Trader Talk

Two Weeks of Goodwill, Then Markets Get Jittery


"Fiscal cliff": Most traders agree there is some goodwill for the next couple weeks, while serious negotiations are under way, but if we get into the week of Dec. 10, and the outline of a deal is not clear, markets are going to get jittery.

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It seems to be about a downpayment on a deal. There is not enough time for a Grand Bargain on taxes and entitlement.

What kind of downpayment needs to be made? You can let the payroll tax holiday expire, and cap itemized deductions at some income level as a way of dealing with tax expenditures. Or raise taxes on everyone above $500,000.

Then, you need to extend the debt ceiling, which based on budget trends will be hit in March. They need to increase the borrowing authority to, say, the end of June.

Then serious work gets done next year.


1) OK, make a decision. Still no firm deal on Greek debt (a new meeting is scheduled for Nov. 26), but German Finance Minister Wolfgang Schauble said there is agreement on a program. (Read More: )

Regardless: Greek bonds are up big.

Huh? A deal will happen, and buried in the deal is the possibility that Greece might be able to buy back its debt (at 50 percent of its value or less), reduce its interest rate, and perhaps extend the maturities of its debt. That's why the markets are not freaking out. The Greeks have done their part by passing the austerity bills (whether they will be implemented is another question).

So what's the holdup? The International Monetary Fund is insisting that the deal stick to its original intention — to reduce Greek public debt to 120 percent of gross domestic product by 2020. The Greeks, and likely the European Union, want this pushed off until 2022.

The IMF thinks this is bad for credibility. What it doesn't want to admit is no one can figure out how to get to 120 percent of GDP by 2020 without writing down debt. And the EU certainly does not want to go there.

Right now debt-to-GDP is close to 180 percent. To cut that in half, according to Societe Generale, would require debt reduction of about 170 billion euros (out of total debt of nearly 40 billion euros). To keep the debt from spiraling out of control would also require much lower interest rates. (Read More: Why All Is Not Lost for Greece, or the Euro...Yet)

This is only the beginning. The moral hazard of debt forgiveness is the elephant in the room: No one will even bring it up, because every other country will want it.

2) Deere falls 3.1 percent pre-market after missing earnings expectations. Deere reported fourth-quarter earnings per share of $1.75, 13 cents below analysts' estimates. Deere, the world's biggest seller of farm machinery, posted better-than-expected sales due to strong demand in the U.S. and Canada, where fourth-quarter sales rose 26 percent. The company generates roughly two thirds of its revenue in the U.S. and Canada. Deere predicts 2013 equipment sales will rise 5 percent, with a 10 percent increase coming in the first quarter. Net income for 2013 of $3.2 billion seems a bit below expectations, which are around $3.3 billion.

2) Johnson Matthey, the largest maker of catalytic converters in the world, issued a cautious outlook for the second half of its fiscal year. The problem: uncertainty over the direction of platinum prices (the key component in catalytic converters), an uncertain U.S. truck market, and weakness in Europe. Johnson Matthey not only makes catalytic converters, it has a division that recycles the platinum. Johnson Matthey trades in London.

—By CNBC's Bob Pisani

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