody thinks the sky is going to fall. But, of course, that was before the politicians started acting like children again.

So, in light of the fact that the professional politicians still have some time to pound their chests and posture for their constituents before the REAL deadline (Congress goes on summer recess on August 6th!), I’m guessing that we’re likely to see more of the same for the next week. However, after taking a look at this crystal ball, I’d best go find the power washer if I intend on using it again anytime soon.

Turning to this morning… The President took the deficit debate to the public last night via a televised address. And although Obama seemed to be pitching a deal that both sides consider dead at this stage, the plea for compromise did certainly sound reasonable at this stage of the game. Foreign markets improved overnight and the futures are pointing to a slightly higher open as the fear of default in the U.S. seems to be ebbing.

On the Economic front… We don’t have any economic data to review before the bell but we will get an update on the Case-Shiller Home Price at 9:00 am eastern, and then U.S. Consumer Confidence and New Home Sales at 10:00 am.

David Moenning
Editor: The Daily Decision