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SPX Could Hit New Reaction Highs if Fiscal Cliff Is Resolved

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From Richard Fisher (President of the Dallas Federal Reserve):

Just recently, in a hearing before the Senate, your senator and my Harvard classmate, Chuck Schumer, told Chairman Bernanke, "You are the only game in town." I thought the chairman showed admirable restraint in his response. I would have immediately answered, "No, senator, you and your colleagues, Democrat and Republican alike, have encumbered our nation with debt, sold our children down the river and sorely failed our nation. Sober up. Get your act together. Illegitimum non carborundum; get on with it. Sacrifice your political ambition for the good of our country – for the good of our children and grandchildren. For unless you do so, all the monetary policy accommodation the Federal Reserve can muster will be for naught."

In my opinion Richard Fisher said in plain English what Ben Bernanke is trying to say in a much more politically correct way – hey Congress, get your act together because I have done just about all I can do on a monetary basis, so it is up to y'all to make the tough decisions on fiscal policy that need to be made to get this economy going again.

Surprisingly, I think Congress, and the president, will rise to the occasion because if they don't, and the country falls off the "fiscal cliff" for an extended period of time, it most assuredly will put us back into a recession. To be sure, it is kiss and tell time inside the DC Beltway, and in my 42 years in this business, when something absolutely had to happen it has typically happened.

For example, in October 1974 Franklin National collapsed for the largest bank failure in US history, in May of 1974 New York City was insolvent, September 1979 saw the dollar implode, in January 1980 inflation soared to 18.1% with short-term interest rates spiking to more than 20%, the October 1987 "crash," in August of 1990 Iraq invaded Kuwait, the summer of 1998's Russian default and subsequent Long Term Capital Management meltdown, not to forget the Enron/ WorldCom debacle – GM's (NYSE:GM) bankruptcy – the Flash Crash – the downgrading of US credit rating, well you get the idea. And after each one of those crises the economy, and the stock market, survived and then prospered. I think it will play that way this time as well.

For that opinion I was called a "cockeyed optimist" by a number of portfolio managers during my recent European speaking tour. I responded by noting that if you study history you find numerous periods of political acrimony where nothing gets done – and we've had that. Now that the election is over I think a fair amount will be done to tackle the debt situation and increase the productivity of government. Moreover, I believe the fiscal cliff will be avoided; or if not, "the cliff" will only last for a few days. That belief is centered on what I wrote in last Monday's missive. To wit:

President Obama was beaten up pretty good in the debates, which looks to have made him more flexible, at least to me. Moreover, if you read his book you come to understand that not only does he want to leave a legacy, like every president, he wants to leave the image of the greatest president ever! Given that, and the fact the Republicans got crushed in the Electoral College, my sense is that both parties will be more flexible going forward. Accordingly, I think President Obama will make some major policy breakthroughs despite the usual Washington Waltz rhetoric.

And last week some "absolutely had to happen" events happened, or at least appear to be close to happening. In the "happened" column was the cease-fire between Hamas and Israel, which as of this morning seems to be holding. In the "close to happening" column is that Greece looks to be on the verge of more financial aid from the eurozone, while in this country I am hearing there are some high-level discussions going on about how to avoid the "fiscal cliff." Certainly the stock market is "hearing" something given the S&P 500's (INDEXSP:.INX) 4.9% sprint from its intraday upside reversal low of 1343.35, that occurred on November 16, into last Friday's closing bell. At the time the NYSE McClellan Oscillator was deeply oversold, suggesting a near-term rally was likely at hand, and boy did we get one.
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No positions in stocks mentioned.
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