If August 2011 Is The "Fiscal Cliff Resolution" Template, Then Watch Out Below

Tyler Durden's picture

Ever since late March, we have said that the only realistic resolution to the Fiscal Cliff standoff (and the just as relevant latest and greatest debt ceiling hike due weeks from today as well), driven by a congress that has hit peak party-line polarity and which the recent election loss only made even more acute, would be a market mandated "resolution" (read sell off) whose only purpose is to crack the gridlock as representatives are flooded with phonecalls from angry constituents who now, and always, will be far more concerned about the value of their 401(k) than any ideological split. By that we mean an identical replica of what happened in the summer of 2011 when the market had to tumble 17% before the debt ceiling "compromise" was finally reached. This also explains why with just 6 weeks of trading in 2012 left, Goldman still forecasts a slide to its 2012 year end target (which it has kept constant since late 2011) of 1250. So while a resolution will almost certainly come, it will not be until the very last moment. As GS summarizes, "Bush income tax cuts was not resolved until December 17th, 2010. Last year’s decision to extend payroll tax cuts was not finalized until December 23rd, 2011. The current challenge is significantly more complex. Divergent views on tax policy, defense spending, and entitlements need to be resolved in a short lame-duck session of Congress."

And while the market may or may not jump after there is an actual resolution, don't expect any real buying ahead of a compromise, as any uptick in the DJIA (the Beltway has still not heard of the S&P500 apparently) will immediately lessen the impetus for a deal. In fact, if the following chart from Goldman is correct, and if we are indeed to relive a replay of the summer of 2011, watch out below, especially since true wholesale liquidation across the hedge fund space has yet to occur.

Some other thoughts from Goldman's David Kostin, who most certainly realizes his dramatic breach with the prevalent Wall Street sell side consensus, which still expects a big push higher in the stock market in the last month and a half of trading:

S&P 500 has declined by 5% during the eight trading days since the election. Index appreciation YTD now equals 8%. We reiterate our 2012 year-end target of 1250 which reflects a potential decline of 8%. Our uncertainty-based fair value P/E model suggests a forward multiple of 11.2x bottom-up consensus estimates which translates into 1275.


Uncertainty swirling around the ‘fiscal cliff’ that must be resolved by year-end, the pending jump in capital gains taxes at the start of 2013, and the debt ceiling that will be reached in late February represent clear and present downside risks to the market in the near-term.


We believe the proverbial ‘fiscal cliff’ ultimately will be avoided, but precedent suggests any resolution will not happen until mid-to-late December. Debate regarding a two-year extension to the 2001/2003 Bush income tax cuts was not resolved until December 17th, 2010. Last year’s decision to extend payroll tax cuts was not finalized until December 23rd, 2011. The current challenge is significantly more complex. Divergent views on tax policy, defense spending, and entitlements need to be resolved in a short lame-duck session of Congress. Political platitudes about compromise will abound during the coming weeks but some disagreements will surely arise. We assign a 55% likelihood that an agreement is reached by year-end.


S&P 500 has near-term political risk but long-term policy support. Our year-end 2013 S&P 500 target of 1575 reflects nearly 16% potential upside from current levels. Although we believe investors will have an opportunity over the near-term to buy the S&P 500 at a level below today, portfolio managers with a longer-term horizon should consider increasing equity exposure.


Last year the S&P 500 fell by 17% between July 25th and August 8th as the US debt ceiling deadline approached. Uncertainty about sovereign


risk in Europe and mixed domestic economic data also occurred at the same time. In retrospect, the sell-off created an attractive investment opportunity given S&P 500 has since rallied by 21%.


History suggests the US stock market has downside risk in December as a result of the pending hike in capital gains taxes. Capital gains taxes are  scheduled to rise at the start of 2013 from a 15% rate to 23.8% (20% plus a 3.8% tax associated with the Affordable Care Act). The nearly 9 pp hike in capital gains taxes is similar in magnitude to the 9 pp rise in 1970 and the 8 pp rise in 1987. In both prior cases S&P 500 posted negative returns in December as investors locked-in the lower tax rate. The S&P 500 fell by 1.9% in December 1969 and 2.8% in December 1986 running counter to trend given December has the second highest average monthly return (1.5%) and a 75% hit rate of positive return since 1928.

And so on.

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ReptilianSlaveMaster's picture

Ink Cartridges will set you free

dwayne elizando's picture

America's looking ripe for a dollar devaluation!

vast-dom's picture

OT: Patreaus debacle cont'd:


"The White House and multiple State Department officials had immediately blamed a crude film about the Islamic figure Mohammad for what they claimed were popular protests that preceded the attacks on the U.S. mission.

According to new, vivid accounts provided by the State Department and intelligence officials, no such popular demonstration took place the night of the attack. Instead, video footage from Benghazi reportedly shows an organized group of armed men attacking the compound, the officials said.


The State Department website lists no consulate in Benghazi.  [...]

Al-Qaida among U.S.-supported rebels"




Obama knew everything. He stopped the troops coming in to protect ambassador. Said troops were en route with correct intel and mission postponed in Sicily. The Clusterfuck Miligate is not over...yet...


vast-dom's picture

POW! SHOUT OUT! but don't count VD out, just yet...

dracos_ghost's picture

Dude, you gave us your word we'd see a collapse. Now I can't buy my kid the GI Joe with the Kung Fu grip.


vast-dom's picture

be patient. it will go down. timing is as we all know not always perfect. but soon you shall buy the whole fucking GI doll range! And some squirter guns. And even a My Little Pony toy. Trust me!

vast-dom's picture




  1. Petraeus hires top DC attorney: reports


    2. Republicans repeat criticism of Obama on Benghazi
    3. just heating up...


PersonalResponsibility's picture

Top DC lawyer?  So, in other words, someone will pay him more to flub the case to let the powers win.  You think he has a chance? ugh, you're on ZH, you should know they can't lose.  Sounds like a giant My Littler Pony fuck shit stack;



graneros's picture

Hell it's been over for weeks now.  Once again nothing.  You really don't think the sychophantic Obama press is going to follow up on anything of revalence do you?  Unless and until someone hands them "proof" that a high ranking Republican is involved you can forget about it.  Besides with fiscal cliffs, Generals having sex under their desks, and WWIII just days away no one is gonna give a shit.  Besides the whole thing is Bush's fault, (or is Romney's?), well anyway it's not Obama's cause he wasn't there or wasn't told or was attending a fundraiser for war orphans without Teddy Bears along side Bruce Springsteen somewhere else when it all went down. 

Debt-Is-Not-Money's picture

"The State Department website lists no consulate in Bengazi"

At first the MSM called it the "Embassy"

When that didn't fly, they called it a "Consulate"

Now that's obviously bullshit so Sen. LIEberman today calls it a "Mission".

What's left?

How about calling it what it probably was/is, a CIA outpost training AL-CIA-DA!

hedgeless_horseman's picture



In fact, if the following chart from Goldman is correct, and if we are indeed to relive a replay of the summer of 2011, watch out below, especially since true wholesale liquidation across the hedge fund space has yet to occur.

In fact, if the following article from Consumer Reports that is currently the lead article on from Yahoo's home page is correct, TPTB want you to be fat, a high utilizer of "health" care, and prematurely dead of a heart attack.  

Best heat-and-eat appetizers

Farm Rich [lol] are big, made of cheese with just the right amount of stretch, and have a lightly seasoned, browned, crispy coating. They cost just 27 cents each. Drawbacks in the other five products include dehydrated seasonings, uneven texture, and off-tastes. Appetitos sticks, for example, have an overused-oil flavor; Alexia sticks have slightly rubbery cheese; T.G.I. Friday’s sticks had more breading than cheese after most of the cheese leaked out. Appetitos, T.G.I. Friday’s, and Nice come with dipping sauces, which didn’t help their flavor.



knukles's picture

But they're finished nicely with a Bath Salts dusting and Creamy Chinese Melamine Center.

JustObserving's picture

I don't remember the Fed being on infinite QE in August 2011.  The Fed will be printing $85 billion a month starting in January.  That should be enough to keep APPL above 500 and FB above 23.  Besides, our good friends, the Israelis, have invested in AAPL.  It would be so sad to disappoint them.


EnslavethechildrenforBen's picture

$85 Trillion per month might be more like it...

Tyler Durden's picture

The $85 billion per month in flow has been taking place for 3 months now (the only difference will be the end of meaningless sterilization at the risk-free short end on January 1), and more importantly, has been long since priced into the current equilibrium price. The issue, as we have repeatedly said, is that to the market $85 billion in monthly flow is now needed just to keep the market from fading.

vast-dom's picture

Since we are operating in the theoretical world of PhDs and econ theory, what's another couple of hundred billion more a month? It's abstract and nebulous and Bernanke KNOWS that he is decimating markets and people and yet it goes on...

knukles's picture

And in other news, it is reported that the EU Big Important Time to Solve Everything Meeting including the Stale Strudel Crisis is Falling upon Hard Times


A Fiscal cliff here, a fiscal cliff there and pretty soon ya got A Bottomless Pit

(populated by the Monkey Demons amongst the flames, heat, steam and smoke with long claws and shining red eyes, ready to tear the fabric of society right apart)

earleflorida's picture

Funny... talking about PhD's?   Petraeus got his at Princeton-- wondering if it was in?

JustObserving's picture

The $85 billion per month in flow has been taking place for 3 months now

Many do not consider sterilized purchases as printing.   Mathematically Operation Twist is printing but probably only a large fraction - not the entire amount

In 2013 Federal Reserve will increase printing from $40 to $85 Billion per month by purchasing $40 Billion a month in MBS (home-backed loans) AND additional $45 billion in 10-30 year US Government treasurys (loans) from financial institutions 


dracos_ghost's picture

If they implement R-Bonds in the pension system, the gubmint will be able to absorb HUGE balance sheet expansions without printing nada and no net deficit effect. The Fed will be able to sell all this shiite at a premium back to 401(k) suckers(aka US Treasury). $85B/mo will be chump change.


Winston Churchill's picture

It would only be for new money,or else a lot  would cash out and take the tax

hit first.Any overnight move would deastroy the UST market with more money

leaving than being forced into R bonds.All those equity's being sold to make

the 401k's liquid would also be interesting.A  90% stock drop before you could

say 'confiscation'.Or maybe thats the plan.

slaughterer's picture

Fade Kostin: the Squid is using him to set up a bear trap.  Kostin will join Tom Lee's team after the Squid fires him.  With 2013 target of 1575 Kostin is already prepping for work with Tom Lee.  

ultraticum's picture

"Peak polarity" between the red team and blue team?  Did somebody wake up and grow a set of cojones last night that I missed or something?  Polarity?  Are you freakin' kidding me?


Spend . . . lift debt ceiling . . . print . . .  rinse . . . repeat.

Ham-bone's picture

Can't be bothered with this trivial shit right now...my Oregon Ducks lost shot at title game last night...I'll be in mourning today.

MiltonFriedmansNightmare's picture

We are, ND!
I was actually rooting for your Ducks last night....not sure I want to play Bama.

q99x2's picture

Who owns all the stock that the FED pumped money into on the way up?

Herdee's picture

And some members at the "federal reserve" are now calling for even more easing.I always got a kick out of the same BS that says that it's not actually money printing.

PartysOver's picture

"In fact, if the following chart from Goldman is correct"


Now that is a good one.   GS being correct?  Laughing so hard I let a stinky loose.