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Monday, December 31, 2012

Stock market has its ups and downs and now ups as fiscal cliff deadline nears


While US stocks declined last Friday, futures were up this morning. However at the open this morning the market seems uncertain which way to go with indices mixed.
Bloomberg reported that Standard and Poor's 500 futures were up 0.8% and the Dow Jones Futures were also up 82 points from the close on Friday. This was at 9 a.m. in New York. As I write this a half hour after the markets opened, the Dow was down 10 points but the S&P and NASDAQ were up slightly. The market seems to be expressing the uncertainty that clouds the whole process at the present time. Last Friday the indices fell on pessimism about the prospects for a deal. Personally I think that a deal will get done although it might be after the fiscal cliff kicks in for a day or so.
Senator Bob Corker on CNBC said that there will probably be a deal today and Democrat Christopher Van Hollen on Bloomberg Television said that progress was being made in talks to avoid the automatic tax increases and spending cuts associated with the fiscal cliff.
The Senate is to convene at 11 a.m. this morning. Talks between the Senate Majority Leader Harry Reid, and Mitch McConnell the Republican minority leader had stalled over income tax rates, the estate tax, and other issues as well. McConnell asked for the help of vice president Joe Biden to break the impasse.
Obama wants taxes to go up on those making over $250,000 a year. He will probably have to raise this to at least $400,000 or more to get a deal in order that the Republicans can save face by saying that they did not agree to the lower cutoff that Obama wanted. But even then there may be problems passing any tax increase for anyone through the house. The House, after all, rejected a bill by John Boehner that would have only raised taxes on those earning a million a year.
The White House wants the estate tax to go up, while Republicans want it to remain where it is at present. There is no agreement about what to do about the automatic spending cuts that will come into effect on January 1, 2013. The costs of not reaching a deal may involve an unemployment rate of over 9% another millions jobs lost and an economy back in recession. Those costs are so high that I find it difficult to imagine that a deal will not be reached.
A spokesperson for McConnell said that talks with Joe Biden had gone well. Latest reports indicate that some issues may be agreed upon but others remain. The White House apparently has agreed to raise the level at which the Bush tax cuts would not be extended to $450,00 for couples as compared to the $250,000 lower cutoff that Obama had long been demanding.
Any deal will also probably include a provision that would prevent an immediate sharp increase in milk prices and that would prevent doctors treating Medicare treatments from facing a 27% cut in their fees. Unemployment benefits due to expire will also be extended.
The Republicans agreed to drop a demand that the formula for calculating Social Security benefits be changed to slow the growth of payments. No doubt the issue will come up again in later negotiations, since Obama signalled he might be willing to agree to this for a significant quid pro quo but not as part of this short-term deal.
There still remain disagreements about increasing the estate tax. The Democrats want the tax to increase to 45% from 35% and the exclusion level of $5.1 million decreased. The Republicans want the tax to remain as it is. There is still disagreement about dealing with the effects of the alternative minimum tax as well.
Republicans also want Democrats to agree to budget cuts for some of their plans. The Democrats propose to erase scheduled defense and domestic cuts that would be more than $200 billion over the next two years and also to extend unemployment benefits. Republicans also would like to make cuts from Obamacare to help cover the costs of reimbursing doctors who treat Medicare patients. While there are still stumbling blocks, I expect that some stop-gap deal will be reached at the last minute or at worst a few days after January 1..

UPDATE: This afternoon President Obama announced a deal was near but not yet completed with some outstanding issues still to be worked out. There is not much time left! The stock market is up now somewhat.

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