Global Markets in Review: Winning Streak for Equity Bulls

The holiday-shortened Thanksgiving week brought investors an additional item to be thankful for when stock markets closed higher for five consecutive trading days - a rare winning streak last accomplished in July 2007. The S&P 500 Index gained 19.1% since the start of the rally on November 21 and 12.0% on the week, registering the largest weekly gain since 1974.

Source: Daryl Cagle

Worrisome economic reports were cast aside by equity bulls, arguing that the bad news had already been priced in. However, U.S. Treasury Note yields were less sanguine and fell to its lowest level on record, pointing to deflation concerns and suggesting that investors remained skeptical about the government’s latest moves to help revive the ailing economy. Importantly, U.S. three-month Treasury Bills were trading at a minuscule 0.03%, indicating that liquidity was still being hoarded.

President-elect Obama stressed the need for quick action to expedite an economic recovery and introduced his administration’s economic team, including former Federal Reserve Chairman Paul Volcker as head of a new White House Economic Recovery Advisory Board tasked to revive growth in the U.S. Involving the 81-year Volcker in this way is a smart move by Obama.

A catalyst for last week’s stock market recovery was the announcement on Monday of the U.S. government’s rescue plan for Citigroup (C), including a direct $20 billion investment and $306 billion in asset guarantees.

With credit markets still not thawing after the introduction of various central bank liquidity facilities and capital injections, the Fed on Tuesday unveiled further steps aimed at lowering borrowing costs for consumers and home buyers. The Fed will buy $100 billion of debt from Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Home Loan Banks, and will also purchase up to $500 billion of mortgage paper backed by the agencies. The Fed will furthermore lend $200 million to holders of key asset-backed securities regarding small business and consumer (auto, student, credit card) loans.

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Source: The New York Times, November 25, 2008.

Commenting on the U.S. government’s bailout actions and quoting from the Jerusalem Post, Bill King said:

There is one last thing that Hank, Ben and Geithner can do: ‘The country’s chief rabbis are calling for a mass prayer rally on Thursday in the hope that heavenly intervention will stem the global financial crisis.’

Next, a tag cloud of the text of the dozens of articles I have devoured over the past week. This is a way of visualizing word frequencies at a glance. The usual suspects feature prominently, with “gold” attracting increasing attention.

Has the stock market reached a secular low or is it just bouncing off oversold levels? According to Fox Business Network, legendary investor Jim Rogers said:

We’re ready for a rally. I mean, the market in October and earlier this month has had a huge selling climax. I covered a lot of my shorts. Who knows if I’m right or not. But I expect the market to rally for some time. It may rally into next year. But … this is a false rally. It’s not going to be great. It’s not the end of the problems in America and it’s not the end of the bear market.

A positive for the bulls is that the period post Thanksgiving through the end of the year has usually been a strong time for stocks. According to Jeffrey Hirsch (Stock Trader’s Almanac):

December is normally a banner month for stocks, ranking second [on the monthly calendar] for the Dow and S&P 500 and third for the Nasdaq.

Should the bullish seasonal tendencies hold true on this occasion, possible first targets are the November 4 highs of 9,625 for the Dow (current level 8,829) and 1,006 for the S&P 500 (current level 896). This will also result in both indices clearing their 50-day moving averages.

From London, David Fuller (Fullermoney) said:

There is no doubt that time is needed for volatility to settle down before many will have the confidence to return to investing, but if one looks beyond the end of the year, 2009 will almost certainly be a better year for investors than 2008.

Although there is not yet conclusive evidence that we are leaving the corpse of the bear behind (especially with Q4 earnings disasters looming in January), it would appear that the nascent rally could have more steam left. (Also read my recent posts “Is the tide turning for stocks” and “Does the stock market rally have legs?“)

I am about to hit the road again - traveling to New York City - and blog posts will therefore take a back seat for the next week as I explore the Big Apple and meet with friends, blog readers and business associates in the cold weather and depressed economic climate.

Before highlighting some thought-provoking news items and quotes from market commentators, let’s briefly review the financial markets’ movements on the basis of economic statistics and a performance round-up.

Economy

The latest Survey of Business Confidence of the World conducted by Moody’s Economy.com said:

Global business sentiment is as dark as it has ever been, although the free fall in confidence may be over. Pessimism is pervasive across the entire globe, with the only distinction being that Asian businesses are somewhat less nervous than elsewhere. Pricing pressures are falling rapidly, although they are not yet consistent with outright deflation.

According to the results of the business confidence survey, the global economy is suffering a severe recession.

Economic indicators released in the U.S. during the past week all pointed to a deepening recession. According to Briefing.com, Q3 GDP was revised down to -0.5% from -0.3%, durable orders slumped by 6.2%, existing home sales fell by 3.1%, new home sales dropped by 5.3%, personal spending declined by 1.0%, and weekly initial claims, while improved from the prior week, continued to register a reading above 500,000.

The Chicago Purchasing Managers Index came in at 33.8, the weakest number since the serious recession of 1982. John Mauldin (Thoughts from the Frontline), added:

The national number due next Monday will be just as ugly, as durable goods were down far more than expected, by a negative 6.2%.

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Commenting on the outlook for interest rates, Asha Bangalore (Northern Trust) said:

Going forward, real GDP is expected to show a decline that is upward of 4.0% in the fourth quarter of 2008. The Fed is widely expected to lower the Federal funds rate to 0.5% on December 16.

However, the Fed’s quantitative easing approach to monetary policy now seems to be targeting the quantity of money rather than its price.

Elsewhere in the world, the People’s Bank of China (PBoC) slashed its benchmark interest rates by 108 basis points and also lowered the reserve requirement for banks. This move indicates that China will be joining the rest of the world in a marked economic slowdown.

For the upcoming week, the European Central Bank and the Bank of England are expected to reduce interest rates by 50 and 75 basis points respectively in the light of a deteriorating economic outlook.

Week’s economic reports

Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Nov 24	10:00 AM	Existing Home Sales	Oct	4.98M	5.07M	5.05M	5.14M
Nov 25	8:30 AM	Chain Deflator-Prel.	Q3	4.2%	4.2%	4.2%	4.2%
Nov 25	8:30 AM	GDP-Prel.	Q3	-0.5%	-0.3%	-0.5%	-0.3%
Nov 25	10:00 AM	Consumer Confidence	Nov	44.9	40.0	39.5	38.0
Nov 26	8:30 AM	Durable Orders	Oct	-6.2%	-2.2%	-2.5%	-0.2%
Nov 26	8:30 AM	Initial Claims	11/22	529K	535K	537K	543K
Nov 26	8:30 AM	Personal Income	Oct	0.3%	0.2%	0.1%	0.1%
Nov 26	8:30 AM	Personal Spending	Oct	-1.0%	-0.6%	-0.7%	-0.3%
Nov 26	9:45 AM	Chicago PMI	Nov	33.8	39.5	38.5	37.8
Nov 26	10:00 AM	Mich Sentiment-Rev.	Nov	55.3	58.5	58.0	57.9
Nov 26	10:00 AM	New Home Sales	Oct	433K	450K	450K	457K
Nov 28	9:45 AM	Chicago PMI	Nov	-	NA	NA	NA

Source: Yahoo Finance, November 28, 2008.

In addition to the Fed releasing its Beige Book (Wednesday) and interest rate decisions by the European Central Bank and the Bank of England (Thursday), next week’s U.S. economic highlights, courtesy of Northern Trust, include the following:

1. ISM Manufacturing Survey (December 1): The consensus for the manufacturing ISM composite index is 38.4 versus 38.9 in October.
2. Employment Situation (December 5): Payroll employment in November is predicted to have dropped by 300,000 after 240,000 jobs were lost in October. The unemployment rate is expected to move up two notches to 6.7%. Consensus: Payrolls: -300,000 versus -240,000 in October, unemployment rate: 6.7% versus 6.5% in October.
3. Other reports: Construction spending (December 1), auto sales (December 2), ISM non-manufacturing, productivity and costs (December 3), and factory orders (December 4).

>> Go to page 2 - Global Markets Week in Review: Equities, Bonds, Currencies, Commodities

Comments on this article>>

Comments

[investor88:]

OK bulls have a chance in Dec 08 possibly early Jan 2009 as per Jim Rogers assessment. Even Jim the bear has covered his shorts, right thing to do, so short term maybe better to lean on bullish trades.

2008 Nov 30 07:24 AM

[PeteK:]

Last Friday, the Bull Run had started in Canada already.
You think that's true ?

2008 Nov 30 10:58 AM

[PhinT:]

I sure did not see a bull run today and I am glad I bought SKF on Friday in my anticapation of the market..good luck to all

2008 Dec 01 04:36 PM