A new set of US elections was held and determined and over the next 2 days, the DOW dropped 450 points and the S&P dropped about 3.5%, so what gives?
Well, starting with America, many analysts are thinking that the “fiscal cliff,” of combined tax increases (expired Bush tax cutsand temporary social security payroll tax cut ending) with spending cuts (half from the department of defense, half from other areas and programs like extended unemployment insurance) will now hit because if a Republican congress couldn’t work with a Democratic senate and presidency before, why would they now? Some analysts have been making adjusting their estimates to make the “fiscal cliff” their base scenario.
Europe is also a major factor as Spain has not yet requested a bailout (opening the endless supply of Euro’s from the ECB) and Greece needs to secure more money which is tied to passing unpopular cutting measures. Greek citizens are rightfully angry (as shown by the support for Tschaipras in the past elections) because taxes have been rising, pensions have been cut, and pay has been cut for many while tax evasion is still rampant. A couple of years ago, a newspaper released a list of people in Greece with Swiss bank accounts. Those responsible have been arrested and no progress has been made on either tax evasion of the wealthy or the tax-free status of their largest exporters. With record unemployment and an economy that has shrunk by over 25% since 2007, it is hard to see how Greece can stomach more cuts. Meanwhile Germany is predicted to enter recession soon which makes it yet harder to make terms for bailout more generous and causes difficulties for the Eurozone as a whole.
In China there is also political backlash as hard-liners from the past are consolidating power and there is fear of not only more anti-Japanese sentiment but possibly a reversal to past process of market opening and liberalization.
One positive thing I can say is that I do believe that the US is less likely to undergo the entire “fiscal cliff” effect than many people think. The elections are over, the Democrats gained ground, and given that situation with relaxed political pressure the Republicans will likely end up giving ground to make something happen. If there is any time politicians feel they can be reasonable, it is after an election when they can finally do something without fear of an immediate reaction from their base.
I hate to sound like I’m throwing good money after bad, but I really think Obama will be good for Excelon. Here’s the basic reason why…
EXC has the following energy production capacity: 55 percent nuclear, 24 percent natural gas, 8 percent renewable including hydro, 7 percent oil and 6 percent coal
Notice that coal is way at the bottom. Obama is known for taking a hard line on coal power with the EPA. In addition, he is not against putting in measures to promote renewables which WILL raise the cost of electricity, recession or no. Natural gas is cheap and the cleanest burning of the fossil fuels and nuclear has no problem with many of the pushes toward air quality requirements or CO2 emissions. Difficulty in creating new nuclear plants has always led to extending the lives of older ones, which is very likely to continue seeing the nuclear capacity of the US growing by maybe 1 plant while the government tries to limit CO2 emissions. This will be good for EXC in the future, and you’ll receive a nice dividend in the meantime. I also reiterate my support for royalty trusts both in energy (like SDR) and in gold (like RGLD).
We’re in for a difficult time ahead for reasons mainly outside the US, and the themes of fixed income, gold, and high yield energy are very much intact. If nothing else helps, always remember the classic piece of advice from Douglas Adams in Hitchhiker’s Guide to the Galaxy: “Don’t Panic.”
Also, keep in mind that if markets start to tumble like they did in 2008 (which I don’t think will happen), there are is a tried and true trick to finding the grossly oversold stocks that are most likely to recover first. I’m going to leave you on this cliffhanger which I will explain in my next post.