Diary of a Financier

Politics Nixed; SPX Next 1425?

In Capital Markets on Mon 1 Aug 2011 at 00:24
  • US Debt Deal complete, sending markets higher, except Italy (perfect!).
  • As expected, the deal lacks all specific spending cuts, it just throws all expenditures on the table as candidates.
  • Albeit modest, this is a start to the fiscal consolidation many demanded, and thanks to the Fed’s persistence, it’s paired with the monetary accommodation I insisted.
  • SPX next target 1425; 1st resistance 1345; 2nd resistance 1365; but first beware the 1255 H&S neckline support (an attractor).
  • All eyes turn to Europe & eventually Emerging Markets.

The debt deal is done. When President Barack Obama held a press conference to declare victory last night, it was a more convincing rendition of his July 19 “false start,” which sent markets in a +2.5% intraday hike before no deal materialized that evening. Right now, S&P Futures (ES/1) indicate a +1.25% rally; Japan already inked +1.34% gains; Italy is accelerating into the red, -0.81% after opening +0.5%… so I’m sitting pretty.

Please flip to Business Insider, where I’ve found the clearest synopsis of the forthcoming debt deal. While I literally had no doubt Congress would consecrate a deal, I’m trying to withhold all sarcasm and criticism, because I’m just damn relieved right now. I can finally resume my bedtime reading of Ron Chernow’s The House of Morgan. (It’s a fantastic book so far, but it has sat idle on my bedside table while I anxiously tap “refresh” on my iPhone to watch the news & flows during the AsianPac/European opens for the past month.)

Debt deal. May I never utter or cross those wretched words again. May this toil never be declared a triumph of the American political system. May we rise from this financial, economic, existential trough.

There is certainly some fluff to this deal. The layman will overlook the accounting shenanigans like PAYGO or amortization, which detract from the magnitude of anything accomplished here. Remember my Friday missive:

I’m thinking their 11th-hour solution would be to put all non-current liabilities on the table to reach the goal of $4T in cuts within 10 years. They can take certain cuts off the table later. Throw all of Social Security and all of Obama’s Healthcare reform on the table as cuts, then spend the next 6 months ratifying everything.

As I had expected, the final bill lacks specifics. It throws the kitchen sink on the table and says, ‘we can cut all this spending if we wanted to.’ But, it commits to nothing; I again paraphrase, ‘We’ll defer decisions about specific cuts until later.’ That’s a lack of resolution. The World Bank, IMF, and the ratings agencies shouldn’t accept another “plan to make a plan.” Per Mr. Obama’s request, Congress did remove the sacred cows (Entitlements) from the bill–relevant only because I had expected them to include them in the ball of wax. I myself am young, yet I would accept Social Security reform that reduces benefits for payors on a pro rated basis, maybe taking a page from Utah’s transition to a defined contribution structure. Beyond that, I’ll leave ZeroHedge and Yves Smith to eat alive the remaining details.

Make no mistake: although the spending cuts are net-net de minimis, this embodies fiscal consolidation. Kudos to that. Ben Bernanke’s Fed has clung to the monetary accommodation that must accompany such deleveraging, as I’ve repeatedly recommended. A character study of Mr. Bernanke coupled with a close reading of history helped me anticipate this path. Make no mistake, I’m not a fan of continued Fed easing (e.g. another round of QE-lite), because it perpetuates the financial manipulation (i.e. disinflation) that inflates an American economy devoid of organic growth, hampered by structural issues. It makes our own quandaries the inheritance of our children. However, I’ve formed my theses in acknowledgement that policymakers’ jobs are attuned to the near-term, not the long-term (>10 years). Humans have a bias toward present over future consumptions. District of Columbians will support the system today at all costs.

I will join Mr. Bernanke in telling Inflationistas to eat it.

I will now await the arrival of S&P 500 (SPX) at 1425.

We’ll all now turn our attention to the saga in Europe; soon the Emerging world too.

No buying the SPX yet, because technicals need to reverse and prove to me that the H&S 1255 necline is no longer an attractor:

ES daily (S&P 500 Futures)

ES weekly (S&P 500 Futures)

No catalyst to reverse the Italian trend:

MIB daily (Italy)

–Romeo

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  1. As SPX turns negative intraday, recall October 3, 2008, when Bush signes TARP into law, which prompted a big intraday rally then reversal… SPX proceeded to fall 40% to its bottom. The charts say the 1255 H&S neckline support will be reached… I wonder if the TARP analogue is an appropriate compass–although I think the 40% downside is an inappropriate yardstick.

  2. […] for answers among many questions. My last specific comment on the the broad market was as follows: 8/1/11- I will now await the arrival of S&P 500 (SPX) at 1425. We’ll all now turn our attention to […]

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