Going Over The Fiscal Cliff Will Create An Epic Dash For Cash

Includes: UUP
by: Danny Furman

With all the debate about the fiscal cliff it's surprising to me that analysts on CNBC and financial websites are not making precise predictions as to what will happen, with regards to the markets and otherwise, if the United States Congress fails to put a deal together- one that satisfies President Obama of course. There are clear options our political leaders have by which to reduce the national debt, however there is no clear course of action. The situation is of unusual concern in that no consensus whatsoever exists among socio-demographically aligned people, meaning social unrest is likely to follow any sort of deal. This lack of directional pressure from the voting public adds to uncertainty and the likelihood politicians remain staunch on party ideals- and fail to make a deal.

An ugly fact of the matter is that 2 million Americans will, at least temporarily, lose their jobs starting January 1 all things constant. Whether or not private sector employees, retirees and others panic is immaterial to public workers affected or threatened by expired funding for government programs. Additionally, many financial market followers would be surprised how few government employees even know of, never mind much about, the "fiscal cliff."

Government jobs are touted as stable and traditionally have been, meaning many who may lose their jobs have had them for decades. Once their bubble has burst these people will prepare for the worst, meaning selling their 401Ks, IRAs or even their houses to create a sustainable living situation.

With signs of genuine growth few and far between, leader of the consumption driven economy Apple's (NASDAQ:AAPL) dwindling margins and recent earnings flops, and disastrous worldwide demographics, a cash heavy portfolio makes as much sense now as ever. Investors should recognize limited sustainable upside to US equity markets and avoid exposure to broad market indexes such as the S&P 500 (NYSEARCA:SPY) and NASDAQ (NASDAQ:QQQ). The Shanghai Index (NYSE:CAF) rallied 3% on December 5, suggesting Chinese equities, trading near 5 year lows, may have bottomed.

Those looking to profit from a "dash for cash" can buy (NYSEARCA:UUP), the Powershares DB US Dollar Bullish Index, which currently trades at $21.83. The index has remained in a relatively tight range of $21-23 over the last two years and the lack of volatility has resulted in extremely low options premiums. It has, however, made massive moves during times of panic- including a $22.50 to $27 move in late 2008 and a $22.75 to $25.75 rally in early 2010. Since UUP moves with a near perfect negative correlation to developed stock markets calls are an inexpensive hedge for long stock portfolios. For a low risk play with significant upside investors can buy June 2013 calls on UUP with a strike price of $21 for .93. For a higher risk, higher reward play consider March or June 2013 $23 calls, currently trading at .05 and .13 respectively.

Disclosure: I am long UUP. 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.

Additional disclosure: via March $23 calls