On the other side of the Sandy Hook tragedy, you have have the tragedy that is our current political system and leaders. I can't tell you how many people that I speak with that are more concerned about the anti-bipartisanship going on in Washington than they are worried about going off of the fiscal cliff.
When people that never talk finance or politics started talking more and more about the fiscal cliff over the past few weeks this gave us cause for great concern. There is no doubt that if nothing is done to remedy the automatic spending cuts and increased taxes there will be an impact upon the economy. However, we would argue that the biggest impact is already being felt which is a crisis of confidence. The sense that we have no idea what direction we may be going in makes people scared and causes paralysis in which no one moves at all.
Several times this week while listening to Bloomberg radio, I heard of multiple Fortune 500 companies having developed multiple operating plans for 2013 based upon what outcome may arise out of Washington. Just think of the time and effort wasted on non-productive activities all because politicians can't come together and do what is in the best interest of the country and its people.
While perplexing as all of this may be, the equity markets have stared this adversity down for the better part of the year and especially over the past two weeks. Friday was a bit of a wake up call as the markets began to pull back sharply on news that a deal as it stands today is not likely to happen. The so called "Plan B" of the Republican party blew up in their faces leaving the Democrats holding all of the cards and not needing to make any moves themselves so that they can blame the other party and vice verse.
We at DWCM are still amazed that the markets have down as well as they have in the face of all of this uncertainty. Of the four equity benchmarks that we compare ourselves against, all but the DJIA will likely finished the year with double digit returns. Even the DJIA will likely produce a high single digit return. Currently the DWCM Fund stands a return above 20% besting all four indices.
The next week could be one of the most volatile trading week of the year for a few reasons. One, most traders and institutional players are off this week which creates extremely low trading volumes which could swing prices in either direction. Second, and likely the biggest driver will be if any deal is reached in Washington. If no deal is reach expect a decent sell off that could linger into the new year. Even if a patch work deal is put together, people may not be fooled and a sell off could still ensue.
We plan to take a cautious approach this week and and pay close attention to our current long-term positions that we would be adding additional capital to in the event of a sell off. In addition, we will be monitoring our current watchlist (which we will update on our website today) for those positions that we would like to bring on as part of our long-term strategy as well.
We believe that currently it is just too hard to determine in the short-term what direction the markets may be headed in which is why we will be focusing in on the long-term side of our portfolio.
The Week Ahead
As we noted previously, we expect that this could be a very volatile week within the equity markets. In addition to shortened trading hours on Monday and closed for Christmas on Tuesday, the rest of the week will be full of political conversations and "what if" scenarios. However, don't loose site of some very important economic data to be released most centered around the housing market.
- Mon - Markets close early
- Tue - Merry Christmas
- Wed - S&P Case-Shiller HPI, Richmond Fed Manufacturing Index
- Thu - Jobless Claims, New Home Sales, Consumer Confidence
- Fri - Chicago PMI, Pending Home Sales Index
We at DreamWorks Capital Management would like to wish everyone a safe and happy holiday season.
DreamWorks Capital Management
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