Sterling Market Commentary for Thursday January 3rd, 2013
A Look at Wednesday’s Wednesday’s Market: The overall market moved very sharply higher on Wednesday, the 1st trading day 2013. While the sharp move higher is being attributed to the “deal” on the Fiscal Cliff that was reached late Tuesday night; I would like to offer an alternative view as to what helped propel the market higher. Granted the agreement on the Fiscal Cliff was a significant factor in yesterday’s move higher; and it shows you the perceived economic impact of keeping tax rates low. However, I would like to point out that because yesterday was the 1st trading day of the new year, it was also the 1st day where investors could re-enter positions following tax related selling last year and establish their cost basis in2013. I think a lot of money came out of the market in late 2012 and had been sitting on the sidelines waiting for the start of 2013; and yesterday we saw the results of that money going back to work. I would also like to point out that the major market indices are basically back at the levels they were when the sell off started in early October. Something to think about if you doubt the validity of my tax related selling theory.
A Few Thoughts on Thursday’s Market: In looking at the charts from yesterday’s trading activity, it looks as if the majority of the indices I track are over extended to the upside. As a result, I would not be surprised to see the market basically track sideways with a slight downward bias over the next several trading days. It is important to keep in mind that there remain a lot of unresolved issues in Washington D.C., and about the only good thing I can find in the “deal” that supposedly resolved the Fiscal Cliff is the preservation of income tax rates for the majority of Americans. Otherwise as near as I can tell, it was a horrendous deal. for the country. Other than the upcoming debt ceiling issue, I do not see any incentive or desire for Democrats, Liberals, and Progressives to engage in any form of meaningful reform or attempts to deal with the problems facing this country and our economy.
I would like to comment on an excellent article in today’s Wall Street Journal by Martin Feldstein titled “The Fed’s Dangerous Direction.” Mr. Feldstein discusses the problems with the Fed’s Quantitative Easing programs and asset buying strategies. He spends a fair amount of time discussing the problems the Fed is likely to face when it stops its asset purchase program and the consequences to the U.S. economy and tax payers. I urge everyone to read this article. As I have been saying for a long time, he also states that when the Fed stops its asset purchase program we are likely to see a dramatic rise in interest rates and a corresponding drop in asset prices. He further discusses the prospects of high inflation taking hold and the difficulties that the Fed will have in combating inflation. He also talks about how the activities of the Fed are covering up the inept and failing policies coming from Congress and the President. It is worth reading, and if you have time I suggest taking a look at it.