Caution Ahead: Pols Merely Kicked Can From Fiscal Cliff To Debt Ceiling Crisis

Includes: CVX, HAS, OXY, RDS.B, SO
by: Mike Nadel

Capital gains taxes are going through the roof! Dividend rates are going through the stratosphere! Sell your big-gainers and dividend-payers now or get crushed by the tax man later! Grab your muskets; the Socialists are coming, the Socialists are coming!

As usual, altogether too many people -- corporate board members, the media (especially the electronic squawkers), politicians, financial "experts" and, yes, regular folks like us -- got swept up in hype run amok. And for what? For the sheer thrill of panicking, it seems.

On New Year's Day, the Fiscal Cliff Crisis turned into a "Meh" Moment. Republicans and Democrats actually compromised -- much to the surprise of pundits who thought "deal" had become a four-letter word and much to the chagrin of millions of ideologues in both parties.

Here on Seeking Alpha, a few authors and hundreds of end-of-article commenters repeatedly had presented the gloomiest of scenarios: Any deal reached by our elected officials would triple dividend tax rates from the 15% that had been in place since 2003, thereby devastating Dividend Growth Investing and similar strategies.

In fact, taxes on dividends (and capital gains) have risen ... but only to 23.8%. And even that applies only to earnings exceeding $400,000 for individuals and $450,000 for couples. Those who don't quite rake in that kind of dough -- in other words, approximately 99% of us out here in Real World Land -- won't see any change in divvy rates at all.

Predictably, the stock market reacted giddily Wednesday, with the S&P up some 2.5%. The rally encompassed all sectors, including many companies beloved by the DGI crowd.

Linn Energy (LINE), an MLP that had been struggling, surged some 4%. Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT), those twin behemoths of tech's past glories that recently had reached 52-week lows, each jumped more than 3.5%. The same was true for tobacco stalwarts Philip Morris (NYSE:PM) and Altria (NYSE:MO). Oil giant Exxon Mobil (NYSE:XOM) finished 2.5% ahead of its previous close.

Business development company Triangle Capital (NYSE:TCAP) was up 4% to reach a 52-week high. Beleaguered mREIT American Capital Agency (NASDAQ:AGNC) saw a 3.35% price increase. Utilities Select Sector SPDR ETF (NYSEARCA:XLU) enjoyed a runup of almost 2%.

Even foreign firms got in on the fun. Norwegian offshore oil driller Seadrill (NYSE:SDRL), which had lost steam lately after a lengthy climb, was up nearly 4%. Canadian MLP Enbridge Energy Partners (NYSE:EEP) gained more than 3.5%.

OK, so what is a Dividend Growth investor to do going forward?

Well, it's hard to imagine this giddiness lasting very long. The debt-ceiling debate, which began percolating minutes after the fiscal-cliff deal was reached, figures to get blazing hot by late February.

Now that Democrats got their tax hikes on the rich, Republicans want deep spending cuts to entitlements and other social programs (but not to the Pentagon, of course). Those farthest on the right probably will threaten to let the nation default on its debts to get what they want.

After the debt-ceiling crisis in the summer of 2011, Standard & Poor downgraded its U.S. credit rating ... and the Dow dove 5.6% in one day. It's not overly pessimistic to think that could happen again, making the Cliff Kerfuffle of 2012 look like it had been a minor spat.

So my investing mantra remains unchanged: Proceed with extreme caution before buying anything.

One company on my watch list, Hasbro (NASDAQ:HAS), actually was down about 1.5% at one point Wednesday. I seriously considered throwing a few bucks at the maker of Scrabble, Nerf and Easy Bake Ovens, but HAS rallied to close at $35.82 (only fractionally down for the day) and I decided to hold off buying the 4% yielder. I will continue to monitor Hasbro closely, as F.A.S.T. Graphs shows it to be undervalued; its 12.6 P/E ratio is well below its 16.2 norm.

Big oil didn't rally quite as robustly as the overall market Wednesday, and it is conceivable that an oversupply of crude could weigh on companies I'm watching, including Occidental Petroleum (NYSE:OXY), Chevron (NYSE:CVX) and Royal Dutch Shell (NYSE:RDS.B).

I've yet to add a utility to my portfolio. Southern Company (NYSE:SO) was drifting down toward my sub-42 buy zone before getting swept higher Wednesday. We'll see how that goes in the days and weeks ahead.

By keeping us from plunging over the cliff but declining to do anything about runaway spending, Congress and President Obama really only kicked the can down the road until the next crisis du jour.

That crisis will dominate headlines and very likely will cause financial panic. It also will present a major opportunity for bargain-hunting investors. I plan to have plenty of cash on hand.

Disclosure: I am long INTC, LINE, MO, PM, RDS.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.