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SPX Needs to Recapture 1390 -- Quickly

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If it doesn't, it probably means we have to go through some kind of bottoming process in the 1300-1350 zone.

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I was abroad (Glasgow, Edinburgh, London, Zurich, and Geneva) during US election week seeing institutional accounts and speaking at conferences. Of course the question on all the portfolio managers' (PMs) minds was about the election, the subsequent effect on the economy, and the various markets, currencies, and the fiscal cliff.

The election results really should have come as no surprise to readers of my missives, or listeners to my verbal strategy comments, because for months I have said the election was President Obama's to lose. It should have also been apparent that Mitt Romney had alienated too many constituencies to get elected. Aiding in the democratic win was an exceptionally low turnout with roughly 13 million fewer voters than seen in 2008. Interestingly, despite his victory, President Obama got ~14% fewer votes than he did in 2008, while Romney received even fewer votes than John McCain.

With the election is in the rearview mirror, hopefully everyone will come together to solve the nation's issues.

To that point, talking to my contacts inside the DC Beltway suggests that better cooperation may be just around the corner. Indeed, the president got beat up pretty well on the Libya scandal, ObamaCare, no budget, etc., potentially making him more malleable. Additionally, I am told he wants to secure his place in history and does not want to spin the economy back into a recession.

Republicans, who got absolutely crushed in the Electoral College vote, may be potentially more pliable as well. In fact, John Boehner's speech was the most conciliatory address I have ever heard him give. If so, what you could see is an extension of the Bush tax cuts because they foot to ~$265 billion per year with $55 billion for the wealthy, but a large $210 billion for the middle class. Somehow, I don't think the president wants to take those tax breaks away from the middle class. I also think the president will raise his $250,000 threshold on the definition of "rich."

The payroll tax cut will likely expire because nobody really knows what it is anyway; and, I think the mandated spending cuts will be postponed since everybody I talk to, both on the left and right, does not want to run the risk of another recession. As the good folks at the GaveKal organization write:

Obama's calculations are also transformed. Until this week, his main objective was to maximize his probability of re-election requiring him to motivate Democratic activists. Hence forth his goal will be to secure his legacy as the president who not only introduced universal health care and decapitated Al Qaeda, but also pulled the US economy out of its deepest economic crisis since the 1930s and assured the Treasury's long-term solvency. He knows that he can only secure this legacy and avoid lame-duck status by breaking the gridlock in Washington. These changing political calculations mean that a new willingness to compromise is virtually guaranteed on both sides of the US political divide. With the job market improving, the housing crisis largely over and the financial system returning to normal, President Obama and the Republican congressional leaders will quickly realize that they have to work together and compromise if they want to claim any credit for the US economic recovery that lies ahead.

As for the equity markets, while I can't watch the markets as closely as I normally do, the S&P 500 (INDEXSP:.INX) felt like it was set to at least give us a throwback rally after Wednesday's wilt. That was until the president's brief comments on the upcoming fiscal cliff. The two points he evinced were: 1) None of his proposals are cast in cement and he is willing to negotiate on everything; 2) He won't accept any plan that does not raise taxes on the rich. Of course as I have previously stated, what is the definition of rich? Is it $250,000 per year, or is it a $1,000,000 per year? Again, I believe the president is going to be somewhat flexible on this number.
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No positions in stocks mentioned.
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