At a get-together this weekend, so it was that I found myself at the center of attention, discussing the fiscal cliff. There I was, riffing off fancy facts that were frightening the heck out of teachers, construction workers, and local bank employees. It hurt me that they weren't more knowledgeable on the single biggest economic issue today -- one that stands to swipe money from their pockets as soon as that ball drops in Times Square.
Then, one fella in the group so eloquently told me the fiscal cliff was irrelevant because he read a bunch of stuff saying so. He and I went toe to toe in a debate -- he obviously going down in flames -- and I left him with this cow-like branding: "Dude, you are a finance chump."
At this precise moment, I feel as though the market is dominated by such chumps. These are folks that have completely detached themselves from investing, and instead have established a class of speculators -- one that's currently dominating the attention of the market. These players are luring Mr. Market into a trance that convinces all that everything is just fine, even though there is no solid ground for such a line of reasoning. Just look at our hero, Mr. Market.
● S&P 500: 50-day moving average has been regained.
● SPDR S&P 500 (SPY): Post-election drubbing is close to recovered as the fund zeroes in on mid-October highs.
● Most economic data are being viewed through rose-colored glasses, thus driving up investor complacency. Just take a look at the CBOE Volatility Index (VIX).
● Market players are nibbling on stocks on two primary hopes. One is that some form of a "fiscal cliff" deal will be ironed out by year-end. The second is that balance-sheet expansion by the Federal Reserve will finally bring back the "risk-on" sugar highs of years gone by, and offset the U.S.'s fundamental fiscal policy issues -- and that goes for the political process.
In order to combat a wannabe, a poseur -- or, in other words, a chump -- you have to wield the facts so as to pour cold water on their unsubstantiated claims. For our purposes, I offer the following quote.
"To have a true investment there must be present a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience." -- Ben Graham
This particularly useful comment above underscores my view: Namely, this three-week move from oversold territory is highly speculative, a true house of cards that could crumble quickly. The fact is that, should you buy a stock today on the prospects for a stop-gap deal, you'd be overlooking the profound effect policy implementation would have on many companies.
It's not that you won't be able to buy a stock in the first half of 2013; this misses completely the essence of my argument. I happen to think that being careful into month-end is wiser than joining the group of chumps, who have at their disposal only hope, and not the truth. The market has to adjust to a series of realties, but the price action suggests it has not yet factored in the global ramifications of the U.S. economy growing at nil to 1% early next year, nor of the continued range-bound nature of employment gains.
That said, I am intrigued by the likelihood of the Fed expanding its balance sheet, as this could be a directive that initially goes forgotten by the market, then becomes a powerful catalyst to buy stocks once the issue of fiscal cliff is addressed.
But, overall, my market call remains bearish.
● Ignore anybody that says to overweight the consumer discretionary sector. The group has outpaced the S&P 500 more than any other of the 10 sectors since the start of the bull market. 2013 will present a real impact on consumers that's set to drive their discretionary dollars lower, and that will warrant a re-rating of the sector from the standpoint of price-to-earnings multiples and earnings estimates.
● According to Investor's Business Daily, in the last six months 73.3% of new jobs created have been by the government. That's pretty telling as to what is occurring in the private sector -- which is showing inconsistent new orders, and new orders gained via slashed prices.
● Key consumer staples names -- such as General Mills (GIS) and Kellogg (K) -- remain near or on 52-week highs, and transportation stocks are not keeping up with the market's advance from mid-November. I would want to see staples weaken and transports strengthen. This would hint that the market has underestimated the underlying strength of the U.S. economy in the face of the fiscal cliff -- and the market currently believes the cliff will be overcome by a strong economy.