After several weeks of pre holiday celebrating that sent many of the indexes to new highs the markets stumbled into Thursday's close and barely remained positive. The tipsy trading on Thursday exhibited very little bias as the markets closely resembled the winding down of a holiday party with revelers heading for the door. With $60 billion, yes billion, in bonuses being paid to Wall Street managers as the year end draws to a close there was just enough positive bias to protect those bonuses.
Dow Chart - Weekly
Nasdaq Chart - Monthly
SPX Chart - Monthly
While traders were attending the office party economic reports were flowing faster than Christmas cheer. The Jobless Claims bounced back from their multi month lows at 316K the prior week to a more normal 333,000 for the current week. It appears that abnormally low number last week and those abnormally high numbers of 361K and 350K the previous two weeks were all errors in the seasonal adjustments. With this weeks claims back at 333k and the recent average, the conditions appear to be back to normal.
Durable Goods rebounded from last months -0.9% drop to grow +1.6% in November. However, orders ex-transportation fell -0.8%. This was the second consecutive decline. The gain in the headline number was due mainly to a +64.2% jump in civilian aircraft orders. You would have thought that big a jump in aircraft orders would have pushed the headline number even higher but a -35% drop in communication equipment offset much of those aircraft gains. Defense orders also fell -31.8%, general machinery -3.3% and computers fell -4.2%. Backorders rose +1.2% stretching their consecutive string or gains to 15 months.
Personal Income rose +0.3% for November with wage growth rising a little slower at +0.2%. Spending rose by +0.2% and even more remarkable savings rose +0.3%. All of these numbers may seem trivial but in the greater scheme of things this is a continued improvement in the face of potential economic weakness. This was the slowest wage and salary growth in five months but the key word is still growth.
The Monthly Mass Layoffs for November rose again to 1399 and will impact 130,423 workers. This was the second monthly increase and well above the lows at 69,000 back in Aug/Sep. Manufacturing continues to be the weakest sector with 29% of the layoffs and the Western region the weakest area. The initial jobless claims for November showed the West with the most new claims at 46,854.
New home sales dropped -12% in November to an annualized rate of 1.125 million. This was the strongest drop in a decade. Inventory levels rose for the fifth month and now stands at a 4.5 month supply. I discussed the drop in housing starts last week as indications that builders may be experiencing a buildup in inventory and could be holding off on new starts until just before spring. This sales number suggests the ever higher trend may be slowing not that the bubble is bursting. With inventory at the highest levels since Feb-2003 there could be some continued price declines if buying does not pickup in the spring. Prices fell -5.2% in November. This could pressure earnings by the builders but nobody seems worried. The drop in sales had no real impact on builder stocks with only minor losses for the day.
Despite the layoffs, drop in home sales and the slow down in personal income we saw Consumer Sentiment jump to its highest level since January at 97.1. This was a gain of +4.3 points from November and +1.4 from the initial December reading. With the election behind us we no longer have every TV commercial telling consumers how bad conditions have been over the last four years. The market is hitting new multiyear highs and cash coming into funds at year end is expected to be at record levels. Consumers have forgotten about the high gas prices in October and are oblivious about the gas problems ahead. Interest rates are still low despite continued hikes by the Fed. Jobs are being created and from the consumer viewpoint life may not be good but it is a heck of a lot better than it was last year. One survey released on Thursday showed over 50% of workers would like to change jobs. While I am surprised it was not any higher it is amazing that so many people want to change what they do for a living.
Franklin Raines was tossed out on his fanny on Thursday but it was not a hard landing. Fannie Mae allowed him to retire early and that allowed him to keep all his compensation totaling some $36 million and an annual pension of $1 million for life. This has quite a few analysts up in arms since the majority of his compensation was tied to the stock price. The same stock price that he is accused of manipulating by managing earnings. If anything criticism is raining down on Franklin and odds are good he will be booted in the fanny from board positions he holds in several other companies.
I know some people are getting tired of this but there are very bad implications from the Russian takeover of Yukos. The hourly news on Thursday was full of sound bites where Putin acknowledged that the takeover by the state was orchestrated by perfectly legitimate market means and was absolutely ethical. The smug acknowledgement by Putin was like a slap in the face for democracy in Russia and analysts are racing to see who will be the next target. The game board for strategic global oil assets is changing as we move ever closer to the coming oil shortage. We had news today that China, in fear their oil supply from Russia may be in danger, was moving to acquire significant production from Canada. Guess who currently buys the majority of Canadian oil? The U.S. of course. Should China bid enough to acquire future oil from Canada then the price we pay for any remaining oil supplies would also be higher. More than price concerns we would then have increasing supply concerns if forced to compete with China for the available production. There is an oil shortage ahead and the positioning by major countries we are watching play out on the global stage is proof of that shortage ahead.
If you are still looking for that late holiday gift then Genetic Saving and Clone has the perfect copycat gift for you. Literally! They will copy your cat and produce a dead ringer clone for a mere $50,000 and give you a money back guarantee. The guarantee is that the cat will be a perfect genetic copy in everything but personality. Personality is a learned component based on upbringing and life experiences but as cat lovers all agree cats think they are better than humans anyway. A woman in Houston was the first cash customer and is very happy with her replacement pet. According to the company hundreds of prospective purchasers have already supplied DNA material from their cats in hopes of a successful clone. Dog lovers will have the last laugh today however because in an interview with the company president he said dogs were much more difficult to clone than cats because they were more complex. He said dogs were even harder to clone than humans. I guess that proves that humans are actually a dogs best friend not the other way around. Abusing this news item for all it is worth I guess the next thing to look forward to is dogs having their pet humans cloned.
Back to the reality of the markets the Dow posted a new closing high for the year on Thursday at 11827. That was only a +11 point gain for the day but it was enough to nearly guarantee a continued post holiday rally. That was +525 points higher than the pre Christmas close in 2003 at 10305 and only 60 days away from its low for this year at 9708 on Oct-25th. Essentially the gains for the entire year for the Dow have transpired over the last 60 days with the first ten months of declines only the preshow. The odds are good we will see 11000 sometime next week and the odds are also good that could be our battleground for quite a while. 11000-11250 was the upside resistance range from April 1999 through June of 2001. We traded well above and below that range during that period but that is the level we must overcome for any real gains in 2005.
The Nasdaq struggled higher on Thursday as well to close at 2160 and just over that 2153 level that has been causing so much trouble. I believe this time we will see a move higher and we will see 2250 become the next resistance level to cuss. The Nasdaq is still struggling under the weight of the SOX and its strong hold on 425. Despite some decent chip news on Thursday the SOX only managed to post a two point gain to 426. The Russell is trying to pull the Nasdaq higher with its all time high close on Friday at just over 649. Both the SOX and the Russell have provided little upward pressure for the last two days but at least the Russell is poised for another leg higher. It should be the index of choice next week.
I mentioned the $60 billion in bonuses expected to be paid to Wall Street money managers as the year comes to a close. These people have a very strong motive to keep the markets printing new highs right into the close on Dec-31st. This performance-based compensation is keeping funds fully invested in hopes of a retirement cash windfall in January. That windfall is currently expected to be more than $31 billion with estimates rising daily. Even if it does not provide a new leg up for the rally it should give those managers with overbought positions a volume cushion to sell into.
For next week the game plan is clear, remain invested as long as the market continues higher. Next week is when the typical Santa rally occurs and market worries should not appear until the first week of January. There are no material economic events on Monday and I doubt the market would pay attention anyway. Holiday cheer and performance anxiety should supply all the motive power we need. Remember the adage, "Should Santa fail to call bears may come to Broad and Wall." All eyes will be watching for the Santa rally to appear.
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Only 5 Trading days until 2005.