Sometimes It’s What Isn’t Said

Daily State of the Markets 
Friday Morning – December 3, 2010  

To some, Thursday’s follow-through rally, in which the Dow put another triple-digit gain up on the board, may have been a bit of a head scratcher. I’m guessing more than a few people were left to wonder why stocks went up big again in the face of a couple weak economic reports here at home and the fact that ECB failed to announce much of anything Thursday morning.

Where was the announcement that the EU was going to follow Ben Bernanke’s lead and start buying every bond in sight? (And for the record, the FOMC did buy somewhere in the vicinity of $7 billion in U.S. bonds yesterday.) And where was the discussion – or even the hint – that the ECB was about to launch some sort of new fangled “unconventional measures?”

After the ECB statement was released, I heard at least one obviously bearish trader exclaim in a rather exasperated tone, “If the powers-that-be across the pond are going to be stubborn about this thing, then how on earth are they going to come in and save the day?”

The key thing to understand about central bankers is they aren’t all as keen on communication as Ben Bernanke has become. (On that note, be sure to set your DVR’s as Gentle Ben will be on CBS’s 60 Minutes again on Sunday.) In fact, the official statement from the ECB didn’t say anything about increasing bond purchases or any other type of “unconventional measures.” However, to experienced watchers of central bankers, this was hardly surprising at all as it is often what they don’t say that is most important.

The situation with Trichet is an excellent example. In a Dow Jones interview, the ECB President was asked why the ECB had “decided against increasing the volume of bond purchases… or setting a target like the U.S. did.” To which Trichet responded in a very telling fashion:

“We did not decide against anything. We’ve said — and I said on behalf of the governing council — that our SMP program was ongoing. We also decided that we would continue to supply liquidity on an unlimited basis, not only for one week and one month, but also for three months, in order to have a set of nonstandard measures that would be commensurate to our analysis of the situation.”

In my humble opnion, this statement had a lot to do with why stocks rallied on Thursday. Although Jean-Claude Trichet did not spell it out in so many words, he made it very clear that the ECB, like his counterparts at the Fed, were on the case. The key was the phrase “we would continue to supply liquidity on an unlimited basis.” Which, in English means, that the ECB will likely do everything in its power to keep this crisis from getting out of hand.

So, the next time the bears have you convinced that the sky is indeed going to fall, it might be best to keep this in mind. Because one thing we know about Trichet and his friends on the ECB is that they don’t “want” to mount their white horses. But our bet is that they will indeed ride if needed.

Let see here… If Europe is not going to fall apart at the seams or drag the global banking system down with it, then money managers might be able to return their focus to the stock market. And if this is the case, then experienced traders know that its about time for Santa to make an appearance. So, are those sleigh bells I hear off in the distance?

Turning to this morning… Foreign markets are mixed in response to China announcing it was shifting to a “prudent” monetary policy.

On the economic front… We’ve got the Big Kahuna of economic data – the Jobs Report – so let’s get to it. The Labor Department reported that Nonfarm Payrolls, which is arguably the most important gauge of the state of the economy at the present time, rose in the month of November by 39,000. This was WELL below the consensus estimates for an increase of 149,000.

The private sector (aka the household survey) showed gains of 50,000 jobs, which was also far below the estimates for 156,000K. The nation’s Unemployment Rate spiked to 9.8%, which was above the expectations for a reading of 9.6%.

Stock futures have reversed course on the news and now point to a lower open on Wall Street.

Finally, best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +0.38%
  • Shanghai: -0.04%
  • Hong Kong: -0.55%
  • Japan: +0.10%
  • France: -0.22%
  • Germany: +0.20%
  • London: +0.14%

   

• Crude Oil Futures: + $0.24 to $88.24
• Gold: – $0.50 to $1388.80
• Dollar: higher against the Yen, lower vs. Euro and Pound
• 10-Year Bond Yield: Currently trading lower at 3.045%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -3.20
  • Dow Jones Industrial Average: -29
  • NASDAQ Composite: -9.05

Wall Street Research Summary

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