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Debt Ceiling Drama is Almost Finished -- Here's What's Next

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At the end of July, the US economy will still be in "stalled growth" mode and global issues will persist, but corporations will continue to grind out earnings -- remember those?

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The reason the debt ceiling question has been such a problem has nothing to do with debt charts or CBO forecasts or any particular financial figures. It's been about Speaker Boehner's seeming inability to control his caucus, which contains a significant number of freshmen and tea party representatives whose seats in Congress are in large part due to oaths they made to hold the line on government spending and the debt. For the tea party, debt is ideologically as important as entitlements are to Democrats. In many ways, it's the whole platform. Caving on this issue is akin to Democrats caving on Social Security and Medicare.

Today, it appears that the tea party caved.

We can't know what changed, but at the time of this writing (late Wednesday night) it appears that Boehner has rounded up enough Republican votes for his bill to pass the House. If not, it'll be close. It doesn't really matter what's in the bill or that it's dead on arrival in the Senate. What matters is that Boehner has shown that he does in fact control most of his caucus under pressure. So Boehner's bill will pass the House or fail in a close vote. Senate Majority Leader Reid will pass a different but somewhat similar bill in the Senate, sending it to the House. Boehner and Reid both want deals. So does House Majority Leader Cantor, House Minority Leader Pelosi, and of course President Obama. There will be a deal that's a hybrid of the Reid and Boehner bills. President Obama will sign it. It's unlikely to happen before August 2nd, but there could easily be some sort of short-term extension. If not, some are saying the treasury won't run out of money until August 8-10 anyway, and even if it does, a few delayed checks for a week won't be the end of the world. Six months from now investors won't care, just like they don't care now about the Japanese earthquakes, even though they sent the VIX to 30 at the time.

So what now? Assuming something like the above plays out (maybe an 80-90% probability), we've made it through July with the debt ceiling resolved, the NFL lockout finished, and Minnesota's shutdown over. The Greece can has been kicked, albeit with Italy and Spain appearing to need attention soon. These were the events I was watching a few weeks ago. Investors will shift their focus back to the economy and earnings (remember those?), which are a mixed bag. The US economy is in "stalled growth" mode, with 2H GDP likely in the 1.5-3% range. Europe continues to be weighed down by its sovereign debt crisis. China is still tightening policy and slowing. India just hiked interest rates 0.50% this week.

That being said, US corporations continue to grind out earnings. Take sales growth to emerging markets, a little growth here in the US, some productivity gains not being passed through to labor, cheap debt, and stock buybacks, and your run-of-the-mill multi-national corporation continues to grow earnings per share at a healthy clip. Microsoft (MSFT) grew EPS 35% year-over-year. Coke (KO) grew 18%. IBM (IBM) grew 14%. Maybe central bankers haven't eliminated the business cycle, but in a world with cheap debt and emerging market secular growth, US corporations have.

Still, I suspect many investment managers are going to be a bit gun-shy after all the macro turmoil of the year -- because of the Middle East unrest, the Japan earthquakes, the European sovereign debt crisis, monetary tightening in emerging markets, and our nasty politics here in the US, simplicity and secular growth as insulated as possible from all that dreck will be the place to be.

More specifically, Apple (AAPL) has $82/share in cash, and will probably end up earning around $30/share this year. At its current price of $392, that means you can buy Apple even after its recent monster run for 10.3 times its ex-cash 2011 earnings. And if Apple's that cheap, you can bet lots of other stocks are cheap too. Consensus earnings for the S&P 500 are around $95-100 for 2011 and $110-115 for 2012. If those estimates hold, I suspect the S&P will finish the year closer to 1450-1500.

Editor's Note: Follow Conor Sen on Twitter @conorsen.

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