Business-Insider

An enormous trading opportunity will be shaping up in the coming weeks and I'd like to share some of the ideas now in order to get better prepared for them. As usual, the fundamentals will be the driver of overall market sentiment, but we're going to use a different set of fundamentals to trade from.

There's a growing consensus among economists that changes in Monetary policy from the Fed will not be able to do enough by themselves to prevent the economy from going into a serious downturn and that a stimulus from a change in Fiscal policy will be required. The fiscal stimulus in this case will probably take the form of a temporary tax cut.

It's very likely that the current meetings of the Presidents Working Group on Financial markets (a.k.a. the Plunge Protection Team) have been at least in part for the purpose of discussing the ways and means of how they will work and that the actual cuts themselves will be announced during the State of the Union address. It's also very likely that momentum for this is going to be building in market participants and that just as with a change in monetary policy, the markets themselves will trade according to the ultimate outcome of whatever happens from a fiscal perspective.

Former Clinton Treasury Secretary Lawrence Summers has been talking about this since November. In his opinion, the economy requires between 50 and 75 $Billion in temporary tax cuts. Martin Feldstein of the NBER is also suggesting that due to entrenched problems in the consumer and banking sectors, monetary policy changes will not have the same "traction" and that "some kind of fiscal stimulus" is now required. There's a precedent here as well: Bush made a temporary tax cut during the 2001 recession so it seems fairly certain he will want to use the same tactic again. However, the implementation of a fiscal policy change will likely be more difficult from a political perspective because things are very different this time around. Back in 2001, Congress was under Republican control so passing the tax cut was relatively easy. Now that the Democrats have control of the Hill, the actual passage could be far more difficult.

So we will be reading and hearing a lot about Bush's plan for a temporary tax cut in the weeks leading up the announcement in the State Of the Union Address on January 28, which comes two days be before the next FOMC announcement. Momentum for this is going to be building up strongly as the TV talking heads like Larry Kudlow and Jim Cramer start beating on the tax-cut drums and the financial press gets all over the story. And here is how an excellent trading opportunity is likely to present itself.

The day after the tax cut proposals are announced in the State of the Union address is likely to be a very good day in the markets and if the markets gets what it wants from the Fed (a 50 basis point cut), the momentum will be further sustained. After that, things will depend on the prospects for passage in Congress. If it looks like a go, the markets will be well-supported and naturally will do very well afterwards if they pass into law. But if fiscal stimulus turns into another political fight and the tax cut package ultimately fails to pass, the market won't get what it wants which means that a serious downturn will likely be seen from that point.

And BTW-you're likely to hear that if the tax breaks don't come soon, they may come too late to be a real help as far as the economy goes.

I imagine there will be plenty to discuss regarding this over the next couple of weeks and I hope you'll be following this along with me. Thanks for reading my post and please use the box to vote. And if you want to try trading this and other economic information with me in my room, you can for just a ten dollar per week subscription that you may cancel at any time. You can join on my blog: thenewstraderfx.blogspot.com
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