November 10, 2012 Sweet Surrender

Risk/Reward Vol. 143

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

"I've fallen out of favor/And I've fallen from grace
Fallen out of trees/And I've fallen on my face."---lyrics from "Falling" by Florence and The Machine

"Well, I won't back down/No I won't back down
You could stand me up at the gates of hell/But I won't back down"---lyrics from "I Won't Back Down" by Tom Petty

"'Cause I'd surrender everything/To feel the chance to live again
I reach to you/I know you can feel it too."---lyrics from "I Surrender" sung by Celine Dion

With the election over and the Fiscal Cliff fast approaching, stocks "have fallen out of favor". Even the much vaunted Apple has "fallen out of the tree" losing more than 20% of its value since September. Down 278 points this week, I see the Dow Jones Industrial Average continuing to fall until the Fiscal Cliff (that nasty combination of tax cut expirations and automatic spending sequestrations scheduled to occur at year's end) is resolved. If the Cliff is not averted, the result (according to a Congressional Budget Office report issued on Thursday) will be a recession in 2013 and a rise in unemployment from the current 7.9% to 9.1%; in short, an economy that has "fallen on its face."

So what are the prospects that the Fiscal Cliff will be resolved in the next few days? Based upon public statements, not good. According to ITS leader, Democrat Harry Reid, the Senate will not enact any legislation that DOES NOT raise the taxes of the upper 2% of households; those making $250,000 or more. The President echoed this position yesterday. According to ITS leader, Republican John Boehner, the House of Representatives will not enact any legislation that DOES raise the taxes of those very same households. If each is to be believed, "you can stand them up at the gates of hell/And they won't back down."

Or so each says. The fact is that the Democrats won the election---and won big. They hold all of the cards. What are the Republicans going to do? Cling to their position while the economy goes into recession (which it may do anyway) and unemployment rises, all for the benefit of the upper 2%? Talk about political suicide! I say, get what concessions you can (a 20% dividend rate, please!) and then "surrender everything"else---and do it now. Then you will have "a chance to live again"---at the polls in 2014 once the effects of increased taxes and Obamacare are felt.. Surrender is inevitable once the pain currently felt on Wall Street moves to the board room (likely there already) and then to Main Street. I feel the longer Republicans wait, the more blame they will absorb. And, Mr. Speaker, "I know you feel it too."

After the Republicans surrender, a measure of stability will return to the stock market. At that time I will re-enter, having preserved a decent profit by liquidating my stocks in early October. Yes, Celine, once again I will "touch my dividends like this/And hold them like that" (albeit at a higher tax rate) as they "all come back to me"---then.