No Mini Deal – GOP Rejects Plan B. We Will Go Over the Cliff. Day Trade From the Short Side

December 21, 2012

If you are a Swing Trader, WATCH THIS VIDEO. It is brief and I recorded it yesterday. The results speak for themselves. The Swing Reversal system will go up from $59.95/month to $74.95/month this weekend.

This is exactly why I have been day trading. The Speaker of the House conducted a litmus test yesterday. He wanted to gauge support for raising taxes on Americans making more than $1 million per year. This would only affect 1% of the population and it did not get enough GOP support to pass. This should have been a relatively easy hurdle. The S&P 500 tanked 20 points on the news.

If Boehner can’t get his party to this threshold, there is no chance to close the gap with the President. Republicans feel that Democrats are not bargaining in good faith. The process to this point has been anything but balanced. That is why they rejected “Plan B”.

Even if the Bush tax credits are terminated, it will still only fund the government for a couple of weeks. This is not a revenue problem, it is a spending problem.

Each year we spend $1.3 trillion more than we bring in. This problem will balloon as baby boomers retire at a rate of 10,000 per day. When you hear $1 trillion in spending cuts, realize that is over a 10 year period. That translates to a measly $100 billion per year. We are still spending $1.2 trillion more per year than we bring in even with the spending cuts.

To reduce spending, Democrats have proposed phantom Medicare cost savings ($300 billion) and interest expense savings. These are not “real” spending cuts. No one knows how the savings will be achieved and we should be saving money in every way imaginable. To make matters worse, Democrats want $50 billion stimulus spending.

Republicans view the Democrats counter offer as a complete joke. The GOP is tired of negotiating with itself and that is why the bill did not pass.

This is a game of chess and Republicans are not playing it well. We are likely to go over the cliff and Democrats will rush to the rescue in January. They will propose to extend the Bush tax credits for anyone making less than $250,000 per year. That plan will come with a giant string attached. Democrats will want a two-year debt ceiling extension. This will probably be negotiated down to one year. If Republicans completely reject it, they will lose face with voters.

As you know from my comments, I believe that Republicans could have negotiated down to the $250,000 per year level and they would not have had to extend the debt ceiling. In this scenario the Republicans would’ve looked like the “good guys” and they could’ve put pressure on the Democrats. Republicans could have also gotten the revenue side out-of-the-way so that they could focus on spending cuts and entitlement reform when we hit the debt ceiling in February.

Democrats want the debt ceiling extended more than anything else. In two years there will be another round of elections and they feel they will regain control of the House. They will have a blank check and they can spend money without worrying about the consequences.

No matter how much Republicans want to keep taxes low, I hope they do not extend the debt ceiling. This is their chance to truly address spending cuts and to reform entitlement. We will go through a recession, but we will come out of it in much better shape.

Yesterday’s vote on “Plan B” changed my forecast. I have been looking for this sharp decline, but I thought we would rebound on a mini deal. That does not look likely.

Asset Managers will reduce risk into year-end. There is too much bad blood right now and we won’t hear anything material until later next week. Now I believe we will go over the cliff.

If Republicans cave-in and they extend the debt ceiling, the market will rally in January. If Republicans stand their ground the market will decline. The debt ceiling negotiation process will get ugly and we could lose our credit rating.

I am day trading from the short side. There will not be positive news for a few days. The volume will be light and I don’t want to be exposed to promises from DC. One optimistic comment could spark a rally and that is why I don’t want to carry overnight positions.

With the dark cloud that’s been cast over the market today, I want to end my comments on a positive note.

Our prosperity will go through cycles, but our faith, family and friends will remain forever. Take time to focus on the things that really matter in life.

May you and your loved ones be blessed this holiday season.

Merry Christmas and Happy Hanukkah!
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