Always Looking For Answers

Daily State of the Markets 
Monday Morning – December 6, 2010  

Good morning. Every once in a while, it is important to remind ourselves why we do the things we do each day – especially in the fickle business of stock market investing. For example, the primary purpose of my Daily State of the Markets report is to identify the driver or drivers of the action in the stock market. As I’ve mentioned a time or two, the thinking is that if we can stay in tune with what is driving the market on a daily basis, then we shouldn’t (always key word) be too terribly surprised when something big happens.

It is also very important to recognize that that I do not necessarily agree with or even at times completely comprehend the driving forces behind the moves. My job is not to give you my opinion on the action, to make a prediction of what I expect to happen next, or to tell you why I believe the market is “wrong” (always a dangerous assumption!). No, my goal, plain and simple, is to identify and stay focused on what IS happening in the market and try my darndest to avoid talking about what I think ought to be happening.

Which brings us to the fourth-to-last Monday in the last month of the year. One of the key questions I was asked over the weekend was, why are stocks rallying? The easy answer is to point to the better-than-expected economic reports from the global manufacturing sector and say that things might be better than investors were assuming. However, that answer flies in the face of Friday’s rather dismal jobs report and doesn’t explain why stocks simply blasted higher in the middle of last week.

Another answer that the press always seems to love is the fact that earnings continue to grow. Earnings have indeed soared up and out of the crisis-induced abyss. But since earnings season has been over for some time now, again, this does little to explain the reason that stocks went on a tear last week.

When looking for answers in the stock market, we like to use the timing of events as clues. And the bottom line is it appears that trader expectations may be the primary culprit for the recent joyride to the upside. In short, last week’s big blast seems to have been sponsored by a central banker (or two).

Although there is no official story to be found anywhere, the word making the rounds Wednesday morning was that the ECB’s Jean-Claude Trichet might soon be forced to take a page out of Gentle Ben’s playbook and start buying bonds more aggressively. While we can argue until the cows come home about the effectiveness of quantitative easing, one of the oldest rules on the books is “don’t fight the Fed” (especially when they are on a mission). So, with Bernanke committed to creating some inflation here in the U.S. (which would be a good thing in the beginning) and Trichet purportedly ready to do whatever it takes to hold the EU together, the glass-is-half-empty crowd started running for cover.

Shorter-term, we can also thank our own Ben Bernanke for Friday’s late-day romp into the close. The timing of the market’s sudden burst coincided with the release from CBS that the Fed Chairman had said in his “60 Minutes” interview that he wouldn’t rule out spending more than $600 million on QE2 if necessary.

Now toss in the facts that (1) there is a lot of talk going around about stocks looking more attractive than bonds to the asset allocators (who are planning their 2011 moves now), (2) the calendar tends to be kind to the stock market from now until April, (3) the expectations in the market that the Bush Tax Cuts are likely to be extended, and (4) the momentum is back on the bulls’ side, and it looks like the Santa Claus Rally is clearly underway.

Turning to this morning… The mood is a little less upbeat as Ben Bernanke wasn’t exactly upbeat about the economy in his “60 Minutes” interview. In addition, debt spreads are widening once again in peripheral Europe. Speaking of Europe, Next, U.S. financier J.C. Flowers, who is a self-proclaimed “grave dancer,” appears to be backing away from a deal to invest in Spanish banks. (Is he perhaps thinking that better prices ahead?) And finally, there is talk again this morning about countries such as Ireland and Germany abandoning the Euro in the future.

On the economic front… The economic calendar shows that there is no data scheduled for release today and things are actually quite slow for much of the week. Thus, traders will be left to their own devices to digest the recent events.

Finally, remember that there is more to life than increasing its pace…

Pre-Game Indicators

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

• Major Foreign Markets:
  • Australia: -0.01%
  • Shanghai: +0.52%
  • Hong Kong: -0.36%
  • Japan: -0.11%
  • France: -0.44%
  • Germany: -0.10%
  • London: +0.23%

   

• Crude Oil Futures: – $0.16 to $89.03
• Gold: + $7.90 to $1414.10
• Dollar: lower against the Yen, higher vs. Euro and Pound
• 10-Year Bond Yield: Currently trading lower at 2.966%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -4.46
  • Dow Jones Industrial Average: -30
  • NASDAQ Composite: -5.87

Wall Street Research Summary

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