No Nervousness on 'Fiscal Cliff,' but It's a Headwind

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"Fiscal cliff": Still no sign of market nervousness. No spike in the Volatility Index, short term or intermediate term.

The VIX closed yesterday at 16.05, about the midpoint of the 14 to 19 point range it has been in for the past five months. Even VIX futures are not popping. December, January, and February futures, at 15.95, 16.96, and 17.97, respectively, are all muted.

So the spread between the cash VIX (roughly 16) and the most active front month contract (February, at roughly 17) is about 100 basis points. The normal spread is at least 200 basis points. Not only is there no worry, but there is less demand for protection than might be expected.

So the Street expects a deal ... what will it be? Republicans cave in on the tax increase for the wealthiest two percent, and the shift immediately goes to a deal on entitlements? This was the position that Sen. Bob Corker espoused.

How about this theory, which I espoused two weeks ago: Market sells off whether there is a deal or not. This is the start of American Austerity. That is what the cliff means: Higher taxes and cutting expenses.

That deal will be a headwind for stocks, not a tailwind.


1) U.S. Federal Reserve meeting starts today, and everyone thinks the Fed will continue to make purchases at their current rate of at least $85 billion a month, $45 billion for "Operation Twist" and $40 billion for purchases of mortgage-backed securities. The difference: This time it will allow Operation Twist ($45 billion a month) to expire and go to outright purchases of Treasurys.

Is this $85 billion from the Fed really necessary? Is it really the difference between keeping the market going and a market collapse? The economy has clearly not cleared the Fed's hurdle: The labor market has not improved "substantially," at least not to most Fed officials.

2) American International Group said the U.S. Treasury willsell its remaining 16 percent stake in the company, offering $32.50 per share of common stock for 234.2 million (about 16 percent of AIG's outstanding shares). That's about $7.6 billion. The federal government will ultimately realize a $22.7 billion total profit on the $182 billion it committed during the financial crisis to stabilize the ailing insurer. The U.S. government will now only own warrants to buy about 2.7 million AIG shares.

Also note: AIG is not repurchasing any of the shares.

By the way, AIG yesterday announced a pre-tax loss of only $2 billion on super storm Sandy. Not chicken feed, but not enough to threaten the financial health of the company. AIG reported a profit of $1.9 billion in the third quarter. See what I mean? Insured total losses still remain around $20 billion.

Most insurance stocks are now back trading where they were before Sandy hit ... including Allstate andHartford Financial Services.

3) Welcome back, Mr. Berlusconi: Italian bond yields rose for a second straight day as investors continued to sell Italian bonds in the wake of the weekend announcement that current Italian Prime Minister Mario Monti would be standing down once the 2013 budget is passed.


Wall Street