MorningWord 1/02/13: The shenanigans in Washington over the last few months remind me a bit of my second semester senior year in college that started off with me doing a whole lot of nothing (good that is) the last couple months. When the eventual year end deadline was looming, and not until the realization that to get my degree on time there would either need to be a “grand bargain” with my French teacher (who barely knew me) to get a “Proficiency” stamp to graduate, meaning I had to learn a foreign language to the standards of an Ivy League institution in a matter of weeks. Well, let’s just say my professor was less than impressed with my politicking and the compromise was between me and my desire to partake in senior week. I passed my proficiency exam with hours to spare prior to graduation, although it wasn’t pretty, and I can still barely make out the items on French menu and I certainly can’t order them aloud!
Our elected officials had to bite the bullet and forgo most of their Holiday break and do what their constituents elected them to do. We have been squarely in the camp that a compromise would get done, but one that would more likely cause further deadlines on some of the most pressing issues, which this one does. This likely means continued volatility in equities, due to continued uncertainty as a result of further self imposed deadlines. Maybe investors have become accustomed to this sort of price action since the 2011 Debt Ceiling debacle to the most recent. I doubt it though. But I would suggest that the post election sell-off in Nov, and last week’s were both fairly orderly, and it wasn’t until volumes got very light last week that the VIX actually breached 20 on the upside. My sense is that investors were not all that bothered, and very few expected the “worst case” scenario, as Enis so aptly discussed in his MacroWrap this morning.
Just as it so happens, investors who have been “cliff dwelling” and had moved to the sidelines are quickly trying to play a little catch-up in the last few days. I can’t blame them, especially with the new year upon us, but very quickly the conversation will turn to corporate earnings and what sectors will see a drag from increased tax rates on close to 80% of Americans.
We are clearly a bit more cautious than most in the near term, and will be very inclined to get fairly short above 1450 prior to Q3 earnings. But as we have also been saying, the Q4 earnings set up may be a bit dicey as we expect to hear the words Fiscal Cliff and Hurricane Sandy as frequently as we hear the words cautiously optimistic.
As we get back in the saddle for 2013, we will be most focused on single stock stories in the near term attempting to separate the forrest from the trees, that’s where we think we can add the most value to our readers, not forecasting fiscal outcomes in Washington.
We wish all of our readers a healthy, happy and prosperous 2013, and we thank you for your interest in RiskReversal and your continued support.
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