My Strategic Forecast

Today was an interesting day with more meaning that most people may realize.  The more the market goes up, the more suspicious we become because of a few factors.  Market internals were good, but gold was up, the bond market was up and down all day, and most importantly, everyone wants to believe everything is alright.  Why is there so much turmoil in Washington with protests, proposed bills nobody wants or understands, the usual corruption and so on.  Yet Wall Street could care less.  Fast approaching is the fourth quarter, and the thoughts of year end bonus comes to mind.  They say that Washington, the Economy and the Stock Market are not linked together.  We say they are more linked than ever before.  Washington has to protect the banks on wall street because if the market continues higher, the voters feel good about the growth of their individual bank accounts and they will vote for the status quo which spells re election down the road.  Washington has every incentive in the world to assure wall streets success.  Washington agrees to keep a floor under wall street, and wall street in return agrees to make sure the markets stay propped up so all is well on the home front.  Sounds like a win win for everyone doesn’t it?  NOT.  Can this type of behavior (only speculation and dreaming at this point) last through a series of events that seem to culminating such as an Iran / Israel conflict.  Why is this important?  Because if there is a conflict in the middle each, and assuming we get engaged from a military perspective, then you can expect some serious pressure in the energy markets.  Then don’t forget the treasury market.  Can forget that, there is so much outstanding debt and more to follow, and someday soon, don’t be surprised to learn that our foreign partners are requiring higher interest rates to be compensated for holding our bonds due to our downward debt spiral.  After all, isn’t that what happened to General Motors?  Not an exact comparison by any means, but they didn’t just fail because of the economy, they were failing for years.  They were issuing a consistant flow of new debt to fund their business.  As they became an increased credit risk, their rating was down graded and they then would have to pay higher interest rates to issue new debt.  Once their debt service payments increased, their cash flow decreased, and the credit crisis emerged, they were toast.  Short version.  Anyway, what happens when the US has to pay higher rates to issue debt.  Bond prices go down.  Interest rates rise for the consumer and the almost recovering housing market does an about face back downward.  The stock market doesn’t like rising interest rates, therefore expect some less euphoria there.

Until then, happy trails during the third quarter window dressing period.  October is near.