How This Ends

by: Dana Blankenhorn

I think I said it fairly clearly last week:

The Street is going to notice the shutdown only when it hits our asset balances. When you start squealing, in other words, then Washington may hear. When you tell your Congress-critter that your checkbook is about to shut down, in other words, then we'll see some action.

The way Washington hears this message is when you panic. If the Dow falls, say, 1,000 points or more in a single day, and the other averages follow suit, while bond prices hit Italy-like levels and the Arabs stop taking dollars for oil, then this whole shutdown-debt limit thing ends.

Not before.

And this probably angers traders more than anything, because we all know what will happen. You'll panic, a deal will get done, and those who didn't panic will take your money.

So no one wants to blink, in Washington or New York.

The best way to explain New York's attitude is to look at a capacitor. A capacitor takes electricity up to a specific voltage, then discharges. This regulates the flow of electricity in the rest of the circuit, and keeps it from getting overloaded.

Mathematicians took this concept and created what's called "saturation arithmetic" with it. Engineers took "saturation arithmetic" and created the Digital Signal Processor with it. Digital Signal Processors now work in real time.

As with past "flash crashes," or "fat thumb" events, a panic over the debt limit can immediately turn into a rally of equal size, once politicians respond. So just as they're waiting for the last minute to make a deal, we're waiting until the last minute to panic.

Yet the panic is the signal that sparks the deal.

The Republican Party is the natural home of Wall Street. Most traders support the Republican Party, expect it to do their bidding, and are flummoxed when that doesn't happen.

But with ownership comes responsibility. If your employees are costing you money, you fire them. The same should be true of politicians. But here's where it gets tricky for traders who prefer Republican government.

At this writing, the outcome favored by Republicans is a short-term deal. Politically, it kicks the can down the road, past the time when primaries against current officeholders are practical. Such an outcome should lead to a slow bleed of money from the market, until the longer-term deal is made.

Take this as a buying opportunity.

The correction upwards, whenever it comes, will be sharp and fast. There is a growing pent-up demand for investments in this country, because outside Washington things are all right.

Natural gas remains in glut, oil production is growing, efficiency is powering manufacturing, and technologies continue to evolve. The annual deficit has been cut in half, and there is, in fact, plenty of slack to deal with whatever solution politicians come up with.

Thus you should be holding on and buying dips. There is no sense trying to time this market - the big desks' algorithms always take sudden moves rather than individuals. Just see that you're diversified, buy whatever falls into what you consider a value range, and wait for the smoke to clear.

What specific sectors should you be buying? You play what works through this current recovery.

That means shale oil plays like Pioneer Natural Resources (NYSE:PXD), whose leases in the Spraberry-Wolfcamp Shale let it frack vertically and could produce oil like Saudi Arabia, at relatively low cost.

I also like cheap renewable energy, in the form of efficiency. Cree (NASDAQ:CREE) makes LED lighting systems that use a tiny fraction of the electricity used by fluorescents, and which can do this under computer control.

The same kind of energy efficiency is driving transformations in the data center. If a panic brings companies like Google (NASDAQ:GOOG) and (NASDAQ:AMZN) down 10%, you should buy them and know they'll go right back up.

My own retirement money is invested more conservatively, in companies like GE (NYSE:GE), which benefits from growth in both health care IT and renewable energy, and in IBM (NYSE:IBM), which is already down 15% from its previous highs as it adjusts to the growth of hybrid clouds.

How you react politically to the money politicians are costing you is your business. Just don't let it get in the way of your real business.

Disclosure: I am long IBM, GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.