Friday, December 21, 2012

Market Slumps On Fiscal Cliff Gridlock

Market is shaken by worry on fiscal cliff negotiation. Traders and market manipulators trade on the news while market participants are very cautious. However, investors are no longer running in animal spirit as during the US rating downgrade in last year. With load of cash on the sideline and a thin portfolio in equity stocks, investors are watching the progress and waiting for opportunities. Speculators and traders dominate the trades before the vacation.

While households are staying away from equity stock market and finding safe haven in treasuries and bonds as well as cash and gold, four years after the financial meltdown, investors come back to the peak of wealth before the crisis. Wealthy investors did not dump the stocks when market was selling in panic because decline in stock price would not affect living standard at all. On the other hand, when market began to recover, stocks were accumulated with the stable income. Therefore wealthy investors have already surpassed the peak wealth in last year. Smart investors also have appreciable gain after years of rising stock market. Even the pessimistic individual investors are seeing a growth of wealth to near the peak before the crisis with savings from the last few years and appreciation in core equity stock assets.
The pullback on concern of fiscal cliff would be an opportunity for market participants to replenish the portfolio at a relatively low cost. However, market participants are afraid that market manipulators may use other insider news to drag down market further. Therefore many investors prefer to wait until fiscal cliff and debt ceiling negotiation becomes clear. But as the financial market is flooded with cash and investors are turning less pessimistic in long term outlook, market is supported by demand from yield hungry investors. Also, increasing number of market participants are gaining confidence in market and take advantage on market pullback to pick up bargains and take profit when market rallies. Therefore market collapse is very unlikely and investors waiting on the sideline realized that the bottom of each pullback are higher than the previous trough. Nevertheless many investors keep on waiting on hope that a major correction may appear some day. But it is believed that market would surpass historic peak before any major pullback at which time broad market index may even be higher than current level.

In 2013, Stocks Set for Fifth Straight Year of Gains: Paulsen
Since Breakout started, Jim Paulsen of Wells Capital Management has come on the show regularly and expressed a bullish view. Despite weak earnings, fiscal cliffs, debt-ceiling debates and downgrades, he's been right. Now, he's doubling down on his bullish view for 2013.

"Next year will probably be the fifth consecutive year of positive equity returns," Paulsen says in the attached video. He's looking for double-digit returns without the terrifying dips and rips we've seen since the bullish streak started in 2009. Ironically, he thinks gains in 2013 may be the hardest to justify from a fundamental perspective.

It's not the earnings that are going to drive us, he says. Earnings growth and margins have been tailing off hard over the back half of 2012, and Paulsen is looking for more of the same in the months ahead. What will move the markets higher in Paulsen's estimation is a willingness of investors to pay up for each dollar of earnings in the S&P 500.

Why the confidence boost? Pointing to the last four years, Paulsen says investors have been assuming the end of the recovery every year. This "cultural mindset" been based on any number of forces, both real and imagined.

Entering 2013, we'll have some sort of resolution on the fiscal cliff, for better or worse, Europe steadying and China's new leadership team promising stability. Nothing has particularly improved, but the worst has been avoided. Eventually, investors are going to notice and start shifting assets into stocks and out of bonds.

Stocks Are the Only Asset Class to Own: Josh Brown
Equities are attracting investors again after November’s sell-off for one simple reason: "There aren’t any alternatives to stocks," says Josh Brown, vice president of investments at Fusion Analytics and author of the popular “The Reformed Broker."

Brown prefers bond-like-equities any day over U.S. government debt and believes efforts by central bankers around the globe will keep buoying markets for the foreseeable future. As for market leadership, Brown says Apple’s days are over as investors increasingly rotate to financials, one of the best-performing industry groups in the S&P 500 this year.

But he's no raging bull. Higher stock prices are obscuring weak market fundamentals, Brown argues, and he points to disappointing earnings reports from U.S. multinationals.

The New 'Goldilocks' Stock Thesis
Stocks are at multimonth highs. The "haven" plays -- gold and bonds -- are being sold.

The "fiscal cliff" does not seem quite so ominous. The euro is at an eight-month high; German stocks are at new highs.

The markets seem to be reallocating resources: from Treasurys to stocks ... from gold to euros.

What is this new Goldilocks thesis? The bulls argue: 1) we're moving to greater clarity on taxes; 2) Europe is showing determination to stay together; 3) China is bottoming; and 4) corporate balance sheets are in good shape.

Bears are not so amused by these arguments. It's all a fantasy, they say: 1) We will get growth with rising taxes and lower spending; 2) we will have unlimited stimulus that will not cause inflation; 3) we will shift from bonds into stocks without a bond crash; and 4) the government will easily be able to afford the higher interest rate expenses they will soon have to pay.

Why the Nation's Largest Pension Fund Manager Is Optimistic
The Dow Jones Industrial Average is essentially flat over the last 12 years. Median household net worth is down. Inflation-adjusted earnings for most Americans are below where they were a decade ago.

It's ugly.

Yet Joseph Dear, chief investment officer of CalPERS, the nation's largest pension fund with nearly a quarter-trillion dollars under management, is optimistic. He thinks we're turning a corner -- housing is coming back, corporations are competitive, and the investment world is too pessimistic.

Now why do I say that? I think housing is likely to see an upturn next year, and that's going to drive a lot of employment and consumption. I think if you look at U.S. companies, they're incredibly competitive. They're really good values in terms of the U.S., of the global economy. I think Europe is on the way to solving the problem, and I was really very skeptical about Europe for most of 2012, whether the Union would be able to make the difficult decisions they've had to make. And I think the leadership transition in China means they've got more levers to pull in terms of keeping Chinese growth up. So on that picture, better than what we've seen. Not like what we saw before the crash, before the financial crisis, but reason to be more optimistic. And that should just make life a little bit better or all investors.

Well, I think there's growing optimism. I'm not on the leading edge of this, but I still think the mindset is having been bruised so badly with losses and terrorized by fear of a real meltdown in the global economy that pessimism reigns.

There's a great quote by the economist A. C. Pigou that said that the error of optimism in dying gives birth to a new era: error of pessimism, which is born not a baby, but a giant. And we are still working through that pessimism phase.

Cash Is King: Printing of $100 Bills Soars
A good detective always looks for a motive when beginning an investigation. And so, when Nick Colas discovered that the number of $100 bills printed last year suddenly spiked, the chief market strategist at ConvergEx Group decided to figure out what was going on.

Part of this new demand, he says, comes from the classic nefarious sources: drug dealers, arms smugglers, tax cheats and bribes. But some of it is also due to hoarding or the fact that more people than ever, oddly enough, are losing faith in government and/or the economy and are shunning the surety of traditional investments. It's a phenomenon that's led to a huge increase in demand for gold and other precious metals, but also for — you guessed it — $100 bills.

And it's not just here at home. While it's hard to quantify the exact amount, it is believed that the majority of $100 bills are probably being held overseas, since they are globally recognized, widely accepted and the easiest way to store wealth.

But alas, there is a silver lining to be found within all of this dollar debasement that at least one Wall Street veteran points to. "It proves beyond a doubt that the dollar is still the reserve currency of choice around the world," Colas concludes. "It may not [always] be from the most savory part of the economy, but it does signal that there's still a lot of faith in the dollar."

Majority of Rich Want Themselves Taxed More: Poll
House Republicans are opposing tax increases on anyone - whether it's Americans making $250,000 or $1 million or more a year.

But a new survey shows that they might be opposing the very people they claim to protect.

"There is an absolute willingness for the vast majority of the One Percent to take a tax increase," said Jim Taylor, Vice Chairman Harrison Group. "What the Republicans think is not necessarily what their constituents think."

Nearly three quarters of them are "extremely or very concerned about their taxes going up." Other recent surveys show that the wealthy support higher taxes as part of a balanced solution to the government debt problem that includes spending cuts.

Still, a majority support for tax increases on themselves, presumably for the sake of the broader economy. Taylor said that for many of the wealthy, the possible reduction in asset values stemming from problems in Washington far outweigh the potential reduction in their income.

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