Fiscal Cliff Uncertainty Presents Real Opportunities

Includes: ATO, DE, SJM
by: David Sims

According to political watchers, the fiscal cliff talks appear to have stalled for now, as politicians took a brief opportunity to enjoy the Thanksgiving break. Time is getting more and more limited to reach a compromise before the start of 2013. Much is at stake, as U.S. will need to come to grips with a possible $600 billion in spending cuts and tax hikes that will drive a wedge into the weak economic situation.

Some recent earnings releases have painted a grim picture for the fiscal cliff and its economic impact on public companies trading on Wall Street. Other earnings transcripts provide an upbeat outlook on the possible outcomes.

In Deere & Company's (NYSE:DE) most recent 4th Quarter earnings call, Raj Kalathur, SVP and CFO, expressed the following opinion on the fiscal cliff issue in regards to Deere's operations.

As we all know, the world faces some big economic challenges today ranging from the U.S. fiscal cliff possibilities to euro debt crisis and the slowdown in emerging market economies. Today's economic uncertainties are real and troubling and John Deere is taking serious precautions in response.

However, we don't see these issues having a lasting impact on the powerful tailwinds that we believe will drive demand for agriculture and construction equipment well into the future.

Deere appears to acknowledge that the fiscal cliff situation will do little to alter the dramatic increase in world population and food consumption going forward. The company is an international player in construction and agriculture. This long-term view is bullish for their business and investors.

Other companies, such as J.M. Smucker (NYSE:SJM) look at market uncertainty as catalyst for taking action. In this case, it may be a stock buyback. In response to a question from an analyst about the best uses of cash, Mark R. Belgya, Chief Financial officer and Senior Vice President, said,

We do intend to direct about half of our cash from operations to acquisitions and CapEx and the other half to dividend and repurchase. Clearly, there's a lot of uncertainty in today's market around the fiscal cliff. So we'll continue to evaluate where we head in terms of that mix between buyback and dividend.

But, it appears that a lot of CEOs are just worried. Kim Cocklin, CEO of Atmos Energy (NYSE:ATO), said this,

The things that keep us every night are the same things that keep you up every night, the fiscal cliff what in the world can get into Washington because we have no control over them, I will say in Washington we thrived under this not existent situation that existed for four years. You had just a lock jaw situation up there nothing got done and we continue to increase earnings, money is extremely cheap, our customer bills have gone down, our value is going up.

So that keeps us up at night Bush tax cuts keep us up. All that stuff is - eventually we have plans, but there is just a lot of paralysis in corporate America right now trying to figure out what kind of costs are coming down as a result of tax changes, Obamacare. The other things keep me up night is we are the future of the country. I've got kids your age unfortunately, so I worry about them I got grand kids.

So, how should an investor play this situation? One could make the argument that a resolution to the fiscal cliff situation may drive consumer and business confidence, unlocking economic value. This is especially true considering that Congress is split politically and will remain split after newly elected officials take power in 2013. A divided Congress is a good thing for markets and it is even better when government functions.

Ben Bernanke recently said,

Cooperation and creativity to deliver fiscal clarity --in particular, a plan for resolving the nation's longer-term budgetary issues without harming the recovery -- could help make the new year a very good one for the American economy.

This could be Obama's opportunity to shine like Bill Clinton in his second term. Like Clinton, Obama may be able to see that the U.S. economy enters a new period of growth. It may even be finally led by alternative energy development, especially if energy inflation takes root. Or possibly, it could be led by a resurgent housing market, that many believe reached a bottom months ago.

Republicans also have an opportunity to move to the center before the next election cycle. Several well-known Republicans have already decided to break the taxation pledge they made with Grover Norquist. Senator Saxby Chambliss (R-Ga.), Senator Lindsey Graham (R-S.C.), Senator John McCain (R-Az.) and Representative Peter King (R-N.Y.) are in that group. This indicates that the ultra-right wing Tea Party movement may be fading and political chains are breaking.

So, with a fifth year of the Obama Administration right around the corner, perhaps some semblance of order and function will return to Washington. Stability in politics is what the United States needs now and this will lead to better economics.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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