Courtesy of John Nyaradi
Friday was a remarkable day that began with a truly terrible Non Farm Payrolls Report and ended with the markets closing higher for the day and week.
The catalyst for the last half hour’s rally appeared to be news that Fed Chairman Ben Bernanke taped an interview for “60 Minutes” due to air on Sunday night, December 5, 2010, in which he suggests that the $600 Billion in quantitative easing previously announced could be exceeded if needed.
So Santa Ben arrived on Friday with the whisper news that we can expect QE 3, QE 4, etc, etc for as far as the eye can see. And market participants are taking this seriously as we head into the final trading days of what has been a remarkable year.
As the lyrics from the old Christmas carol go:
You better watch out!
Better not cry!
Better not pout!
I’m telling you why,
Santa Claus is comin’ to town.
Santa Ben is also getting help from his main elf, European Central Bank President, Jean-Claude Trichet, who also went on a bond buying spree this week in Irish and Portuguese assets in an attempt to fight off the bond vigilantes threatening Ireland, Portugal and Spain.
We’ll talk about all of this in greater detail in a moment but, first, let’s take a look at the technical situation in our current market:
Looking At My Screens
Chart courtesy of http://www.stockcharts.com
In the Point and Figure chart of the SPX, we can see how we’re at the top of resistance at 1224, in a bullish configuration and with the recent column of Xs, demand is back in control of this market.
The key now will be to see a break above 1224 for the bull market to continue into the end of the year, while a break below 1180 would be a double bottom sell signal.
Interestingly, on shorter term charts of one, ten, thirty and sixty minutes, this breakout higher has already occurred.
Barring a war on the Korean Peninsula or Congress blowing the extension of the Bush tax cuts, recent market action suggests higher prices ahead and so our status has changed to “green flag flying.”
The View from 35,000 Feet
As mentioned at the outset, the employment report was truly miserable with just 39,000 new jobs being created, down from 172,000 the previous month and way below the estimated 155,000.
For an economy that needs approximately 100,000 new jobs a month just to absorb new workers coming in, these numbers are truly disheartening. Overall unemployment rose to 9.8%, the highest in seven months, and underemployment came in at 17%.
Overseas, the European Central Bank was busy trying to stop the contagion from spreading as it stepped up its bond buying activity in the hopes of stopping the rolling crisis from spreading to Spain and Portugal. Expanding central bank activity seemed to be in favor on the Continent, as well, as Jean-Claude Trichet suggested that expanding their version of quantitative easing should also be considered, and he also found a friendly ear in the International Monetary Fund for this potential expansion.
Over the weekend, the Republican controlled Senate staged a filibuster to stop the extension of the Bush tax cuts without including the “wealthy,” and now this becomes a high stakes game of chicken because failure to extend these tax cuts is forecast to have extremely negative consequences for the equities markets going into 2011. Consensus view is that the tax cuts will be extended for all classes this week to console Republican demands while the long term unemployment benefits previously voted down by the Senate will be reinstated for some period of time.
On the positive side of the ledger, weekly unemployment and the ISM reports provided some Christmas cheer along with a new trade pact between Korea and the United States that should be a job booster.
Finally, President Obama’s national commission on deficit reform failed to get enough votes to send the recommendations onto Congress and so austerity, at least for the time being, has been tabled in the United States.
What It All Means
Clearly the recovery is proceeding at a glacial pace and it appears we’ve got a long road ahead to return employment to acceptable levels. The central banks of the world continue to fight “contagion” in Europe and slow growth and the threat of deflation in the U.S. with seemingly unlimited commitment to asset purchases more commonly referred to as “printing money.”
Austerity doesn’t seem to work as witnessed by the fiasco in Ireland and kicking the can down the road seems to be the policy du jour.
For the time being, it appears that Santa Ben and his elves very likely will be successful in their efforts to push asset prices higher and ward off a global calamity. How long this house of cards can remain standing remains to be seen.
But for now, with just 20 days left until Christmas, Santa Ben has come to town and global markets appear to be coming to his party with the seasonal “Santa Rally” getting underway.
The Week Ahead
“Sixty Minutes” will likely be the main market driver this week as economic reports are light.
Thursday: Initial and continuing unemployment claims, October Wholesale Inventories, Q3 Household Debt
Friday: December Consumer Confidence
Sector Spotlight:
Winners: Viet Nam (VNM), Homebuilders (XHB) South Korea (EWY)
Losers: 20 Year Bonds (TLT) U.S. Dollar (UUP)
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