The Script Behind Today's Selloff

 | Nov 07, 2012 | 12:00 PM EST
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It's too easy a call for a broker to make. It's too easy to say, "Sell, sell," and that explains a lot of the decline we are seeing right now.

So let me put on my brokerage hat, the one I wore in the 1980s when I worked at Goldman Sachs, and give you my script, a script that's probably behind a lot of the selloff you see. It's a script with an undercurrent that says it is time to make some changes in your portfolio. It's a script meant to meet objections all along the way, because, believe me, there are always objections when you are trying to get that transaction and generate commissions, even as you genuinely believe that the trades must be done and the investments switched around.

First, I would say, look, there was a feeling on Wall Street in the last few weeks that Obama was going to lose, that Romney had decided to spend a ton of money and win Pennsylvania and Ohio, and he already "owned" Florida, so it was a done deal.

Don't believe me? Did you watch CNBC's coverage last night? Republican after Republican came on, sanguine, joyous even, that such a scenario would play out. These people are just plain sellers. They bought on a Romney win. They sell on a Romney loss.

Most of my investors would probably then say, "Oh, that will run its course. I am not selling my Gap (GPS) or my Costco (COST) on that presumption, right or wrong."

I would then mostly agree with them that the newfound Romney-defeat hangover will run its course. But I would rebut that we suddenly have a new worry. The head of the European Central Bank, Mario Draghi, picked today to say that things have worsened dramatically in Europe, including Germany. I would point out that this did matter to the market, because the S&P 500 futures were relatively benign until he released his statement, and what a doozy it was. Especially given the general strike in Greece and some weaker industrial production figures out of Germany.

That means there is a new sense of urgency to fixing the European mess, and we have learned to be wary of the way Europeans are going about their bailouts. I mean, after all, Spain hasn't even requested its money, and in the interim the bank that I monitor, Banco Santander (SAN), has been hammered. That's the crucial bank in the Spanish banking reformation, meaning it must survive, even thrive, if Europe in general and Spain in particular are to come back. It can't keep going down.

The client would then say, "Wait a second, we've been through this European issue before and it was resolved in time in a positive frame, so why do I have to take any action? That's a fool's errand. You are just trying to churn me." Yes, people do say that, even the ones who like you.

I would say, OK, sure, this too shall pass, I guess, but let's talk fiscal cliff. Their eyes would immediately roll -- I could feel it through the phone. They have heard it over and over, and I am sure many of the people on the other end of the line would say that's totally discounted in the market.

Then I would say, wait a second, look at what happened in the election last night. We did not solve the gridlock issue, so we will get this sequestration with its dramatic increase in taxes on stocks. The client would then say that the president's speech was an olive branch to the other side and that it is a new era.

To which I would respond, what the heck are you talking about?. Some dyed-in-the-wool Democrats might actually like to go over the cliff, because such a jump would cut what they might think is a bloated defense budget while at the same time raise taxes for rich people who have had a terrific ride under the Bush tax cuts. Some Democrats might argue that it is time for the rich people to pay the piper. Meanwhile, some dyed-in-the-wool Republicans might want to go over the fiscal cliff, because that would send the economy into a recession, allowing the Republicans to pick up a huge number of seats in the midterm 2014 elections.

Even if that's a cynical interpretation, it would get their attention for certain. The twisted world that is Washington inspires a ton of hatred among everyone, but particularly the wealthy, and I think I would have then softened them up for what I regard as a prudent reallocation of capital. Not a fleeing of the market but a recommendation for some trims and tucks and recastings to stay diversified and protect gains.

Remember, a good broker has several responsibilities. He has to worry about preserving your capital and getting you some capital appreciation. But given that you only need to get rich once -- a line I used endlessly, courtesy my fabulous former partners Jack Shepherd and Walter Haydock -- I would be putting on my capital-preservation hat, which resembles a hard hat more than a soft chapeau.

Here's what I would say. We need to take some profits in the biggest winners, stocks such as, for example, retailers, because they have benefited from the payroll tax cuts and other benefits from the government, and those breaks are going away in the new regime. So there will be less purchasing power.

Second, I would say that even if I thought that a stock like Wal-Mart (WMT), which has had a huge run, could go up another 10%, it might still pay off to sell it now with a much lower capital gains tax rate than we would get on the other side of the fiscal cliff. Needless to say, a stock like Apple (AAPL) is very right for this kind of call. But so could be JPMorgan (JPM), which you might have bought when the "London whale" surfaced and took the stock down to $33. You could throw in that JPMorgan's nemesis, Elizabeth Warren, just got in the Senate, and that's going to be very bad news for JPMorgan. It could be even worse for the incredibly performing Capital One (COF), because Warren is no fan of credit cards and the fine print that goes with them.

Third, I would say that the stocks we have appreciation in with big dividends will be less attractive, and we have to try to ring the register there ahead of others who might be less tied in than we are. This is a tough one, because most of these stocks that I follow that have good dividends are keepers, they are doing well and they can continue to gain. Exhibit A in this kind of call is AT&T (T) -- it's up a lot, it doesn't grow fast, it has to spend a lot of money to maintain its network, so why not lock in the gain? Its dividend, which you might have coveted, is going to be taxed at possibly double the current rate or more, given that dividends are slated to be taxed at ordinary income rates. That's happening right as you read this.

Now, here's the real rub. I would never tell people to sell everything. That would be stupid. "Just please raise some cash" would be the watchword, with the emphasis on "some." I would be telling them to trim and revisit after the selloff is done and the cliff is priced in.

I would then tell them we will almost immediately start to put money into companies that will not be hurt by the cliff, ones that do fine in a slowdown, at better prices than you would otherwise get. Remember, everything is coming down right now. That's not logical. I would say avoid European risk. I would urge them to consider some gold, more than ever, because the currency is much more likely to be debased under Bernanke and Obama than Romney. Why not pick up some master limited partnerships for non-retirement accounts with their bountiful distributions?

And sit on the cash. Not going to hurt. Could help.

You know what? I would get that sale. I would clinch it. The client would then thank me, and we would do the trimming just as we both wanted and do a repositioning into what's worth more now that the election is over and the fiscal cliff is upon us.

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