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 Anthony Mirhaydari Nov 19, 2012 4:39PM

Image: Stock market Traders (Photodisc/SuperStock)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 anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

46Comments
Nov 21, 2012 4:57PM
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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...

 

Just saying...

 

Sincerely,

 

A dis-satisfied customer and voter...

 

Nov 20, 2012 3:10PM
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"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". 

Nov 20, 2012 1:50PM
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The current generation of leadership in business and government has significant skill and big picture handicaps.  HP is a glaring example.  Investment banks, lawyers, auditors, management couldn't catch the $8 billion accounting fraud in due diligence before closing an acquisition ?

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
Nov 20, 2012 12:54PM
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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...."

And....

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".

Nov 20, 2012 10:54AM
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Darn, I was hoping for a 10% correction off the top.  Could still happen.  I don't think the bull is over with the economy still at such low levels and things looking better overall. I was expecting a 10 year bull market off the bottom in 2009.
Nov 20, 2012 10:25AM
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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 ...?

Nov 20, 2012 10:19AM
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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...

Nov 19, 2012 9:27PM
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Here we go again. Three year end fiscal crisis; Greek debt, Fiscal cliff and slowing economy. Now we're going to have three year end fiscal solutions; Greek debt, Fiscal agreement and economy mending. Oh well, we go up 6% and we go down 6% 2-3 times a year. That's 36% a year if you're a trading wizard.
Nov 19, 2012 8:48PM
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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?

Nov 19, 2012 8:39PM
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They would be a bargain if Obama was not president.

We would not be experiencing this market dump if Romney had been elected. Let's see what the socialists can do without us!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1

Nov 19, 2012 8:10PM
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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.   

 

 

Nov 19, 2012 7:46PM
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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.

Nov 19, 2012 7:41PM
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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.

Nov 19, 2012 7:26PM
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Just think we are only 1000 points from geting back to our high for the year!!!!!!!!!!!!!!!!!!!!!!!
Nov 19, 2012 7:25PM
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The only thing a investor wants either good or bad is to purchase stocks on fact and results.  Losing gains to rumors and gossip and hearsay is **** and only for speculators and manipulation of the markets. To lose money from a companythat lost money is one thing but to lose money because they think this might happen is another.
Nov 19, 2012 6:59PM
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how many times are you going to say this - one day you prove it is going up another day - it's going down - paid to make people jump - someone should take you off the site. You are just a paid phoney
Nov 19, 2012 6:40PM
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This is a fools rally, one last gasp in the hope that it may spur  better Christmas sales. John Williams' Shadow Stats puts unemployment (using today's gov. data and gov. methodology from 1990) at 23% Inflation using same stats is now running at 9%. Anybody who thinks this is going to end well for investors is out of their mind. When government cuts kick in next year the economy will drop like a rock. When everything is based on lies, funny accounting, and massaged statistics only bad things can happen.
Nov 19, 2012 6:37PM
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Do yourselves a favor, invest OVERSEAS, buy SPECIE, Guns and Ammo...

Prepare for 4 more years of democrat economic Malaise....  Anyone want to wager we will be in worse shape economically 4 years from now than we are today?

Nov 19, 2012 6:21PM
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Here's a direct quote from Anthony's column of 10/16/2012. (Just last Friday)

 

"But I have been and continue to be a buyer, as I believe that the downtrend, since the September market high, has nearly run its course".  

 

 

You may hate everything about the stock market, about politicians, about the direction of our Country, but the truth of the matter is that for the most part Anthony has been EXTREMELY accurate in his forecasts.

As they used to say in the hood, "Don't hate the player, hate the game."

To all the bears out there...what has your negativity accomplished for you these last few years?  Your constant "SELL SELL SELL" advice, if taken, would have been disasterous.  There are a lot of corporations out there who are VERY productive, VERY well financed, VERY profitiable, and sitting on an awful lot of cash.  Are they hiring? Nope.  It would seem that the current amount of employees they have is sufficient.  You may not like the way they run their businesses, but from a purely capitalistic viewpoint, they are golden.

 

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