Home Stretch


“It’s easier to resist at the beginning than at the end.” – Leonardo da Vinci

Holiday columns are short columns (do I hear a sigh of relief?). I hope you all were able to enjoy Thanksgiving Day and take maximum advantage of the long weekend.

From a technical perspective, the stock market is very overbought, though on a strictly short-term basis, not so overbought that it can’t go higher. From a valuation basis, I could fill pages with charts showing you why it’s in dangerous territory.

None of those may matter in the short term, as there’s a sense of elation and invincibility building deeper into the market. It looks like we’re about halfway through a bubble formation, and my feeling – backed by flow and sentiment measures – is that the market wants to try for it. Nothing is a sure thing, but we’ve already breezed through two traditionally weak periods this fall.

For the rest of the year, there are two known hurdles that the market has to cross to get the S&P up to 30% on the year. The first is next Friday’s jobs report, and the second is the FOMC meeting the week after that. If the jobs report is strong, you may see the market pull back in case the Fed pulls off a surprise taper in December. I don’t think that the latter is likely to happen, but it’s dangerous to predict policy decisions – especially when you haven’t yet seen the jobs data that is supposed to be the central bank’s focus.

If the Fed doesn’t taper this month and is still vague about when it might happen, expect the markets to rush to new highs. If the bank does taper, or says it’s on the verge of doing so in January, expect a sharp pullback to follow. QE hardly matters to the real economy anymore, but it is all the asset markets think about.

The Economic Beat (in holiday time)

Durable goods were (-2.0%) in October, near the consensus. Business capital goods spending fell for the second month in a row, bringing the (falling) annualized rate of growth for the last two years to 3.5%.

Pending home sales fell (-0.6%), instead of the expected 1.1% rise. Tight credit and rising prices have slowed the pace of sales – the Case-Shiller report showed a year-on-year increase of 13.3%, while the federal index that excludes luxury homes showed an increase of 8.5%. Building permits hit a new recovery high, but the strength is in multi-family housing. The starts data for September, October and November is still late and will be released on the 18th of December.

The Dallas Fed manufacturing survey eased, while the Chicago PMI, now compiled and owned by Deutsche Borse, showed another strong reading of 63.0. However, the same strength is not visible in the Chicago Fed’s Midwest Manufacturing index, which rose 0.4% and is up 5.7% the last twelve months. The regional bank’s National Activity index rose, bringing the 3-month average above zero (barely) for the first time in eight months, but this may not survive the next read. The Richmond Fed’s survey showed a sharp increase to 16. Overall, the regions were mixed in November, with some of the larger regions (New York, Philadelphia) showing slower growth, while others had an increase.

In a similar vein, the Conference Board showed consumer confidence falling, while the University of Michigan had it rising. Neither reading is at extreme levels.

The national PMI (ISM) readings are on Monday, along with a delayed construction spending report, beginning a very busy week. Tuesday should see November auto sales, while Wednesday has the ADP payrolls report, delayed new home sales data and the service sector PMI. The Fed’s Beige Book is in the afternoon.

Thursday has some same-store sales data to go with another GDP revision and factory orders. The main report of interest will be the November jobs report on Friday morning, released at the same as the personal income and spending report.

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