Anthony Peters, SwissInvest Strategist
But first up, please permit me to wish you all a very happy New Year and all the very best for the 2013 accounting period. Let’s face it, the New Year is nothing more than that. It’s not the winter solstice so it has neither special astronomical nor astrological meaning and if it weren’t for the book closing, it would possibly be just another day.
Nevertheless, the P&L clocks are all reset to zero and, in the words of Shakespeare’s King Henry V, “I see you stand like greyhounds in the slips, Straining upon the start. The game’s afoot: Follow your spirit, and upon this charge Cry ’God for Harry, England, and Saint George!”
Dealers need inventory and having one out of the old year with books as flat as possible, they need to reload – and reload fast. The sharp rally which customarily greets us in the early sessions of the new year has precious little to do with investor optimism or new beginnings and green shoots of recovery. It is a pragmatic and predicable rebuilding of market makers’ inventories. That does not make it a bad thing.
The passage of what is effectively limp-wristed legislation through Congress has now occurred and rather than addressing the issues of debt and deficit
Everyone should be long into the first weeks of the year and downside risks are about as low as they ever get. Offers will be lifted, left, right and centre but those who forget that the rally is largely technical do so at their own peril. Throughout today, screens will be flashing news of the massively positive market response to the resolution of the Fiscal Cliff risk now that Congress has done what we all knew it was going to do – this was, in Rumsfeld-speak, a known known – although I would happily argue that financial assets would have been on a mission, irrespective. It’s the beginning of the New Year – they always do the same thing. Buyers of dips will probably have to wait until early to mid-February to get a look-in.
I suggested towards the end of last year that 2012 had not been a year of problem resolution but one of successful postponement and that I did not envisage that 2013 would be the one either during which the fiscal chickens would come home to roost. The passage of what is effectively limp-wristed legislation through Congress has now occurred and rather than addressing the issues of debt and deficit, it has created breathing space for those who find it hard to face up to the realities of US Federal finances.
Fiscal fudge
Unless I am completely wrong in my reading of the details (which would not be at all surprising), Congress has agreed to a reshuffling of the tax and benefit system to a net cost of US$4trn over the next 10 years while delaying spending commensurate cuts of $1.4 trn until the debate over the debt ceiling is reignited in a couple of months’ time.
Thus, as we stand, all we have to show is an agreement to increase the deficit by US$330bn per year for the next decade. Am I surprised that more than half of the Republican representatives voted against the package? Fact is that we have in front of us the first increase in domestic taxation in the United States since 1990 and even at a marginal rate of 39.6% on income over $400,000 for individuals and $450,000 for households, the broad impact is negligible although increasing taxes on the rich is a politically expedient, maybe even necessary, precursor to raising basic tax rates on the entire working population. However, I would like to humbly add that I sincerely doubt the presence of that kind of joined-up thinking from this particular lame-duck Congress.
Year-end always brings out the statisticians and the ones I enjoy most at the moment are the ones reflecting on the performance of bank stocks. Lloyds rallied by some 85% last year and even the moribund Royal Bank of Scotland returned 54%. Somehow I suspect that many of those younger bankers who have been obliged to take their bonuses in stock rather than cash might be dancing in the aisles.
In the case of RBS, of course, it does not help those long serving members who see the closing price of 331p and who wistfully look at their stock awards of 2007 which were priced at something north of £50 per share. I myself still hold a dog-end of Bank of America stock which I was awarded in the $50 area and which has now sharply rallied back to $11.61. Oh well, easy come, easy go…..
On that happy note, please permit me to wish you all a very successful 2013. May you be long the rallies and short the corrections but, most of all, may you be smart enough to garner the credit for having made the right calls while being able to find someone else to blame if, as and when it all goes horribly wrong.
The main rules never change.