I don't know how my fellow denizens within the Seeking Alpha community feel, but if I have to hear about the "Fiscal Cliff" or CNBC's self-important puff phrase "Rise Above" one more time today; I am going to have to take the rest of the day off. That being said, I am enjoying the continuation of the bounce back from the recent lows in the market that started Friday afternoon on some encouraging comments from both sides of the aisle regarding resolving the budget impasse. It is a pretty predictable rally and I am happy I took some of my shorts off in the last week and booked profits when others expired profitably on close of business Friday. As they say, timing is everything in life.
Not to say I am buying into this rally as I think is a short-term event and I am not adding to my longs today on the back of this upturn. I am selling covered calls on some positions that had their original call positions expire Friday. There are myriad reasons I believe this rally will fade and the next few months will be an environment "To sell the rips, buy the dips".
First of all, the whole cooperative spirit that politicians successfully conjured up on Friday is already is unraveling. Pelosi and Reid were on the rubber chicken circuit during the weekend saying they plan to hold the line on entitlements (just under 60% of the federal budget) and unions plan a major ad buy to advocate for not making any entitlement changes. In addition, President Obama is showing his usual hands-on approach to budget negotiations in between his photo ops in Myanmar and Congress is on vacation for the next week and a half anyway. In short, these discussions are going to ebb and flow throughout the process and resolution will probably go past the end of the year.
We are still having the wrong conversation as a nation around our government with regard to federal revenue versus federal spending. Revenue is about back where it was prior to the recession, but spending is more than $1T higher (See chart). Even giving in to the President's plan to make the rich pay their "fair share" will only result in closing one tenth of our annual deficit. Until we get serious as a country around government spending and entitlement reductions, we will continue to sink deeper into a debt abyss and this will remain a headwind to further market upside.
One thing that will happen regardless of the negotiations is the start of the implementation of Obamacare in 2013. This will raise taxes by some $23B during the year and the Congressional Budget Office estimates the act will result in the loss of 800,000 jobs. I think this estimate will come in at the low end just based on anecdotal conversations I have had with friends that run businesses but assuming that these cuts happen in equal installments over the next 18 months or so, this will reduce the country's already anemic job growth by approximately one third using the monthly jobs numbers over the last six months.
The NASDAQ is having a good day, but not as good as it appears. Apple (NASDAQ:AAPL) accounts for around 50% of the gains today. As outlined in a column Saturday, I do think Apple bottomed on Friday and would continue to be a buyer on any dips from today's levels. Hewlett Packard (NYSE:HPQ) reports after the bell today (Monday) and I expect the company to be light on revenues given its reliance on PC's which has caused problems throughout the reporting season for other players in this space. This could put a damper on the open tomorrow.
Finally, corporations are cutting their spending plans at the fastest pace since the end of the recession. Combined with the impact of superstorm Sandy and the Wall Street layoffs connected to the implementation of Dodd-Frank; the outlook for jobs over the next six months is likely to be weak.
Bottom Line: Don't chase this rally. There will be numerous dips that offer better entry points over the next few months. Also consider selling covered calls on existing positions to take advantage of today's rip and pick up some income and lower overall portfolio volatility.