Dumb Talk About Going Over the ‘Fiscal Cliff’
Allow the "fiscal cliff" to happen as a "wake-up" call to politicians? Please. I heard it over the weekend from a few politicians, and even Paul Krugman at The New York Times.
This is playing with fire. Markets have been relatively calm on the fiscal cliff ... so far. A 300-point drop in the Dow Jones Industrial Average is nothing compared to what could happen. The CBOE Volatility Index, the VIX, has remained relatively calm, well below 20. That will change quickly if this thinking takes hold.
Just look what happened the last time Congress couldn't make a decision on debt. When the debate on the debt ceiling exploded in August 2011, and Standard & Poor's downgraded U.S. debt, traders went ballistic ... the VIX went almost to 50 ... rivaled only by the spike in volatility during the May 2010 Flash Crash and after the Lehman collapse. The S&P 500 index dropped 7 percent that week (the week ending Aug. 5). The following Monday it dropped another 6.7 percent.
I'll make it even more simple: Both the International Monetary Fund and the Congressional Budget Office have forecast higher unemployment and a recession if we go over the fiscal cliff. (Read More: See CNBC's Complete Coverage of the 'Fiscal Cliff')
The Republicans have already said they could accept higher revenues as part of an agreement. How could this be done without directly raising taxes on people making over $250,000? They could limit exemptions. Or how about just capitulating a bit and allowing higher tax rates on people making over, say, $500,000, or $1 million as Bill Kristol has suggested?
1) Kudos for Jefferies: the firm has sold itself to Leucadia for $17.66 a share. Why good news? Because there was enormous pressure on it a year ago to sell at a firesale price in the wake of MF Global's collapse. Jefferies CEO Richard Handler resisted, and now he has successfully got a much higher price for shareholders.
The deal will give Jefferies more capital, which means more influence. And Handler will be CEO of Leucadia! Talk about retaining influence!
A roughly 23 percent premium was certainly better than the paltry 7 percent premium that KBW got for selling itself to Stifel Financial last week, but it doesn't change the fact — the investment banking business is very, very tough. (Read More: KBW Shares Jump on Stifel Takeover)
2) Greece passes austerity budget, but gets no aid. Austerity budget approved in Greece, but we still don't have money disbursed. Euro zone finance ministers have received the so-called troika (European Central Bank/European Union/IMF) report on how Greece is implementing its austerity plan, but reports indicate there is a piece missing: An evaluation of Greece's debt position. Greece wants two more years to implement its austerity plan. It looks like there will be no more money coming to plug that hole.
3) Japan's Nikkei posts its longest losing streak in four months after data showed the country's economy shrank in the third quarter for the first time since last year. A decline of 3.5 percent in gross domestic product year-over-year was a tad worse than expected. Capital expenditures fell much steeper than anticipated, as companies like Sony and Panasonic cut spending amid a stronger yen and more competitive markets. Exports were also weak as territorial tensions with China were a drag. (Read More: What Can Save Japan's Battered Economy?)
4) Six months late: JPMorgan downgrades Caterpillar. Really? Now? After it is one of the worst performers in the Dow industrials, down 7 percent this year, with the Dow industrial average up 4.9 percent? At least they admit the call to keep it an "outperform," or a buy, has been "the wrong call in 2012." They seem to justify this way-late call by blaming it on Obama: "...[W]e cannot overlook the continued pressure ... to reduce capex, as well as the reelection of President Obama and the impact this could have on the U.S. coal and energy sectors."
—By CNBC's Bob Pisani
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