Fiscal Cliff Investing - Strategies for Investment Protection

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Feeding this dynamic is the inexorable growth of automatic, formula-driven spending on older Americans.

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Meanwhile, discretionary spending excluding defense , has fallen to just 17 percent. After all, domestic spending supports priorities liberals once fought and bled for. Meanwhile, the Urban Institute estimates that federal spending on children will decline about 20 percent over the next decade. This growing disparity seems perverse at a time when poverty rates are higher for children than seniors 18 versus From the standpoint of investing in children and families, uncontrolled mandatory spending on seniors is like a fiscal version of the Doomsday Machine from Dr. The fiscal skirmishing in Washington has aggravated this systematic whittling down of public investment.

And it suits conservatives just fine. The sequester is squeezing the very programs liberals care most about — including the National Endowment for the Arts, green-energy subsidies, the Environmental Protection Agency and National Public Radio. Outside Washington, the sequester is forcing a fiscal retrenchment for such liberal special-interest groups as Planned Parenthood and the National Council of La Raza, which have growth dependent on government largess.

One reason enough Republicans voted to partially suspend the sequester is that it will also eviscerate defense spending. Of course, progressives could avoid a zero-sum conflict between entitlements and domestic programs by borrowing more money or hiking taxes. Unfortunately, either expedient collides with economic and political reality.

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Given the halting recovery, big tax hikes now are economically dumb as well as politically infeasible. Many liberals have convinced themselves that the entitlements can be made solvent as the boomers surge into retirement simply by raising the payroll tax. By making labor more expensive, it would discourage employers from hiring workers, especially young and low-skilled ones.

Pennsylvania Trust, Author at Pennsylvania Trust - Page 6 of 8

And it would transfer more wealth from young workers to retirees. That was the year the U. Lee sees investors efforts trying to front-run — and sell into — a bad outcome for the Washington negotiations. That, in turn, will offer a dip-buying opportunity, with specific focus on financials and cyclicals. He also expects energy to outperform as it often does following consecutive quarters of strong stock market gains.

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Other experts are a bit less sanguine about the outcome, even though the consensus belief is that the U. Michael Yoshikami, CEO and founder of Destination Wealth Management in San Francisco, thinks investors ought to gravitate to dividend-paying stocks to protect cash flow, with a focus on technology and consumer staples — essentially "higher-growth assets or assets that do well in a more austere environment.

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James Paulsen, chief market strategist at Wells Capital Management in Minneapolis, said that whatever the Washington negotiations produce, investors should count on getting less stimulative help from the government. For Randy Frederick, director of trading and derivatives at Charles Schwab, a likely market pullback over the summer brings with it a chance to employ options strategies like covered calls and collars, both of which attempt limit downside. Email us at NetNet cnbc. Sign up for free newsletters and get more CNBC delivered to your inbox.

Get this delivered to your inbox, and more info about our products and services. Privacy Policy. Such figures are often confused with money moving out of public corporations. Dollars leave public companies through corporate actions such as share buybacks or dividends or through companies going private; it enters through IPOs, secondary offerings, and earnings.

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  7. In the U. It is fiscal discipline of a kind, albeit delivered with a blunt instrument. Some observers have noted that greater certainty around fiscal policy is more important than fiscal policy itself, and perhaps by March this will turn out to be true. Many investors I meet struggle to find the right balance between the mediocre certainty of fixed income returns and the less certain but more probable inflation beating potential of equities. Low interest rates, time and the receding possibility of another financial crisis are all factors. For some it helps to think of Cash as representing risk capacity.

    Within our equity strategies we have maintained low levels of cash over the past few months but recently made a couple of portfolio adjustments.

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    The insurance sector has long been struggling with excess capacity with the consequence that in many cases premiums were not high enough to earn an acceptable return. We think their cash generating ability will allow continued substantial share buybacks over the next several quarters. At 11 times earnings and with improving margins we think the threat of online competition is more than fully reflected in the price.

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    However, we still believe the business transformation to a store of many individual shops is the right strategy for the long term. We have been encouraged by the cost savings achieved, the performance of the initial shops opened last August, the demand expressed for shops from vendors, and the announcement of the return to promotions. A revaluation may occur without many shares changing hands. We increased our position in January. Income generating sectors bounced back following selling pressure going into year-end. While investment tax rates rose the final outcome was not as bad as many had feared.

    So we remain fully invested in MLPs and believe the long run outlook remains good although January is often seasonally strong and this January was exceptionally so. Dividend yielding stocks also bounced back nicely, and our Hedged Dividend Capture Strategy delivered a solid month. Investing for income is still a challenge facing the vast majority of investors, and this theme is likely to be important for a long time to come. I had the opportunity to meet with several retired people who live in Florida either part-time during the winter or all year.

    Chatting with them about investments really brought home to me the challenge many face of obtaining sufficient stable income on which to live. Bonds purchased years ago are maturing and the replacement opportunities are far less attractive. Equities remain a scary place although the strong start to the year is leading to modestly improved risk appetites.

    But for many retired baby boomers, they are having to confront significantly lower investment income than they imagined perhaps as recently as years ago. There remains a great deal of cash on the sidelines.

    What’s This ‘Fiscal Cliff’ Anyway? Do I Need to Worry?

    We have recently made a couple of small sales. Insurance companies have been seeing improved pricing and consequently their discounts to book value have been narrowing. We remain constructive on equities overall though, so will be looking for opportunities to reinvest this cash.