The Day Ahead: Fiscal Cliff Care Package

 | Dec 31, 2012 | 8:30 AM EST
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Aren't moms great? Who else always has your back when the chips are down?

One thing that has made my mother so clutch throughout the years is her obsessive attention to detail, which often results in edible care packages for a busy son.

So today, as my mother and other baby boomers sit and watch Uncle Sam possibly destroy dedicated years of retirement planning, I plan on paying homage by offering investors a tidy fiscal cliff care package.

To Feed the Fiscal Cliff Concern

  • In terms of strategy on this epic day, I strongly suggest doing nothing. Don't bother researching a company's 2007 10-K and dot-connecting on 2015 potential earnings power. Forget trying to be a stock trading superhero by buying on fiscal cliff rumors. Today is all about watching the insanity from afar and being prepared to strike (sort of like the ratings agencies).
  • Roughly 5 million households generate between $200,000 to $500,000 in annual wage income. These supposed job creators will be harmed in various ways (a sense of being picked on and classified as the ax of the tax man becomes sharper) by their elected officials, which makes one wonder about the direction of employment by the middle stages of 2013 (component reads on employment in regional manufacturing and consumer confidence are not too encouraging).
  • Payroll shock is coming in the second Friday in January. It's in our DNA to deny something that will cause us harm until the moment of reckoning arrives. I am growing concerned on there being an economic data cliff in January, created by the improved month-on-month trends logged in December that seemingly vanish due to December's political shenanigans. If you believe in the efficient market hypothesis, then this economic data cliff theory should not seem far-fetched and is unlikely factored into stock valuations.
  • The savings rate of consumers will probably head lower in the first half of 2013, a true after-effect of Keynesian stimulus pumping up wage income and the general standard of living. When consumers dip into their precious savings, it's usually allocated to needs rather than wants, and that suggests an economy not operating at full capacity.
  • Average tax refunds will shrink and with that purchases driven by credit card leverage in the initial part of 2013. Politicians are charting a path to fundamentally altering longheld consumer traditions.

At a time like this, I am reminded of an age-old proverb passed on to me by a mentor: "Price is truth. Respect it." Indeed, it stinks being so miserable on the markets while wielding a do-nothing mantra. Back in the day, I used to believe that a compelling fundamental story and an attractive P/E ratio on a company, regardless of market sentiment, would be enough to weather any storm. The fine-tuned, semi-jaded me now thinks otherwise and will let the market dictate when it's clear to wade into the fiscal cliff's muddy waters.

Friendly Assorted Reminders

  • Perpetual Washington political games warrants embedding a slightly higher risk premium into any stock you are modeling.
  • Do not be suckered into thinking dollar stores benefit disproportionately by the impending sharp first-half 2013 growth slowdown. These companies are already having unfavorable sales mix trends, and they will be made worse as their customer base purchases less. 
  • On the horizon lays this event: a lame piece of fiscal cliff legislation that, although handing modest headline relief to stocks, will coincide with less-than-stellar sets of comments from corporate America during earnings season. January is teed up to be brutal, and we might have to reposition our portfolios as earnings season nears. Further, the sentiment could dent the typical investor interest in prior-year underperformers as the New Year begins.

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