The Day Ahead: Why the Fiscal Cliff is a WMD

 | Dec 27, 2012 | 8:05 AM EST
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First, got to attend to some business. To the person that inquired whether I incorporate Elliot Wave Theory into my analysis, the answer is no. I can honestly care less about Elliot Wave Theory. All of my attention is 100% on utilizing every piece of fundamental analytical training I have been taught, as well as talking with the stock market on a daily basis. By all means, enjoy that Elliot Wave Theory. It's just not a tool that I will be using anytime soon.

Moving right along, observing the markets on Wednesday and I couldn't help but imagine a game of children playing telephone. There were a whole bunch of made up theses on a slow day for news. The issue I saw was that consensus wisdom on the fiscal cliff continued to leave the market too optimistic for the stone-cold truths poised to arrive in the next week or so. But a few of the weak lines of reasoning were:

  • Stocks are marking time, preparing to pop as soon as a stopgap fiscal cliff deal is inked. Pardon me, but this is ridiculous logic from the smart money not wanting to incite a riot in the market (mass selloff). Instead, they wish to sell hope to the slow (mutual fund whales) and to the confused (the retail investor) while quietly dumping long positions. How else could this drippy-drab move in the market since last Friday be explained? You mean to tell me it's a reflection of nibbling on risk biscuits? Come on my dudes, I wasn't born yesterday.
  • Jumping off the fiscal cliff is good, as it would set in motion decisive action that ultimately leads to comprehensive legislation in early January as supposed to a place marker. Do me a favor. Without any commentary from the peanut gallery here, take a second to actually think on this thesis. It's pure rubbish.

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One leg of the recovery, the consumer spending rebound, is being eaten away by termites. The telltale signs of a highly-probable first half 2013 spending retrenchment (as in retail sales growth goes slightly negative) began in November and are currently in the process of transmitting to stock prices as consumer-facing companies' earnings trajectory is evolving for the worse.

Off-price retail stocks TJ Maxx (TJX) and Ross Stores (ROST) are no longer working. Ideally, these trade-down names would catch a bid with more discretionary retail stocks heading into the trash bin. No rotation into retail safe-haven stocks is an indictment on the entire economy, with perhaps small business job creators planning hiring/raises cautiously. In a tweetable moment, #TrickleDown.

Target (TGT) and Wal-Mart (WMT) have crumbled from the beginning of December, yet continued to lose ground on the negative holiday sales news.  That means the true direction of consumer spending six months forward is not priced into the stocks.

Consumer staples are relatively outperforming. Pretty interesting, in my view, considering these are the dividend payers that were dumped by the market due to the fiscal cliff's capital gains implications. Market goers more willing to be exposed taxwise and to slow growth stories, in order to protect capital than indulge in growth-type names that could be pummeled by an upset market.

The U.S. Dollar Index peaked near Nov. 12, has been in steady decline from there, but gold and silver prices have not perked up. This means 2013 deflationary forces from real economic conditions in the U.S. (which have implications on a China recovery) trump extraordinary Fed accommodation in terms of rates and balance sheet.

Oh yeah, how is that platinum chart looking?  That's what I thought.


Source: Kitco


Yours truly is not listening to anyone suggesting getting long this market here.  I know their arguments and view them as flimsy as balsa wood. I recommend limited risk exposure, and the playing (investing is NOT a game, so I use this term with tongue in cheek) of newly-forming themes such as a deteriorating outlook on the consumer. On Twitter last week I said "trust me, short Aeropostale." Keep trusting me on that call.

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