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As the end of the year approaches, so does the potential for the United States to fall off the "fiscal cliff." The term denotes the upcoming combination of government spending cuts and rising taxes. A few countries in Europe have already jumped off the fiscal cliff. Countries like Italy, Spain, Portugal, and Greece, have raised taxes and cut government spending in order to get debt and budget issues under control.

Take a weak economy, have the government raise taxes, then have the government cut back on spending at the same time, and I will show you a recipe for a major recession, just like the one many European countries are experiencing now. While there are some investors that hope Congress will act to minimize the potential impact of this event by negotiating where the budget cuts will take place, there is little reason to believe that the economy won't take a significant hit in 2013.

Some might argue that the United States economy is superior when compared with many European countries, and I would agree. However, that will not save the U.S. from the reality that higher taxes will lead consumers to spend less money and when the government also cuts back on spending (borrowed money), there will probably be a marked decline in the economy. A recent Barron's article summarizes the impact one analyst believes the fiscal cliff will have on the U.S. economy next year; it states:

"Under the fiscal cliff alternative scenario, we would expect the U.S. to fall into a recession in the first half of 2013, with negative GDP growth and the year ending with the unemployment rate at 9.1%."

For the past couple of years, the U.S. economy has been boosted by low tax rates, and a stimulus package of nearly $1 trillion (borrowed, of course), and that will soon be reversed. Now that the markets have experienced a rally based on QE3, it is a particularly good time to consider selling stocks that could be significantly impacted by austerity or fiscal cliff issues that this country will be facing in the coming months. Here is a closer look at 3 stocks that could be hit hard by the fiscal cliff:

American International Group (NYSE:AIG) shares have rallied sharply in 2012. Even in the past few months the stock has jumped from about $27.50 in June, to over $33, recently. This company is one of the world's largest insurance companies, and it was also in deep trouble after the financial crisis that began in 2008. Many believed this company was doomed, but it received a major injection of funds from the U.S. Government. The company has become profitable and is now considered to be a successful turnaround by many investors. However, financial stocks are often hit hard when recessions occur, or when asset values (like stocks) drop in value. Insurance companies like AIG often have major exposure to financial markets and stock investments, which is one reason why it could decline sharply. AIG is even mentioned in the Barron's article as a stock that could be impacted in a fiscal cliff downturn.

Here are some key points for AIG:
Current share price: $33.20
The 52-week range is $19.18 to $35.42
Earnings estimates for 2012: $4.27 per share
Earnings estimates for 2013: $3.48 per share
Annual dividend: None

Morgan Stanley (NYSE:MS) shares have surged in the past several weeks, rising from about $12.50 per share in July, to around $18.50, just recently. The rally seems to be fueled by optimism that Europe would find a solid solution, although those hopes have started to fade. A number of shorts appear to view Morgan Stanley as a proxy for European bank stocks. This is because investors believe that it has counter-party exposure to European banks, financials and sovereign debt. Earlier this year, a CNBC article quoted an analyst who stated: "If another financial crisis were to strike, like the one in 2008, Morgan Stanley will be the first to go --that's the conventional wisdom on Wall Street. So says, Charlie Bobrinskoy, vice-chairman of Ariel Investments in an interview on CNBC's Fast Money. "That's why whenever there's trouble in Europe, Morgan seems to fall the most," he says."

Morgan Stanley has tried to limit its exposure, but for many investors this stock will still be an ideal short candidate due to exposure to equities which will probably decline in value in a fiscal cliff situation. The Barron's article mentioned above also lists Morgan Stanley as a stock that could underperform in the fiscal cliff scenario.

Here are some key points for MS:
Current share price: $16.84
The 52-week range is $11.58 to $21.19
Earnings estimates for 2012: 92 cents per share
Earnings estimates for 2013: $1.95 per share
Annual dividend: 20 cents per share which yields 1.2%

United States Steel Corporation (NYSE:X) shares are already trading near the 52-week low, but in a significant economic downturn, things could get worse. This company is one of the world's largest makers of steel and related products. Steel is a key component in autos, construction and many other products that are highly sensitive to the economic cycle. In a fiscal cliff scenario, consumer confidence could decline, unemployment could rise and many businesses and individuals would be less likely to buy cars and invest in new construction. Furthermore, cuts in government spending would likely reduce steel-rich infrastructure projects such as bridges, and also diminish demand for heavy equipment and construction materials. Currently, analysts expect earnings to jump from just $1.48 in 2012, to around $2.23 per share in 2013. However, in a fiscal cliff scenario, the estimates for 2013 could be way too optimistic, and that means the stock could remain in a downtrend.

Here are some key points for X:
Current share price: $19.31
The 52-week range is $17.67 to $32.52
Earnings estimates for 2012: $1.48 per share
Earnings estimates for 2013: $2.23 per share
Annual dividend: 20 cents per share which yields 1%

Data sourced from Yahoo Finance. No guarantees or representations are made.

Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Source: Why The Fiscal Cliff Could Hit These 3 Stocks Hard