That's my take on the latest developments.

It is always amusing to watch the business media, which were so concerned with a deft default last week and now so enthusiastically (almost breathlessly) embracing  the Washington "progress."

My message remains ... buy the mystery (of an impasse in Washington early last week ) and sell or short the history (an agreement tonight). 

Unlike many, I see a weak pattern of third-quarter earnings ("the mother's milk of stock prices") and guidance ahead.

IBM (IBM) (a large Berkshire Hathaway (BRK.B) holding) is just out with earnings and provides another example of very poor top-line performance.

I will have more on my near-term thesis in the next few days.

If the market was a song i t would be Gerry Goffin and Carole King's "Will You Still Love Me Tomorrow?" as sung by the Shirelles.

Thanks for reading my Diary, and enjoy your evening.

• The economy is expanding 'at a modest to moderate pace.' 

In the Fed's Beige Book, the economy was described as expanding "at a modest to moderate pace," which covered the period of September through early October, thus capturing a few weeks of the partial government shutdown.

Here are some relevant comments from the release:

• Consumer spending continued to increase and activity in the travel and tourism sector expanded in most Districts.
• Business spending grew modestly in most districts.
• Employment growth remained modest in September. Several Districts reported that contacts were cautious to expand payrolls, citing uncertainty surrounding the implementation of the Affordable Care Act (Obama care) and fiscal policy more generally.
• Demand for nonfinancial services rose and manufacturing activity also expanded modestly.
• Residential construction continued to increase at a moderate pace. By comparison, non-residential construction again expanded at a slower rate.
• Residential and CRE activity varied across districts, but largely continued to improve.
• Financial conditions were little changed on balance, with lending activity remaining modest in most Districts.
• Price and wage pressures were again limited.

The bottom line is that the U.S. economy is growing, but at a still lackluster rate of about +2%. It's becoming more likely that the Fed will wait until January when Federal Reserve Chairman Janet Yellen has full rein to decide what's next with its policy. Assuming this is the case, the Fed will have a $4 trillion balance sheet by then -- up from $3 trillion at the end of 2012 -- with no change in the average rate of job gains and what is still a +2% growth rate.

The Fed members' econometric models will say "keep on going," which they probably will. But practical common sense should call for some "look in the mirror" introspection so they can see that what they are doing isn't working. Not to mention it will likely cause mess when it's time to reverse (as we saw over the summer with just the mention of it).

In response bond yields are dropping -- ProShares UltraShort 20+ Year Treasury (TBT) is  down $1.50-plus.

• I will be back in an hour or so.

A heads up: I am heading out to have lunch with an investor, and I will be back in an hour or so.

While I'm away, here is the webcast site for the press conference in Washington, D.C.

• Here are his musings at midday.

Midday market musings from Sir Arthur Cashin:

Early tweet that Boehner would move whatever the Senate sent onto the House floor for vote kicked relief rally into overdrive.  "Buy the dippers" saw it as last visible "dip" to buy before yearend.  As I said on TV, what markets do about one hour after passage will tell us a lot.

A boost for bulls is that, so far, run rate higher than yesterday.  At 12:30, run rate projects to an NYSE final of 700/780 vs. yesterday's 675.

• Namely, the tranche I purchased over the past three days.

I am selling out of the extra Citigroup (C) at $50.54 -- namely, the tranche that I purchased over the past three days (at a cost under $49).

I am keeping my core investment position in this Kass Katch and Best Idea.

• I have shorted JPMorgan Chase against my Citi long.

I am shorting JPMorgan Chase (JPM) against my Citigroup (C) long now at $53.83.

So I have two pair trades on in the banks: long Citi/short JPMorgan and long Northwest Bancshares (NWBI)/short Bank of America (BAC).

• Sticking with it.

Buy the mystery (of the Washington, D.C., impasse last week) and sell the history (of the Washington, D.C. agreement this week).

• Boenning & Scattergood's Rich Farr chimes in.

One of my themes over the past few months is that housing would pause/stall because of reduced affordability (higher mortgage rates and higher home prices particularly relative to incomes).

Boenning & Scattergood's Rich Farr chimes in on this today:

HOUSING AFFORDABILITY AT LOWEST LEVEL IN NEARLY 5 YEARS: 

According to the National Association of Realtors, the Housing Affordability Index fell to 156.1 in the month of August, which is the lowest level since November 2008!  In fact, the Housing Affordability Index has been in steady decline throughout 2013. The drop in affordability is largely due to higher mortgage rates (let's face it, our entire credit-fueled economy is addicted to low rates and is becoming a Fed-induced bubble), but rising median home prices are also making it more difficult for new buyers.  According to the NAR, the median sales price for existing homes was $212,200 in the month of August, which is an increase of +14.4% Y/Y.  The median family income increased just +1.96% Y/Y to $63,783.  With the mortgage rate increasing to 4.41% in August (4.13% prior and 3.70% in August 2012), the NAR estimates that the average monthly payment now represents 16.0% of income, which is the highest level in four years.

NAHB/WELLS FARGO U.S. HOUSING MARKET INDEX SLIPPED TO 55 IN OCTOBER: 

The NAHB Housing Market Index declined -2 points to 55 in October.  In the month, Traffic flows declined -2 points to 44, Current sales declined -2 points to 58, and Future sales declined -2 points to 62.  "A spike in mortgage interest rates along with the paralysis in Washington that led to the government shutdown and uncertainty regarding the nation's debt limit have caused builders and consumers to take pause," said NAHB Chief Economist David Crowe. The data were mixed geographically, with declines in the Northeast (-13 points to 31), the West (-5 points to 58), and the South (-4 points to 54).  The Midwest was the only region to increase in the month, up +2 points to 65 (new record high).

U.S. MORTGAGE APPS INCREASE +0.3% LAST WEEK-PURCHASES DOWN -10.9% Y/Y: 

According to the Mortgage Bankers' Association, the Composite Index of U.S. Mortgage Applications increased +0.3% last week to 457.1; however, the Composite Index is now down -52.6% Y/Y (-54.7% Y/Y prior).  Also, the four-week average is now up +1.6% Y/Y (+4.1% previously).  Mortgage applications increased last week despite the fact that the average 30-year mortgage contract rate increased for the first time in five weeks, up +4 basis points to 4.46%.  In the week, the Refinance Index increased for the fifth consecutive week, up +3.8% W/W.  However, the Refinance Index is still down -62.3% Y/Y!  The Refinance share of all applications increased to 65.5% from 63.6% prior.  Conversely, the Purchase Index declined for the third consecutive week, down -4.8% W/W and -10.9% Y/Y (-5.6% Y/Y prior).

• According to an AP tweet.

Break in! Associated Press tweet:

• Here is what I am seeing.

A 4:1 to buy on regular and program desks and I see buying in all things financial, semis, retailers and transports.

I see selling in utilities, consumer staples, energy master limited partnerships and homebuilders.

• After this week's impasse is resolved in Washington, D.C., what is there to look forward to?

A question that every investor and trader should ask themselves: After this week's impasse is resolved in Washington, D.C., what is there to look forward to? A better economy, rising sales or increasing corporate profits relative to expectations?

I don't think so.

• It's long Northwest Bancshares/short BofA.

Favorite pair trade: long Northwest Bancshares (NWBI)/short Bank of America (BAC).

• On the short side.

Game plan on.

The market is spiking based on reports that Boehner has agreed to take up the Senate's plan and allow it to pass with Democrat votes.

I am now scaling into the shorts that I covered yesterday afternoon.

• I shorted more shares at $14.32.

I added to my Bank of America (BAC) short at $14.32, raising my cost basis to $14.27 in premakret trading.

• I cannot access the comments section from my computer.

For some reason, I can't access the comments section on my computer.

Until this is corrected, I won't be able to respond to subscribers.

• Here is his two cents.

From London, England -- Sir Mark  J. Grant:

I place economy among the first and most important virtues, and public debt as the greatest of dangers to be feared.To preserve our independence, we must not let our rulers load us with perpetual debt.  If we run into such debts, we must be taxed in our meat and drink, in our necessities and in our comforts, in our labor and in our amusements.  If we can prevent the government from wasting the labor of the people, under the pretense of caring for them, they will be happy.

-- Thomas Jefferson

According to the Origination Clause of the United States Constitution, all Bills for raising revenue, specifically tax bills, must originate in the House of Representatives.

The Origination Clause, the U.S. Constitution (Article 1, Section 7, Clause I) also known as the Revenue Clause states the following:

"All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills."

James Madison said:

The House of Representatives can not only refuse, but they alone can propose the supplies requisite for the support of government. They in a word hold the purse; that powerful instrument by which we behold, in the history of the British constitution, an infant and humble representation of the people, gradually enlarging the sphere of its activity and importance, and finally reducing, as far as it seems to have wished, all the overgrown prerogatives of the other branches of the government. This power over the purse, may in fact be regarded as the most complete and effectual weapon with which any constitution can arm the immediate representatives of the people, for obtaining a redress of every grievance, and for carrying into effect every just and salutary measure.

While I have proposed a plan recently that could be used to keep the U.S. government from defaulting it is clearly a last ditch, at the end of the rope, just before the bell rings strategy. In my mind it preserves the nation from default but at a cost to democracy no doubt. Since it is not a Bill of Appropriation but an end run around the necessity for one to be voted upon it probably violates the spirit of the Law without violating due process.

If no agreement is reached then the Administration and the Federal Reserve Bank may have to consider such a plan, and I have laid out a workable one, but I will honestly tell you that I hope that my scheme, or some variation of it, is not the final answer though it, in my opinion, is still better than an American default.

I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I traveled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.

-- Benjamin Franklin

We had a technical blip in 1979 as some of you may know but it has not been since 1933 that the U.S. government defaulted which I annotated in a previous "Out of the Box." Even in that instance, the failure to pay was restrained to the American people and was not applicable to foreign holders of our debt. While it is abundantly clear that we have the ability to pay our debt, unlike a Greece or Cyprus, what is less clear is if the deep division between the House and the President can be bridged. It is not just a political divide, in my view, but a difference in core and fundamental American values.

"To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical."

-- Thomas Jefferson

It is rather now like the Olympics now; "It has all come down to this." The Press likes to play it out like it has all come down to who blinks first but I do not think that is the real issue at hand. Rather I subscribe to the notion that it all comes down to what valuation you wish to put upon those with resources and those without and how much the government will demand from those "who have" to hand over to those "who have not."

Then, of course, the markets around the world will opine on the decision or a lack of decision but I can assure you of this:

There will be no cheering anywhere if Casey strikes out!

The batter is up.

• Let's take a look at the overnight and early-morning price action in the major asset classes.

The rundown:

• S&P futures  are up 7;
• Nasdaq futures are up 10;
• Nikkei is up 0.18% (sixth consecutive daily advance);
• China Shanghai is down 1.80% (growth concerns);
• European markets are down;
• euro is down;
• crude is up $0.10;
• gold is up $9; and
• the 10-year U.S. note yields 2.17% (down 1 basis point day over day).

Worth mentioning:

• A three-day win skein of nearly 55 S&P points was broken yesterday amid a very newsy day.
• I traded actively on Tuesday, and I expect to trade even more aggressively in the days ahead, as the backdrop is ideal for an opportunistic trader. I built a big short in PowerShares QQQ (QQQ) in the morning ramp. I added to my longs in Citigroup (C) and Potash (POT) and added to my other index shorts SPDR S&P 500 ETF Trust (SPY) and iShares Russell 2000 Index Fund (IWM). At 3:00 p.m. EDT, I covered half of my shorts as the market's drop accelerated.
• I have shorted more SPY at $170.40 and IWM at $107.68 in premarket trading this morning. I also shorted Bank of America (BAC) at $14.24 in premarket trading.
• Here is a critical view of Bank of America's earnings release.
• As discussed in yesterday's opening missive, my game plan stays the same. I am a seller on the inevitable news of progress in Washington, D.C. Soon, we will return our focus to fundamentals and the disappointing economic and profit growth that lie ahead. Earnings guidance is back at early-2009 levels -- and going lower.
• I am agnostic on bonds, expecting the 10-year U.S. note yield to range (narrowly) between 2.50% and 2.85% over the balance of the year. We remain around 2.70% now.
• I expect a last-minute agreement in Washington, D.C. and for the market to sell off on the news. I still believe that the yearly highs are in.
• Fitchlowers U.S. outlook, but frankly I place the U.S. ratings agencies only slightly lower than my view of the Boston Red Sox baseball team.
• The housing stall continues, as MBA mortgage purchase applications are down 4.8%, down 0.7% last week.
• The world according to Peter Boockvar --
  
  There has been no fence sitter effect on the desire for buying a home after the 35 bps drop in mortgage rates post the September 18th FOMC meeting. Whether due to worries about what's going on in DC, double digit price increases (when income is growing no more than 2%) and/or mortgage rates that are still 85 bps above the recent May lows, applications to buy a home fell 4.8%, down for a 3rd straight week and is at the lowest level since January. Refi apps on the other hand have responded to the drop in rates as it rose 3.3% w/o/w, up for a 5th straight week to a two month high. Refi apps though remain 60% below the peak of the year in May.
  
  From an investor sentiment perspective, the entire political drama show over the last few weeks still can't bring the bears out of hibernation. Investors Intelligence said they rose just 1 pt on the week to 21.6 and are just 2.1 pts from matching the lowest level since March. Bulls fell to 42.3 from 45.4 with more people expecting a Correction but they are those that are longer term bullish and want to buy that dip.
  
  The only noteworthy data point overseas was a further sign that the UK labor market is getting better. Jobless Claims in September fell 41.7k, well more than the estimate of a drop of 25k and August was revised down by 9k to -41.6k. These drops are the most since 1997 and with the August unemployment rate at 7.7%, we could get a quickened pace to 7% from here which is the BoE's target for possibly starting the tightening cycle. The pound is higher and the 10 yr Gilt yield is rising to a 3 ½ week high.

In the news:

• The Wall Street Journal -- "The Debt Denouement"; "Galston: The Tea Party and the GOP Crack Up."
• The Washington Post -- "Republicans Are at a Dead End." 
• The New York Times -- "Sorry, Kids. We Ate It All." (Thomas Friedman).

Some possible economic and earnings catalysts that could be impact markets:

• Eurozone car registrations for September (2:00 a.m. EDT).
• Eurozone CPI for September (5:00 a.m. EDT).
• Eurozone trade balance for August (5:00 a.m. EDT).
• U.S. CPI for September (8:30 a.m. EDT; this is postponed because of the shutdown).
• NAHB housing market index for October (10:00 a.m. EDT; this will still happen despite shutdown).
• Fed Beige Book (2:00 p.m. EDT; this will still happen despite shutdown).
• Fed speakers -- George (6:30 p.m. EDT) and Fisher (6:45 p.m. EDT).
• CNBC guests -- Buffett will be co-host in the morning, BlackRock's Fink will be on at 3:30 p.m. EDT, and Honeywell's Cote will be on at 4:30 p.m. EDT.
• Italy Prime Minister Letta to Meet U.S. President Obama (Oct. 16).
• Earnings before the open -- ABT, Accor, ASML, BAC, BK, BLK, CMA, Danone, GWW, KEY, MAT, MTG, NTRS, PEP, PNC, PJC, STJ, SWK, USB, WSO.
• Earnings after the close -- AF, ALB, AXP, EBAY, IBM, KMI, NE, PTP, SLM, SNDK, STLD, UMPQ, WGO, XLNX.

• Apple reduces orders for iPhone 5c.

On Oct. 10, I wrote, "Apple (AAPL) continues to trade poorly on the heels of a China-based story suggesting iPhone 5c production cuts."

In response, I sold my trading long rental in Apple.

This morning, The Wall Street Journalconfirms the story that I  mentioned a week ago:

Apple has notified its two assemblers for the low-cost iPhone 5C that it is reducing orders of the smartphone for the fourth quarter, people familiar with the situation said, raising concerns about weaker-than-expected demand and its pricing strategy for the device.

Apple's shares are down $3 in premarket trading.