A Prescription for Caution

I am the first to admit that I was surprised by the market's relatively mild reaction to the dueling press conferences of House Speaker John Boehner and Senate Majority Leader Harry Reid on Thursday. While the third-quarter GDP projection was revised up to 2.7% from the original projection of 2%, it was expected and most of the drivers of the improved results (inventory build, government spending) are unlikely to be repeated in subsequent quarters. In addition, President Obama's opening gambit ($1.6 trillion in new tax revenue, a minor $400 billion cut from entitlements, $50 billion in new stimulus and control of the debt ceiling from Congress) will do nothing to lower the temperature between the two sides in Washington.

I believe investors are too complacent in thinking the fiscal cliff will be resolved in an orderly fashion by the end of the year. Incentives for both sides to take negotiations right to the deadline and probably into 2013 are strong. I believe that when the majority of investors realize this, it will trigger a significant market selloff....265 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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