What Washington Dysfunction Means for the Market (It’s not all bad).

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Washington Update

The House Saturday night passed a bill that funds the government through Dec. 15, but added a one-year delay on the individual mandate to the “Affordable Care Act” and removed a tax on medical devices.  Like the earlier version, this bill is dead in the Senate, so at this point the chances of the federal government shutting down at midnight tonight have increased substantially.

But, although the media will portray it as such, even if the government shuts down for a short period, it’s not a bearish game-changer.  The real risks here (that would require getting defensive, and fast) are for a protracted government shutdown (not just a few days) and/or a breach of the debt ceiling.  Drama aside, both those “Armageddon” scenarios look very, very unlikely.

At this point, the Senate will come back into session around mid-day today, where they will vote down the CR sent from the House.  And, at that point, we start the game all over again—will the House pass the “clean” CR or will it add another set of amendments?  The answer will result in a shutdown or not (although at this point at least a temporary shutdown is likely, just based on the fact there’s not a lot of time to get everything done).

Bottom line is this, though: Unless a government shutdown becomes extended (say >20 days or so), it’s not a bearish game changer.  Selling right now isn’t panicked  – its just cautious and there are no bids in the market.  But, keep in mind the high probability is that a deal does get worked out to fund the government sometime in the next few days (if not late tonight).

This Week

Besides Washington drama and a heavy calendar of economic data, there will be multiple Fed speakers (highlighted by Ben Bernanke on Wednesday, although there may not be much on monetary policy. The speech is called “Community Banking in the 21st Century”).

Internationally, all eyes are on Italy.  PM Letta is scrambling to shore up support for his government amidst the with drawl of support by Berlusconi.  All this is occurring as the Italian Senate is set to vote on Silvio Berlusconi’s expulsion on Friday, and more pressingly Letta will hold a vote of confidence Wednesday.  Obviously if there is a collapse of the Italian government and new elections, that will be a significant negative event for Europe peripherally.

In Japan, Prime Minister Shinzo Abe is expected to announce tonight whether the planned sales tax increase will go through in the spring. (The wide expectation is “yes it will.”)

Micro-economically, the calendar is quiet but we’re now in “pre-announcement” season for Q3 earnings, which start with Alcoa (AA) on Tuesday, Oct. 8, so there are potential surprises lurking.