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TMFDeej (99.47)

Don't worry about the fiscal cliff

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December 21, 2012 – Comments (9)

While I normally try to stick to my knitting in terms of investing and ignore much of the shenanigans that go on in Washington, I made an exception last night and looked into what was happening with the "Fiscal Cliff."  When I heard that the Republican's "Plan B" had fallen apart I knew that we were going to see some red in the markets today.  Sure enough, that's exactly what we're getting.

Don't let this whole ordeal ruin your holiday though.  The Fiscal Cliff is no big deal.  In fact, while I'm not buying anything today if the carnage continues into next week with year-end tax selling and increased thinking that a deal on the cliff might not get done I probably will buy.  I've been expecting something like this to happen and I have a nice slug of cash ready to deploy in my real-life portfolio, around 15% or so in my investment accounts...which is a lot for me.

Whether people want to admit it or not, it's a fact that the economy is slowly but surely getting better.  A deal will eventually get done to fix this cliff issue.  How do I know?  Because 99% of the voting public will blame the already battered Republican party if a deal is not reached (this is coming from a registered Republican who is becoming increasingly alienated by the extreme right).  Just in talking with most of my friends, the more moderate ones anyhow, every single one of them sees the situation like what is described in this Business Week article (link).  Basically that the GOP is threatening to blow up the entire U.S. economy to protect the rights of a few "millionaires and billionaires" despite the fact that the top tax rates are half of what they were in the 1980's.  Now I know that there's more to it than that, and that we have to get the deficit under control, but that's what the public perception is likely to be. 

So I personally would be shocked if a deal doesn't get done in a reasonable period of time.  In the meantime, enjoy the buying opportunity and check out the sort of news that we all need from time to time:

26 Moments that Restored our Faith in Humanity This Year.

By the way, for someone who has a CAPS portfoio that contains 196 long positions and zero short, I find it fascinating how I always outperform in bear markets.  Today for example, I'm up nearly 200 points to over 5,000...the highest level that I can remember.  I guess that some of my picks could be considered conservative and most of them pay dividends, but it is interesting nonetheless.

If I don't blog again before then, have a very Merry Christmas everyone!

Deej

9 Comments – Post Your Own

#1) On December 21, 2012 at 4:20 PM, lemoneater (88.58) wrote:

Merry Christmas!

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#2) On December 21, 2012 at 5:42 PM, ChrisGraley (31.89) wrote:

I agree that it will work itself out, but although I'm not conservative myself, I have a bunch of conservative friends and the message that I got today was that Boehner didn't get enough support for plan B today because the conservatives feel they have already given up too much. They are also still reeling from end around on the healthcare thing. Obama is viewed as a complete enemy. Not someone that they want to deal with.

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#3) On December 21, 2012 at 9:37 PM, rd80 (99.10) wrote:

I know I'm biased and probably in the minority, but I think it's Boehner who's offered up all the compromises so far - although his political skill hasn't been inspiring. Other than agreeing to a small change in the way Social Sec accounts for inflation, I'm not aware of much that the President has put on the table to close the differences.

To make taxes fairer, if eliminating the low rates paid by a few very rich people is actually a goal, the tax code needs to change the way dividends and long term cap gains are taxed, higher rates won't do the job because Buffett, Romney, et. al., don't have much income that gets hit by the higher marginal rate

At this point, I think the fiscal cliff is far preferable to the President's 'more taxes, almost no cuts' approach.  Short term, there'll be some pain, but that'll be far better than continuing to let debt spiral out of control.

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#4) On December 21, 2012 at 9:39 PM, rd80 (99.10) wrote:

I guess that some of my picks could be considered conservative and most of them pay dividends

A tried and true recipe for outperforming in down markets.

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#5) On December 22, 2012 at 11:54 AM, Melaschasm (88.39) wrote:

Great blog, but there is one really annoying statement.  "the top tax rates are half of what they were in the 1980's. "  While many people may believe this is true, the top rates have not been as low as the 80's since Bush senior agreed to raise taxes.  After the Reagan cuts the top marginal rate was 28%, after the Bush cuts the top marginal rate was 36%.  

While the change in how dividends are treated have benefited some rich people, it should be noted that Romney and Buffet had no meaningful change in their tax rates paid before and after the Bush tax reforms of the 2000s. 

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#6) On December 22, 2012 at 2:23 PM, TMFDeej (99.47) wrote:

Good point, Melashasm.  I should have said the 1950's or 1960's not the 1980's.  I observed this by looking at the following article over at Barry Ritholtz's Big Pucture Blog:

Your Tax Rates Since 1913

At least it was based upon something :).

Deej 

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#7) On December 22, 2012 at 5:48 PM, MKArch (99.66) wrote:

Like everyone else Deej I have an opinion about the cliff but I'll keep it to myself. I noticed I've been adding points in CAPS even though my maxed out portfolio is almost all long. When I visit your CAPS page my score points graph is superimposed on your's and they're almost parallel. I doubt anyone could get to the top of CAPS making conservative pics and I know I got to the top 1% betting heavy on the U.S. and sectors like home building, financials, health care equipment and semiconductor equipment in addition to a good dose of the inverse ETF's. For the most part my CAPS portfolio follows the major indices directionally but exceeds them in magnitude but once in a while I'll lag on an up day for the markets or hold up on a down day. My guess is it's a sector thing and some sector(s) we both bet heavily on is doing relatively well while the broader market sells off.

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#8) On December 23, 2012 at 9:38 AM, TMFDeej (99.47) wrote:

Cool observastion MKArch.  Thanks for posting.  Your portfolio looks like mine on 'roids :).  I've been very, very tempted to make macro and sector bets here in CAPS and I think that I probably would have done fairly well with them.  But...I have been trying to stick to my knitting and only invest in things here that I would in real-life and macro bets are not my cup of tea for real money. I'm trying to avoid style drift.  

BTW, thanks for not allowing this to evolve into a political discussion.  That certainly wasn't the intent of my post.  I was more trying to say not to worry about the cliff from an investment perspective because I think that everything will work itself out in the long run. 

Happy Holidays!

Deej 

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#9) On December 23, 2012 at 12:53 PM, MKArch (99.66) wrote:

Happy Holidays to you too Deej!

I love your work on this forum and your comments about investment style inspired me to pontificate on the value of CAPS in general. I never really bought into what I believe was the original premise of the competition, that individual investors could find actionable investment ideas from the average rating of a large investment community. That said as a journeyman type investor with no formal training other than the Hidden Gems Community (until the economy forced me to drop my subscription) and  an M* subscription I find this competition invaluable.

Hopefully I can get my thoughts on CAPS out in an intelligible way as writing is not my strong suit. I didn't actually intend to build a macro focused portfolio but if I had to characterize my style it's opportunistic. When I joined CAPS in 2006 when it was in BETA form I decided I would go for a handful of picks betting on high accuracy and points. I this worked well and I shot up to the top 1% even getting to number 5 rank in the early months of the competition. In the late summer of 08 shortly before Lehman fell and everything fell apart it looked to me like we were going to get away with another drive by recession and I bet the farm in CAPS that we would. Obviously that one blew up in my face.

It's tempting to babble on about the moves I made but to keep this short I kept my wits about me. In general I made a CAPS specific choice to bull my way through what was obviously a situation where just about everything I owned was going to get cheaper in the not too distant future. My strategy was basically triage, dump what wasn't coming back and try to salvage the rest. When the market bottomed in March of 09 I hit rock bottom in CAPS hitting the bottom 10 player rank but never saw it as anything other than an opportunity of a lifetime and adjusted my CAPS and real portfolios to take advantage of what I thought were the best opportunities of an avalanche of once in a lifetime opportunities. While I never had a doubt that I would get back to the top of CAPS again and the moves I made at the bottom would be the reason even I was shocked to be back in the top 1% only a few months later.

The point I'm trying to make is that the value in CAPS is in seeing how my strategies play out over the long term and also in following individuals like you to see how other players strategies play out as well. It's a shame that it seems like a lot of other TMF staff have stopped playing CAPS or have nearly given up on it. I learn a lot from fellow players and miss their contributions. I'm not sure what the powers to be in TMF land think about CAPS these days but IMO learning by doing and following others is where the value is in the CAPS competition.

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