WASHINGTON, January 2, 2013 – It’s always darkest before the dawn. At least that’s the latest artifact we can mine from the cliché factory to describe this morning’s market action. As we write this, we’re a few minutes before the first market open of 2013. Futures are already rocketing into the stratosphere, and pre-market trading in most traded issues is going through the roof. That’s a far cry from the fiscal cliff fear and loathing that plagued most of last week’s trading.
As most news junkies already know, a glum House of Representatives signed on to the Senate’s faux fiscal cliff fix which jacks taxes up smartly while providing precisely zero in terms of budget cuts—even delaying the draconian, “mandatory” fiscal cliff cuts to Medicare and the military that were supposed to immediately take effect today.
For most taxpayers, the most noticeable item in this agreement—which either was signed into law by the President or will be very shortly—will be a kick back up in their FICA (Social Security-centric) deduction. This is the result of allowing FICA deductions to go back to their original levels dating back two years ago when the so-called “payroll tax cut” went into effect, adding a few hundred actual dollars to everyone’s paychecks via a cut in standard payroll deductions.
We’re tax-cutters from way back, but always thought this payroll tax deduction was trivial and stupid, kind of like pouring gasoline on the still-glowing embers of last year’s Yule Log. The idea behind the cut was yet another misguided “stimulus,” which assumed that the extra virtual pay in each paycheck would be spent, thus helping the economy to grow. Many people actually saved and did not spend the money, and there’s little hard evidence that it helped anything very much.
What it didn’t help, however, was the nonexistent Social Security trust fund, which became more of a joke than it already is. That massive, cash-strapped entitlement, already on its way to virtual and actual insolvency, was battered further by the absence of the substantial chunk of contributions that vanished in this ill-advised tax cuts.
So, to the point: while we despise what happened in yesterday’s House vote, we don’t have a problem with the end of the payroll tax cut. This money had always been programmed to go into the non-existent Social Security lock box. It’s good to see that has come to an end, which will make Social Security less of an accounting joke this year, if ever so slightly.
That said, everything else in the bill is a real tax increase, geared toward gouging “the rich,” who have now been redefined upward to those singles making $400K+ and those couples making $450K and above, proving at least that the marriage penalty is alive and well with a vengeance. The revenue brought in by this class-struggle line item will, by our estimates, pay down a fractional amount of the U.S. fiscal deficit for the better part of four hours.
The whole fiscal cliff struggle, thus far, has been a predictable joke, mostly on the Republicans. The current “solution” is merely another incremental tax rise, ultimately affecting everyone, including the middle class, via the payroll tax “rise.” A nice chunk of this new money will actually go toward more Democrat constituent payoffs new spending (including more subsidies for the President’s friends in the money-losing alternative energy segment, particularly wind). And percentage-wise, precisely nothing was done about the current overspending spree.
Worse, there’s still no indication as to what might be coming with regard to actual cuts and to the inevitable battle on the debt ceiling which the President has announced he’d like to control himself in the future, freeing him from messy scuffles with the Congress which he wins anyway via his usual strategy of demagoguery. That’s unconstitutional, of course, but that sort of legal nicety has never bothered this President before.
In any event, this uncertainty overhang still leaves American businesses with insoluble dilemmas which will severely limit future growth plans as businesses will lack the clarity required to move ahead with confidence.
In any event, all this will be forgotten at least for a day or three as the market soars. But keep in mind that even this rocket shot that starts the new year is due less to the fiscal cliff “solution” than it is to the fearful market action that ended 2012’s fourth quarter of trading. To wit:
Apple, smithereened by profit taking geared toward avoiding the inevitable 2013 tax increase and nothing else, should quickly regain a lot of lost ground.
Gold, silver, platinum, and palladium—under severe pressure by a mysterious and perhaps rolling cartel of sellers since roughly last August—should quickly regain ground, at least for a while.
Oil will probably regain some lost ground due to speculation, which pointedly ignores increased supplies.
Financials should pick up the pace after fizzling somewhat in late December, benefiting from the Federal Reserve’s printing presses.
Resource stocks should catch a serious bid if manufacturing looks like it might pick up.
And, in a story we will try to get to over the next couple of days, the battered stock of Herbalife (HLF) looks like it’s being lofted mightily by a tremendous short-squeeze which likely could be one of the more interesting tales of early 2013.
BTW, market’s been open now for about 15 minutes and we’re up 224 Dow points, followed by pluses of 26.27 on the S&P 500 and a scorching 67 points on the NAZZ. Put on your seat belts if you haven’t already done so. Today will be a lot of fun for the bulls.
But watch your back, dudes. The DC Follies, 2013 edition, ain’t over yet.
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.
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