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Washington: Light At the End of the Tunnel?

Gary Black

The Republicans continue to lose ground in the public opinion polls as the federal government shutdown drags on. As the President scores almost daily body blows against the GOP (laying the foundation for blame in next year’s mid-term elections if the economy slows with tapering), Republicans surely are trying to extricate themselves from what looks increasingly like a losing fight. In the latest CBS news poll released this morning, Americans overwhelmingly disapprove (72% to 25%) of shutting down the government. Even among those who disapprove of Obamacare, 59% disapprove of shutting down the government over the issue, versus 38% who don’t. Additionally, 44% of Americans blame Republicans for the shutdown, versus 35% who blame the President and Congressional Democrats. In the latest Quinnipiac poll released on October 1, 17% of voters approve of the job Republicans are doing versus 74% who disapprove—a record-low favorability rating.

The President offered a clear opening for the Republicans in his speech yesterday afternoon. According to Obama, the way out for Republicans is to give up fighting the Affordable Care Act, which already has been passed by both chambers and upheld by the U.S. Supreme Court (not to mention, the Affordable Care Act was a key issue in the Presidential re-election last year, which Republicans lost).

Instead, Obama said he is open to a good budget deal without tax increases, and what is being referred to as a “grand bargain” by legislators. This would include entitlement reform, corporate tax reform, chained CPI (that is, cost of living adjustments for Social Security and veteran’s payments tied to CPI), and most importantly, reduced defense spending cuts as phase II of the sequester kicks in on January 1, 2014. In return, Republicans would have to pass a clean continuing resolution and increase the debt ceiling before the October 17 deadline.

How likely is such a deal over the next two weeks? Representative Paul Ryan is leading this charge with the blessings of Senate Minority Leader Mitch McConnell and House Majority Leader John Boehner. It would allow tea party Republicans to tell their constituents they got something from the President, not a repeal of Obamacare but something potentially much bigger.

Many of the legislative elements of the grand bargain have long been discussed in Washington, and the structural elements could be attached to legislation that contains a clean continuing resolution and an increase in the debt ceiling. Given the Republican’s weakened position after three days of shutdown, and Boehner’s comments this morning that he would suspend the Hastert Rule (the practice of passing legislation with majority of the majority party), he clearly is sending a message that if push comes to shove, he would cobble together enough moderate Republican votes with the vast majority of House Democrats to avoid a debt-ceiling debacle. That increases the odds of a grand bargain, which would be very good for equities.

We remain bullish and view the recent market weakness as an opportunity to buy equities.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Sequestration refers to mandatory federal budget cuts which go into effect if certain budget criteria are not met.

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