S&P: At the Cusp

One of the better books on the subject - Michael Lewis’ ‘The Big Short’ (an examination of the Sub-prime 2007 crisis, and who  won and lost) - demonstrates the fallacy of the economic notion of the ‘rational man’.

What the story shows that a few saw the dangers of the sub-prime and CDOs and took advantage of it.

The stock markets seem to be caught up with the same myopia that engulfed pre-subprime.

The ’solving of the Greek crisis’ (see http://www.bbc.co.uk/news/business-15473381) has seen a spike in the world’s indices.  But:

1. The ’solution’ still has Greek debt at 120% of GDP (down from 160%).
2. Moreover, this deal seems to be dependent, at least, in part of Chinese participation (see http://www.guardian.co.uk/business/blog/2011/oct/27/eurozone-debt-deal-live-coverage-reaction?newsfeed=true).
3. Finally, you still have a much more troublesome issue - the Italian debt which is too big for any any bailout.

My view is this ’solution’ has yet to prove itself, and that we’ll be back at this issue in no time soon.

Now back to the S&P - we are right at resistance. Basis cash, the levels are 1258 to 1264; and today, we saw the Dec contract trade at the equivalent of these levels in Globex.

What’s important for me is the GDP is due out today. Consensus expects 2.5%. I expect a lower figure. If I see a figure, at or below, 1.6%, I’ll be looking to short the Dec Contract. Given that the ‘Greek solution’ has led to a euphoric sentiment, a much worse than expected number will provide a low risk opportunity for profit.