Navigating the No Man’s Land

Beltway shenanigans are threatening your investment income, but I've got a couple strong trading names to investigate for your holdings

   

This market’s in a bit of a No Man’s Land, with some pullbacks over fears that the fiscal cliff won’t be resolved in Washington that have seen stocks like Apple (NASDAQ:AAPL) drop some 8% in recent weeks, alternating with substantial rallies on any whiff of real confidence that the political logjam will be resolved, sending Netflix (NASDAQ:NFLX) on 10% jump.

So, how do we put together all of the positive and negative vectors into a single narrative? The United States’ economy is struggling to retain traction in a cyclical recovery for households, and consumer goods, like appliances. I’ve also been pretty vocal about my bullish stance on homebuilders, including Lennar (NYSE:LEN), but this economy is treading water in just about every other place.

If things go well with the fiscal cliff and the debt ceiling negotiations, the U.S. economy may grow at faster rates in 2013 and 2014. If things go badly, then the economy will likely slump into a mild recession, which could linger for a long time, sort of like a cold you can’t shake.

Both sides of the fiscal cliff debate this week embarked on road shows to rally support for their positions, which was a marked difference from the behavior that preceded past major budget clashes in the past. It’s been very divisive and unhelpful. I fear that Congress will use gimmicks and some new taxes to create to a deal that’s just big enough to put off the fiscal cliff but so small that it will make little difference in the long term trajectory of the nation’s finances.

There are so many little details in the budget talks that will have material impacts, including the return of a social security tax and a new Obama Care tax that takes away 3.8% from investment income and 0.9% from wages on joint incomes over $250,000. Also, bonus depreciation on capital equipment is scheduled to end, and the alternative minimum tax will snatch millions and millions of dollars from 26 million middle-class tax payers.

The bottom line is that no matter which side wins the debate, the tax on investment income is going to go up. The maximum tax rate on capital gains could rise to 23.8% from 15%, and the maximum tax rate on dividend income may rise to 43.4% from 15%. These will have major impacts on economic activity, though perhaps more at the start than later on when the fact is absorbed.

So, if the government is going to stifle economic activity, naturally the Federal Reserve is going to have to do more, but what that might be after four years of near-zero interest rates is really a big question. At the very least, I think we can expect the Fed to continue to buy bonds and mortgage-backed securities.

The weird and unintended effect of this austerity plus zero interest rates policy is the government leaders and central bankers are essentially encouraging investors to leverage up and speculate more.  Analyst Craig Drill notes that monetary policy is already pushing investors farther out on the risk spectrum for bonds in terms of duration and liquidity to obtain a 7.5% annualized returns expected by pension funds, endowments and families. As a result, trading is going to be more important than ever to meet your retirement fund goals.

I suggest you do so prudently using ideas from my Trader’s Advantage service, as well as my new service I’ll be launching next week called CounterPoint Options.

Some of the better bets right now are cell towers, such as SBA Communications (NASDAQ:SBAC) and American Tower (NYSE:AMT), and some beaten up utilities, such as NRG Energy (NYSE:NRG) and AES Corp. (NYSE:AES).

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