Time for optimism?
Research suggests the market is pricing in too much recession risk from the fiscal cliff. If so, stocks are a bargain.
By all indications, the rebound rally I've been expecting kicked off on Monday in a big way. The entire "risk-on" complex of stocks, commodities, and risky high-yield bonds is launching higher while safe haven trades like the U.S. dollar and Treasury bonds are suffering. Traders, it seems, are suddenly feeling more optimistic after Friday's fiscal cliff negotiations in Washington went rather smoothly.
While Democrats and Republicans still maintain large disagreements on things like taxes, both parties seem to be moving towards common ground. The most important of which is that a temporary extension of the $720 billion worth of tax hikes and spending cuts set to hit on Jan. 1 -- giving lawmakers more time to hash out a comprehensive deal.
As a result, Wall Street is beginning to realize they've been too pessimistic. And as a result, the buying pressure is on and is set to continue.
On Friday, Senate Majority leader Harry Reid said Congress and the White House would not wait until the last day of December and could agree on a deal framework prior to the deadline.
Republicans seem willing to countenance tax increases in exchange for spending cuts and entitlement reforms backed by a legal structure to ensure the cuts are made.
Moreover, there is also progress over in Europe. There are reports that eurozone officials are going to indicate tentative approval for releasing Greece's next eagerly awaited bailout disbursement of €44 billion. And officials from the European Central Bank appear to be warming to the idea that Greece, because of its persistently weak economy, will likely require a third bailout program.
Investors weren't expecting this turn of events. JPMorgan strategists note that the drop in stocks have priced in a 40% probability of a fiscal cliff caused recession which, in their words, "is too high for us."
But what of the risk that President Obama leads a charge on raising capital gains and dividend rates on investors? JPMorgan separately notes that tax-sensitive U.S. households likely hold only 13% out of $24 trillion in U.S. corporate equities outside their retirement accounts. Tax-insensitive investors, such as hedge funds, pension funds, and offshore entities, are the more probably marginal buyer of American stocks.
And they are largely unaffected. Indeed, they find no historical evidence that capital gains of dividend tax changes alter the investment patterns of retail investors or the payout policies of non-financial corporations.
All of this sets the stage for an end-of-year Santa Claus rally fueled by a newfound cordiality in Washington combined with the rising likelihood of another dose of cheap-money stimulus from the Federal Reserve at its December policy meeting.
In response, I continue to recommend clients focus on areas including silver, crude oil, and related energy stocks including Marathon Petroleum (MPC), which I am adding to my Edge Letter Sample Portfolio. Valero Energy (VLO), shown above, is also doing very well.
If you're looking for quick and easy exposure, consider these three exchange traded funds: The iShares Russell 2000 (IWM), the iShares High Yield Corporate Bond (HYG), and the DB Commodities Tracking Fund (DBC).
Disclosure: Anthony has recommended MPC, HYG, IWM, and VLO to his clients.
Be sure to check out Anthony's 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.
The markets are just like a Cup race in my eyes. ANYTHING can happen at ANYTIME. Look at this past weekend, where Jimmy J. who ONLY lost the title to Keslowski, because his junk broke a rear pinion gear. Stocks are the same way. You can be on top one day, and lose it all another. And as for "optimisim"... This writer is just trying to stoke the happy train down the tracks again. In REALITY, you will find that more and more people (as the financial cliff approaches) will be pulling more of their money out of the banks that still are functioning, and the ONLY investments people will be making, are for personal safes and lockboxes to put THEIR cash in.
Bottom line: The ONLY guarantee that YOUR money is safe, is if it is in YOUR possession. With the markets, they can go up, but they can also crash and burn...
A dis-satisfied customer and voter...
"Time For Optimism"?
Actually...I think the American public thinks it is time for the TRUTH. So the gov needs to stop manipulating numbers, financial "experts" need to stop reporting false information, corporations need to stop lying etc. Until we admit we have problems and then face them... we will never be in a position to find a viable long term solution. It is time to stop "drinking the Kool-Aid and looking thru rose colored glasses".
The colleges have been generating wave after wave of under-educated wannabes for about 30 years now. The whole system has been infested and corrupted with them. When you have a bunch of kids watching the good life fantasies on TV and then looking for jobs in the finance industry which represents a disproportionate share of the economy, you've got a problem.
If you are going to go to college, get a classical education first. Don't waste undergraduate time and money on courses in various cultural studies, in "occupy wall street" (Columbia University), etc.
Otherwise, learn a trade or run your own business and underground/off books if necessary. You will be responsible, accountable, and learn alot more
TWO THINGS COME TO MIND,oops...Maybe three ?
The Big Spider says to the little Spider, "Let's just sit back and wait...."
The Old Bull says to the young Bull, "No, let's just walk down and get them all...."
The Tortise and the Hare....."Slow and steady wins the race."
And I've always liked Warren Buffet and Charlie Monger's approach of "Greed and Fear".
The Deals are in the Wind.....Just give it a week or two..
Was kind of surprised about the Housing starts...Best since Bush/Cheney Fiasco...
What about the empties and foreclosures still sitting around here and there ...?
It's good to know that we have the possibility of a Robme presidency, out of the way..
Now maybe the Markets can stabilize, and America can move FORWARD..
Instead of STAGNATING...
Last week was a tantrum. This week they are covering. Thin volume. Nothing has changed. Still no budget agreement and europe is still bailing out Greece which they have been doing forever it seems.Suckers beware.
Nice to see that JP Morgan sees no effect on the market if Cap gains taxes go up. Do you really want to bet on that JP?
We would not be experiencing this market dump if Romney had been elected. Let's see what the socialists can do without us!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1
Unfortunately it may take something as harsh as the cliff to actually make a dent in the problem we have with our deficit. A non-cliff compromise will just be a postponement of the inevitable. Sounds crazy but we may need to go over a cliff. At least there will be solid footing at the bottom.
Today's market activity feels suspiciously like a set up to lure the suckers back in. Nothing changed except that nothing bad happened today. Lots of articles on how low-priced this market is bla bla bla. With the Fed dropping in 85 billion?/month we should see huge surges and big volume.
Corporate profits are up 78% with Obama and companies are sitting on a record amount
of cash.To hear CEO`S talk you`d think we should have a pity party for then, or a benefit.
The Dow is up 5,000 points with Obama.Right wingers just hate to hear the truth.
Wall St. and the Fed are responsible for the downfall of the United States. The stock market is not
the economy as Wall St. and the Fed beleives. I dont think Main St. can afford much more of the
the markets rising due to the Feds devaluing the Dollar. Every time the market goes up all
commodities also go up, not based on supply and demand but based on the ruination of our
Dollar by Bernanke and Co.
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Tighter regulations and the end of a lengthy bull market in bonds have changed the landscape forever.
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