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Head on a Swivel - Weekly Intermarket Report January 4, 2010

|Includes: iShares 20+ Year Treasury Bond ETF (TLT)


INTERMARKET-ANALYSIS AND KEY INDICATORS SUMMARY


(Full Report and Charts available at thehallmarketreport.wordpress.com/)

Economic News

Quick Note: Sherriff Bernanke and his Posse are out in force this week with Bernanke, Kohn, Duke, Hoenig, Bullard, Rosengren all giving speeches or participating in panels.  A couple of key dates to watch is Bernanke on Jan 3 in Atlanta at the American Economic Association Annual Meeting and Bullard who is speaking in Shanghai to the Jiao Tong University Forum on January 7 and the University of Finance and Economics on January 8.

There were six significant US economic data points released last week and as usual the results were a mixed bag. However, the components considered most important carried the day with unemployment claims coming in at 432K (estimate 460K), Chicago PMI topping the 55.2 estimate at 60 and consumer confidence coming within a sliver of its 53 estimate (52.9).  Even though the major items were equal to or better than expectations the US markets lost ground for the week. There were no major Canadian data points released last week; the TSX lost slightly.

Major data points this week are the US ISM Manufacturing PMI which is expected  to be up from the previous week and the CDN Ivey PMI which is forecast less that the previous month. Tuesday sees pending home sales which is calling for a 2.9% drop m/m (this data is 35 days in arrear so we are looking at November sales). Thursday and Friday see the typical host of employment data on both sides of the border with both unemployment forecasts calling for a saw-off m/m (for data reporting purposes define “unemployed” - statistical sarcasm).

Credit Markets

All quiet here.

Bonds

Bonds falling and yields rising as reallocation continues on the improving economic outlook and the record borrowing levels that the US is undertaking.

Currencies

The USD, as measured by the dollar index, closed the month up for the first time since June against its major trading partners (4% for the month). The USD strengthened on the belief that the extended stimulus support provided by the Fed is nearing an end. Mono-a-mono the Loonie posted back to back monthly gains against the greenback as it caught a bid on the back of  the commodity assets that the world increasingly wants. The Euro held steady as European stocks posted its third weekly advance against the USD rally as traders believe the USD has overshot its relative value.

Commodities

Gold caught a bid at the end of the week on the same day the North American markets pulled back (interesting the US dollar also gained). Copper, our commodity bellwether for the economy, is now at a 16 month high for 2 reasons; 1) the improving global economy; and 2) the threat of a strike in Chile (worlds largest copper producer). Oil was up on the week on better economic news and NatGas as down on good storage numbers won over cold forecast as drawdown was less than economist expected (124 bcf compared to 143 bcf).

North American & Nikkei Indices

It was a dramatic final day of the year as all major US North American indices pulled back with the Dow sliding 1.1% and the Nasdaq and the S&P 500 each falling about 1% and closing down for the week.  The rest of the global markets were mixed. With the best year in terms of percentage gains since 2003 now behind us and a S&P 49% recovery off the March lows the question is will the uptrend continue. We remind ourselves that markets have multiple legs in a recovery and that you can’t have a 2nd recovery leg without a pullback. Question to ponder: when will the pullback occur, how big will it be, and how strong will the second leg be.  Clarity begins starting January 4, 2010 and we’ll keep a close eye on the charts. (See point below for additional comments).

Significant Point of Interest  -  Recoveries and Pullback, History Rhymes in a Dynamic Fashion

During the 2007-2009 bear market the Nasdaq lost 56% in 17 months after the housing bubble burst. In its first leg the Nasdaq lifted as much as 81% from the March low.  By Comparison, in the bear market of 1937-38 the Dow lost 50% in 13 months and the first leg recovered 63% in seven months but then correct 24% in the next six months. The second leg recovered 31% in five months but did not reach the previous high. Three of the four major indexes have yet to suffer a 10% correction in this bear market. Pullbacks happen, 2nd legs sometimes fail to outrun the first leg and new elements enter the equation. History may not repeat but it will rhyme.  As Sergeant Esterhaus said “Let’s be careful out there”!

Geopolitical Perspective—Land of the Rising Sun, and the Falling Politician

Japanese Prime Minister Yukio Hatoyama, who’s country ‘technically’ ended its recession last year  is faced with falling wages and prices, a campaign finance scandal and an disapproval rating of 42%. The cabinet, who voters view as inexperienced, are fighting amongst themselves and the governments relationship with Washington is currently strained over a military base relocation.  A toxic mix of a weak government and a weak currency.



Disclosure: QQQQ, XMA