Fiscal Cliff Giddiness: Hang Onto Your Shorts (Literally)

An investor colleague of ours whose portfolio we assist in managing recently sent me an interesting email.  Although the topic of conversation was primarily concerning Markel (MKL) and the merits of owning the stock, he provided some insight into the fiscal cliff fears and how he saw opportunity.
"As for Markel, it doesn’t make sense to jump in after a 300 point gain. The time to have bought was w/in the past few weeks when the market was declining on “cliff” fear. I would have thought that you might have suspected a last minute deal and the resulting jump in the markets. I did and did a little buying last week".
My response: 
"The proposed merger of Alterra involves a cash and stock transaction, which presents merger arbitrage potential for some investors. I believe this is one of the reasons that MKL stock got so hammered when the deal was announced in December.  Regarding your comment that it would not make sense to jump in after a 300 pt. gain, it is the unique arbitrage "angle" which suggests little or no correlation to the overall market advance.  That said,  the link below offers the best explanation of the merger/arb considerations". 
 
However, it was the expectation that he thought I should have anticipated a "last minute deal" as the catalyst for a rally.  And why the hell wasn't I jumping in?  He was certainly correct in his assumption that a "Fiscal Cliff" faux-resolution would spell relief, but a 300+ point rally in a few days is over-the-top.  On this issue I replied:
 
"As for me expecting some sort of last minute fiscal cliff deal, all I can tell you is that the only expectations I had of a deal were the possibility of an up-or-down vote which is what ultimately occurred.  All this does is delay "sequestering" for two months and is on top of a brewing fight on the debt ceiling. Hardly a cause for celebration in my view as a flawed and fragile partisan "peace" is going to erupt into a three-stage budget fight in the coming months".
 
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