It has been my position that Sequestration is not that big a deal, it is likely to be eventually resolved with minimal impact, oh, and even if implemented, it is a minor hit to GDP.

If you want the corollaries to this, it is the creation of an incessant media noise machine, initially CNBC but now enjoying the widespread MSM adoption of a congressional sex scandal. Its meaningless in the long run, but it generates page views.

If you want to reveal your ignorance in the matter, just use the phrase “Fiscal Cliff” — its code for “I haven’t any idea what I am talking about, but lets  jump on the bandwagon and hope no one notices.

To wit: the hardening of positions as the supposed deal has fallen apart. Both political parties seem to simultaneously want AND be afraid of a deal. President Obama put Social Security on the table — it has nothing to do with the deficit, and has therefore enraged his core supporters. House Speaker Boehner put tax increases on the table, and suffered a rear guard revolt. His job is in danger, with a few names floated as replacing him. Each side seems to be secretly hoping for a miracle, namely, sequestration occurs, and the other guys get blamed. I guess this is what passes for leadership these days.

Now, with deals falling apart and positions hardening, it means the end of the market rally.

Or does it?

As the chart below shows, myriad deals points have been floated, endorsed, critiqued and rejected. All the while, Santa has come to Wall and Broad. The S&P500 is 100 points higher than where it was a month ago, despite little motion on a deal. Regardless of what your views on the current theater of the absurd in DC, the one thing that is inarguable is that as the compromise deals have fallen apart, the markets have shrugged it off and powered higher.

I have repeatedly stated that day-to-day action is nearly all noise, and most explanations are after-the-fact rationaliztions. Every rally ends, and this one could sputter to an end today. But I am curious as to how the Rise Above clown show will explain the current market action if it continues to power higher in the face of (the horror!) uncertainty    . . .

 

 

 

Sequestration Offers and Counteroffers

Source: Wonkblog

 

Category: Markets, Politics, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

34 Responses to “Market Rallies as Fiscal Cliff Deal Fails”

  1. gordo365 says:

    So – from the charts – none of these back and forth deal offers included any defense spending cuts? Stunning. Simply stunning.

    The gun lovers are going to either treat kids as collateral damage or bankrupt the country or BOTH.

  2. Jack Damn says:

    But I am curious as to how the Rise Above clown show can explain the current market action.

    I hate to sound simplistic, but isn’t this mostly “end of the year” mark-up? As for this week, it’s Op-Ex week in December:

    - http://quantifiableedges.blogspot.com/2012/12/the-most-wonderful-week-of-year.html

    Over several time horizons op-ex week in December has been the most bullish week of the year for the SPX. The positive seasonality actually has persisted for up to 3 weeks. [...] Even though last year failed to see a move higher during opex week the stats still appear extremely strong.

    I think the selling in November was for tax reasons due to Fecal Cliff fears (dividends, four more years of Communism, healthcare at gun point, etc…). Pretty easy to see that by looking at Utilities.

    I don’t think the buying in December has much to do with Washington or the Fecal Cliff unless, as you write, investors/traders realized in the 13th hour that it was all blow and now show. I think the buying now has more to do with chasing into the end of the year performance, sector rotation (Financials on fire), prep for 2013, etc…

    Also, Friday is the end of the world. So, no need for stops on your trades. Just let ‘em run.

  3. Hugh says:

    The market may have priced in some sort of compromise solution that (might) include going over the cliff in December and then climbing back in early January 2013 with middle class tax cuts.

    Hey, and Ben is still buying $85BN of paper a month, with so very few shopping days in December.

  4. Jack Damn says:

    Also…

    A lot of people point to “low volume” as a reason of lack of participation by Mom & Pop USA in the stock market, but I’d like to point out that most of that “lack of participation” is lack of selling. There are fewer sellers today then there were years ago … not fewer buyers.

    Plus, the Fed has the market back-stopped. Any major pullback WILL be met by Fed intervention. Why would anyone sell for any length of time? What are going to do: put it in the bank?

    As such, pullbacks are shallow and bought up. Thus the reason November tax selling gave way to December end of the year performance chase over fears of political policy.

    Until the sellers return to the market, the fear of a major pullback lies in the hands of the remaining market participants … and they’re all mostly buyers and the Fed. There is no other (or very few) place where these particular buyers can get the kind of return on their money that they can in the stock market.

    Bank Of America (BAC) is up almost 100% this year. KBH (home builder) is up 150% this year. It’s the only game in town for these buyers who need that kind of return.

    Unless earnings dive (highly unlikely) the market will continue this pattern. No sellers. That’s what the low volume is telling you and that’s why what happens in Washington has only a knee-jerk affect that has the duration of a sugar buzz.

  5. Really? I always thought (LOL) you needed a seller for each buyer, and vice versa . . .

  6. JohnT says:

    As for “fiscal cliff”, it doesn’t count unless it is a looming fiscal cliff. I bulk my arms out to appear as “looming” as possible, whenever I intone the cliche.

  7. denim says:

    “Why the “Fiscal Cliff” is a Scam” In four parts by James Galbraith
    http://therealnews.com/t2/index.php?option=com_content&task=view&id=33&Itemid=74&jumival=951

    While the Fiscal Cliff is a scam, the Financial Crisis is not a scam and it is world wide and it benefits a few perps. More by James Galbraith:

    “Yesterday we heard Professor Nouriel Roubini give a magisterial and very high speed tour of the world situation making it clear of course that the promised recovery has not occurred. But if Nouriel is Sir Isaiah Berlin’s fox, who knows many things, let me try this morning to be the hedgehog who knows one big thing, and that one big thing is that what we are experiencing is a single, unified, global crisis of the economy and of the financial system. It is not a cluster of distinct and separated events; a subprime crisis in the United States; a public debt crisis in Greece; a bank crisis in Iceland; a real estate bust in Ireland and Spain; nor are there distinct U.S. and European crises, nor can the financial be separated from the real, nor is Germany a country to which crisis has not yet come with the suggestion that there might be some separate way out. There is one crisis, only one crisis, a deeply interconnected crisis of the world system. This crisis has, I think, three deep sources going back not twenty years but forty years to the early 1970s and the end of what we sometimes call the “golden age,” the “glorious thirty” years in the immediate aftermath of the second World War.

    The first of the three deep sources is, I think, the rising real cost of the resources that we use, of energy and of everything that we use energy for. … …”
    http://yanisvaroufakis.eu/2012/12/12/we-all-live-under-the-dark-cloud-of-the-same-crisis-james-galbraith-at-germanys-ig-metall-trades-union-congress-7th-december-2012/

    And since GE has determined the cost of solar generated electrical energy is going to be competitive with any other form of generation, like nukes, natural gas, and coal. Why doesn’t the US get the jump on the world with cheap energy and be the world leader in really clean manufacturing?

  8. smedleyb says:

    You got it all backwards, Barry.

    Rise above — resistance levels across multiple indexes and sub-indexes!

    That’s not punditry, just good stock forecasting.

  9. There is no such thing as “Good Stock Forecasting”

  10. Jack Damn says:

    Really? I always thought (LOL) you needed a seller for each buyer, and vice versa . . .

    Yeah, yeah…that’s not what I meant…whatever.

  11. Jack Damn says:

    There are few people selling and walking away then before.

    Selling is rotation or mechanical … not sell to go somewhere else as during 2007-2009. That’s why there are fewer long term sellers in the market today. Volume has leveled out to those who will buy and sell and buy. Not buy and sell and fuck off as before.

    Fewer long term sellers.

    And again, the December buying isn’t conspiratorial. It’s December … a usually positive month with a smaller pool of market participants that have no intention of selling and walking away (in bulk).

    To-da.

  12. TLH says:

    I have read that the smart money is betting the market is going down while the dumb money is buying the market. Since the dumb are running the federal reserve and our government, the market goes up.

  13. rd says:

    I think the biggest single hit to GDP early in the new year will be the expiration of the temporary payroll tax reduction. Probably every dime of that has been spent within days of the paycheck getting deposited.

    I think the least impact would be the rise in the top end marginal tax rates. Very little of that money is likely being spent.

    My guess is that Geithner & Co. will be able to play lots of little sequestration games to buy three months before actual government spending tails off, so that won’t be an impact unless they are still struggling to come up with a deal in the spring.

  14. Bill Wilson says:

    When a deal is finally made, traders will have to take profits, so the market is rallying in hopes of future deal rumors. This whole fiscal cliff situation was probably planned out in a Goldman board room. “When the muppets sell, because they’re worried about the fiscal cliff, we’ll buy. When the muppets buy, because a deal has been made, we sell.” The whole thing is perfectly timed for a year end rally, and a January pull back.
    I’m obviously joking, but how many times have we seen this. The market rallies on rumors of deals, bailouts, etc… Then sells off when the deal is made.

  15. Crunchy Breaded Fish Sticks says:

    BARRY,

    So have you changed your asset allocation?

    In late October you announced cutting S&P500 exposure by half, and affirmed that investment posture throughout November, even as the S&P500 bottomed. But suddenly last week you told Bloomberg TV that you were “all in”.

  16. Yes, we made a number of changes over the past few weeks — it will be updated in an end of year (or beginning of year) post.

  17. AHodge says:

    sequestration is the term for the specific spending cut technique
    you would not have even know it but from congressmen

    most of this package is not spending cuts
    the biggest tax hike to avoid is the AMT patch which they will probably do next week?
    so that solves a quarter of prob
    if they pass a — hold taxes for most– bill next week
    that solves most of it–sequstration alone and properly defined not so big for austerity
    and has some good qualities

    im partly with ya fading this
    but if they let all ride more than 2-3 weeks into new year
    or even all but AMT i think we will have a mild self inflicted recession
    –because of all the other weak stuff you cite
    and econ so weak-we not far from the turndown edge

    this is not end of world, not real pretty either
    –over in europe they have the policy inflicted ” end of the world”

    another debt ceiling crisis if unfixed by march would be bad
    –worse than above

  18. CSF says:

    First, the market could be rallying in part because of QE4, encouraging signs from China, and relative peace and calm in Europe.

    As for Washington, you may be right. It’s also possible that the market is pricing in compromise in the near future, if not before January 1st. The similarity between Boehner #2 and Obama #3 probably says more than the political rhetoric.

    The real question is what happens next. What will earnings look like in the first half of 2013?

  19. I don’t know about fiscal cliff- but if I see “Santa Rally” posted one more time I am going to punch CNBC in the face:

    “Early Santa Rally? If Congress Doesn’t Mess Up”

  20. Mike in Nola says:

    We don’t need no stinkin’ deal. If there is one, it just shows how Obama is willing to sell out the bottom 75% to secure his future corner office and speaking fees.

  21. AHodge says:

    but im not really rworried about debt ceiling
    because this is exclusively republican–no negotiatin needed
    just do it Rs
    or abolish it like you should

    look at us world we are important
    its theater or conceivably they think a negotiating chip
    but Boehner already talking about big one two year raise

  22. AHodge says:

    so i think you were trying to find a not threatening substitute for “cliff”
    But sequestration not so good
    i like constance hunter’s fiscal bunny slope

    remembering you could even get dinged on that a little–if you are a beginner

  23. DeDude says:

    The so-called “fiscal cliff” is about changes in GDP and it is well known that there is not that great a correlation between stock market prices and GDP. Think October 1986-87; stocks moving like crazy in a stable economy. Think March 2009-10 stocks having huge gains in a struggling economy. Even if you still think GDP is somehow connected to stock market prices the real GDP affecting issues in the “fiscal cliff” talks are pretty much decided. The loss of the 2% pay-role tax cuts will cut GDP about 0.7% and that is pretty much a given. The thing they are really fighting about is the tax increases for the rich, and if implemented that will only cut GDP by 0.1%. So the critical cuts to GDP are pretty much locked in already (regardless of cliff or compromise).

    The thing that matters to the stock market is how much more money will be put out by the Fed – and a steady stream has been guaranteed by Ben and his bodies.

  24. constantnormal says:

    “… Market Rallies as Fiscal Cliff Deal Fails”

    … not today … perhaps the markets know that nothing much is to be expected from our Repooblican/Democrap duopoly, and the existing tax situation and the usual-and-customary end-of-year scramble to dress up fund balance sheets, is what is driving this market … and nothing else matters

  25. mad97123 says:

    Everyone knows Santa will lift the Markets in December. Since every trader knows this fact, the markets must rise, because they always do. Has nothing to do with the cliff.

    To Jack Damn’s point, all that money on the sideline must be invested, it can’t sit in the bank. The sellers will immediately realize they have the cash now, and buy back at higher prices.

  26. James Cameron says:

    > I think the biggest single hit to GDP early in the new year will be the expiration of the temporary payroll tax reduction. Probably every dime of that has been spent within days of the paycheck getting deposited.

    “Now it appears that the tax cut won’t be extended. That alone will reduce the take-home pay of a typical American worker by about $1,000. J.P. Morgan economists estimate the expiration of the payroll tax holiday would put a 0.6 percentage point drag on GDP. CBO’s numbers bundle the payroll tax cut and extended insurance benefits together, and get a cost of 0.7 percentage points of growth and 800,000 jobs. In an economy that has been growing only around 2 percent a year, those numbers could have a significant effect on the recovery.”

    The ‘fiscal cliff’ deal could hurt the economy

    http://goo.gl/OaITB

  27. drtomaso says:

    I can’t take credit for this, because I think I read it on Krugman’s blog, but it has a start ring of “oh, duh” to it, which is why I think it will happen.

    (1) We go off the cliff.
    (2) Dem’s introduce a middle class tax cut for those making $250k or less in income.
    (3) Republicans will make a show of fighting it under the auspices of deficit hawkishness, but in the end, they never met a tax cut they didn’t like, and they need to get re-elected in the end as well.
    (4) Programs de-funded by the cliff will slowly be re-instated, as their constituents raise holy hell.
    End state: taxes go up a little on those over 250k due to the expiration of tax cuts. Sequestration will eventually be scaled back as individual programs get their funding restored. Dems get to say they protected the middle class while sticking it to the 1%ers- Republicans get to stick to their silly little tax pledge by never actually voting for a tax increase.

    Everyone leaves happy, except perhaps CNBC anchors (but they can make it up by flooding the collectibles market in 20 years with their silly little pins).

  28. VennData says:

    “…Really? I always thought (LOL) you needed a seller for each buyer, and vice versa . . .”

    This is why I do NOT read this blog. It’s a simple fact that you can burn your stock certificates and ergo, there would be no buyer. It’s called Supply Side Demand Destruction, something we tried to get people to do with GE stock all the time. I’m sure Buffet is constantly burning some of his portfolio positions, every day, to make the value of his other stocks go up. But, why he bought into GE after I left is crazy. And to think he pays he secretary enough so that her taxes are higher than his. He’s a nut case!

    – Jack Welch

  29. 4whatitsworth says:

    It’s an especially tricky time on one hand it does look like our fearless leaders will mostly kick the can on the other hand the economy has a real economic recovery underway.

    As far as the political situation goes there seems to be a consensus that there will be a one to one trade on tax revenue vs expense cuts. As we know each side has its position so it is easy for them to agree not to hike taxes and not cut spending. What the plan is on the debt ceiling is remains to be seen, I suspect those are the real discussions going on. The best news for those who want to believe that this government will be good for the markets and the economy is that Bernake has said that the US will flood the market with cheap money until the economy comes back and people are back to work. If you really believe that deficits don’t matter and Obamanomics work then you should bet farm now go barrow as much cheap money as you can and by stocks or other income producing securities. A good bet would be emerging market stocks they take American dollars at the moment. If I were in this camp I would worry about big unions and strikes history has shown what this culture does in the long run.

    Relative economics aside the economy wants to recover and has some really good things going on. Consumers have cleaned up their personal balance sheets, companies are very lean and well managed, and all the fear and uncertainty has created opportunities for risk takers. This said I think that Q4 profits for capital spending companies are going to be low. We will see if consumer goods companies can make up the difference. This will be the first reality check for market. The second reality check is what happens when the payroll tax cut comes off, Obamacare tax kicks in, and risk takers are taxed more for their risk.

    To sum up my view there are three dynamics at play that should be watched carefully the monetary printing press, the result of all the little tax hikes coming, and mood of risk takers. What’s going happen.. I have no idea it looks like the government to going to print more money than will be absorbed by tax hikes so cash is trash. I think the big question is who is up for the big risk because there are many opportunities but when the printing slows down its going to be painful. At this point I am all in the market on my tax deferred accounts and don’t have much to sell in my non tax accounts. For my taxable investments I am in the stay real camp and have changed my investment horizon to look 5-10 years out and provide a tax hedge. The only risk I am interested in are things that have an international appeal, protect me against inflation, and are not taxed until I execute the transaction. My big worry is international politics and WW3.

    BR, I would be interested in your thoughts as to what happens when interest rates revert to the mean.

  30. constantnormal says:

    Hey, BR, as you are an analytical informatics kinda guy, didya ever consider a market indicator of coincident opinion by the “professional” analyst community? Perhaps an unweighted and asset-weighted version of it?

    The recent profusion of analysts projecting an up year for the equity markets in 2013, combined with the chart of the day [http://www.chartoftheday.com/20121219.htm?T&utm_expid=13704437-7] got me to thinking about such a metric …

    “The Ritholtz Scale” … you could get into the textbooks alongside Bob Schiller …

  31. drtomaso says:

    People still see their stock certificates? Or can you call up your custodian and for a fee have them do the burning? I guess that’s safer- they burn so many they probably have like special equipment.

    I imagine this comes in handy in the commodities markets. Forget to roll over those December contracts and don’t want to pay to store all that corn? Call the Burninator.

  32. constantnormal says:

    I thought that paper certificates were a thing of the past, but apparently not …

    And as for the electronic registration of stock ownership, is it any more reliable than MERS?

    (I certainly hope so)

  33. The Treasury Dept will be handcuffed by the $16.4 trillion Debt Limit in five days and the Fiscal Cliff issues commence to hit the fan the following week. Obama pretends to be making hurtful concessions but the facts are otherwise. Negotiations in DC appear to be merging around $1 trillion in cuts over the next ten years. But the leftist media does not explain to folks the cuts are not cuts, but merely a slowing of the spending increases.

    My Debt Wall model calculates the federal debt will rise (on its present course) another $13.8 trillion over the next ten years. Today’s $16.4 trillion debt becomes $30.2 trillion in 2022. Congress will try to hide the fact the USA is in a Structural Depression by implementing nine more trillion dollar Deficits. Your federal gov’t is bankrupt … a dead man walking. It will face a treasuries yield crisis (7%) in 2024.

    Debt Wall & TRI charts: http://trendlines.ca/free/economics

    Debt Wall chart: http://trendlines.ca/free/economics/DebtWallUSA/DebtWallUSA.htm