OUTSIDE THE BOX
SEPTEMBER is important in American culture and business. The month opens with Labor Day marking the end of summer, the next week sees the school year begin, and on September 30, the US government and many companies close their accounting books for the fiscal year.
Would you like to make a wager on the upcoming US presidential election and have a 90-percent chance of winning? Here is the system.
Forget the opinion surveys. Since 1900, the stock market has correctly forecast 90 percent of presidential elections. In the 28 elections tracked, there have been only three exceptions: 1956, 1968 and 2004.
In the 16 elections when the stock market climbed before Election Day, the incumbent party was re-elected 15 of 16 times.
If the stock market gains from September 1 to the election on November 6, the odds forecast that the incumbent, Obama, wins. If the market falls, he loses.
Want better odds than 90 percent? How about 100-percent accuracy?
Whenever the stock market has a gain of at least 6 percent in January of an election year, the incumbent loses, not wins. It has worked 13 out of 13 times since 1936. This January 2012, stocks were up 8 percent predicting an Obama loss.
Therefore, Obama needs the stock market to go up starting September 1.
Federal Reserve Chairman Ben Bernanke knows that if Obama is defeated, about 15 minutes after the new president takes office, he would be replaced. Bernanke also knows his actions can move the stock market either up or down. Being Federal Reserve chairman is one of the most prestigious positions in the world. Being a university economics professor is not. Bernanke wants his boss re-elected.
The stock market now runs on one thing: Massive amounts of cash infusion by the Federal Reserve. When Bernanke talked about more Quantitative Easing, the markets went nowhere. The market wants to see money on the table, not just talk.
Global stock markets cheered and went higher on news that the European Central Bank (ECB) intends to bail out Spain’s banks with at least $125 billion. It is not because the markets love or even care about Spain. They want more money in the global financial system.
But before all the bailouts for Greece, Spain, and probably Italy are over, the total amount will be closer to $500 billion, a huge windfall for the stock market.
The problem is though that the ECB does not have that kind of money. The Federal Reserve does.
Bernanke and his boss Obama would love to fund a stock-market rally, a big one. But there is one little catch.
The US government has a debt ceiling of $16.4 trillion. As of last Thursday, total debt is $15.7 trillion, leaving a balance on the “credit card” of about $650 billion. The US increases its debt by $4 billion per day. By September 1 the available credit will be down to about $300 billion, leaving very little left to pump the stock market and save Europe without going over the debt ceiling. Increasing the debt limit would require a vote of Congress which politically would just about be a re-election killer for Obama.
It is unlikely that the Fed will do anything more than “talk” the markets over the next two months. It needs to save its ammunition until September. However, the most critical time is after September 30. In fact, if the Fed blows through the debt ceiling by saving Europe before September 30, Obama is finished.
We can expect little action and a lot of positive spin through July and August which should keep the markets stable with an upward bias partly because the newly elected European leaders do not want an Obama replacement because then the Fed money will disappear.
Bernanke will be between a rock and a hard place on that September decision day. It should be fun to watch. In the meantime, buy the PSE and the peso.
E-mail to firstname.lastname@example.org, Website is www.mangunonmarkets.com, and Twitter @mangunonmarkets. PSE stock market information and technical analysis tools provided by COL Financial Group, Inc.