Thursday, January 03, 2013

T-57 days and counting...

What is left of the market kicked off the year with a buying orgy yesterday on the heels of the fiscal cliff avoidance plan.   Most of Wall Street expects the stock market to go up about 8% in 2013 and we got about 25% of that gain yesterday.

So we put Francine the Fiscal Fiasco (hey, if the weather channel can name every snowstorm, it won't be long before CNBC starts naming DC dramedies) behind us but forming in the Caribbean is is Debbie the Debt Debate when we hit the debt ceiling at the end of February.  The reality is that the micro-deal that was reached does little to address the long-term financial situation in our country.  This was evidenced by the fact that the rating agencies are now looking at the implications of this deal on our long-term outlook.

I don't recommend that anyone digs in their heels over the debt ceiling.  It's an artificial threshold that has no real meaning, but if a resolution is not reached the impacts on our country would be significant.  I think however, that this debate plays well on main street so even if it is a flawed debate expect plenty of 2016 Presidential contenders (yes, Sen. Rubio I'm talking about you) to line up on the Sunday talk shows to say "Look, you can't keep spending more than you take in...".

Again, this is a flawed concept because our debt issuance is due in part to demand.  Despite huge jumps in our total debt, people around the world are still clamoring to buy our debt.  I'm concerned that the dysfunction in Washington will only grow over the next two months as we get closer to the debt ceiling.

After the debt ceiling, there will be more drama coming including ----  A) determining the sequestered amounts, B) determining cuts in entitlement spending, C) additional taxes and finally, D) the President needs another Continuing Resolution.

Yeah, happy days are here again!
While I lightheartedly poked fun at the NASCAR tax breaks in the bill, it should be noted that the big winners in this bill are really American multinational corporations.

While there was a great deal of hand wringing over tax breaks for green energy and region-specific credits like the post-9/11 incentives to keep firms in lower Manhattan, ultimately the fear was striking any of these items from the bill could sink the whole ship.  While the word "uncertainty" was tossed around CNBC like a hacky sack in Boston Commons, the reality was that business leaders weren't obsessed with the uncertainty of their business prospects, but rather the uncertainty of whether their tax giveaways would be renewed.

Ultimately, the big boys got what they wanted. 1) US companies operating foreign subsidiaries can passive income (think interest payments) into lower-tax “active” investments which benefits big multinationals with financing arms like GE or Caterpillar.  2) Tech and Pharmaceutical companies will continue to be allowed to move intellectual property to subsidiaries in low-taxed or no-tax countries.

Aren't you glad we avoided that cliff?


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