MorningWord 11/06/12: Likely Decisive Victory, Then Very Likely Fiscal Cliff Hell

by Dan November 6, 2012 9:21 am • Commentary

MorningWord 11/06/12:  Back on Sept. 6th our main macro man Enis was on CNBC’s Fast Money Halftime program with another fairly esteemed guest, hedge fund legend Leon Cooperman.  Enis and I have had a few conversations about Cooperman’s candid comments that day, but just yesterday Enis reminded of Cooperman’s expectation for the SPX given the potential presidential election outcomes:

from the roughly 1400 area a Romney victory would add 100 points to the s&p and an Obama victory would probably be maybe a 50-point decline. I think it is very important. We’re at a crucial point in economic history of the country and I think what happens in November is very important.  

Now that is just one man’s opinion, and this could have changed by now, but what is clear to us is that all the opinions that we hear and read in the financial press about where stocks are going based on the election outcome really don’t amount to a hill of beans. The fact of the matter is there are probably 100-200 people in the world who determine the immediate direction of the market after such a significant political/market event, Big Money Managers at mutual funds and hedge funds like Cooperman.  And here is the thing, the Big Money is sort of like a Mafia, they have their “Meets”, (they used to talk on the phone, before the Feds starting tapping them) but my sense would be that they come to see things fairly similarly.  If “Don” Cooperman suggests that we have 100 points up on a Romney win, and 50 points down on an Obama win, he’s most likely projecting who he wants to win, but that’s probably a fairly common sentiment among people like Cooperman that we (the little guys) should be aware of anyway. But tomorrow, the news cycle will quickly turn back to Europe and lame duck session negotiations over the “fiscal cliff” and I would be very surprised to see an outsized moved based on an outcome that polls have allowed most poll watching money to game ahead of time.

Last night I was on Fast Money and we were tasked with picking stocks/sectors that should perform well/poorly based on the potential outcomes.  One of my fellow panelists put it fairly clearly, a lot of the good news is in the stocks, so probably not wise to chase them, which also only leaves potential disappointment for those that have rallied, like coal.  Gaming this process can be a bit risky and not likely to profitable.  Back in Oct I used Calendar Put Spreads to define the range of stocks like JPM & GS with the hope of owning Nov Puts cheaper in the event of an Obama win and some downside volatility in banks stocks.  The stocks remained above my strikes, and then I spread the puts, now I own verticals.  This was the extent to me trying to game the outcome of the election, but I think a clear-cut decisive win for either candidate this evening should be a very short-term positive for transparency issues, but then the dialogue will quickly fall into “Fiscal Cliff Hell” as the losers will be far less inclined to play nice on any compromise.  This could bring with it some volatility, which is interesting to note a decent size trade in the VIX options yesterday, someone bought 35k of the Nov 20/30 Call Spread for .78.

We will sit on the sidelines for now and stick to the micro and let the “made” guys determine the next 50 to 100 points.