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Next Week's Market: Beware the Continuing Resolution Bounce

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Nine observations about how the situation in D.C. is shaping up.

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For what it's worth, I'm on the executive board of my local Democratic party district organization. I mention this because it's impossible to talk about what's going on in Washington, DC, without some bias creeping in, and we always want to make bias clear here at Minyanville. I also mention it because I think it's relevant to point out that I have some experience and contacts in the political arena.

I was chatting with some of those contacts this week and here is how the situation is shaping up:
  • Weekend talk shows are going to be very confrontational and full of posturing, with very little talk of compromise.
  • The Senate will pass the continuing resolution (CR) legislation without any defunding of the PPACA ("Obamacare").
  • Monday's market will almost certainly open, and very probably close, without a vote on a CR by the House.
  • Odds are pretty much even whether the CR is passed on Monday or some time on Tuesday, which technically would cause a government shutdown -- but only briefly. Therefore, there's a chance we could open on Tuesday without a CR vote. If the market craters on Monday, I'd expect the House to vote late on Monday night to prevent a repeat on Tuesday morning.
  • It's likely whatever the Senate passes, the House will pass -- after lots of protestation.
  • The CR is only the appetizer. Both Democratic and Republican polling shows a difference in public opinion between a "government shutdown" and not raising the "debt ceiling" in terms of holding those separate votes "hostage" to political demands. You and I can agree that makes no sense, but that's what the polling indicates.
  • Based on these polling differences, the Tea Party strategy is to "compromise" on the CR and then hold fast on the debt ceiling. The White House suggests the debt ceiling will be hit on October 17. The Office of Management and Budget (OMB) says it might be perhaps a little later.
  • While there is a rising tide within the GOP to stand fast against their House minority coalition partner (Tea Party), those riding that tide are still in the minority. That makes it unlikely that Speaker Boehner will choose to throw his coalition partners under the bus soon enough to avoid the US going at least a day or two beyond the debt ceiling deadline.
  • There is a good chance the CR and perhaps the debt ceiling extensions would not go past November, setting up a repeat of this process in another month.
Monday's market will be rough if the above is correct. Once the CR is passed, I'd expect a relief rally in the Dow (INDEXDJX:.DJI) and S&P 500 (INDEXSP:.INX), but I can't emphasize enough that passing the CR is simply political kick-the-can. The debt ceiling is actually a bigger deal economically, especially globally, and that's where the Tea Party has decided to make its stand. Bottom line: Be careful buying any CR-related market bounce early next week.

Twitter: @AlpineBV_Miller

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No positions in stocks mentioned.

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