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By Jason Stipp | 12-20-2012 04:00 PM

How to Read a 'Cliff'-Induced Sell-Off

Short-term market gyrations over the unfolding Washington drama could make a good shopping opportunity for certain stocks, says Sanibel Captiva's Pat Dorsey.

Note: Pat Dorsey is the former director of equity research at Morningstar. He is now the president of Sanibel Captiva Investment Advisers.

Jason Stipp: I'm Jason Stipp for Morningstar. The uncertainty quotient is high as we approach the end of 2012, with a lot of headlines focusing on the fiscal cliff and other issues, so what should you do if we do see a big selloff in the market in these last few days of the year? Here to offer his insights is Sanibel Captiva Investment Advisers President Pat Dorsey.

Thanks for joining me, Pat.

Pat Dorsey: Go eat more of your Christmas Turkey; that’s my answer.

Stipp: That's number one. The number one thing investors should do.

Dorsey: Exactly.

Stipp: There are concerns that we could see some volatility here at the end of the year. Up until mid-December, we've had a good year in the stock market. If people start to get worried, maybe they take some of those profits. If I see a bad day in the market here in these last few days, what should I be thinking about fundamentals, sentiment--how should I calibrate?

Dorsey: I think it's probably going to be caused by Boehner and Obama not being able to play nice with each other, and that's probably what will cause a big sell-off like that. And so, I think what you need to do is look at it on a company-by-company basis.

Let's say that, for example, defense sequestration is going to be worse than anticipated, or there is a big defense program that's now on the chopping block that wasn't before. That might actually affect a specific company, like a Lockheed Martin or General Dynamics. And so that might be a reason to reassess what you think the company is worth.

But do fiscal regulations affect Apple, in any way shape or form? Probably not. So, if that's been a company that's been on your radar screen, you get a big drop in the market because people are worried about the fiscal cliff. Well, how many iPhones they sell really isn't terribly well-connected to what our budget does.

Stipp: We know that tax changes are also on the table. What if we get some more information about tax hikes on capital gains, for example. What if it's higher than expected or what if the deal that they're trying to craft would make the tax burden higher on investors in different ways or at different income levels? Does that change the fundamentals of your stocks?

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