My theory: forget the cliff; buy America!

Founder and Publisher of the Switzer Report
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The beauty of the crowd I talk to through this Switzer Super Report and my TV show on the Sky Business Channel is that they are so smart and involved in investment that I benefit from their critical analysis of everything I say or write.

We all need objective observations to ensure we are always working on self-improvement and intellectual progress. The poet William Blake also summed it up neatly when he theorized that without controversy there is no progress.

Over the weekend I received this from Massoud: “I couldn’t believe it when I heard you tonight wishing the market down and being concerned that the so called ‘fiscal cliff’ is not spooking the investors enough for a good sell-off. I know mate, you want to take advantage of their stupidity, so I understand!”

He nailed it, but he also shared his thoughts, which had a lot of merit and the whole episode underlines the perils of when a long-term investor like me, and a hell of a lot of you out there, tries to become a market timer.

Of course, Massoud might not have read my analysis of the fiscal cliff from the outset, where I said I expected to see a bit of a sell-off, which would be a buying opportunity, but if there wasn’t one, I didn’t care because I am virtually 100% invested anyway, apart from a small cash holding thanks to super contributions.

What cliff?

I loved this analysis by Massoud, showing he is even more cynical than me about market generalizations and simplistic theorizing:

“I don’t really know which moron came up with the fiscal cliff expression, as it is a completely misleading descriptor of the actual circumstance – a bit like mislabelling a slush fund as workers’ safety fund! I have seen – on reputable news programs – many photos of a car representing the US economy going over this huge Grand Canyon-type cliff, which obviously implies near death once you hit bottom. Apart from the fact that a compromise is likely before these cuts come into effect, there is close to zero chance of the US economy collapsing, even if agreement is not reached and the automatic cuts come into effect on 1 January 2013.”

In fact, the US economy could cope until mid-February before public service operations start to run out of money. The only thing I would say is that if Congress does play silly buggers and nothing shows up before December 31, then the stock market could be spooked. In fact, hedge funds and short-sellers would try to leverage the fear and loathing and then sell-off or a buying opportunity would come later than I would have wanted.

Massoud came up with the same conclusion, when he said: “Agreement will be reached within a couple of weeks, if not just days after they have gone over the more appropriately called ‘fiscal bump’ and the US economy will hardly notice it, although you may well get your wish of a spooked share market!”

My philosophy

Massoud’s argument rests on a simple proposition that I’ve been canvassing for the past couple of years: buy America and don’t believe China is stuffed.

What is intriguing is that there are a number of positives emerging that not only support my view, but also offset the fiscal cliff fears, such as:

  • US employment data for November showed that 146,000 jobs were created instead of the 96,000 that were expected, pulling unemployment down from 7.9 to 7.7%.
  • In China, factory production climbed to a 10.1% year-on-year gain in November compared with estimates of 9.8%. Retail sales growth posted a solid 14.9% increase, which will please the new regime because they are committed to urbanisation programs to help the economy grow through consumer spending.
  • The official China estimate for economic growth is 7.5% and more and more experts are now seeing an 8%+ result.
  • Last week, the key Shanghai Index rose 4.1% on expectations the economic pace is quickening and the Politburo signalled an increased focus on urban development.
  • Finally, in a positive sign for Australia, output of rolled steel rose 16.5 % in November up from 11.7% in October.

The only worrying news is out of Europe, where the European Central Bank (ECB) predicts growth will be negative this year and next. Meanwhile, Italy has a political issue with Prime Minister Mario Monti announcing he will resign in the near future following former PM Silvo Berlusconi withdrawal of parliamentary support for the Monti coalition.

Berlusconi will contest the new election and will appeal his conviction for tax fraud and the four-year jail sentence.

Europe will be annoying politically, but we have seen some progress market and economy-wise and these pluses should help stocks next year.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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