Sell-off accelerates amid fiscal cliff deadlock
Stocks finally suffer a bout of panicked selling pressure. Yet sentiment remains bullish.
For weeks, the bulls on Wall Street have blissfully wanted to believe that -- despite all signs to the contrary -- President Obama and House Republicans could come to an agreement on red-meat issues like tax hikes and spending cuts to avoid the fiscal cliff at the end of the year.
After GOP House Speaker John Boehner was unable to pass his "Plan B" -- featuring tax-rate hikes for millionaires and billionaires but no spending cuts -- this illusion has slowly been shattered. Thursday, Democratic Senate Majority Leader Harry Reid admitted that it looks like we're headed off the cliff just as the next, much scarier catalyst comes into view: the debt ceiling, which the Treasury says we will hit in a matter of days.
But as the fiscal cliff fiasco demonstrated, there is little reason to believe Washington will come to an agreement easily. That, along with the threat of a credit rating downgrade and signs of economic weakness, has investors headed for the exits in a big way.
This is a big reversal for many.
Despite signs that a new downtrend is being established amidst a political stalemate in Washington -- from various technical measures to our own Trend Indicator (more on that below) -- sentiment remains very bullish. Newsletter writers following the Nasdaq are now recommending one of their most extreme net long positions in more than a decade; a breathtaking reversal from their bearish positioning just five weeks ago.
These people were banking on a last-minute fiscal cliff compromise deal. Maybe they get one before the end of the year. I'm doubtful. A short-term deal will likely happen in mid-January. Everyone will sigh in relief.
But that only opens the door to the much more difficult task of raising the U.S. Treasury's debt ceiling (which will be hit on Dec. 31, but will be extended through cash-management measures until February or March). And that will require an agreement on the long-term, structural drivers of the deficit including entitlements and health care costs.
If you think the battle over raising taxes on millionaires and billionaires is tough, just wait.
The system is clearly unsustainable. There are a record 56.7 million Social Security recipients. But only 94.75 million full-time private sector workers in the country. And we've yet to tackle the issue of reducing health care costs and making the system more efficient.
And while the Federal Reserve is keeping Treasury yields low -- preventing bond investors from expressing their displeasure -- the credit rating agencies suffer no such hindrance. If a deal doesn't get done, or if it's accompanied by embarrassing political stunts and excessive delays, the Treasury will be hit by additional downgrades.
Standard & Poor's cut our AAA rating last summer in large part because of our dysfunctional politics.
Wednesday, Moody's warned that if there is no clear path on the fiscal outlook and debt trajectory next year, they will downgrade us too.
All the while, the economy is tipping -- along with Japan and Europe -- into a new recession as business spending dries up and consumers pull back as confidence falls.
The risk-off complex is starting to move as a result of the market weakness, with the Dow Jones Industrial Average falling through its 200-day moving average. Treasury bonds, the U.S. Dollar, and volatility are all doing well. Everything else pretty much isn't. The exception is precious metals, which are hanging in there to my surprise (I expected additional weakness on the pop in the dollar).
As a result, I'm booking profits in my precious metals shorts and adding new exposure to Treasury bonds (long), energy (short), technology (short), and the euro (short) via the Direxion 3x Treasury Bull (TMF), Direxion 3x Energy Bear (ERY), ProShares UltraShort Nasdaq QQQ (QID), and the ProShares UltraShort Euro (EUO). I'm adding all three to my Edge Letter Sample Portfolio.
Disclosure: Anthony has recommended TMF, ERY, QID, DUG, UUP, and EUO to his clients. Be sure to check out his new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at firstname.lastname@example.org and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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We re-elected a LAZY, arrogant, socialist, corrupt even by Chicago standards, Imbecile. He is too stubborn to extend the W tax cuts. He insists on more taxes, the republicans say OK, but only if the leech class 47% start to pay also. The imbecile '57 states' insists on more spending when we need to slash spending, including DEFENSE spending.
Wait till next month, and their is NO debt ceiling increase. The House will not increase Obama's credit card limit one dime until he submits a 'balanced budget'. This president is economically clueless. He has worked as hard on this as he has on jobs, i.e., he has done nothing...
What do you expect when you have the failed leadership of the imbecile Obama?
Deal with the democrat depression.
all those in then congress that are shorting this market ought to be sent out to space on the next launch
No budget passed or even proposed by dear leader in 4 years.
a complete disgrace an embarrassment to this country
We will get the 47% that pay ZERO now to start to pay for Obamanomics. We shall see how well they like it ONCE THEY HAVE TO PAY FOR IT...
We Republicans understand the LEECH 47% will always VOTE for SOMEONE ELSE to pay for government. We understand they rather VOTE for a living instead of working and eraning one.
We need to wean the 47% of the government teet... The cliff will force them to start PAYING taxes. A novel concept to the leech class...
Be careful with sucker's rallies today, do not fall for them, we just had one at about 1045 hrs or so.....Pieces of dirt in complete control, we expect those rallies from time to time to lure people in...Just play it safe...Perfect day to stay on the sidelines, at least for now...More later.
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