More Wall Street fun on the 'fiscal cliff'

Washington's re-elected team of losers is at it again.

WASHINGTON, November 12, 2012 – Nothing much to see here today folks. We held off on today’s column hoping for something a little more definitive in the market either way, but no dice. The market seems frozen into slow meltdown mode, with averages briefly up this morning before resuming their relentless march down. It’s also a weird trading day, with markets open, banks closed, and last week’s stock settlement dates delayed by a day due to the holiday.

The negativity has cleared slightly as of this writing (12:25 p.m. EST), with the Dow down about 12 and the S&P down a fraction and trying to move higher. But the Long March off the “fiscal cliff” will probably resume later this afternoon, barring some kind of small relief rally in between.

It’s really hard to see what’s driving the markets except the usual bugaboo that makes all businesses nervous—fear of the unknown. Given that the current White House—inexplicably given another 4-year lease on 1600 Pennsylvania Avenue NW—is still willfully clueless as to what uncertainty does for business planning, we don’t expect an atmospheric change anytime soon. President Obama briefly cheered markets when he, along with House Speaker Boehner declared they were ready for compromise.

But then the President did his usual Colombo 180: Oh, by the way, we still need higher taxes for “the rich,” and I’ll veto anything that doesn’t punish them. The briefly happy stock market tanked again after that brilliant post-election demonstration of bipartisanship, and it will likely stay anemic unless something drastically changes.

What the market is likely doing, mostly, is building in some extra insurance against that fiscal cliff as well as shoring up for the unknowns in Europe and in Greece. The latter country, somewhat surprisingly, coalesced around still more austerity, but the government there still wants a 2-year extension on actually doing something, so the EU won’t give them any more money. And since they don’t have any money of their own, apparently, the situation there remains, erm, another cliffhanger. Nothing much to like here or anywhere, is there.

CNBC online noted this weekend that “Two of the most influential market prognosticators today — Pimco’s Bill Gross and Goldman Sachs’s Jim O’Neill — both warned clients…of the perils of the coming ‘fiscal cliff,’ when tax increases and spending cuts kick in at the end of the year.

“’U.S. fiscal cliff (is) deeper than advertised,’ said Gross, whose firm oversees $1.9 trillion, in a tweet. ‘It’s a Grand Canyon. Washington will defer entitlement cuts & raise revenues only marginally.’”

Continuing with Gross’ chain of thought, “O’Neill, chairman of Goldman Sachs Asset Management, warned clients in a note that market momentum was quickly turning down on fears of policy gridlock.

“’The world and the U.S.’s own people need Washington, D.C. to be sensible,” wrote O’Neill. “We had a rehearsal of life without a fiscal package in August 2011, and it wasn’t very pleasant.’”

Both Gross and O’Neill avoid the glaringly obvious fact that American voters inexplicably not only re-elected Jimmy Carter II as president, but also voted back in essentially the same House and Senate that failed to do one single thing to help the economy over the past two years. I.e., how can anyone imagine a different outcome now given that America’s voters decided to give Washington’s bunch of losers another chance to screw things up?

That said, it’s also remarkable how pundits, the financial press, and everyone else is talking this market down, down, down. Could it be that the professional investors are short and are trying to force mutual funds and those few foolish small investors who are left to unload their longs, thus making more money for the fat cats.

The problem with most “free” financial advice out there is that it’s provided by “pros” (CNBC’s favorite headline term) who are doing nothing more everyday than hawking their current book. So it’s hard to determine if the worst-case scenario for the “fiscal cliff” is already baked into the averages today, or if we still have further to go on the downside.

We’ve been selling into this mess, particularly our beloved utilities which have been getting hammered, largely due this time to the now-cascading effects of the EPA’s effective total ban on coal-generated power. Utility after utility is announcing the shuttering of its older and/or smaller coal plants. Coal mines are issuing boatloads of layoff notices (how’s that workin’ out for ya, union coal miners who voted for Obama?), and so are the utilities since, if they shut down coal fired facilities, who needs anyone to staff them?

So, in spite of better and better yields as they go down, utilities are now starting to give us capital losses—unusual in this group—so it’s time to leave them.

Also, anyone who nibbled on banks during the recent rally ought to be unloading them as well. As it become clear that Dodd-Frank does not allow banks to be profitable at all, any intelligent investor will avoid these once key behemoths at all costs as well, and selling has been heavy in this sector as well.

It’s probably time to hedge what we have left with short ETFs, and we’ve been nibbling into them today. SH (short E&P) is a plodding old war horse that we picked up on Friday. It’s generally too pokey to make much out of unless you own thousands of shares, but it can be at least a good placeholder in a down market.

Likewise, there are numerous sector short ETFs, with SMN (double short materials) and QID (double short the tech-heavy QQQ index) being good bets. FAZ (the triple short financial ETF) takes care of the banks, but this is one dangerous puppy and we’ve had mixed luck with it before, along with its happier opposite, FAS (triple long financial ETF).

We’ve gotten involved in all the above but will have a hair-trigger on FAZ as, with the triple-leveraged momentum, you can get killed in a matter of seconds if you’re not hawkeying the darn thing on your computer or having your broker do the same.

Aside from this, we are dumping, as circumstances warrant, various odds and ends from our portfolios so that what eventually remains will be either short, relatively safe (and few) longs, bonds, muni bonds, and cash, cash, cash. Plus a tiny bit of physical gold ETF IAU just to keep our hand in.

Columns are likely to be fairly short for the rest of this week as we try to figure out if anything meaningful is going to happen anywhere. We keep going back to the fact that American voters last week voted in nearly every last one of the idiots who’ve been causing the once-mighty U.S. economy to stagger and fall for the last two years. What in the name of the Almighty were voters thinking?

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate. He is currently long IAU, SMN, QID, FAZ, and SH and continues to hold medium term corporate and municipal bonds.

Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

Follow Terry on Twitter @terryp17


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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  



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