Is this as good as the market will get?

A surge of short covering and excitement marks the start of 2013. It could also be the year's high, as the months ahead look difficult.

By Anthony Mirhaydari Jan 2, 2013 1:00PM

Close-up of a burning sparkler copyright IMAGEMORE Co., Ltd., Imagemore, Getty ImagesThe risk-on complex is moving higher -- save currencies -- after Congress kicked the can on the fiscal cliff at the cost of the House Republican leadership. 


The deal, which maintains the Bush tax cuts for incomes under $400,000 to 450,000 (but ends payroll tax cuts) and delays the sequester spending cuts by two months, will add $4 trillion to the deficit over 10 years, according to the Congressional Budget Office and will subtract 1% from GDP growth this year.

 

This is exactly the kind of punt on the deficit that the credit agencies have been warning about, and it sets the stage for an even uglier fight over the Treasury's borrowing limit in the weeks to come.

 

The unresolved nature of the debate, along with a looming Q4 earnings season likely to be disappointing, new recessions in Europe and Japan, and shaky consumer and business confidence, and by all indications, the two-day market blast may very well be as good as it gets for the bulls this year.


For one, as the charts below show, the market is tracing out a pattern very similar to the lead up to the August 2011 market meltdown. Lots of stop running volatility, ups and downs before the crash started. This is the nature of the computer-driven trading reality as real, human participation continues to diminish.

 

 

There are other reasons for skepticism.

 

Breadth suggests the recent surge is being driven by a narrow subset of the market. That's a sign of weakness, like a house built on a shaky foundation. While the NYSE Composite has pushed above its September highs, on Friday the percentage of NYSE stocks above their 50-day moving average was just 69% vs. 85% back in September.

 

 

And since the fiscal cliff deal was passed with more Democratic votes than Republican ones in the House, it will likely mark the end of House Speaker Boehner's run as President Obama's legislative opponent. His second in command, House Majority Leader Cantor, voted no on the deal and is expected to challenge Boehner on Thursday when the House selects its new leadership.

 

Cantor is one of the self-identified "Young Guns" in the Republican House and will be a more aggressive challenger on issues of spending and taxes. Obama has already expressed his desire to see the sequester spending cuts offset with a combination of tax hikes (via deduction limits) and spending cuts.

 

It's hard to see Republicans giving any more on taxes now without deep spending cuts and entitlement reforms. That will be the point of contention that makes the debt ceiling fight so much rougher than the fiscal cliff. 

 

Plus, the optics of the debate have shifted in favor of Republicans. It's not longer middle class vs. the rich. They've already raised taxes on the wealthy. Now, it becomes about spending vs. debt -- a firmer ground for fiscal conservatives to make a stand on.

 

So, if you thought the fiscal cliff debate was harrowing, just wait. Instead of the cost of failure being tax increases for everyone, the cost of failure now is a default by the U.S. Treasury. And if Congress kicks the can again and doesn't stop the medium-term rise in the debt-to-GDP ratio, the rating agencies, by their own commitments, will start issuing downgrades. 

 

By adding the sequester to the to-do list, the task has been made even more difficult.
Gap stock market surges like the one we're seeing today often market topping events. With volatility, market, and political risk so high, for most conservative investors, I continue to recommend moving to cash. A little upside could be had by adding exposure to the PowerShares DB US Dollar Bullish Fund (UUP), with the greenback poised to move higher once today's ebullience fades.

 

A more leveraged play on the same idea would be the ProShares UltraShort Euro (EUO).

 
Disclosure: Anthony has recommended 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 anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.   

 

59Comments
Jan 2, 2013 2:18PM
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US (Congress and President) still has to deal with the debt ceiling and that will require spending cuts across the board with maybe a little more tax increases. You'll see Medicare eligibility age finally tied to Social Security. You'll see SS age raised by 1-2 years at 1 month per year over the next 24 years for those under the age of 50. You'll see defense spending cut another 5-10% as we say goodbye to the Middle East and hello to alternative energy. We also see tax reform by eliminating or limiting deductions for home mortgages and other giveaways. We also need immigration reform really bad.
Jan 2, 2013 4:58PM
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The Liberals got their tax increase on the wealthy. What? That still leaves us in dire straights? But... Hey... Didn't that... Wasn't that supposed to...

 

No, It did essentially nothing to better our economy and reduce our deficit. All it did was get Obama re-elected. Like all the conservatives have been blogging about for months, is that it would have little to no impact on the solvency of our wasteful government.

 

Be careful Democrats, It wont be long until anyone with a job, any job is considered 'Wealthy' and they come after you for your "Fair Share'

Jan 2, 2013 5:31PM
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If I ran our household budget like Congress runs the USA budget, my wife would shoot me!   She'd probably get off under a plea of "Justifiable Homicide"
Jan 2, 2013 5:06PM
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It used to be that the "Stock Market, in general- and "Individual Stocks" specifically were an indicators of the overall health & well-being of the their specific industry or the general out-look and direction of the Country as a whole.  This hasn't been the case for years!!!  The Market is nothing more than "Legalized Gambling" and most of the games are "rigged".  The best investment you can make is to invest in yourself. Get a better Education, start your own Business...OOPS- SORRY...that doesn't even work now that the Government is going to "tax the hell" out of anyone or any business that makes MONEY.  So much for the "Incentive" to "Make it Big in America"... the Government just took that away from as all!!! 
Jan 2, 2013 4:53PM
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The president has been the single largest contributor to this problem (1/3 of the national debt in his first 4 years) so he needs to solve by admitting that his stimulus spending was a failure and spending cuts are what are needed,  Sure it's bad for the economy in the short term but the last 100 year party brought to you by Progressivism has to stop sometime.  It's time to man up and end it now.
Jan 2, 2013 5:19PM
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If the market is going to jump over a screwed up agreement about the fiscal cliff, leave me out!
Jan 2, 2013 4:13PM
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This definitely wasn't a "win" for Democrats. They'd have been better off to see January 1 arrive without a deal. That would have let all taxes rise to pre-Bush levels and established a foundation upon which the Republicans would have something to "win" by voting for tax cuts for the middle class, up to $250,000 by negotiation, and for spending cuts by trimming defense and other programs.

 

Instead we get what appear to be permanent tax cuts for those making up to $400,000 a year while the middle class sees their effective take home decline with the reinstitution of with-holding.

 

Sure, social security with-holding needs to begin again at normal rates, but not necessarily now, and assuredly not without lifting the cap on income so that the receipts collected increase.

 

And this agreement did nothing about joblessness in the U.S., still the largest obstacle to a full recovery.

 

We've ended up with two parties in office that are effectively of one mind, if of different names. The wealthy profit from this agreement, but not the middle class.

 

 

Jan 2, 2013 6:59PM
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I concur 100%.  All that was done was kick this bag of s--- down the road.  I am ashamed to be an American after 2012 continuous display of irresponsible performance and behaviour by those we placed in office to serve and protect us.  I hope today's market performance reflected business sentiment going forward and not the reaction of a  mob that is easily appeased by throwing them a few loaves and fishes (i.e., the deal).  Now let's see if business can take control and move this market in the direction it should have been moving over a year ago regardless of what our elective officials do in the month's ahead.  I think it is time for American Business to show our Socialist Government that we don't care what they do (or don't) and what they do doesn't matter - American Business must move the country forward - capitalism is what this Country was built on and Business needs to take control.  
Jan 2, 2013 5:36PM
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The surge in the market was totally predictable, and I took some money off the table today.

 With all the angst  and hand wringing over the fiscal cliff, an agreement was a sigh of relief for the market and an inevitable reason to push stocks higher. Not always but often, the market takes a second look at its hysterical behavior and suddenly becomes more circumspect and rational. While we may have a day or two more of irrationality, I expect the market will quickly cool off. To what extent I don't know. 

It is only a couple of hundred points from its 52-wk high, and I can't see much reason for it to do all that much this year with all the political and economic problems. 

BTW I got a red MB C63 AMG for Xmas. What did you clowns get? A tootsie roll? Har har har!
Jan 2, 2013 6:28PM
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So without further ado, here are eight corporate subsidies in the fiscal cliff bill that you haven’t heard of and I am sure...they all benefit the average American citizien.  This whole fiscal cliff deal is nothing more than a joke, an embarassment and once again proves how corrupt our system is and of course Wall St. "soars" on the great news.  All I can say...is bullsh*t!!!

 

 

1) Help out NASCAR - Sec 312 extends the “seven year recovery period for motorsports entertainment complex property”, which is to say it allows anyone who builds a racetrack and associated facilities to get tax breaks on it. This one was projected to cost $43 million over two years.

2) A hundred million or so for Railroads - Sec. 306 provides tax credits to certain railroads for maintaining their tracks. It’s unclear why private businesses should be compensated for their costs of doing business. This is worth roughly $.

 

3) Disney’s Gotta Eat - Sec. 317 is “Extension of special expensing rules for certain film and television productions”. It’s a relatively straightforward subsidy to , and according to the Joint Tax Committee, was projected to cost $150m for 2010 and 2011.

 

4) Help a brother mining company out – Sec. 307 and Sec. 316 offer tax incentives for miners to safety equipment and train their employees on mine safety. Taxpayers shouldn’t have to bribe mining companies to not kill their workers.

 

5) Subsidies for Goldman Sachs Headquarters – Sec. 328 extends “tax exempt financing for York Liberty Zone,” which was a program to provide post-9/11 recovery . Rather than going to small businesses affected, however, this was, , “little more than a subsidy for fancy Manhattan apartments and office towers for Goldman Sachs and Bank of America Corp.” Michael Bloomberg himself actually thought the program was excessive, so that’s saying something. According to David Cay Johnston’s The Fine Print, Goldman got $1.6 billion in tax free financing for its new massive headquarters through Liberty Bonds.

 

6) $9B Off-shore financing loophole for banks – Sec. 322 is an “Extension of the Active Financing Exception to Subpart F.” Very few tax loopholes have a trade association, but this one does. This strangely worded provision basically allows American corporations such as banks and manufactures to engage in certain lending practices and not pay taxes on income earned from it. According to , supporters of the bill include GE, Caterpillar, and JP Morgan. Steve Elmendorf, super-lobbyist, has been paid $80,000 in 2012 alone to lobby on the

 

7) Tax credits for foreign subsidiaries – Sec. 323 is an extension of the “Look-through treatment of payments between related CFCs under foreign personal holding company income rules.” This gibberish sounding provision cost $1.5 billion from 2010 and 2011, and the US Chamber loves it. It’s a provision that allows US multinationals to not pay taxes on income earned by companies they own abroad.

 

8) Bonus Depreciation, R&D Tax Credit – These are well-known corporate boondoggles. The research tax credit was projected to cost $8B for 2010 and 2011, and the depreciation provisions were projected to cost about $110B for those two years, with some of that made up in later years.

Conveniently, the Joint Committee on Taxation in 2010 did an analysis of what many of these extenders cost. You can find that report .


Read more at
Jan 2, 2013 6:41PM
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As much as we want these markets to go up, what we had today was a relief rally, an emotional reaction and plenty of short coverings....Don't misunderstand, its great to soar but, whenever people stop and think and evaluate what happened with this so called "fiscal cliff", that's when reality will set in...It was a bad bad deal, almost no spending cuts and taxes going up on everyone, that is correct, everyone that pays taxes, that is...And the party is just starting, debt ceiling arguments coming up...Celebrate tonight and be ready for reality to set in tomorrow or the next day...Hey, this is what happens when you have a marxist, incompetent community organizer as president...Sad.
Jan 2, 2013 7:36PM
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Kicking the can down the road.  We no longer have any politicians who give a rat's **** about the future of this country.  They only want to increase their own power by spending money other people have worked to earn. The USA is the walking dead because it is just a matter of time before we collapse
Jan 2, 2013 5:36PM
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The rich get richer and the rest of America pays for their crooked butts. Well at least O-Abomination can pay for his vacations now and put us another 13 trillion in debt before 2016.. Everyone paying for this roller coaster ride and wall-street working the fools again to rip us off again.
Jan 2, 2013 6:51PM
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OBAMA IS THE one I blame for most if not all of this.  HE IS suppose to be the leader and he is a CATEGORICAL FAILURE at leading.
Jan 2, 2013 5:43PM
Jan 2, 2013 6:17PM
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I guess if someone threatens to kill you and they only take off your leg then you are grateful. So it seems to go with us and Congress.
Jan 2, 2013 4:02PM
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Yes the long view is negative but for the rest of the month, lets make money.
Jan 2, 2013 5:29PM
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I've been on MSN MONEY for 1 year now and remember   advising investors to stay out of the market at the beginning of 2012. 
Jan 2, 2013 9:12PM
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Hi, there is nothing that out performs the stock market, over a 20 year peroid, not housing , gold or land, a wise man puts his money in good Blue Chip, American stocks !
Jan 2, 2013 5:03PM
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Anthony makes a lot of good points. I expect this will be a rocky year for the market contrary to the predictions of the market pros. Until and unless, Washington starts acting in the best interests of the American people, business, the economy, and the market will be in a holding pattern.

Don't like my view? Well why did you vote for Obami El Salami fools?
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