Monday, August 1, 2011

It's a deal: Obama, Congress will avert default

Ending a perilous stalemate, President Barack Obama and congressional leaders announced agreement Sunday night on an emergency deal to avoid to avert the nation's first-ever financial default. The arrangement would cut more than $2 trillion from federal spending over a decade.

The dramatic agreement, with scant time remaining before Tuesday's deadline, "will allow us to avoid default and end the crisis that Washington imposed on the rest of America," Obama said. Default "would have had a devastating effect on our economy," the president said at the White House, relaying the news to the nation and to financial markets around the world. He thanked the leaders of both parties.

House Speaker John Boehner telephoned Obama at mid-evening to say the agreement had been struck, officials said.

No votes were expected in either house of Congress until Monday at the earliest, to give rank-and-file lawmakers time to review the package.

But leaders in both parties were already beginning the work of rounding up votes.

In a conference call with his rank and file, Boehner said the agreement "isn't the greatest deal in the world, but it shows how much we've changed the terms of the debate in this town."

Obama underscored that point. He said that, if enacted, the agreement would mean "the lowest level of domestic spending since Dwight Eisenhower was president" more than a half century ago.

Senate Democratic leader Harry Reid provided the first word of the agreement.

"Sometimes it seems our two sides disagree on almost everything," he said. "But in the end, reasonable people were able to agree on this: The United States could not take the chance of defaulting on our debt, risking a United States financial collapse and a world-wide depression."

In his remarks, Obama said there will be no initial cuts to entitlement programs like Social Security and Medicare. But he said both could be on the table along with changes in tax law as part of future cuts.

That was a reference to a special joint committee of lawmakers that will be established to recommend a second round of deficit reductions, to be voted on by Congress before year's end as part of an arrangement to raise the debt ceiling yet again. That is expected to be necessary early next year.

Pending final passage, the agreement marked a dramatic reach across party lines that played out over six months and several rounds of negotiating, interspersed by periods of intense partisanship.

A final stick point had concerned possible cuts in the nation's defense budget in the next two years. Republicans wanted less. Democrats pressed for more in an attempt to shield domestic accounts from greater reductions.

Details apparently included in the agreement provide that the federal debt limit would rise in two stages by at least $2.2 trillion, enough to tide the Treasury over until after the 2012 elections.

Big cuts in government spending would be phased in over a decade. Thousands of programs -- the Park Service, Labor Department and housing among them -- could be trimmed to levels last seen years ago.

No Social Security or Medicare benefits would be cut, but the programs could be scoured for other savings. Taxes would be unlikely to rise.

Without legislation in place by Tuesday, the Treasury will not be able to pay all its bills, raising the threat of a default that administration officials say could inflict catastrophic damage on the economy.

If approved, though, a compromise would presumably preserve America's sterling credit rating, reassure investors in financial markets across the globe and possibly reverse the losses that spread across Wall Street in recent days as the threat of a default grew.

Officials familiar with the negotiations said that McConnell had been in frequent contact with Vice President Joe Biden, who has played an influential role across months of negotiations.

In the first stage under the agreement, the nation's debt limit would rise immediately by nearly $1 trillion and spending would be cut by a slightly larger amount over a decade.

That would be followed by creation of the new congressional committee that would have until the end of November to recommend $1.8 trillion or more in deficit cuts, targeting benefit programs such as Medicare, Medicaid and Social Security, or overhauling the tax code. Those deficit cuts would allow a second increase in the debt limit.

If the committee failed to reach its $1.8 trillion target, or Congress failed to approve its recommendations by the end of 2011, lawmakers would then have to vote on a proposed constitutional balanced-budget amendment.

If that failed to pass, automatic spending cuts totaling $1.2 trillion would automatically take effect, and the debt limit would rise by an identical amount.

Social Security, Medicaid and food stamps would be exempt from the automatic cuts, but payments to doctors, nursing homes and other Medicare providers could be trimmed, as could subsidies to insurance companies that offer an alternative to government-run Medicare.

Officials describing those steps spoke on condition of anonymity, citing both the sensitivity of the talks and the potential that details could change.

The deal marked a classic compromise, a triumph of divided government that would let both Obama and Republicans claim they had achieved their objectives.

As the president demanded, the deal would allow the debt limit to rise by enough to tide the Treasury over until after the 2012 elections.

But it appeared Obama's proposal to extend the current payroll tax holiday beyond the end of 2011 would not be included, nor his call for extended unemployment benefits for victims of the recession.

Republicans would win spending cuts of slightly more than the increase in the debt limit, as they have demanded. Additionally, tax increases would be off-limits unless recommended by the bipartisan committee that is expected to include six Republicans and six Democrats. The conservative campaign to force Congress to approve a balanced-budget amendment to the Constitution would be jettisoned.

Congressional Democrats have long insisted that Medicare and Social Security benefits not be cut, a victory for them in the proposal under discussion. Yet they would have to absorb even deeper cuts in hundreds of federal programs than were included in Reid's bill, which many Democrats supported in a symbolic vote on the House floor on Saturday.

As details began to emerge, one liberal organization, Progressive Change Campaign Committee, issued a statement that was harshly critical.

"Seeing a Democratic president take taxing the rich off the table and instead push a deal that will lead to Social Security, Medicare and Medicaid benefit cuts is like entering a bizarre parallel universe -- one with horrific consequences for middle-class families," it said.

While politically powerful business groups like the Chamber of Commerce are expected to support the deal, tea party organizations and others have looked disapprovingly on legislation that doesn't require approval of a balanced-budget amendment.

If they keep to that position, it could present Boehner a challenge in lining up enough votes to support a compromise, just as Obama may have to stand down rebels within his own party.


It’s Time to Buy Big U.S. Banks: JPM, WFC, MS

Since mid-February, bank stocks have endured a death march. Even top-notch hedge fund managers like billionaire John Paulson have dumped large positions in the sector.

However, there are signs that things are improving. For example, the KBW Bank Index (BKX) spiked 3.3% last week.

There are several catalysts suggesting a rebound may be at hand. For example, according to a recent report from Goldman Sachs (NYSE:GS), there are positive trends in the overall growth for commercial loans, lower credit losses and stronger cost savings. It’s also encouraging that the balance sheets are fairly strong.

In addition, the bad news – such as regulations and low interest rates — has already been discounted by investors. In other words, the banks could be poised for some nice upside. For investors, what is the best way to play this? I think the best strategy is to focus on quality operators that have overlooked earnings power.

Here’s a look at three top names:

JPMorgan Chase (NYSE:JPM): In the latest quarter, the firm was able to increase revenue an impressive 7% and profit came to $5.43 billion. JPMorgan is seeing lots of strength from its investment banking operation – in terms of equity and debt offerings. In fact, with the spike in IPOs, there should be much more growth. But perhaps the biggest advantage for JPMorgan is its CEO, Jamie Dimon, one of the world’s best bankers. He always seems to know how to find ways to capitalize on opportunities. Shares of JPMorgan are also incredibly cheap, with a price-to-earnings ratio of about 9. Moreover, the dividend yield is 2.8%.

Wells Fargo (NYSE:WFC): Of course, this is one of Warren Buffett’s top holdings. His firm,Berkshire Hathaway (NYSE:BRKA), owns 342.6 million shares. Apparently, he is still quite bullish on the bank’s ability to generate long-term returns. True, the company’s recent quarter was somewhat weak on the top line, and there continues to be issues with real estate and business loans. Yet the situation should improve as the U.S. economy perks up. In light of Wells Fargo’s massive scale and breadth of product offerings, the firm is in a great position to benefit. At the same time, Wells Fargo has been getting aggressive with cost cutting.

Morgan Stanley (NYSE:MS): The firm has spent decades trying to beat Goldman Sachs, and in the second quarter, Morgan Stanley finally did one-up its rival. The firm posted stellar results for investment banking with revenue of $2.09 billion. Fixed-income also posted a topline of $1.47 billion. Why the strong performance? Simply put, Morgan Stanley was willing to take on more risks, but it was still well-managed. For example, the firm lowered its exposure to commodities. Also, on the corporate side, Morgan continues to be the top advisor for merger deals, which generate juicy fees. Granted, there has been some recent weakness, but the mergers business can comeback quickly, and more importantly, companies have huge cash war chests to do deals.

Top Fund Sees Gold At $3,000; Stock Crash

Gold could rise to $3,000 an ounce, while stock markets look likely to plummet in coming years as governments print even more money to try and stimulate economic growth, says the CEO of $2 billion hedge fund firm Superfund.

Though gold hit a record of $1,628/oz on Wednesday as investors spooked by a possible a US debt default sought a safe haven, Superfund CEO Christian Baha believes further loose monetary policy in developed economies will put pressure on paper currencies and drive gold higher.

'I still think gold is very cheap, and paper currencies are overvalued,' said Baha, who has kept almost all his personal liquid assets in physical gold or silver or gold-denominated versions of his funds for the past eight years.

Baha said the yellow metal could hit $3,000 'easily' in one-to-two years, depending on how much money is printed, while hyperinflation could see it go to $10,000.

'It's just a question of time until the dollar or euro inflate more, and eventually you get hyperinflation. The Fed is printing too much. It's just monopoly money. I don't believe it's the end of QE (quantitative easing); they will find a new way to keep printing money.'

His views echo those of a number of other fund managers, who are hunting for ways to protect their portfolios from the euro zone debt crisis and the possibility of another global recession.

Baha, whose computer-driven hedge funds follow trends in global futures markets and quickly trade market anomalies, also said quantitative easing had helped support stock markets -- the FTSE 100 is up 9 percent over the past year -- but that a sharp market fallback was likely eventually.

'I hope the (government budget) deficits will disappear, but if they don't, I want to be protected,' he said. 'I think there's more volatility coming up. I assume in the next few years we'll see a big crash, because there's so much money being printed, which keeps the market going up, but there will be some hard reactions in the market.' A Reuters poll of 63 economists on Wednesday found one in four, up from one in five a month ago, thought the Bank of England would launch a second round of government bond purchases.

Baha also said his $230 million Superfund Blue, a market neutral hedge fund that aims to profit quickly from market anomalies, would do better out of today's volatile conditions than in markets with little volatility.

The fund returned 24.41 percent in 2008's market chaos and is up 5.35 percent so far this year. In comparison, the average hedge fund has struggled this year, particularly in May and June's choppy markets and commodities sell-offs, and is up just 0.77 percent for the first six months of the year, according to Hedge Fund Research.

Superfund Blue uses a range of factors such as pattern recognition, momentum and trading volume to pick stocks that have strong technicals -- i.e. they are well-regarded by other investors -- and are likely to move higher, be that after a rise or fall in price.

The fund, which has seen gross exposure vary between 160 percent and 12 percent over the past week, then hedges the position by going short the wider index, but will sell it the same day or within a few days. 'There are no really bad market conditions, it doesn't care what the market is doing,' said Baha.

'Even in a market crisis, the Blue strategy will perform very well, as we've seen in 2008. Higher volatility is what the fund likes a lot.'

Sovereign Debt Ratings by Country

Technically Precious with Merv

Well you can’t much argue with new highs but you can be cautious. Something just doesn’t seem right, at least not from the short term, although the long term continually looks great for gold (and silver).


I know this is a commentary on the precious metals (gold and silver) but I thought I’d just throw in a chart of oil. It seems to be ready for a major downside break.

I don’t intend to go into a detailed technical analysis of oil here but will just briefly comment on a couple of chart patterns that are easily spotted by a simple technician.

The price of oil (Texas Light Sweet Crude) seems to be trapped inside two separate patterns, a wide upward sloping channel and a bearish Decelerating FAN trend lines.

From the channel perspective oil is very near its lower support line. A breach of this line is a serious bearish indicator. On the other hand oil could just bounce off the support and head back towards the upper resistance line. Take your pick.

As for the FAN trend lines, usually the breaking of the second FAN trend line tells me that the trend had ended but it requires the breaking of the third FAN trend line to confirm. Since the establishment of the third FAN trend line, from the low in mid-May 2010, the market action has remained trapped within the confines of the second and third FAN lines. As you can see, the third FAN trend line is also the lower support line from the channel. Again, a breaking of this support line is also now a confirmation of the bear per my FAN Principle. So, we are in nail biting territory until the smoke clears, one way or the other. Watch a move below the $90 level or above the $100 level. That should warn you of which way the wind in blowing.

Two final quick notes: my Table of Non-Edibles Futures Indices already has oil rated as NEG (bearish). You can access the table at and go to the commentary download link. Secondly, my long term momentum indicator has already broken below its long term up trend line for a negative cautionary sign possibly forecasting the future move in oil.



Sometimes just a few seconds look at a chart and one can say, “no problemo, moochachoes” or something like that. Gold continues its two and a half year bull move with no real end in sight, at least not from the long term standpoint. The long term momentum indicator is still far from any serious warning of possible problems ahead. Sit back and relax. The only cautionary element from this chart is the fact that the up side does not seem to have much more room for growth while the price could drop considerably and still be inside the up trending channel.

Trend: Gold continues to move higher above its positive sloping long term moving average line.

Strength: The long term momentum indicator is well entrenched in its positive zone above its positive sloping trigger line. It is within a heart beat of its previous high levels, within any margin of error.

Volume: The volume indicator is plowing ahead in its all time high territory above its positive sloping trigger line.

The long term rating can only be BULLISH with all that.


The intermediate term still looks like a run-away on the up side, with some caution.

Trend: The trend continues higher but seems to hesitate at times. Gold remains above its positive sloping intermediate term moving average line and despite some hesitation there is no immediate hind of a reversal.

Strength: The intermediate term momentum indicator remains in its positive zone above its positive sloping trigger line. It is showing some minor weakness versus its advance last April but the advance is not over yet and the strength might come back.

Volume: The volume indicator continues to show strength and remains above its positive trigger line.

On the intermediate term the rating remains BULLISH. This is confirmed by the short term moving average continuing its move above the intermediate term average.


Short term things look more precarious. Friday’s sharp move into new highs was on greatly reduced volume, not encouraging. The past couple of weeks of positive price action has also been on greatly diminished strength. The short term momentum indicator has not been able to breach its highs from a couple of weeks back despite the strong price move. From a very short term perspective the Stochastic Oscillator has shown even greater weakness. All this seems to be suggesting we should expect a price reversal any day now. However, despite these warnings the Friday position of gold remains okay, i.e. the reversal has not yet started. Maybe tomorrow? Or Tuesday?

Trend: Gold has been comfortably above its short term positive sloping moving average line for four weeks now. Time for a change?

Strength: As mentioned above the short term momentum indicator is showing weakness versus the price move. One might suggest this is a negative divergence but it’s too early to

say that. We need the price to turn around and then see if the momentum indicator reached new highs or gave us a negative divergence. Still, the momentum indicator IS in its positive zone and above a positive trigger line.

Volume: The daily volume action is giving us some headaches. The very high volume day on a down price day a few days back with a low volume day during an upside move on Friday does not give one confidence that the upward move has much longevity left in it.

Putting it all together the short term rating remains BULLISH but could change very fast. The very short term moving average line confirms this bull.

As for the immediate direction of least resistance, the Stochastic Oscillator is suggesting very serious weakness from the very short term perspective. Despite Friday’s move the SO continued in a downward path. I will go with the lateral direction BUT it does look like the downside is getting more possible every day.


The silver long term P&F chart did make an upside break but the projection, based upon its consolidation period, is only to the $49 mark. That is to the previous high, P&F wise, and not quite into new high territory. Although these projections are often conservative one would not put money on them being so. For now, if speculating in silver from the short to intermediate term one should keep this projection in mind. In any case, projection or not, one would follow the charts and stay with the trend or get out if the trend ends.


Trend: Silver continues to trade above its positive sloping long term moving average line.

Strength: The long term momentum indicator continues in its positive zone above its positive trigger line. Having said that it is showing weakness versus previous moves. In other words this move does not have the strength behind it that previous bull moves had. This should be considered as a warning of possible trouble ahead.

Volume: Here too the volume indicator can be considered as positive being above its positive sloping trigger line. However, the recent volume action has been decidedly weaker than previous rallies.

Still, all in all the long term rating at the Friday close remains BULLISH.


Trend: Silver remains above its intermediate term moving average line and the line slope is to the up side.

Strength: The intermediate term momentum indicator remains in its positive zone but by Friday close has dropped below its trigger line. The trigger although in the process of turning down has not quite made it and remains very slightly with a positive slope.

Volume: The volume indicator is showing weakness but remains above its intermediate term positive trigger line.

For now the intermediate term rating remains BULLISH. This is confirmed by the short term moving average line continuing to move above the intermediate term line.


Trend: The short term trend appears to be in the process of topping out. It has been toying with its short term moving average line but has not quite moved below it on a closing basis. Silver closed on Friday just above its positive short term moving average line.

Strength: The short term momentum indicator seems to have also topped out. It has broken below a well defined short term up trend line for a serious short term warning. However, it is still in its positive zone but already below its negative trigger line.

Volume: The daily volume action throughout its recent advance has been relatively low and not a good sign.

For now the short term rating must still be classified as BULLISH but with change possibly happening momentarily. The very short term moving average line is confirming this bull rating and caution as it has turned downward and is very close to moving below the short term line.

Holiday trip - There will be no commentary next week

Merv’s Precious Metals Indices Table

Well, that’s it for this week. Comments are always welcome and should be addressed to

By Merv Burak, CMT

Mark Mobius: US Dollar, Treasurys No Longer Safe Havens

The U.S. dollar and Treasurys, which proved to be safe havens during the global financial crisis, can no longer be viewed as such because of the on-going debt impasse, renowned investor Mark Mobius told CNBC on Friday.

Instead, Mobius, who oversees about $50 billion as executive chairman at Templeton Emerging Markets Group said emerging markets were now a much safer bet.

“The debt crisis in the U.S. and Western Europe puts emerging markets in a very strong position because their debt to GDP ratios are much lower than the developed countries and their foreign reserves are greater than the developed countries,” Mobius said.

Mobius believes a shift is under way towards emerging market stocks and said that he was bullish on commodities and gold [XAU= 1626.59 3.10 (+0.19%) ] .

“Commodities are a very big part of our portfolio because we believe in dollar terms that commodity prices will continue to trend upwards,” Mobius said.

Despite the debt crisis and a pullback in purchasing managers indexes in the U.S., India and China, Mobius said investors shouldn’t be worried about another global recession.

“The consumer is alive and well and kicking both in the U.S. and in emerging markets, so I’m not too frightened. The consumer has lots of cash to spend and they want to spend, because they don’t want to hold currencies,” Mobius said.

Within emerging markets, Templeton has been focusing on equities in China, India and Russia, where benchmark indexes had so far lagged behind the broader group.

“If you’re talking about slower growth in China and India, for example, you’ve gone from 9 to 8 to 7 percent, even 7 is tremendous growth,” he added.

Mobius admitted that some emerging market stocks had gotten expensive, but he said he was most bullish on the retail sector, where he expected to see some consolidation, and on packaging companies, which were further upstream.

He added that Templeton was continuing to make a big push into frontier markets, in which the firm now has about $1 billion invested.

“We’re big in Nigeria, we are big in Vietnam, we’re big in Ukraine and many of these frontier markets are doing quite well and the good news, of course, is that they’re still quite cheap,” he said.

Mobius accepted that some frontier markets suffered from low levels of liquidity, but he said Templeton hasn’t had any major problems because the markets were very different, and so, extremely uncorrelated.

US Economic Calendar For The Week

10 amISMJuly 54.3%55.3%
10 amConstruction spendingJune 0.2%-0.6%
8:30 amPersonal incomesJune 0.%0.3%
8:30 amConsumer spendingJune 0.0%0.0%
8:30 amCore PCE price indexJune 0.2%0.3%
TBAMotor vehicle salesJuly 11.9 mln11.5 mln
8:15 amADP employmentJuly90,000157,000
10 amISM nonmanufacturingJuly 53.3%53.3%
10 amFactory ordersJune -0.9%0.8%
8:30 amJobless claims7/30 405,000398,000
8:30 amNonfarm payrollsJuly 75,00018,000
8:30 amUnemployment rateJuly 9.2%9.2%
8:30 amAverage hourly earningsJuly 0.2%0.0%
3 pmConsumer creditJune --$5.1 bln