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 email@example.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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.
Yes the hope from big investment houses that the sucker and chump factor still shows signs of life...
Just wait for the sell off either tomorrow or Wednesday.
Anthony, I guess facing yourself in the mirror every morning is still not an issue. Take your advice that's channeled through your corporate sell side masters and shove it up your rear. Folks, this is a short covering squeeze so that all the margin called hedge funds and primery dealers can get a better exit point by year's end.
Mir - ha - ha - ha - ha - ydari. Don't trust him. Don't believe him. Don't have anything to do with him.
Wall Street is a mess. They so want your money so bad that they have priced in everything. The next terrorist event? Priced in. Buy. Buy. Buy. The European debt (sovereign and fiscal) crisis? Priced in. Buy. Buy. Buy. The "Fiscal Cliff" thingy? Up or down: all priced in. Buy. Buy. Buy. Capitialism? All priced in. What Capitalism? Capitalism is dead. Buy. Buy. Buy. Free Market Economy. What Free Market Economy? All priced in. Either way. Up or Down. All priced in. Buy. Buy. Buy. Get the idea?
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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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