Playing defense in front of the fiscal cliff

It's not as scary as many would have you believe -- and anything that results in movement is an opportunity in some way.

By MSN Money Partner Dec 3, 2012 2:29PM

Dollar bills floating over U.S. Capitol copyright CorbisBy Martin Tillier


Until now, I have avoided writing about the fiscal cliff. This is partly because I am a little bored with it -- like many others. Mainly, however, it's because I don't believe it's really that big of a deal.


If Ben Bernanke hadn't coined the scary phrase regarding a dangerous precipice, I don't think we would all be as bothered. I mean, "A return to previous tax rates and spending levels" just doesn't sound scary. 


I realize that, as we struggle through a slow recovery, tax increases and Federal spending cuts could be potentially harmful. I also have far too much experience with politicians around the world to believe that this bunch will do the obvious thing for the good of the country, regardless of party or ideology. It's just that the long-term effects of the seemingly inevitable brinkmanship and bluster are not likely to be significant.


In the event our leaders fail to reach agreement by the appointed time, budgets will be cut and taxes increased, at least for a while. One of the perks of being a lawmaker is that you have power, including the power to undo your own stupidity. This, at least, I believe they will do. Once both sides have shown their respective bases how principled they are, real negotiations will begin. This may happen just before "the cliff" or it may happen just after, but history suggests it will happen.


So what does all of this mean for traders and investors? Anything that results in movement is an opportunity in some way. The problem is that the traditional defensive move -- buying bonds -- could well be the worst thing you could do. If politicians unashamedly display their intransigence, one possibility is another downgrade of U.S. Treasuries. Don't forget that the debt ceiling will be a part of these negotiations. Bond markets may not look so fondly on a second demonstration of a dysfunctional legislature. Looking for the opportunity in equities makes more sense.


As the deadline approaches, any hint that agreement will not be reached is likely to be greeted by a wave of selling. Once the inevitable agreement is reached, ground will be recovered. Generally, I hate it when people say "buy on dips." It is an obvious, and often impractical, piece of advice. In this case, however, where the dips are the point, it makes sense. In order to buy, you need cash.


Taking profit over the next couple of weeks, particularly in dividend-paying stocks, is a sensible way to free up cash in many ways. Whether taxes on dividends increase or not, the expectation will produce weakness in traditionally high-yielding sectors such as utilities, telecom and consumer staples. If you have long-term holdings, locking in a 15% capital gains tax rate won't hurt either.


Of more interest to me is what to buy on the expected dips. Here there is room for some creative thinking. Sectors that are bound to get hit hard may offer the best opportunities for the brave. Most companies in the aerospace and defense sectors, for example, have been preparing for the worst. Anything short of massive, long-term cuts to defense is likely to present an opportunity. Northrop Grumman (NOC) has reduced headcount by 17% already and has been focusing on opportunities in other parts of the world, notably Asia.


Raytheon (RTN) is another well-known name to watch. Like NOC, they are a global business and have substantial U.S. business already obligated, in the belief that there will be cuts to future projects. These future cuts, of course, could be reversed.


There are also companies that could get dragged down despite limited impact from defense cuts. B/E Aerospace (BEAV) is one to keep an eye on. They are a supplier of cabin interior products and various fasteners and parts for the aerospace industry. What makes BEAV of particular interest is that they have significant revenue from retrofitting existing aircraft. If new orders, whether commercial or military, fall, then refitting can be expected to rise. Either way BEAV is positioned to take advantage.


There is no doubt that, in financial markets, any crisis presents risk. Exaggerated fear of a crisis that is unlikely to unfold, however, presents opportunity.

Tags: NOCRTN
6Comments
Dec 3, 2012 6:28PM
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Dr. Kildearheart, your President is a Lazy, Arrogant, Corrupt (even by Chicago aldermanic standards) Imbecile.  He is a Marxist bent on destroying the middle class.  He needs more money to support his leech class 47% that pay nothing.  

What we need is the deadbeat 47% to start paying their fair and EQUAL share.  

Lets treat everyone EQUALLY.  Lets have EQUAL taxation.  Our government is spending 3.8 trillion a year.  There are about 308 million Americans.  That works out to about 49,000 per family of 4.  If you are not paying 49,000 in taxes, then you are a LEECH on the rest of us.  When can the rest of us expect you to start pulling your weight, instead of feeding at the public trough?    So many leech democrats...   We are fed up with you stealing from us...
Dec 4, 2012 2:56AM
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  Re-TOGRe-TOG(Re-TOG) ..... thanks for the note, I deeply appreciate  your brains, his whole published POST is only a MIRAGE.                                      
Dec 3, 2012 3:25PM
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Wake up America

Hello! Hello! You all there members in the house of Representatives, stop kicking the ball down the ladder and talking silly games, and tell the Democrats with your sick intentions, with your manufactured Macho Man voices, the future planned atrocious and nasty cuts you want to do to the middle class. You persist in creating more tragic deceptions during this Cliff situation making it very difficult for our president Mr. Obama, to deal with you all. Why don’t you copy, and try to solve the situation in an intelligent and respectful way, like the distinguish Tip O’Neill did with Mr. Regan many times, producing progress for the country, and not much despair, and annihilation of hope! You cannot give a tax cut one more time to the rich, and make the rich, richer, on the back of the middle class! The citizens are getting fed up with all of you. You are risking serious consequences of permanent anger from the American people that you have let down so many times before!  You all made yourself a joker again today when saying the president wants you to Roll Over, when you have done every dirty manipulation to trying the president to Roll Over the last four years on every honest Bill he wanted to pass trough the dysfunctional House of Representatives to help the people now, not later! The Budget is bad because you all in the House produced it in the last fourteen years by lack of cooperation with the president, and the reckless expending, including Bush years! 

Dec 4, 2012 3:23AM
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Doc you can just call me TOG many do, don't make it hard on yourself or typing...Some call me worst.

 

BTW... to all, keep an eye on Gold tomorrow A.M., along with the U$D dollar and oil...

 

Possible some opportunities on Miners or other Instruments to bar against Inflation... 

Dec 3, 2012 10:23PM
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The word is going around that someone saw Boehner in front of a large mirror in the White House, and he muttered to himself “Mirror, Mirror, on the wall! Who’s the fairest of them all” The mirror imaged responded. “You are not!” Then he sardonically smile, and went to his meeting followed by his flock of Tea Party members, and Ryan, to turn down one more time of the one hundred efforts by the Democrats to have the House Republicans increase the tax on the very rich, to help balance the Budget, to prevent the Cliff, and to honor the people of the USA that gave him the job he does not deserved as a representative of the people, to help, protect, and work for their benefit only!

Dec 4, 2012 1:50AM
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Dr. Kildearheart....I couldn't have said it any better, actually I couldn't.

 

And don't let those two ruffians get you down..They would say the Sunshine is too hot, but still stand in it, bitching.

 

Hey, he is our President for another 4 years, we have to do something; Like it or not.

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