Sell the News. This Is Only A Relief Rally. The Real Battle Is About To Start.

January 2, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

The New Year has started off with a bang. Politicians signed a mini deal late last night and investors are rejoicing. We are within striking distance of the highs of 2012 and the headwinds will be stiff. I hate to start 2013 on a pessimistic note, but I am looking for an opportunity to get short.

Today’s move is nothing more than a relief rally. Politicians should have been able to strike this deal weeks ago. The real battle will begin immediately now that we have hit the debt ceiling.

Republicans plugged their noses and they signed the bill as a good faith gesture. They have been vocal about the lack of spending cuts and entitlement reform. By the same token, the President said that the GOP would be making a big mistake if they thought this was the end of tax hikes. Obama will put a limit on deductions and he will close loopholes.

The fiscal cliff negotiations were just a warm-up. They did not go smoothly and it came down to the wire. Democrats will increase their representation in a few weeks and we’re almost through the “lame duck” session. Fasten your seatbelts; this is going to get ugly.

Democrats want a two-year debt ceiling extension. They don’t want to deal with this again before the next round of elections. No matter what, they are not likely to sign any bill that extends it for one year. Based on the rhetoric, they don’t want to touch entitlement. At very most, they will raise the eligibility age for Medicare by two years. When it comes to spending, they are willing to slash defense spending, but that’s about it. They will conjure up massive cost savings from Medicare and interest expense and that will be their solution for “spending cuts”.

Republicans are losing their power. Right wing conservatives have divided the party and they are digging their heels in. The GOP knows that the debt ceiling is their last bargaining chip for the next two years. Deficit spending is spiraling out of control and this is their last chance to do something about it.

To put the mini deal into perspective, tax revenues will generate $60 billion of income to the government this year. That doesn’t even pay for hurricane Sandy.

Every time you hear about $1 trillion in spending cuts, realize that is over a 10 year period. We are not trying to balance the budget. Instead of overspending by $1.3 trillion, we are trying to only overspend by $1.2 trillion per year.

This rally won’t last long. Corporations have put off long-term plans and they know that this is far from over. Obamacare will soon kick in and 6000 new regulations have been put into effect since the November election. Perhaps the biggest piece the puzzle is demand. Companies do not see a catalyst and they don’t have any reason to expand operations.

The rhetoric will turn very ugly in a couple of days. The U.S. Treasury can only postpone the default for 60 days so these negotiations have to start immediately.

Retailers reported dismal results, MasterCard said that Christmas revenues were only up .7% for merchants and consumer sentiment was very weak. Earnings season is almost upon us and we are likely to get warnings in the next couple of weeks.

I am looking to short this rally. We are up 5% in two days and I believe this is a “sell the news” event. The rally from this morning is starting to lose its luster and I am buying a handful of puts now. If I see continued selling throughout the day I will add. If the SPY breaks below the 100-day moving average I will add.

If the market continues to move higher, I will wait patiently for my opportunity.

May all of you have trading success in 2013.
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