Wednesday, June 11, 2014

Dow drops triple digits on uncertainty over changes in DC

Dow fell sank 102 & closed near the lows, decliners over advancers 3-2 & NAZ slid 6.  The MLP index was off 2+ to the 501s & the REIT index lost 1 to the 299s.  Junk bond funds were mixed & Treasuries went up.  Oil fluctuated near its multi year highs & gold was flattish.

AMJ (Alerian MLP Index tracking fund)

CLN14.NYM....Crude Oil Jul 14....104.39 Up ...0.04  (0.0%)

Live 24 hours gold chart [Kitco Inc.]

Cantor Pressured to Leave House Leadership as Contenders Jockey
Photo:   Bloomberg

The primary election loss of House Majority Leader Eric Cantor, who helped broker deals to end standoffs on the federal debt ceiling in Oct & Feb, has investors concerned that policy makers may find future agreements more difficult to reach.  Cantor was defeated by Tea Party-backed challenger David Brat who had been critical of Cantor’s willingness to compromise on issues ranging from the debt limit to the Obama administration’s signature health-care law.  The defeat of Cantor, who had been viewed as the leading contender to succeed Jon Boehner as House Speaker, opens the door for candidates to Rep leadership roles with more partisan profiles.  Prices for Treasury debt rose.  The debt cap won’t loom over financial markets until the middle of 2015, following the Feb vote to extend US borrowing authority.  Even so, small-gov groups saw the unwillingness of Rep leaders to block an expansion of US borrowing authority as an abandonment of Rep principles & vowed to extract a political price in this year’s congressional elections.  Cantor’s loss raises big questions about the future leadership of the party & the party’s direction.  Conservative members of the House had hoped to use the debt ceiling talks to extract concessions on spending & other issues from the pres.  Cantor plans to step aside from his leadership post on Jul 31, five months before midterm elections are held.

Cantor Defeat Puts Markets on Guard for Debt Limit Gridlock

The Treasury posted a $130B budget deficit in May & the smallest shortfall for the first 8 months of a fiscal year since 2008, as a stronger economy & rising employment bolster revenue.  The deficit last month was about $9B less than the $139B shortfall in May 2013, according to the Treasury.  For the fiscal year, which began Oct 1, the gov is running a budget deficit 30% smaller than it was a year earlier.  Revenues for that period are 7% higher than a year earlier & outlays are 2% lower.  In the fiscal year thru May, the gov posted a $436B deficit compared with a $626B shortfall in the same period a year earlier.  Today’s Treasury report showed revenue increased to $200B last month from $197B in May 2013 while spending totaled $330B, a 2% decline from the same month a year earlier.  The month of May has registered deficits in 59 of the past 60 years because no significant tax payments are due.  The CBO in Apr projected that the federal deficit will decline to $492B this fiscal year, the smallest in 6 years, from $680B in 2013 & a record $1.4T when Obama took office in 2009.  Next year, the shortfall will decline further, to $469B, the nonpartisan agency said.  The 2014 deficit will be 2.8% of GDP, according to CBO, compared with 4.1% of GDP in 2013.  The labor market has improved this year as payrolls pushed past their pre-recession peak for the first time in May.  Job openings climbed to an almost 7-year high in Apr as employers sought more workers to help manage stronger demand in the rebounding economy.  During the first 8 months of the fiscal year, individual tax receipts, the single largest revenue item, were up 3.3% from the same period in fiscal 2013 & corp income-tax receipts increased 15.6.

Budget Deficit in U.S. Narrows as Economy, Jobs Bolster Revenue

The Justice Dept is seeking $17B from Bank of America to settle probes into its handling of mortgages ahead of the financial crisis, according to the New York Times.  Talks stalled on Jun 9 after the firm offered more than $12B to resolve the investigations.  The dept was moving to put the finishing touches on a civil complaint against the bank that would accuse it of selling mortgage investments that led to $B in losses.  BAC, the 2nd-biggest US lender, is among at least 8 banks under investigation by the Justice Dept & state attorneys general for misleading investors about the quality of bonds backed by mortgages amid a drop in housing prices.  Many of the loans in question were inherited by BAC when it purchased subprime lender Countrywide Financial & Merrill Lynch.  Prosecutors are seeking a bigger settlement amount from BAC than the record $13B agreed to by JPMorgan Chase (JPM), a Dow stock, over similar issues in Nov.  BAC stock fell 33¢.  If you would like to learn more about BAC, click on this link:

U.S. Prosecutors Seek $17 Billion for Bank of America Settlement, NYT Says

Bank of America (AC)

Who would have thought a primary election for a congressional district would have a big impact on the stock market?  But it did.  Questions are swirling around about what changes are coming to DC as Cantor plays a key roll in the House.  He had a large impact on brokering the compromise deal as a first step on reducing the budget deficit.  Now next year's battle to come up with a 2nd step looks to be ugly.  Along those lines, improvement in the deficit is not as good as the headline makes it out to be.  The 8 month month number above would have been an ENORMOUS 12 month deficit just a few years ago.  Then there's gov spending which will start rising again in the coming years.  This is not the best of all worlds & the market sell-off reflects that.

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