December 1, 2012 Hostage

Risk/Reward Vol. 146

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

"It's quarter to three
There's no one in the place except you and me
So set 'em up Joe
I got a little story you oughta know."---lyrics from "One for My Baby" sung by Frank Sinatra

"I can change your life, make it so new
Make you never want to go back to the old you
Ciroc and lime, give it a lil' time
And she gonna transform like Optimus Prime"---lyrics from "I Can Transform Ya" by Chris Brown

"Can you guess my name?/And can you guess my trade
Well, I won't rest before the world is made
Arm in arm the angels fly/Keep me falling from the sky
Steel Monkey"---lyrics from "Steel Monkey" by Jethro Tull

The stock market is a hostage of the Fiscal Cliff rumor mill. This week's stock chart tells a "little story you oughta know". At noon on Tuesday, the market was trading in positive territory, "set up" by good housing and consumer confidence news---the type of information that should drive market action. Two hours later, Senator Harry Reid held a press conference where he stated little if any progress had been made in resolving the Fiscal Cliff. By "quarter to three"(EST), the market had dropped over 60 points and ended the day down 86. The next day the market continued downward until President Obama stated that prospects looked good for a resolution. The stock market rose on the news and continued generally upward until Friday when Speaker Boehner flattened it by stating that Fiscal Cliff discussions were going nowhere. Honestly, when it comes to D.C. its seems "there is no one in the place" who is looking out for "you and me".

The Dow Jones Industrial Average ended the week up 16 points. But, I remain on the sidelines. I have read nothing that makes me believe that either side is ready to compromise on Cliff issues. The President has stated that an increase in the top two tax brackets is a sine qua non of any resolution. He has remained steadfast on this point for more than a year. I don't see him relenting. Politically it would be foolish for him to do so. Keep in mind that Barack Obama sees himself as a "transformative" President. With Democrats controlling both houses of Congress during his first two years in office, he was a veritable "Optimus", passage of the Obamacare being a "Prime" example. "Give it a lil' time" and you will see how Obamacare has "changed your life." Going forward, he will not be satisfied unless and until he transforms how wealth is distributed in this country. But, as the past two years have shown, he can do nothing with a Republican controlled House. So how best to rid himself of those pests? Either make them abandon their "no tax increase" pledge and thereby incur the wrath of their Tea Party base or have them commit political suicide by holding fast to that pledge and vaulting the country over the Cliff for the sake of the wealthy that populate the upper two tax brackets. The President wins and the Republicans lose---either way. As I said, prospects for compromise don't look promising.

When I do reenter, I won't be a "Steel Money". World steel production capacity is currently 1.8 trillion tons with 350 million tons of additional capacity coming on line in 2013. Worldwide consumption is only 1.5 trillion tons, 46% of which is consumed by China which naturally has a preference for using domestically produced steel. Steel production overcapacity was highlighted this week as France threatened to nationalize one of Arcelor Mittal's French steel mills scheduled to be closed as redundant. Seeing itself as an "angel", the French government does not want employment to "keep falling", even if steel prices do.

Despite my recent dire predictions, the stock market has remained remarkably steady; now down only 3.6% from when I exited in October. I may have overreacted, and frankly nothing would please me more should that be the case. I would have preserved my desired profit level for the year and lost only one quarter's dividends in return for sleeping well for three months. To me that would be a satisfactory result. That said, I continue to believe that we stand a 50/50 chance that our lame duck Congress will send us over the Fiscal Cliff and into unchartered waters. Should that occur, the market will surely plummet, but I will be kept afloat by my cash position. If the worst occurs, I will not be grasping for air through some "Aqualung", "feeling like a dead duck, spitting out pieces of broken luck." (Jethro Tull)