Where is our Santa Clause rally?
We usually have one. Even last year the Dow went from 8,149 on Dec 1st to finish at 8,776 on Dec 31st. This year, we’re lower than we were on Thanksgiving and challenging the 10,200 line, the lowest we’ve been since Nov 9th. Why has Santa Clause forsaken us? Most likely, it’s because we already got our Christmas present in November, when the Dow ran from 9,712 on the 2nd to 10,406 on the 16th. That was when we threw in our bullish towel as it was way over our 2009 target (9,850), which is based on fundamental market valuations, rather than Christmas wishes.
We still face serious headwinds in the economy and, as I’ve said many times this year, the current market valuations are ignoring the risk factors of owning equities – an amazing thing considering how recently those risk factors showed up and bit people’s faces off both last fall and this spring. For example, according to the NYTimes this morning, American International Group, Fannie Mae, Freddie Mac and GMAC, are not only unable to repay the government, they are in need of continuing infusions that make them look increasingly like long-term wards of the state. The total risk they pose to the taxpayer far exceeds that of the big banks. Fannie and Freddie, in the final days of the year, are even said to be negotiating with the Treasury about greatly expanding the money available to them.
While some banks are repaying TARP funds, these wards of the state need MORE money or we are right back to the default risk that sent the market plunging last year. What else sent the market plunging last year? Oh yes, it was credit default swaps. We still have many hundreds of Trillions of those nasty little suckers outstanding and now the cost of insuring sovereign debt against default in Europe is right back to where it was in March, when we thought the World was ending. “It’s going to prove extraordinarily difficult for countries to cut back on budget deficits,” said Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris. “Many countries are facing severe difficulties in coping with the economic downturn.”