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Republican House Win Keeps Bush Tax Cuts Alive For All

Even though this new Republican-controlled House of Representatives won’t be sworn in until next year, the largest number of seat gains in the chamber since 1948 will keep the Bush Tax cuts, which expire at the end of this year, alive for all taxpayers in 2011, policy strategists and investors said. The fact that two Senators will be seated right away makes some sort of compromise by Christmas a near certainty, they said.

“Republican gains will put pressure on Congress to extend all of the Bush tax cuts,” said Ed Mills and Benjamin Salisbury, FBR Policy analysts, in a note after the Mid-Term results. “Senators Mark Kirk (R-IL) and Joe Manchin (D-WV) won special elections and will be seated almost immediately. Both have signaled some support for extending the Bush tax cuts, in addition to several seated Democratic Senators.”

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FBR believes the compromise will ultimately be a kind of “decoupling” with the tax cuts for families earning less than $250,000 made permanent and the cuts for those earning above that level receiving either a one- or two- year extension. Either way, tax cuts for all will remain for another year.

This would have been unthinkable to Democrats two months ago. An informal poll of “Democratic Congressional Insiders” by Strategas Research put the chances of a one-year Bush tax cut extension at just 26 percent.

Allowing the cuts enacted by President Bush in 2001 and 2003 to expire would cause the rate on capital gains to sunset back to as much as 20 percent from the current 15 percent. Dividends would be taxed again at the income rate of the taxpayer, or as high as nearly 40 percent.

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The options market is signaling that investors fully believe the tax cuts will be extended for all at least another year, according to Jon Najarian, co-founder of TradeMonster.com. There is not heavy put buying in stocks like Apple that have surged this year and would trigger a mighty big capital gains tax bill if the cuts were allowed to expire, the trader said.

“I would offer that we extend the cuts rather than let them sunset, but tie any future sunset to something like GDP,” said Najarian, who is also a ‘Fast Money’ trader.

“Forget calendar sunsets. Instead offer something like when we get to two consecutive quarters of 4 percent GDP, in other words economic expansion, we let the Bush era tax cuts sunset and go to whatever the Congress has set as the next tax level.”

Still both scenarios put forth here are considered worse than just making the tax cuts permanent, many said. A move that would give certainty to investors and corporations, the traders said.

“The agreed upon ‘solution’ will have a couple layers of complexity in order to make it tough for the average guy to understand it,” said Jim Iurio of TJM Institutional Services. “But they have to agree upon something, because neither party wants to be the one who let the tax-cuts expire for the middle and lower class.”

* For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

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Trader disclosure: On November 3, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Pete Najarian owns (BAC), (LVS), (MS) and (NTRS). Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC) and (MSFT). Cortes is short crude oil, gold, (AAPL) and (RSX). Cortes is long S&P 500. Cortes owns (GOOG), (K), (TSN) (CLX) and US Treasurys. Joe Terranova owns (APA), (AAPL), (AXP), (C), (GOOG), (GS), (FCX), (HES), (IBM), (MCD), (NKE), (ORCL), (PCP), (PEP), (UPL), (VRTS) and (XBI).

For Guy Adami:
Adami’s wife works at Merck

For Brian Kelly:
Accounts managed by Kanundrum Capital own (GLD)
Accounts managed by Kanundrum Capital own (GDXJ)
Accounts managed by Kanundrum Capital own (TLT)
Accounts managed by Kanundrum Capital own (TIP)
Accounts managed by Kanundrum Capital own (SLV)
Accounts managed by Kanundrum Capital own (CLF)
Accounts managed by Kanundrum Capital own (ANDE)
Accounts managed by Kanundrum Capital own (GPRE)
Accounts managed by Kanundrum Capital own (JJG)
Accounts managed by Kanundrum Capital own (HD)
Accounts managed by Kanundrum Capital own (PCL)
Accounts managed by Kanundrum Capital own (XHB)
Accounts managed by Kanundrum Capital own (FCX)
Accounts managed by Kanundrum Capital own (EWH)
Accounts managed by Kanundrum Capital own (CLF)
Accounts managed by Kanundrum Capital own Euros
Accounts managed by Kanundrum Capital are short Japanese Yen

For Joe Terranova:
Terranova is chief market strategist of Virtus Investment Partners, LTD.
Virtus Investment Partners own more than 1% of (ABAX)
Virtus Investment Partners own more than 1% of (ALK)
Virtus Investment Partners own more than 1% of (AMKR)
Virtus Investment Partners own more than 1% of (CASS)
Virtus Investment Partners own more than 1% of (CMS)
Virtus Investment Partners own more than 1% of (CSC)
Virtus Investment Partners own more than 1% of (CSVI)
Virtus Investment Partners own more than 1% of (FCFS)
Virtus Investment Partners own more than 1% of (IGE)
Virtus Investment Partners own more than 1% of (LDR)
Virtus Investment Partners own more than 1% of (LPHI)
Virtus Investment Partners own more than 1% of (MGRC)
Virtus Investment Partners own more than 1% of (NRCI)
Virtus Investment Partners own more than 1% of (DBV)
Virtus Investment Partners own more than 1% of (XLB)
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Virtus Investment Partners own more than 1% of (XLI)
Virtus Investment Partners own more than 1% of (XLU)
Virtus Investment Partners own more than 1% of (SOA)
Virtus Investment Partners own more than 1% of (SUBK)
Virtus Investment Partners own more than 1% of (WDFC)
Virtus Investment Partners own more than 1% of (WMB)
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RICHARD VOLPE
RBS makes a market in U.S. Treasuries

JEFFERY HARTE
Sandler O'Neill has received compensation from (BAC), (C), (JPM) for investment banking services in the past 12 months.
Sandler O'Neill intends to seek compensation from (BAC), (C), (JEF), (JPM) for investment banking services in the next 3 months.
Sandler O'Neill has received compensation from (BAC), (C) (JPM), (MS) for providing products or services other than investment banking services in the last 12-months.
(BAC), (C), (MS) is a client of and receives non-investment banking securities-related services from Sandler O'Neill

PETER BOOCKVAR
***No Disclosures***

DEBORAH WEINSWIG
Citigroup owns 1% of (SKS), (SVU)
Within the past 12 months, Citigroup has managed an offering of (TGT), (WMT), (HD)
Citigroup has received compensation for investment banking services provided within the past 12 months from (TGT), (WMT), (SKS), (HD), (KR)
Citigroup intends to seek, within the next 3 months, compensation for investment banking services from (WMT), (KR)
Citigroup received compensation for products and services other than investment banking services from (COST), (M), (JCP), (KSS), (TGT), (WMT), (HD), (WAG), (KR), (SWY), (SVU) in the past 12 months.
Citigroup has, or had within the past 12 months, the following investment banking clients (TGT), (WMT), (SKS), (HD), (KR)
Citigroup has, or had within the past 12 months, the following non-investment-banking, securities-related clients: (COST), (M), (JCP), (KSS), (TGT), (WMT), (SKS), (HD), (CVS), (WAG), (KR), (SWY), (SVU)
Citigroup has, or had within the past 12 months, the following non-investment-banking, non-securities-related clients: (COST), (M), (JCP), (KSS), (TGT), (WMT), (HD), (WAG), (SWY), (SVU)
Citi makes a market in (COST), (M), (CVS)

ANTHONY SCARAMUCCI
Scaramucci and SkyBridge Capital owns (BP)
Scaramucci and SkyBridge Capital owns Gold

MIKE KHOUW
Cantor Fitzgerald makes a market in (OPEN)