Bad Is Good Again?: SP500 Levels, Refreshed

As Wall St. gets back to cheering on negative economic data in hopes of more short-term performance boosting stimulus out of the Fed’s annual retreat to Jackson Hole this Friday, we thought we’d take the opportunity to update you with our latest quantitative levels and thoughts as it relates to some key items on the reporting docket for the rest of the week.

Tomorrow (8/24): The Congressional Budget Office (CBO) will release an updated version of their Budget and Economic Outlook at 9:30am EST. The key metrics to watch for are deltas in their GDP estimates. Per the previous outlook, the CBO was forecasting YoY growth in real GDP of +2.7% in 2011, +3.1% in 2012, +3.4% from 2013-16, and +2.4% from 2017-21.

We’ve been on record several times stating that their assumptions are rather pollyannaish in the context of the long-term trend in U.S. economic growth (+1.6% over the last 10yrs; +2.8% over the last 30yrs) – bubbles in internet technology and U.S. housing/household consumption included!

The key takeaway here as it relates to financial markets are potential markups to our long-term debt/GDP and deficit/GDP statistics, as growth (the denominator) falls, causing a further reductions in tax receipts that boosts cumulative deficits and debt (the numerators). According to the CBO’s previous outlook:

“All told, if growth of real GDP each year was 0.1 percentage point lower than is assumed in CBO’s baseline, annual deficits would be larger by amounts that would climb to $68 billion in 2021. The cumulative deficit for 2011 through 2021 would rise by $310 billion.”

Look for incrementally hawkish rhetoric out of the political right the event the CBO walks down their growth assumptions closer to the economic reality of an economy still driven by a fear-mongered (see: Bernanke’s pledge to hold rates at ZERO through mid-2013) and deleveraging consumer. Such Policy Pong will continue to be the main driver of the omnipotent EUR/USD exchange rate.

Friday (8/26): The second reading/first revision of 2Q11 U.S. real GDP is due out Friday morning. Until the BEA demonstrates some measure of stability in their analytics, we continue to flag potential downside to consensus expectations of +1.1% QoQ SAAR. It’s worth repeating that GDP in 1Q11 was revised to the downside by -81%! Moreover, it’s not just 1Q11; the agency has a long history of consistently printing elevated advance GDP estimates that ultimately wind up being revised downward at a later date when investors are paying less attention to them. Per an April 2011 Economist article:

“… during the ten years to 2008, America’s quarterly GDP growth rate was, on average, revised down between the first and final published estimates by an annualised 0.5 percentage points. In contrast, GDP figures in the euro area were revised up by an average of 0.3 points.”

The S&P 500 Index remains bearish from a TRADE, TREND, and TAIL perspective. Our refreshed immediate-term TRADE range is 1,097-1,161.

Buy/cover low; sell/short high.

Darius Dale

Analyst

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