Daily State Of The Markets: On The Wrong Track, Or ...

 |  Includes: DIA, SPY
by: David Moenning

Good Morning. Don't look now fans, but the fiscal cliff negotiations might suddenly be on the wrong track. While stocks celebrated with big gains Monday and Tuesday based on idea that a deal was almost certain to get done before the fiscal cliff clock struck midnight on 12/31, the GOP's decision to proceed with "Plan B" appears have caused traders to rethink the likely outcome of the game.

Just when you thought the powers-that-be in Washington (i.e. Boehner and Obama) might actually be closing in on a deal to keep the U.S. from (a) going over the fiscal cliff and (b) a repeat of the embarrassment that was the debt ceiling debate last year, the negotiations appear to have stopped. Just when you thought we might be seeing our elected officials working together to do what's best for the country, the political brinkmanship returns. And just when I personally began to think that things might be improving in D.C., I was proved oh-so wrong.

Perhaps I am overreacting. Maybe the dueling press conferences and the "Aw shucks, I can't understand why they didn't just agree with my plan" rhetoric is simply more posturing/negotiating in the press. Maybe I don't see the bigger picture here. And I am cognizant of the fact that I don't negotiate for a living. But on Tuesday, it sure seemed like the two sides were closing in on a deal as both Boehner and Obama appeared to be making very public concessions. But by Wednesday afternoon, well ... not so much.

I saw a chart yesterday afternoon that showed the offers both sides had proposed on each of the important fiscal cliff issues. While the devil is always in the details, what struck me was how close the negotiations had actually become. Sure, the GOP doesn't recognize all of the "spending cuts" proposed by the president as actual cuts. (Because they aren't. Sorry, but reductions in interest payments - on money you didn't borrow - don't count as spending cuts.) And on the other hand, it is a safe bet that the Dems aren't thrilled about the potential revenue proposed by the GOP. But the key point here is that the two sides were making progress toward meeting in the middle. And while neither plan was perfectly "balanced," they did appear to be getting closer.

When on a call yesterday answering questions about what appeared to be a change in the market's mood, I wound up using one of Winston Churchill's most famous quotations to describe the situation. I know I've used this line in recent columns but I think it fits perfectly here once again. Churchill said, "The Americans can be counted on to do the right thing ... after they have exhausted all other possibilities."

In my heart of hearts, I do believe that both Speaker Boehner and the president want to get a deal done as "going over the cliff" doesn't do either side - or the country - any good. However, perhaps the key to the negotiations at this point in time is the game clock ... as in there is still plenty of time on the clock.

You see, while there is a lot of talk about this Friday being some sort of deadline in order to get all the procedures in place to pass legislation to avoid the cliff, everybody knows that this is a bit of a faux deadline. Heck, even 12/31 isn't a hard deadline because there are ways the Treasury can avoid collecting those extra taxes that are supposed to begin on 1/1/13. As such, I'm guessing that the teams in Washington still think there is still plenty of time on the clock to negotiate.

So, if you are the Republicans, now is the perfect time to go off track and see if you can't create some sort of breakthrough for your team in the process. While everybody knows that Plan B won't pass the Senate (and even it did, the president has said he will veto the bill), the Republicans don't seem to have the upper hand in the current negotiations. Thus, it appears that now is the time to try a different tactic - because they can always fall back to the existing offer.

From my perch then, it appears that we should expect to see more of the same over the next week and a half. Until the clock actually starts to wind down, we are likely in for a lot more of the same political games. And given that it is the holiday season, we should also expect the computers to continue to push prices in the stock market to and fro until a deal is done.

Turning to this morning ... Stock futures have recovered from early losses and are now pointing to a modestly higher open. Some M&A is helping lift sentiment and we've got a BIG batch of data this morning. But make no mistake about it; the cliff is still the focus. And on that note, word is the House will vote on Plan B today and is being seen as a "statement" on the talks.

On the Economic front ... We'll get the GDP (2nd Revision), Weekly Jobless Claims, Bloomberg Consumer Comfort, Philly Fed, Existing Home Sales, Leading Economic Indicators, and FHFA House Price Index reports this morning.

Thought for the day ... The future belongs to those who believe in the beauty of their dreams. -Eleanor Roosevelt
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: +0.27%
- Hong Kong: +0.16%
- Japan: -1.19%
- France: +0.09%
- Germany: +0.05%
- Italy: -0.02%
- Spain: -0.05%
- London: +0.09%
Crude Oil Futures: +$0.12 to $90.10
Gold: +$2.70 to $1670.40
Dollar: lower against the yen, euro, and pound
10-Year Bond Yield: Currently trading at 1.827%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +4.04
- Dow Jones Industrial Average: +50
- NASDAQ Composite: +12.51
Positions in stocks mentioned: none