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Cliff-fight: Obama:1 Republicans:0

It was an interesting week when we saw lots of turns and twists in "fiscal cliff" saga. In the end, one aspect of "cliff" mess was resolved with tax increases on rich and super-rich whereby middle class and upper middle class were spared with tax-increases which they would have been hit otherwise. Stock Markets were happy with best new year day gains on DOW. But all of this may be short-lived since there are more "cliff" fights are coming. This round was clearly won by President Obama with clever negotiations tactics which lasted till last minute (by design). Republicans got played in this and came way short and had no option but to sign off which was essentially what President wanted all along. And worse part was that they got no brownie points at all even though they won on extending tax-cuts permanently for 99% of Americans - one of their major policy victory.
Well done President Obama in first round.
Now there are at least 2-3 more rounds remaining in "cliff" fight.
  • Expiry of 2 month extension to automatic cuts to defense and other spending (Mar 1)
  • Increase in debt ceiling(sometime in Feb and early March)
  • Remaining 2013 budget approval (March)
Are republicans ready for these rounds to fight a balanced fight with newly confident President? Or would they just boast all throughout the discussions and cave in at last minute due to pressure from media and markets? Given that Bohener barely won post of Speaker and Mitch McConnell is up for re-election in 2014 and divided party due to recent election and "cliff" losses, I am not sure the GOP leadership is ready for winning any of these rounds. But given that 2012 elections had a split verdict with democratic President and republican house, GOP better start acting that they are party of small government and rein in spending and runaway deficit. While this may come at cost of increased market volatility and potential slowdown in economy, it's time to put US economic house in order. This is where all these leaders should go back to 1990s and pick some lessons. After all US economy did best in 1990s.
How would this play out in markets? S&P closed at 5 year high today. Last time it reached that level was in Dec 2007 just before onset of economic crisis. Given upcoming "cliff" events and Q4 results starting from next week, it's time to be on side-lines and watch out how these fights play out in markets.   So my advise would be to take off some chips off the table by selling some of your stocks or at least selling covered calls against your holdings during this upswing in markets. There would be times when you can get back into markets when all cliff fights are over.
/Shyam

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