Should You Fear a Market Plummet Whenever Harry Reid Speaks?

NEW YORK ( TheStreet) -- Your best bet is to not bet against Harry Reid. Simply ask the markets.

The U.S. Senate majority leader from Nevada emerged late Tuesday afternoon to tell reporters that it would be "extremely difficult" to address the so-called fiscal cliff before Christmas. The comment triggered a selloff in the the major U.S. equity indices late in the day.

"Harry Reid pulled an Apollo Creed, it was kind of like a quick punch to the market," said Michael Gayed, chief investment strategist at Pension Partners.

Reid's comments may have initially concerned investors as the Democrat provided the first bit of clear language about fiscal cliff talks since President Barack Obama and his administration suppressed details of discussions that had transpired with House Speaker John Boehner over the weekend.

Boehner's office hasn't offered the public any more color other than that "the lines of communication remain open" between both sides. The White House also remained silent on the issue as Press Secretary Jay Carney said on Monday that he believed the best prospect for reaching an agreement was to not read details of the conversations between Obama and head lawmakers.

Reid has stood behind the president's plan to extend middle-class tax cuts and raise rates on the top 2% of income earners throughout the fiscal cliff debate, so his suggestion that a deal may fail before the holiday break was the first signal in days from a leading Democrat that negotiations may not be going as smoothly as presumed.

Stocks finished higher on Tuesday, but Reid's comments ended the rally and the major averages never returned to their intra-day highs.

So why is it that Reid's comments jolted the market, while investors seemed to shrug at Boehner's comments earlier in the day?

"This is one of the toughest son of a bitches you'll ever meet," said one source who has been a friend of Reid's since the politician first ran for the House of Representatives in 1982. "This is a guy who ran the Nevada Gaming Commission and effectively de-licensed the mob -- they put a contract out on his life ... his wife got in the car one day, turned the car on, and there was a bomb in it. ... He told them to go screw themselves."

The source doubted that Reid would ever back off the position to raise taxes on the wealthiest 2% of income earners -- a buzz saw issue that Boehner's Republicans have refused to agree on.

It's possible that the market ticked lower because it bet that Reid wasn't bluffing, but the indices managed to swing back, albeit not at session highs.

"Small-cap stocks, relative to large-cap stocks, are much more dependent upon U.S. domestic economic growth -- more revenue comes to small-caps than large-caps," said Gayed. "If you look at the way small-caps behaved, sure they fell after Reid's comments, but they didn't underperform; it's not like they were down more in that decline."

Reid roiled markets two Tuesdays ago, Nov. 27, when he said he had been disappointed with how talks had proceeded to that point.

The Senate majority leader is widely considered one of the most powerful political leaders in the country, and his majority Democratic caucus in the U.S. Senate makes it impossible to pass a budget without his approval. In other words, what Boehner's Republican House passes, Reid must approve and vice versa.

Even Reid's power, though, has his limits. Obama, Boehner and Reid have all released negative reactions to the fiscal cliff negotiations that have affected the markets, but some analysts have suggested that markets are becoming immune to the rhetoric, much like the Greek debt talks.

"It's a chance for Harry Reid to do this: 'Hey I can rattle a market, too,'" said Lee Munson, chief investment officer at Portfolio LLC. "Between Boehner and Reid and Obama I have every confidence that they're working this out, and I'm not concerned about the saber-rattling because they have to do it."

The worry has been that if lawmakers hadn't reached a deal before Dec. 25, then nothing would get done before Jan. 1 as most politicians would be on vacation with their families.

Last-minute decisions often have characterized the divided climate in Washington since GOP victories in the 2010 mid-term election split power between the two chambers of Congress.

So maybe Reid, Boehner and Obama simply are waiting for a killer grand finale before 2013.

"It's not going to happen a day sooner, because there's no upside: Politics is a grand theater, so why would we close early?" said Munson. "And it won't help markets, because who wants to deal after Christmas with some huge surge and not be there to deal with it?"

-- Written by Joe Deaux in New York.

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