Hi Ho. Hi Ho. To the center we will go

Vincent Farrell
Soleil Securities Corporation
November 30, 2010

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Bill Clinton could sniff the political winds better than most 20th-Century politicians. When he was set back in the 1992 mid-term elections, he shifted course. That couldn’t have been easy by any measure, but figure he also had to tell Hillary she was out of a job as health-care czarina. But he did it, and the economy went on to a pretty good six years subsequently.

President Obama is much more committed to his ideological slant, but that won’t help his dream if he is a one-term President. Twenty-three Democratic Senate seats will be up for re-election in 2012, and those guys will be tacking to the center quickly, away from the President, with the winds blowing as they are. If we at Soleil are guessing right, unemployment will still be over 9% in 2011, when electioneering takes on speed. It would be tough to campaign with that rock around your Presidential neck. The big question post-election has been: would the President move to the center? We saw the first hint of an answer the other day when the President froze Federal (read: union) salaries. That’s a big move that has been advocated by some Republicans for a year or more.

Will we now see a deal on the Bush tax cuts as confirmation of a centrist move? If the administration struck a deal to extend all the cuts, say, in a trade for additional extended unemployment benefits, we may get a different tenor out of the White House. (Note: send a memo to the President suggesting he appoint a few business types to his administration. It’s sort of nuts there are none and it would be a good, yet non-conciliatory, gesture.)

If we got some more inklings of a center-type move, the narrow trading range the market is stuck in could resolve itself to the upside. I’m not holding my breath, so my downside tilt stays in place. We have been bouncing back and forth between 1175 and 1200 on the S&P for almost three weeks. Such narrow markets break one way or the other. I’m guessing we roll over and visit the 200-day moving average which is moving up and is a bit over 1130 now. My colleague, Kevin Towl, asked Tuesday if we needed a 10-12% correction from the top (1227 top, for a move to around 1075-1100 if we had to see a 10-12% hit). I don’t see that. The 200-day should/will/I hope prove to be formidable support. I do agree with Lola Jane Farrell’s honorary uncle, Dougie Kass, that we have seen the high for the year and for me the question is the extent of the downside drift.

All we have to worry about is the stock market (and Iraq, Afghanistan, Korea, unemployment …), but the Europeans need to also question the viability of their currency. The bail-out of Ireland was a self-bail-out of European banks by the European governments. They essentially bailed out themselves and said no loss need be taken. We’ll just move a few pieces of furniture and all will be well. No one is buying it and the crisis will move to Portugal or Spain or Italy. To say we will wait till 2013 and bonds issued thereafter before losses might (repeat: might) be taken boggles the mind.

Greece, Ireland, Belgium, Portugal and Spain are probably wondering why they ever got involved in the Euro in the first place. The Irish pact predicts their GDP will grow 2.75% a year till 2014 (what?) and that year 20% of their GDP will go to interest payments! Germany has to feel the financial burden, but, had it not been for the euro, they would have a very strong mark and no export competitiveness. Do the Germans then stand up financially forever? Francois Baroin, a French spokesman, said the bail-out shows, “The absolute determination of Europe—of France and Germany—to save the euro.” We’ll see. I think Greece and Ireland are bankrupt but the EU says they aren’t dead unless we say so. But General, they aren’t breathing. It doesn’t matter. Just pretend they aren’t dead and everything will be okay. Reminds me of some retail brokers I know.

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Vincent Farrell | 212-380-4909 | vfarrell@soleilgroup.com