Editor's Note: Combining his passions for the markets, humor and food, "What's cookin' with Kenny Polcari" is a blog published twice a week on CNBC.com. With more than 30 years of experience on Wall Street, Polcari provides insight and analysis on the markets, as well as a recipe du jour. Buon appetito!
Congressional leaders said Tuesday a deal to end the partial government shutdown and raise the deal ceiling is within "striking distance." Senate Majority Leader Harry Reid said leaders have "made tremendous progress" and that Tuesday will be a "bright day." Senator Minority Leader Mitch McConnell reiterated and said, "We've had a good day."
(Read more: )
(Will this be a Cinderella moment, in which the horse-drawn carriage turns into a pumpkin at the stroke of midnight? Speaking of pumpkins, try the penne with pumpkin cream and sausage below.)
But what does it really mean? This proposal would open the government until Jan. 15, 2014, and extend the debt ceiling until sometime in February, allowing "more time" to discuss the budget to reach an agreement by Dec. 13, 2013.
Stocks are very sensitive to the drama, rising and falling with each media appearance by one of the clowns. Markets wants to move on. In fact, it wants to move higher, as it expects better days ahead, and yet remains in check until it gets some clarity and finality. This latest deal would offer little of both, as the fight will only begin again in December.
Can you say KICK THE CAN DOWN THE ROAD?! We are doing exactly what Europe did during its debt crisis. Just let someone else worry about what the future looks like. Can we discuss TERM LIMITS to replace the OUT OF TOUCH legislators that inhabit the Capitol? Why should these men and women make a career out of it when they can't do the very basics? Where is the accountability?
(Read more: GOP to push bill toend shutdown, up debt ceiling)
Is this all just a distraction so that they shift the focus from the weakening economy? Third-quarter earnings season has begun, and with 6 percent of the S&P 500 companies having reported, 55 percent beat lowered profit expectations, a rate still below the historical average. Once again, earnings are mixed at best, with top-line revenue growth missing and earnings beating. But we still have 94 percent more to analyze.
According to research from FactSet, 90 S&P 500 companies have lowered third-quarter expectations. That's the largest number of companies to issue warnings for a quarter since the company started tracking these figures in 2006. This should be a real concern from a valuation perspective, no? If this happens, will we see more downgrades?
If the Fed keeps on with QE and stock prices go higher, price-to-earnings ratios will increase and make the overall market more expensive. (As prices go up and earnings go down, P/E ratio increases.) Bulls do not appear to be concerned by the lower forecasts as long as the Fed keeps serving the Kool-Aid, but it doesn't change the fact that an anemic economy will soon catch up to stock prices.
That's exactly why the Fed isn't going anywhere yet. A weakening outlook, political disarray, another budget battle only weeks away and rising interest rates all force the central bank to remain engaged.
Are bonds, utilities and gold all warning of weakness, of deflation ahead? A downturn in bond prices (forcing yields higher), a slowing in utilities and the breakdown in gold may be a trend that investors need to pay attention to. Or it could all be a result of the political uncertainty. Either way, caveat emptor.
You can feel the energy as the S&P wants to retest the all-time highs of 1,725 with trader types looking to engage the algo's to make short-term (millisecond) investment decisions; longer-term asset managers remain reflective and invested. So a move higher benefits them and a move lower will let them put more money to work. Once investors realize the we have only delayed, the markets will have to come back to reality.
Both the Dow and S&P have gained over 3 percent in the past four trading days, and both still remain below their all-time highs. A few large-cap names are well below their highs, suggesting caution ahead. But before we ring the bell we would need to see the Dow break below its 200 day moving average at 14,758, while the S&P would have to break below the August lows of 1,625 to signal any real change in trend.
As long as the deal is done and the Fed stays the course, look for the market to focus once again on earnings and fundamental macrodata reports. We remain solidly in the 1,680/1,725 trading range.
And now from the kitchen of Kenny Polcari, here's his recipe of the day!
Penne with pumpkin cream and sausage
This recipe came to me from my dear friend Margaret. This is a great dish that I'm making again this weekend for a small dinner party, as it is the perfect fall dish and one that seems so appropriate under the circumstances.
Bring a pot of salted water to a boil.
Brown the sausage in a large frying pan. Remove. Add the onion and garlic and a splash of olive oil. Add wine, bay leaf and chicken broth. Bring to a boil. Cook until liquid is reduced by half.
Stir in the pumpkin, half the sage and all the remaining seasonings. Cook a little longer about two minutes. Add the cream and sausage. Heat through. Remove the bay leaf.
Drain pasta, reserving a mugful of the pasta water and return to the pot and add the sausage mixture. Toss to coat. Add a bit of the pasta water to moisten. Sprinkle the cheese. Serve in warmed bowls immediately.
—By Kenny Polcari, director of NYSE floor operations, O'Neil Securities and CNBC contributor, often appearing on "Power Lunch." The author is not compensated by CNBC for this or any other written materials found on CNBC.com.
About Kenny: Kenny has more than 30 years of experience on Wall Street. Currently director of NYSE floor operations on behalf of O'Neil Securities, he has also worked for Icap and Salomon Brothers. You can follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.
Disclosure: The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O'Neil Securities or its affiliates.