Monster’s Perspective:
The days after the “Fiscal Cliff” deal

Happy New Year to all and Happy New Year indeed.

While I’m happy that a Fiscal Cliff deal got done, this deal without any address to government spending is indeed a very small deal. And while we still have the debt ceiling ahead of us, we can’t deny the bulls their day. This is why I didn’t say go short the market, rather just go to cash.

I thought the risk was we could see up to a 50 point S&P rally, and indeed, we were 50 points above our low print during the regular hours on Monday December 31st.

The S&P 500 was at $1,443 when I said go to cash (12/21) and since trading to $1,398 (all figures in cash S&P 500) we’ve made it back to $1,453, a gain of a whopping 10 points or just 0.7 percent. That’s pretty thin gruel my friends.

I know many of you thought the goal of the deal to dodge the Fiscal Cliff was to prevent a series of steep spending cuts and tax increases on the middle class from automatically taking effect in the New Year. But you’d be wrong, as part of the deal was, as it always is with Congress spending our money, all about pork! In this case nearly $68 billion in pork as tabulated by Congress’ Joint Committee on Taxation!

Yup, lawmakers gave the green light this week to extending dozens of business and industry tax breaks, like a cost-recovery program that will save the owners of “motorsports entertainment complexes” (thus dubbed the NASCAR Pork Chop) about $70 million over the next two years.

A tax credit for construction of renewable energy projects, like wind turbines and biomass, geothermal and hydro power generation, for one year. It’s projected to cost about $116 million, the committee said.

That may seem like a drop in the bucket, but here’s the kicker: While the extension to qualify for new projects covers only 2013, the actual tax credit itself is good for 10 years. That means new projects that break ground in 2013 will be able to claim the credit for the next decade, at an overall price tag the committee put at slightly less than $12.2 billion.

An arcane provision of corporate tax law, called active financing income, that lets U.S. corporations defer taxes on some income they earn from their overseas subsidiaries. That provision will cost the U.S. Treasury more than $9 billion this year and $1.8 billion next year.

Tax breaks for Hollywood producers who shoot their movies and TV shows in the U.S., at a cost of about $430 million through 2014.

A program that sends most federal taxes collected on rum produced in Puerto Rico and the U.S. Virgin Islands back to those territories to subsidize domestic production. Bar tab: $222 million over two years.

A tax break worth about $15 million a year for asparagus growers hit hard by cheap asparagus imported from Peru.

$4 million in tax breaks over the next two years for people who buy “2- or 3-wheeled plug-in electric vehicles” — in other words, electric scooters, Segways and the like.
On a positive note, we noted in my Blog this week that I had read recently that Warren Buffett has agreed to purchase $2.5 billion of SunPower’s solar projects in California. If the Oracle is buying more solar, it might mean the subsidies are back; at least that’s my read. FSLR and SPWR would be key stocks to watch.

Back in August, I was convinced that the spot VIX was doing exactly what it should have been doing back then and that it was revealing something very significant. Remember that the spot VIX measures the range of puts to calls trading in the market, and the range at the time was narrower than it was for some time. That narrowness is what the low VIX reflected.

I said at the time, “That doesn’t mean there’s no fear in the market, it simply means with all the fear in the market, big money investors expect the market to be stuck in a range.”
Like me, optionMONSTER’s Chris McKhann has been examining trends in the VIX in detail over the past months and just yesterday (January 3rd) he wrote a very insightful article for our website ( as he tried to answer the question, “Where is the volatility (trading)?” Chris forwards the opinion that “those who trade volatility through delta-hedged positions usually care more about prices. As such, they were probably hesitant to pay a large premium of implied volatility (cost of the options) over the historical volatility.” It is hard to disagree with him. The article is well worth reading.

With the Holiday Season behind us, and even with the bumps ahead of us, I hope that 2013 gives us a year of Good Trading.


Jon “DRJ” Najarian

Jon ‘DRJ’ Najarian is co-founder of optionMONSTER® and co-lead analyst for the InsideOptions™ trade idea alert systems. He spent the first 29 years of his trading career trading in and around the pits of the Chicago exchanges.

“DRJ” is a frequent contributor to CNBC, the Wall Street Journal, as well as other prominent financial media organizations. Mr. Najarian also co-developed the patented trading algorithm the Heat Seeker®, used to detect unusual trading activity.

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