Home > Uncategorized > 2012/12/14: Quick Post: Fiscal Cliff impasse deepens as Republicans leave town

2012/12/14: Quick Post: Fiscal Cliff impasse deepens as Republicans leave town

© 2012 ROHR International, Inc. All International rights reserved.

Is it really that bad? It seems the problem is what we outlined in earlier analyses on the Republican position. While they are being pressed to provide revenue increases or even actual top bracket income tax hikes (an anathema to many members of their party), the Democrats are also pushing them to specify which spending cuts they would approve. That seems a bit much, as the Democrats are the party with members who are running around asserting that no spending cuts at all may even be necessary.

One must admire the Democrats for attempting a political ploy where Republicans are reviled by some members of their own party for capitulating on either revenues or tax rate increases, and also get to be painted with the brush of the “Mean Old Republicans” who are demanding specific spending cuts.

That is how we reached the impasse yesterday where House Speaker John Boehner bemoaned the lack of any serious proposal from the Democrats, noting that the “slow walk” the Democrats were choosing to use as a negotiating tactic would end up plunging the US off the Fiscal Cliff.

And we know he’s really not bluffing…

…because some Republicans are already leaving town for their holiday break

And as a final note, none of that would seem quite so troubling if it were not for a simple fact: There probably is some truth in the perception that the Democrats feel they would be able to effectively ‘politic’ an early January Fiscal Cliff plunge. In fact, what many moderate Republicans also fear is the general public pique at such a dysfunctional outcome would be characterized far more as “Everyone’s taxes spiked up because the mean old Republicans were protecting their rich cronies”

The real acid test will be whether the Republicans did indeed provide significant revenue enhancement that was not met by anywhere near the 3-to-1 spending cuts/revenue ratio the President had been willing to agree prior to the election. The election has certainly emboldened Democrats.

General Market Observations

▪ The bottom line is that the December S&P 500 future dropping back below Tuesday’s 1,423-1,420 gap higher creates an Exhaustion Gap top with resistance back around the high-end of the gap. While it is possible that could be overrun again to the upside on any great Fiscal Cliff news, for the reasons noted above we are skeptical that there will be further movement on either side until the later part of next week. Even if it should rally, the 1,425-30 resistance is reinstated, with the key lower support not until the 1,400 and 1,388 areas.

It is also important to note the March S&P 500 futures contract is trading at a $6.00 discount to the December contract. That creates a bit of additional challenge, as its drop back below Tuesday’s 1,417-14 gap higher also creates an Exhaustion Gap top with resistance back around the high-end of the gap. But the quarterly futures expiration is not until the end of next week, so potential for it to rally back above that into the low-1,420 area while still only testing resistance does not become more critical until the later part of next week.


▪ And the degree to which that unknown is leaving less of an intermarket influence out of equities now into other asset classes is also apparent in the degree to which other markets have not responded more dramatically to the sharp swings in equities of late. The bottom line is govvies have had to weaken a bit in the face of sustained equities strength in spite of yesterday’s sharp selloff, yet are only down to some key supports for now.

▪ Foreign exchange remains less friendly to the US dollar in the wake of what the Fed and Mr. Bernanke had to say Wednesday. That also rightfully seems to ignore the equities weakness of the last couple of days. Yet the Japanese yen remains the true weak sister on anticipation of political and monetary policy changes attendant to their upcoming election. The most telling technical details were reviewed at some length in yesterday’s TrendView BRIEF UPDATE, and we refer you back to that for further details.

Thanks for your interest.

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