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Kass: Current Fears Are Overblown

Color me more optimistic. I am pleased to be back on the reservation, buying stocks and looking for more undervalued equities.

Once Bitten, Twice Shy

Fears of a deep fiscal cliff appear to have been the proximate cause for the market's profound weakness in the last week.

It is important to recognize, however, that the message of the 2012 election was moderation. From my perch, moderation equals compromise. Mr. Market and his participants might be now incorrectly playing the last war (which took place during the budget deliberations in August 2011).

I believe the fears are misplaced; I don't believe we will go over the fiscal cliff in a major way.

We are at the point of necessity, and my view is that both parties get this.

Sleeves will be rolled up in the next two months -- just as Republican Senator Graham and Democratic Senator Schumer are now working toward a broad agreement on immigration, a pro-economy/business compromise could be forthcoming with multiple concessions. Compared to the budget deliberations of August 2011, this time around neither party can risk the perception of being obstructionists in the negotiations. Americans clearly have voted with their feet, and they want and prefer compromise over drama.

I agree with Whitney Tilson's recent remarks on the fiscal cliff on CNBC:

It's a forcing mechanism that's going to cause both parties to touch their third rail. Republicans are going to have to touch the higher-taxes-on-the-wealthy third rail. Democrats are going to have to touch the entitlements third rail. And this "fiscal cliff" is a beautiful thing to make that happen.
There will be some fiscal drag in 2013, but, when all is said and done, it will likely be only 1%-2%. And a better-than-expected recovery in housing, a continuing rebound in consumer confidence and spending, and a return of some business confidence (manifested in improving hirings and capital spending) will serve to offset most of the lost growth.

To understand why I am of the view that the fiscal cliff will be materially avoided, we have to go back to the debt negotiations last summer and to the election results on Tuesday night.

The Debt Negotiations of 2011

Today both parties enter negotiations on the fiscal cliff with low approval ratings. This is not surprising as the Democrats and the Republicans have a recent history of disrupting domestic economic growth, adversely impacting business/consumer confidence and having caused a mini stock market crash in August 2011.

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Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

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