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At Least 'Do Nothing' Is Off the Table

Jin Lee | Bloomberg | Getty Images

"Fiscal cliff": Do nothing is off the table — that's the good news from the weekend. House Speaker John Boehner has a new offer that finally moves on taxes for the wealthy.

There were always three options: 1) do nothing; 2) make a Grand Bargain; and 3) do the minimum necessary, i.e., some combination of modest tax increases and spending cuts.

The first option is now off the table. A Grand Bargain, including a deal on the debt ceiling, is still possible, but a lot is now centered around a deal between a Grand Bargain and the minimum necessary.

On July 25, the Senate passed S. 3412, the Middle Class Tax Cut Act, which increased rates for couples making over $250,000 to 39.6 percent, fixes the Alternative Minimum Tax so it doesn't kill the middle class, and sets capital gains and dividend taxes at 20 percent for those in the higher income brackets.

There is where negotiations are centering. There is the heart of a deal.

Elsewhere:

1) Asia catches a bid:

a) Japanese stocks finished at an eight-month high after a landslide victory by the conservative Liberal Democrats gave them a super-majority in the lower house, making their programs veto proof. Likely prime minister Shinzo Abe has called for "unlimited" monetary easing by the Bank of Japan, more spending on public works, and more defense spending.

While part of the conservatives's victory can be attributed to the poor handling of the Japanese tsunami-earthquake by the ruling DPJ party, you can also thank China's bellicose stance toward its neighbors. There were large-scale demonstrations in China in September against Japan, largely around China's insistence on controlling small islands in the East China Sea near Japan. This is leading to a rebirth of nationalism in Japan. (Read More: Disputes Over Small Islands Pose Big Conundrum for US)

b) The Shanghai Composite Index up another 0.5 percent, closing at a four-month high after rallying the most in three years last Friday on speculation state-backed institutions were buying stock after a manufacturing survey contributed to growing optimism the world's second-largest economy will rebound.

2) Knight Capital Group: Still waiting for a deal. Knight's board meeting has begun; it is weighing competing bids for the company from Virtu Financial and Getco. There's a strong likelihood that one or the other will increase their offers. Not clear if we will hear anything today.

There's a small possibility the board won't go with either offer. It's no secret Knight has not viewed itself as a distressed seller. Tom Joyce, understandably, wants to keep the company together.

But there's a big problem with the status quo: the stock price. Knight was trading at $2.50 before these offers came out; it's now at $3.20. Knight shareholders will have to sign off on the deal, and they will want that stock price up.

Will anyone else make a bid? I've said many times it is unlikely a publicly held company will step in at the last minute with a bid, due to the difficulty of getting a controversial company past a board.

Any other private companies? The dark horse is Citadel, one of its main wholesale competitors, which likely made a bid for the company in earlier negotiations. There's two big problems: There's lots of bad blood between the two competitors, and their customers (the TD Ameritrades and E*Trades of the world) would likely not be delighted to have fewer choices to send their order flow. Knight controls roughly 30 percent of the wholesale (retail) stock order flow, Citadel about 25 percent, with the rest controlled by UBS, Citigroup, ETrade, and a few others. TD Ameritrade's CEO, Fred Tomczyk, sits on the Knight board.

3) Airlines rally pre-market after Dahlman Rose upgraded its industry outlook to bullish from cautious, expecting air carriers to benefit from higher passenger revenues in 2013. Dahlman Rose sees increasing traffic and industry consolidation driving growth. Delta Air Lines, US Airways, and United Continental all rise one to two percent pre-market after being upgraded to "buy" from "hold." Airline stocks have been on a tear recently with the NYSE Arca Airline Index hitting a 52-week high last Friday.

4) Coal stocks up on a Barron's article, which said the stocks are oversold and Chinese demand is poised to increase.

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