A Haystack Filled With Needles

 | Nov 07, 2012 | 7:28 AM EST  | Comments
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Do we really have to start the fiscal cliff drumbeat immediately? Or can we just stipulate that at some point we will be down 1,000 Dow points, maybe more, before anyone acts to bridge it?

I want to approach the cliff discussion in three serial ways, the order that will define the stock market.

First, we had an election last night. It was definitive. There's no disputing Cleveland votes. There were no hanging chads in Florida. In fact, despite the big swath of red in your face, it wasn't even close. That's right, I repeat, it wasn't even close. The way election coverage unfolds is per se close, but let's just imagine that Ohio, Pennsylvania and Virginia closed at 7 p.m. and could tally instantly. We would have been in bed at 10 p.m. It's the way news is filtered that it seems so close. I wrote the lead story in the Harvard Crimson about how Mississippi put Carter over the top in the 1976 election. It seems silly right now, I mean, did Colorado put Obama over the top? Who cares? He went over the top by a wide electoral margin and you may hate that we use electorals but, as they say in sports, that's all she wrote.

Given that we have a resolution, we can't sniff at having a resolution. We are therefore better off than we were yesterday when there was plenty of news about how we won't have any resolution.

Second, given that we have seen this tableau before, like the last four years, we can't presume that we are going to see a wholesale repeal of prices. What's the point? The Romney boomlet, and that's what it was, impacted coal. It didn't even impact oil. There weren't a heck of a lot of stocks that ran in anticipation of a Romney surprise even as the Romney people on air at CNBC seemed mighty surprised and like Josey Wales in "The Outlaw" of the same name, they didn't want to believe the war was over and were still declaring victory.

Maybe they will sell their coal stocks today.

Third, the focus has to be on earnings, not fiscal cliff because fiscal cliff is that kind of binary, risk-on, risk-off garbage that people who don't want to do the homework on individual stocks get to throw out. How I wish I had that luxury, but I co-manage a charitable trust, have a lightening round and have prided myself not on saying "the national league will win the series," but on picking the team that does, because, ultimately, no one wagers on the National v. the American league except people who are too lazy to find out who is playing.

So, no legal challenge, no different regime and no risk-on, risk-off approach to the fiscal cliff.

All that said, after last night's Democratic victory, and lets call it that, the fact is that there are people who won't call it that. Many of those people are cliff walkers. I want to send them to Newport, Rhode Island where they can cliffwalk among the mansions because  a byproduct of what these people believe in is lower stock prices and I favor higher stock prices. It is undeniable that if we go over the fiscal cliff it is simply better to be short than long. I can name many more shorts than longs when we take the plunge so, I say "thanks for nothing," if these ideologues get the edge on the compromisers. If we are in a permanent state of battle then we are in a permanent state of the need to have one foot out the door.

But let me draw you into a radical thesis. First, not every stock will be sent down by the cliff or at least stay down by the cliff. You going to eat fewer Kellogg's Frosted Flakes? You going to drink less beer? Are foreigners, the swing  voters for many companies' earnings as diverse as Coca-Cola (KO) and Anheuser Busch going to sip less Coke and swill less Bud? I don't think so.

We can pick plenty of stocks to go with the moment. Don't trust this methodology just outlined? Then go buy some Carlsberg. Now, I like a good Carlsberg if I can find one, but the CEO this morning, when asked on Bloomberg whether he's worried about the fiscal cliff after his company reported a mighty quarter that moved the stock almost 4%, looked incredulous and said he doesn't sell a lot of Carlsberg in the U.S., but he is making huge inroads in Russia.

Maybe we should worry about a Russia fiscal cliff.

Nyet.

Again retreating to the non-binary notion of the true market as opposed to the risk-on, risk-off intellectual laziness, who says we have to buy Huntington Ingalls (HII), perhaps the company most affected by the Cliff because it makes naval ships and we know that Obama could lump them in with bayonets and horses if the Pentagon's not careful.

Maybe it's Newport News-on, On Nerwport News-off, to focus directly on ship building.

Ah hah, you say, but won't taxes have to go up and we need to sell dividend stocks so we have dividend-risk-on, dividend-risk-off? I think that one look at the makeup of Congress tells you that we aren't going to see a radical revision in taxes, even as that's a way off the cliff.

Sequestration, as loathsome as it is, will impact the tax rate for dividends, as the Office of Management and Budget would be directed to take up the tax to ordinary rates. But given the fractured nature of Congress, I doubt they will let that happen.

So, let's play it out. We focus on fiscal cliff, then we close our eyes to the next set of earnings that come out. Oops, it is still earnings season, including retailers. It is difficult enough to parse out Sandy, now I have to parse out Sandy and then throw away the whole group anyway because it is high-growth-retail-on, high-growth-retail-off? We focus on fiscal cliff and we fail to look at the companies that have done so much to cut their exposure to Europe or to develop a business that doesn't even go near the national park, let alone the cliff itself. We focus on the fiscal cliff and forget the flood of stimulus that is driving China's markets higher?

At this point, that's like Doestoevsky's gambler focusing on red except it is red or blue. You are simply betting that the two parties hate each other and this was a dig-your-heels-in event, not an event that says "wow, if we go off to the far right we win a lot of elections." I get that we might have that situation, but that's why I default to trying to make money in individual stocks rather than the roulette table. Who knows, we might get a couple of double-zero takeovers by companies that don't care about sequestration and there are plenty that don't.

I guess my bottom line is that I am not going to let the obvious deter me from finding what some view as needles in a haystack and I view as a haystack filled with needles.

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