Viewpoint: US fiscal cliff is a false fear for stocks

The US fiscal cliff battle drags on. Taxes will rise on 1 January - investors fear if a deal isn't reached in time, higher taxes will cause a recession and bear market. It's a false fear, and false fears are always bullish.

First, the "fiscal cliff" is fake. Politicians made it; they can move it. The cliff first loomed in 2010 and politicians, fearful of angry constituents, kicked it past 2012 elections. They can do it again past 2014 - same logic. Even if there's no deal by year-end, they can delay implementation, by a month or two or 17. It's up to them! They did it in 2011 - they delayed the payroll tax holiday expiration by two months to buy time to compromise on a longer extension. These deadlines are political, fake, and can be moved.

And they want to compromise - particularly Democrats. They have 20 Senate seats up for election in 2014 and Republicans just 13. And nine of those seats are in vulnerable states which Democrats took from Republicans in 2008. Those seats can easily flip back. Democrats don't want to face voters angry over taxes.

Even if there's no deal and taxes rise, there's a vast history of tax rate moves in the US, UK and globally and no evidence that rate moves - up or down - are predictive for immediate future economic or market direction. No recession I can find was ever caused by a marginal tax increase. I don't like higher taxes, but not because they cause recessions. Provably, they don't.

How do hikes affect stocks?

As for stocks, in the US there have been 27 major income tax rate changes since 1928 - 15 cuts and 12 hikes. (I use the US for its longer data history, but it's the same in the UK and globally.) What did shares do after? Overwhelmingly, no matter whether taxes were cut or hiked, shares rose - 70.4% of the time. After 10 of the cuts, shares were positive 12 months later. Shares fell after just five cuts, which means shares were twice as likely to rise as fall after a tax cut.

That doesn't surprise you. What surprises you is shares were up 12 months following nine tax hikes, but fell after just three hikes, i.e., shares were three times as likely to rise after a tax hike, the opposite of what most think. People automatically assume tax hikes weigh on shares, but history and evidence don't support that. In fact, the reverse!

More amazing are capital gains tax (CGT) moves. Since 1928, there have been six cuts and nine hikes - 87.7% of the time, regardless of CGT rate direction, shares were positive 12 months later. Shares rose, five to one, after CGT cuts, but shares rose eight to one after hikes. Some may view that and form a new myth, believing, perversely, shares like tax increases. No. All it means is shares always and everywhere rise much more than fall over time.

Then, too, tax policy is inherently local and global factors matter much more. Tax rate moves are near meaningless for shares. But the fear is bullish - when expected disaster doesn't arrive, that positive surprise can boost shares, such as pharmaceuticals giant Pfizer (PFE).

Pfizer has a prodigious range of top-notch brand names, and a stream of new products will capture growth from an ageing developed-world demographic, plus new emerging middle classes overseas - all wrapped in a classically cheap stock.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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European and U.s. stocks slip on fiscal concerns

NEW YORK (Reuters)-the euro and the u.s. stocks fell on Tuesday as concerns about the threat to the world economy posed by the u.s. "fiscal cliff" offset optimism of a deal to relieve Greece debt, although European and Asian stocks gained on first investor optimism.

The downdraft in u.s. stocks was unlike moves higher on other stock markets around the world, while safe haven German bonds declined after global lenders a new deal to reduce Greece's debt and releasing loans needed to reached the country stay afloat.

But investors if Democrats and Republicans prepared to resume budget negotiations in Washington, again evaluated risk.

Senate Majority Leader Harry Reid said Tuesday that he is disappointed that there is "little progress" under democratic and Republican legislators as they try to reach a deal to prevent the end of the year "fiscal cliff.

President Barack Obama will this week launch a multiple pressure support for his proposals to avoid sharp tax increases and cuts which will otherwise enter into force at the beginning of 2013 and could hurt economic growth.

Positive u.s. economic data is not managed to concerns. A gauge of the U.s. business planned expenditure increased the most in five months in October. But a fourth consecutive month of declines in shipments underscores the damage inflicted by fear of a tighter fiscal policy next year.

"Now that Greece is out of the picture for the time being, the u.s. fiscal slope is front and center," said Christopher Vecchio, currency analyst at DailyFX in New York.

The euro touched $ 1.3009 early in the global day, its highest level since October 31, but lost momentum when tentatively set back. The last of 0.3 percent at $ 1.2932.

Michael Hintze, founder and CEO of hedge fund CQS, told a Reuters Summit he expects the euro zone to continue muddling through her problems. But he added that "the chances are pretty high ping on the road by misstep."

After 12 hours of talks, international lenders decided on steps to cut Greek debt to 124 percent of gross domestic product by 2020 and promised further measures to lower it below 110 percent in 2022.

After months of jockeying, the deal was generally expected by the markets and paves the way for the euro zone neighbors Greece and the International Monetary Fund to pay out nearly 35 billion euro aid next month.

But with doubts about the ability of Greece to its growth and debt reduction targets to hit, few analysts expect the most recent agreement to the last chapter in the euro zone crisis three years.

Although stocks waxed and waned during the u.s. session, they lost ground as investors finally found small gains support.

The Dow Jones industrial average.DJI ended down 89.24 points, or 0.69 percent, at 12, 878.13. The default & arms of 500 Index decreased 7.35 is points, or 0.52 percent/SPX, on 1, 398.94. The Nasdaq Composite Index fell 8.99 points, or 0.30 percent, IXIC. to 2, 967.79.

"It's about your money, and it's going now," said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago. "At this point, you must make your movements and

Avoid the threat of more taxes.

"As long as there is no deal, I would expect to see more of these machinations – just in case," he said.

The MSCI index of global stocks for last of 0.2 percent. European shares on the FTSEurofirst 300 index.FTEU3 ended up 0.3% and the MSCI index of shares the broadest of the Asia-Pacific outside Japan gained 0.5 percent on a near three weeks high.

DEBT TALKS

Safe haven German Government fell after the Greek deal bonds, with benchmark Bunds delivers on 1.434 percent. Ten year Greek yields were last at 15.824 percent.

The benchmark 10-year U.s. Treasury note rose 8/32, with the yield of 1.6386 percent.

"(The Greek deal) is not a green light for a sustainable rally for risk assets across the Board. As we have seen before once the market begins to investigate some of the details, well doubts, "said Michael Leister, a senior rates strategist at Commerzbank in London.

Unease about the American and Greek Finances was compensated by the encouraging data on the u.s. economy.

U.s. consumer confidence rose to a four-and-a-half year high in November as consumers became more optimistic about the economic prospects of the private sector, according to a report published on Tuesday.

The Greek agreement encouraged buyer on a three-week high before it gave profits, while Brent crude retreated to about 110 dollars per barrel as Greek optimism was countered by concerns about the looming fiscal situation of the USA. U.s. crude oil futures fell 0.5 percent to $ 87.31.

After a first post-Greek deal lead decreased to $ 741.25 per ounce gold, of 0.4 percent.

(Reporting by Nick Olivari additional reporting by Angela Moon and Ed Krudy in New York and Marc Jones and Emelia Sithole-Matarise in London; Edit by Dan Grebler)

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Asian stocks fall as the focus moves to the u.s. budget talks

TOKYO (Reuters)-Asian shares ended a winning streak of seven days on Wednesday as investor concern increased about whether u.s. lawmakers the world's largest economy in danger of a recession that were to make headway in their budget discussions by not.

Tuesday the agreement by international lenders to cut Greek debt relief that the country offered a looming bankruptcy, but skepticism about the lack of details about how Athens will run budget reforms to meet the new objectives of the debt is averted capped a rise in European equities and the euro.

U.s. stocks slipped overnight after Senate Majority Leader Harry Reid expressed disappointment about little progress in dealing with an approaching "fiscal cliff" of deep cuts in government spending and large tax hikes at the beginning of next year.

MSCI the broadest index of shares of the Asia-Pacific outside Japan advanced of 0.2 per cent, retreating from Tuesday nearly three weeks highlights.

Australian shares.AXJO decreased 0.4 percent, easing two-week highlights. Government data on Wednesday showed a delay in investment in the resource sector, the main motor of the Australian growth, such as costs rose and commodity prices fall, driven by a drop-off in the Chinese question.

Committed investments in large resources and energy projects still rose to a $ 268.4 billion on 31 October a 260.8 billion dollars in late April, but the rise partly due to higher project costs and a decrease in the number of projects masked said Australia's Bureau of resources and energy economy.

South Korean shares.KS11 opened 0.5 percent lower.

The agreement on Greece is good news that it opens the door for disbursements to prevent a default on upcoming debt payments, but it doesn't relate to financing and medium-term debt sustainability issues, Barclays Capital analysts said in a note.

"The uncertainty brought by this approach allows European assets, including the euro, vulnerable to global growth risks. For that reason, we believe that the European muddle through strengthened the market response to the fiscal cliff discussion in the us. "

The euro fell 0.1 percent to $ 1.2937, slipping from a peak of $ 1.3010 hit on the news from Greece on Tuesday, its highest level since October 31.

Japanese Nikkei stock average.Follow N225 opened of 0.5%, after the conclusion of a seven-month high.

The Nikkei has risen 8.8 percent in the past two weeks since the Government announced a 16 December elections. Japan's largest opposition party expected to win power and investors expect that it will force the Bank of Japan in aggressive easing.

Concerns about the fiscal crisis overshadowed positive us economic data which showed improvement in durable orders, the real estate sector and consumer confidence, that a 4-1/2-year high in November, hit and drove that safe haven US Treasury prices higher while the strengthening of the dollar.

The dollar fell 0.1 percent against the yen at 82.06. U.s. crude oil futures fell by 0.1 per cent at $ 87.09 per barrel. Gold stabilized at $ 1, per ounce on Tuesday after slipping 741.45 for a second session.

(Editing by Michael Perry)

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