After listening to last night’s stump speeches from the leaders of both political parties, I humbly call on the services of the one American who perhaps could solve our nation’s current fiscal crisis judiciously and expeditiously. Although passing in 1991, Theodor Geisel, known to us all as the lovable “Dr. Seuss,” could still instruct high ranking officials of the U.S. government on the benefits of compromise and the consequences of unmitigated stubbornness. Some may think that I have taken too flippant of a tone to such a complex problem that has the potential to cause substantial collateral damage to both the domestic and global economy. I counter by arguing that I am dead serious in proposing this analogy as any seven year old who recently read such classics as “The Zax” or “The Sneetches” would question how people would rather dig both heels in the ground and balk at fixing the crisis than responsibly performing their civic duty given to them by their parents at the ballot box.
I suppose that referencing Dr. Seuss breaks down at one level, for the famous children’s author always takes the dilemma of each story beyond the point of no return such that the misery that arises from implacable decision making teaches a moral far more valuable than all that had been lost. Unfortunately, we do not live in a world with star belly sneetches, zax, or even cats in hats. Instead, the damage done by the inaction during the days prior to next Tuesday’s deadline would dwarf the lesson learned in a post August 2 state of default and/or AA+ credit.
Alas, I remain optimistic that the parties will consummate a deal that appropriately addresses the issues at hand and with time to spare. The market agrees with me, for while the S&P 500 continues to stall its upward march when reaching the mid-1340’s to leave behind a tall pile of wood to chop acting as significant technical resistance, the blue chip index would have already dropped precipitously if investors truly believed in a likely credit event. That being said, upon an announcement of an agreement, I still expect stocks to gap higher aggressively.
I indicated in yesterday’s commentary that game theory suggests President Obama should bundle the raising of the debt ceiling with shrinking the budget to win the day as his alliance with the Senate, which includes the backing of some moderate Republicans, tips the scales just enough to force the House Republicans to defect from their stance. His address to the nation from the White House last night did just that to maintain the slight advantage he owns. Perhaps he received a bit of an unintended gift from Speaker Boehner and his faction by not adequately apprising the ratings agencies of their plan to solve the crisis as CNN’s Erin Burnett reported that S&P has hinted it likely would still downgrade U.S. sovereign debt upon enactment of this option.
The conservative blogs immediately chewed on Ms. Burnett’s reporting as pure liberal media fodder, yet I maintain these firms have remained fully transparent throughout this process. For example, Moody’s announced just last week that not only will Congress need to raise the debt ceiling to avoid a loss of AAA credit, but the legislative body, in concert with the Administration, also must engage in significant long term deficit reduction measures. The Speaker’s preferred course of action unquestionably fails on this second metric while the alternative Reid plan arguably clears both hurdles.
Rep. Boehner and, more importantly, Tea Party congressman who swept into power last fall are both savvy and excellent campaigners. I can only come to one conclusion for making such an error. That is, they must know they are beat, but if they can portray the façade of a fight worthy of historical relevance, they can maintain their electoral base. We can then tip our hat to their ability to compromise as we all enjoy an extension of the current bull market and open the following pages to share with our children:
And he laughed as he drove in his car up the beach, “They never will learn. No. You can’t teach a Sneetch!” But Mcbean was quite wrong. I’m quite happy to say that the Sneetches got really quite smart on that day, The day they decided that Sneetches are Sneetches and no kind of Sneetch is the best on the beaches. That day, all the Sneetches forgot about stars and whether they had one, or not upon thars.”
From “The Sneetches and Other Stories” by Dr. Seuss, 1961
S&P 500 SEP E-Minis Key Technical Levels
Support: 1326.75/26.50, 1322.00, 1310.25/1308.25/08.00, 1300.50, 1291.25, 1278.00
Resistance: 1340.25, 1342.50/43.75/44.25, 1352.75, 1356.25/57.25, 1367.00, 1370.00, 1380.00