Tag Archives: fiscal cliff

Feel Good Politics

“The government faces some very tough decisions in the months ahead. The very real concerns over the growth of our own debt must be balanced against the need to nurse the recovery along. Washington deserves to hear our voices as we express our own opinions on the amount of debt we’re willing to carry versus the benefit we’ll receive from its creation. The most important thing is that we force them to recognize the very real issues at hand and not allow them to sit by idly as our economy pushes towards our own unsustainable European outcome.”

That was my closing paragraph in December of 2011. Apparently, the politicians were too busy with re-election plans throughout 2012 to do any damn thing about any damn thing other than ensure their own welfare, care packages and raises in 2012. Fiscal Cliff? Debt Ceiling? Payroll Tax Extension? Tax Reform? It’s starting to look like half of our governing officers jackhammer potholes just so the other half will have something to fill. Meaningful legislation and the idea of elected public servants has simply become a yearning for the, “good old days.” The reality is that this is exactly the same type of yearning that guarantees the perpetuation of this futile cycle.

The grandiose version of this cycle is that we should all have everything we want, when we want it. It’s been pounded into our brains through mass marketing that tells us we NEED their new product. It’s been made available to us through buy now pay later, lay away, credit cards, refinancing and high interest paycheck loans. Finally, our government who encourages us to spend, spend and spend endorses it. Everyone deserves to own a home and the only reason 98% of us don’t have more is because 2% of us have too much. Frankly, we’ve become an insatiable society that feeds off the entitlements garnered by our individual representatives.

The psychology behind the society we’re quickly becoming is best viewed through Dr. Loretta Breuning’s satisfaction experiments with monkeys. The applicability of this train of thought requires the general public to assume the role of monkey and we’ll place the government in the role of experiment coordinator, Dr. Loretta Breuning. She showed that monkeys fed the same diet are perfectly happy and well adjusted. She then adjusted the flavor of the leaves in their diet to be super tasty. The monkey’s appreciate the new flavor and quickly favor it above all other foods. The final step is the monkeys’ observed behavior when the leaves are returned to their normal flavor. The monkeys react with rage, even though they were perfectly happy with the same leaves prior to the experiment.

The exaggerated negative response to the leaves returning to their original flavor clarifies the human principle that losing something that was given elicits a much stronger response than unexpectedly gaining something new and pleasurable. Our minds focus on what we’ve lost, rather than what could be. Similarly, benefit programs and economic stimulus generate a much stronger negative response upon their repeal than the positive response generated upon their implementation.

This axiom holds true at the individual level as well as for the economy as a whole. This experiment, in greater detail, also showed that the positive effects of the new flavor were short lived. Therefore, positive reactions diminish much more quickly than the negative ones. This aspect of her work compares favorably to the diminishing returns of economic stimulus programs. For example, there have been three rounds of quantitative easing. Each round has provided a smaller bang for the buck than the previous round. Comparison in an apples to apples format would show that when we as individuals and when the economy as a whole expects another handout, the less we appreciate what we’ve already been given. However, the removal of those handouts will create an alarm that rings far more loudly than the chorus of, “thank you,” could ever be.

The politicians from small towns to Washington D.C. are all aware that their livelihood rests upon election. Therefore, in their own self-preservation they must introduce more special interest bills to replace the specially flavored leaves of the previous administration and heaven forbid they should try and take away what has already been given. This is what the, “fiscal cliff” has brought us. “Grand Compromise?” Hardly.

The agreement to raise taxes on the top tier and extend the unemployment benefits has done nothing to solve the cultural dependency of handouts for votes that has gotten us into this mess to begin with and will increase the Federal debt by $4 TRILLION over the next decade, according to the Congressional Budget Office. The votes bought by the politicians and paid for by us continue to push us deeper and deeper into the same economic ditch as the European socialist governments.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

The Stock Market Bounce is for Real

We published a sell signal for the S&P 500 in our October 4th article, “Who is Pushing the Stock Market.” Several fundamental and technical reasons were laid out. The fact that the market topped out the very next day and sold off by 9% in the last month leads me to believe that this decline may have run its course. The easy money on the sell side has been made and perhaps, we should start looking at the buy side of the market.

Separating the, “what happened” from the “why did it happen” is always tough. Throwing political variables like the election and the Euro crisis into the mix along with individual accommodations for the fiscal cliff and estate planning leaves us with very real macro and micro implications currently in play. We’ll take a brief look at these and see why the odds may be stacking up in favor of the buy side of the market.

The markets clearly viewed the election results in a negative light by selling off 6.3% in eight trading sessions. I think the markets were fully prepared for an Obama victory prior to the debates however Romney’s debate performance was just enough to make it a bit of a race. Therefore, investors chose to hold on through the election just in case Mitt pulled it off. Had Mitt won, we wouldn’t have seen the selling pressure. Obama’s victory guarantees higher taxes going forward. Therefore, many people are rebalancing their portfolios to take advantage of the tax laws as they stand in 2012. That answers some of the, “why” for the decline.

Commercial traders greeted the sell off in the markets with open arms. Traders in the Nasdaq and Dow Jones were major buyers, doubling their net long position in the Nasdaq and increasing their position in the Dow Jones by more than 50%. The major surge in commercial buying has pushed momentum back in favor of the bulls. Furthermore, combining the recent sell off with commercial trader buying has provided us with a Commitment of Traders buy signal. This is the methodology I presented at the World Traders Expo in Chicago last month.

Further bullish indicators focus on the extremely bearish sentiment of the trading public. Without getting into too much detail, many of the indicators that measure investor sentiment are exceptionally bearish. These readings typically mean the opposite is about to happen because the investing public typically does the exact opposite of what they should do. This one of the primary reasons we follow the commercial traders, rather than the small speculators.

Technically speaking, there are two key points. First of all, the sell off pushed us to a new three month low. Secondly, the about face reversal the market pulled provided indication of a major rejection of that low. The rally on the 19th was so strong that 90% of roughly 2,800 stocks traded on the NYSE closed higher. That kind of rally provides a statistically valid bottoming signal. Merrill Lynch was the first to capitalize on the statistical relevance stating that since 2006 there have been 1,733 trading days and this type of day has been observed only 62 times. The relevant pattern is that we should pause for a couple of days before resuming our climb through the 10, 20, 30 and 65 day moving averages which come in at 1372, 1388, 1404 and 1417 respectively.

One last piece of evidence of the rejection of the new three-month low made on the 16th is that the market immediately opened .5% higher and continued to climb another 1.5% for the day. The strong rally off the multi month low has only occurred 9 times since the Daily Sentiment Report has been tracking this and their research shows 7 of the 9 led to multi week bull runs. The two that didn’t pan out were both in the months following the tragic events of September 11th.

The sell off that we anticipated came to fruition however, I believe it’s much harder to turn around and buy the market when the media is so full of naysayers. To them, I would concede that not coming to an agreement on the fiscal cliff would send the stock market much lower. However, I believe that they will reach some type of settlement. The market will gyrate according to the most recent piece of news but ultimately it will climb higher. Finally, we cannot let sentiment overrule quantitative analysis. To ignore the facts would be choosing to live in ignorance.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Tax Hikes We’ll All Feel

The election is over, the dust is settling and the economic landscape is coming into focus. The fiscal cliff and the Federal debt ceiling dominate the immediate foreground. Both of these issues come down to the business practices of revenues and expenditures.  However, since this is the government and not a business it will be subjected to gamesmanship and hyperbole as both political parties spin their solutions in an attempt to come out, “a winner.” Unfortunately, the reality is that regardless of the spin, you and I will end up paying more for the year that’s already past as well as the coming years.

The post election stock market selloff is no aberration. Wealth, for many has come through the ownership of equities. When it comes to the vast ownership of equities we can quickly narrow the demographic to investors who’ve chosen wisely over the years and benefitted from their patience in the market. However, the economic crisis of 2008 saw the equity markets halved in the blink of an eye. When global market uncertainty is combined with rising estate and capital gains taxes, its no wonder that investors are pulling money out of a stock market that has very nearly recovered to 2007 levels, especially when the rally appears to have run its own natural course.

The estate taxes and capital gains tax increases may seem a bit out of touch with the everyday person but the alternative minimum tax (AMT) is something that will affect more than 70% of U.S. tax payers, according to the New York Times. Here’s the real world perspective you need prepare for. The Washington Post stated that the average income tax refund is $3,000. The expansion of the AMT will levy taxes on individuals earning less than $200,000 and married couples earning less than $250,000. The cost as applied to the middle 20% of all earners will be $888. The net effect will be nearly a $4,000 adjustment to your lifestyle. Furthermore, there will be no tax refund. In fact, odds are you’ll have to pay more taxes instead.

The combined effects of the tax increases for the middle 20% of earners ($40k-$65k) will be an increase of about $2,000. However, it is important to understand that this is an additional pay in, on top of the tax refund you probably won’t receive. Therefore, the net change in your spending habits will have to account for about $4,000 less in 2013. The same numbers for the top 20% (more than $108k) is about a $14,000 difference.

The second part of the fiscal cliff is the debt ceiling. Most of us are now familiar with this term thanks to the political standoff last summer that brought about the first credit downgrade of U.S. Treasuries in history. The debt ceiling is currently set at $16.4 trillion Dollars. The argument over the debt ceiling is the same as our family deciding which bills to pay except, rather than laying out a course of action, the politicians simply ask the Treasury to print more money. These arguments are about funding the same programs that they already passed (but shouldn’t have) in the budget. Technically, if Congress doesn’t raise the debt ceiling then the government has to decide who gets paid and who doesn’t, just like the rest of us.

The debt ceiling has, historically, been a non-event. It has been raised 76 times since it was first enacted in 1962. However, the economic welfare of this country and its citizens is being held hostage by both political parties as they attempt to find a deal that works best for themselves individually, rather than us collectively. Currently, there is talk of forcing the U.S. off the fiscal cliff in order to gain a political advantage as one side blames the other. The sad part is that it really would come down to whom has the best spin-doctor to sell the U.S. population on their version of what happened. After all, it’s not like someone is going to stand up and take responsibility. I believe the reality is that the truth is usually somewhere in the middle and most decisions aren’t as black or white as they first appear. Therefore, very little will be done, just enough to keep us rolling. Alarmingly, that may be the biggest problem of all as we are tossed back and forth between Scylla and Charybdis.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.