Home > Uncategorized > 2011/09/09: Obama Jobs Plan DOA: Higher Taxes Won’t Fly with Republican House

2011/09/09: Obama Jobs Plan DOA: Higher Taxes Won’t Fly with Republican House

First of all let’s allow that there are many other factors buffeting the equity markets today. Greece had a failed T-bill auction, which heightens the fears that either over the weekend or some other time very soon it will actually default. There was also the downbeat communication from the ECB at yesterday’s post-rate decision press conference that it had significantly lowered its 2011-2012 growth forecast.

That was much like the recent change in the Fed’s projections. Yet, it was different for the ECB, because it had maintained upbeat expectations and raised interest rates over the earlier part of this year. It’s downside revisions for what was considered one of the few remaining much strong economic centers is that much more telling for the global economy as well as Europe. And in yesterday’s post we discussed why Monsieur Trichet’s claim that at 1.50% the ECB’s base rate was still accommodative was misguided; with political implications for Chancellor Merkel as well as a negative influence for the European economy.

Of course, Mr. Bernanke’s reiteration yesterday of the Fed’s concerns about the near-term economic weakness didn’t help either. Although, we can’t imagine what else he would’ve said without being completely disingenuous and looking foolish. And he revisited a very relevant point that set the stage for Mr. Obama’s jobs program speech yesterday evening: the current economic weakness was not created by faulty monetary policy, it is a creature of the political class, and they’re the ones who have to address it. And it seems less likely than ever that the political process in the United States is going to offer any solutions for the economic mess anytime soon… and that’s the real problem with what President Obama proposed yesterday evening.

First of all, at $447 billion it was approximately 50% larger than anything that had been previewed by the White House. With so much focus already on how much of the US GDP than is historically viable was being commandeered by the federal government, that was sure to meet strong opposition from the Republicans. It also raised more than a few eyebrows among the economic analysts, and even quite a few members of his own party who are running for reelection in 2012.

There was a very interesting televised focus group shortly after the speech ended. Let’s allow in the first instance that the broadly bipartisan folks participating in that were very clear about one thing on which they agreed: they are disgusted with all politicians, including their own party as well as the opposition for their lack of ability to get together on anything to address the economic and employment situation. Yet, what was most interesting is the degree to which it was not just the Republican participants whose graphically displayed electronic indications of negative opinion spiked when the President discussed the government doing more; many Democrats now seem to feel the government should just get out of the way.

Without getting into too much further depth on that, the discussion portion of that group was heavily tilted toward the degree to which the aggressive expansion of burdensome regulations was at least as much a problem as any higher taxes. Along with the lack of ability to somehow pass those very advantageous trade agreements (a self-inflicted form of protectionism), that amounts to the ‘Taxulationsim’ tendency of Washington DC (and especially this administration) that we have noted on many previous occasions. There’s the combination of excessive taxation and regulation combined with a bit of protectionism.

Without at least the suspension, and hopefully a somewhat significant rollback, of the continuing regulatory tsunami visited on the most important small business sector, there really isn’t much chance they’ll be any capital investment or hiring. And of course, none of that will be addressed if the basic jobs stimulus program is not going to be passed timely by Congress because the Republican House will not stand for a single dime of tax increases. Whether or not that’s the right way to approach this right now might be debatable; what is not is that the Obama administration knew that when it was developing the program he presented yesterday evening. It all appears to be nothing more than a further extension of the ‘blame game‘ both sides are playing to position themselves for the 2012 US general election.

What a way to run a country: our plan is to hope the voters hate the other guys more than they hate us by the time the next election rolls around. Unfortunately for the US public and economy, and by extension the global economy, taken at face value that means nothing and all will get done until after the election 14 months from now. Of course, it may not be quite as diabolically depressing as all that, because there’s one other event that might actually help before then…

The looming Thanksgiving deadline for the Congressional Super Committee to find another $1.5 trillion in spending cuts that can hopefully survive a straight ‘up or down’ vote in both houses of the US legislature to avoid another debt downgrade from S&P. Oops, sorry, we guess that’s more like $1.95 trillion in the wake of what Mr. Obama had to say yesterday evening.

Whatever anybody else might have thought about this new jobs program proposal, we know there were at least 12 people who significantly disliked it: the members of that Super Committee who’s already significant challenge in finding middle ground between seemingly intractable positions just became that much harder.

General Market Observations

So it was no surprise that while there was a bit of a rally while the President was giving his speech yesterday, the September S&P 500 future quickly fell to approximately six dollars lower from last night’s US Close in electronic trading yesterday evening. And as it remained that sort of slightly depressed level into this morning, things maybe didn’t seem so bad except for one slight problem… that left the market back below the low end of the important interim 1,192-85 technical area. And any sustained activity back below it pointed toward another test of the far more important mid-1,100 area. And lo and behold, what might today’s trading low being so far? Nothing other than 1,150.

And the reason that sort of technical view is important right now as a general market observation is that we must allow that other forces outside of the lameness of Mr. Obama’s proposal also played a major part in driving the equities down today. That includes some very significant disarray returning to the European debt crisis. And looking forward, any violation of that lead contract S&P 500 future mid-1,100 area support would be more negative on this trip than previous ones due to certain technical factors.

In essence, the equity markets are teed up for a decision at the start of next week which may leave them ready to experience another round of sharply weakness such as the one they experienced at the beginning of August. Yes, we know, more analytical Cassandra’s spreading fear and loathing. Yet, we always also ask whether the psychological and economic drivers are in place to reinforce any sort of aggressive trend (up as well as down)? And in this case even the casual observer needs to allow that the combination of various factors are likely once again to allow for more than a bit of weakness before things stabilize.


The most critical indications have been for equities and govvies, and now the foreign exchange gets to join the party on the failure of the euro below the 1.3837 EUR/USD July low. That leaves the 1.3900-1.4000 area as formidable resistance back above the market, with a likely test of 1.3400 as the next critical level. It is both significant previous congestion and approximately the overall upward trend channel (from the major 1.1876 June 2010 low.)

While there was a chance the September S&P 500 future might revisit the very important 1,224-1230 congestion and Fibonacci retracement area (the levels it was up at as recently as last Tuesday into Wednesday morning), the negative reaction to combined communication from Trichet, Bernanke and ultimately Mr. Obama has likely scuppered that potential. Slipping back below that important interim congestion in the 1,192-85 area overnight into this morning left the best that can be expected for now is a holding action into the mid-1,100 area that at least brings a another bounce. If it fails instead on the current downswing, we suspect another attack on the also prominent 1,100-1,090 support is likely. The extended immediate potential if that lower area gives way is a swing back down into the 1,040-1,000 area support from last summer.

More important in direct relationship to the crisis in Europe, the German DAX stock index had managed to recover back above important 5,312-00 support on Wednesday after knocking it out on the way to a new low for the overall selloff on Monday into Tuesday of this week. However, later on today (European time) it failed well back below it again for the weekly Close; not an auspicious sign for how the equity markets are likely to perform early next week.

Of course, the other very interesting bit was how little the government bond markets had backed off on any of the equities rallies since early August. That was a huge warning sign on not trusting the short-term rallies in equities. However, they look even better on the current rally than they had on previous equities weakness. September T-note future has pushed back above 130-20, and instead of backing off this time it’s holding up well right into its previous all-time high at 131-20.

Far more impressive was the continued bid at the end of last week in the September Bund future above the 135.50-.80 oscillator resistance for the push to the top end of its extended 138.00-139.00 oscillator thresholds. And even in spite of the expiration of the September contract leaving the deeply discounted December Bund future a full 150 points lower yesterday, that was still only back down around an old critical resistance (now support) at the 136.26 mid-August previous all-time trading high. And it has already pushed back above the 138.00 area in the wake of the equities weakness. Thoroughly predictable, yet impressive nonetheless.

Thanks for your interest.

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