I would hold off buying stocks here.\u00a0 Earnings momentum is poor, much of the world is in or near recession, stocks are not particularly cheap at 13.4x 2013E EPS of $106, and the probability we go over the fiscal cliff on January 2 is high\u2014over 75%, in my opinion.\u00a0 Why am I bearish on the Fiscal Cliff?\u00a0 Right after the election, John Boehner offered a significant concession \u2013 raising taxes on the rich by cutting loopholes.\u00a0 The White House came back with a complex proposal, really a Democratic wish list, that Republicans considered \u201cunserious\u201d if not insulting. When he heard it, Mitch McConnell burst out laughing.\u00a0 Meanwhile, just three weeks after the election, Obama is back on the campaign trail, agitating for higher tax rates on the rich.\u00a0 Not an auspicious way to start productive negotiations.<\/p>\n
An optimist would say Obama\u2019s opening bid is just posturing aimed at impressing his base, prior to concessions he will have to make later.\u00a0 If so, he was successful. NPR reporters were positively giddy when describing his derisive offer; CNBC likened it to the Godfather scene where Michael Corleone offers \u201cnothing\u201d to a corrupt Nevada Senator who demands a bribe to grant a gaming license. But this opening gambit, the optimistic scenario goes, will soon be followed by serious negotiation to avoid the cliff.\u00a0 Larry Kudlow reasons it would be terrible for Obama\u2019s legacy if, following a pathetically weak economic recovery in his first term, his second term starts with a recession.\u00a0 He\u2019d make Herbert Hoover look good.\u00a0 Some pundits say \u201cthe blame\u201d would be heaped on the Republicans, not Obama.\u00a0 To which Kudlow correctly counters, \u201cNo one knows who was the Speaker of the House when Herbert Hoover was in the White House.\u00a0 The President gets the blame.\u201d<\/p>\n
While it is impossible to disprove this optimistic scenario, there are good reasons to be skeptical.\u00a0 Following the bitter 2011 negotiation\u2014when Obama became enraged when Boehner broke off talks\u2014there is already plenty of \u201cbad blood\u201d between the two, and now Round II has started off on the wrong foot.\u00a0 Obama has always wanted to be a \u201ctransformational\u201d President willing to take chances with the economy; in 2009 he focused on healthcare reform rather economic recovery.\u00a0 Income redistribution is his top priority, and in his mind that means higher tax rates; liberal Democrats blame the infamous \u201cBush tax cuts for the rich\u201d for all that has gone wrong with the economy over the past decade. (Weird but true.)\u00a0 And Obama considers himself to be in a very strong position, because if we do go over the cliff taxes rise on everyone; he can blame Congressional Republicans for that and then negotiate a tax reduction for the \u201cmiddle class\u201d while leaving most of the defense cuts in place.<\/p>\n
Another reason for caution is that the issues in play are numerous and complex\u2014tax rates on ordinary income, potential cuts in tax deductions, tax treatment of dividends and capital gains, whether to extend the payroll tax cut, cuts in discretionary spending, the Alternative Minimum Tax, and reforms of Medicare and Social Security. And don\u2019t forget the need to raise the debt ceiling. \u00a0Republicans sound serious that they refuse to yet again \u201ckick the can down the road\u201d on entitlement reform, but liberal Democrats oppose changes to Medicare and Social Security (apparently even changes that mainly hit \u201cthe rich\u201d).<\/p>\n
Furthermore, we are hearing that the \u201ccliff\u201d is actually more of a \u201cstaircase.\u201d\u00a0 Unlike 1995 there will be no dramatic government shutdown, just a supposedly temporary rise in tax rates and a slow-walk by bureaucrats in Washington DC to reduce spending.\u00a0 (The Pentagon has yet to make contingency plans for going over the cliff.)\u00a0 So the sense of urgency is greater on Wall Street than in Washington which, after all, never saw a tax increase it did not like.\u00a0 But the Alternative Minimum Tax raises the stakes.\u00a0 Mellon Bank\u2019s Dick Hoey reckons that if the AMT is not fixed 28 million middle-class taxpayers will be hit with the AMT and, in many cases, not receive the tax refund they were counting on.<\/p>\n
Which takes us back to the stock market.\u00a0 If I am wrong and we do get a deal before year-end, one inducements is likely to be a stock market plunge in the U.S. and perhaps overseas.\u00a0 So, whether we do or don\u2019t get a deal by year-end, the upcoming fiscal cliff fisticuffs are likely to create a buying opportunity over the next couple of months.<\/p>\n","protected":false},"excerpt":{"rendered":"
I would hold off buying stocks here.\u00a0 Earnings momentum is poor, much of the world is in or near recession, stocks are not particularly cheap at 13.4x 2013E EPS of $106, and the probability we go over the fiscal cliff … Continue reading