The markets rallied as tensions over Dubai eased and traders went back to work after the Thanksgiving holiday. The rally was broad based with all indexes posting nearly identical percentage gains.

Market Stats Table

Today's rally was more of a short squeeze after the Dubai drop but I will take any gains we can get. Equities were also rebounding as the dollar resumed its downward slide after a couple days of strength as a flight to quality play during the Dubai crisis.

It was strange to see equities moving strongly higher since the economics today were less than exciting, financials were being downgraded and Fed presidents were calling for a rate hike. It just goes to show you the power of a short squeeze.

The negative economic news came from the ISM Manufacturing report for November. The headline number fell to 53.6 from 55.7 in October. Analysts had expected a slight decline after October's 3.1-point spike but were caught off guard when the index gave back more than 2 points. On the positive side the new orders component rose to 60.3 from 58.5 and prices paid fell from 65.0 to 55.0. Inventories fell a whopping 5.6 points to 41.3 and suggests an uptick in the manufacturing cycle in the months to come. On the negative side the employment component fell to 50.8 from 53.1 and the production component fell to 59.9 from 63.3. The production index spiked +7.6 points in October so some decline there was expected. The prices paid component at 55.0 is proof that the Fed is right in expecting inflation to remain low for months to come. The report was negative but only slightly after you consider the big gains for October. This ISM rate suggests GDP for Q4 will be in the 3% range.

ISM Chart

Construction Spending for October came in flat but that was better than the expected 0.5% decline. Compared to the +0.8% gain in September a flat performance for October was lackluster but at least the sector held its gains. The rate of construction is still down -14.4% since October 2008. Private residential construction rose +4.4% in a revision of the September numbers. Considering the large numbers of foreclosures still depressing the housing market it was encouraging to see this component revised higher. Public construction is struggling and may have peaked for this cycle. Getting funding for new projects is very hard and many are being canceled or delayed. Office building vacancy rates are growing as businesses downsize or go out of business.

The Pending Home Sales Index was another lagging report out today covering the October period. The index rose to 114.1 from September's 110.0. This was well over the consensus estimate for a drop to 109.5. This is the ninth consecutive month of increases. The strong gains in the Sept/Oct period were people rushing to buy a house before the tax credit expired in November. That has now been extended until spring and a move up credit was added.

Pending Home Sales Chart

Lastly auto sales increased in November for everyone but Chrysler. Total sales rose to 10.9 million annualized from 10.4 million in October. The decent sales gains suggest the sell forward into the cash for clunkers program was not as bad as people thought. We did see a sharop drop off in September to a 9.2 million rate but the drop was short lived. GM saw sales rise +6.3%, Ford +8.6%, Toyota +11.5%, Nissan +27% and Hyundai +34%. Chrysler was the black sheep and saw sales drop -19%.

Auto Sales Chart

Wednesday we will get the Challenger Employment report and that is seen as a preview to Friday's Non-Farm Payrolls. The Non-Farm Payrolls is the 800-pound gorilla left on the schedule for this week. Everything that happens for the next 48 hours will be focused around the payroll report. Updated consensus estimates are for a loss of -130,000 jobs compared to -190,000 in October. Morgan Stanley is still standing by its estimate for a loss of -75,000 jobs. Actually either number would be a positive for the market with the smaller number very positive. Obviously any number much over those estimates could be very detrimental to the current rally.

Payroll Chart

It was a very light news day when the resignation of GM's CEO was the major headline. In a news conference the GM board said it "accepted" the resignation of Henderson and the current chairman of the board Ed Whitacre will become the interim CEO as the company looks for another CEO. In published reports the event was called a firing or an ouster. GM spokesman Chris Preuss said, "The board decided and Fritz agreed, that given where we are it was time to make some changes." Henderson assumed the job in April after Rick Wagoner was forced out by the administration as part of the government restructuring of GM. Henderson presided over the chapter 11 bankruptcy. Reporters said late in the day that the GM board wanted to change faster and Henderson wanted to go at a slower pace. The failure of Henderson to sell the Saturn brand to Roger Penske and the Saab brand to Koenigsegg Automotive evidently sealed his fate.

Northrop Gruman Corp (NOC) announced it was not going to bid on the $40 billion tanker contract for the Air Force. Northrop originally won the bidding with Airbus as a partner but Boeing protested the bids. After further review the Pentagon voided the bidding and drew up plans for a new bidding process. Back in 2004 Boeing was knocked out of being awarded an earlier bid because of an ethics violation. The Pentagon circulated the third draft RFP in early November and Northrop asked for revisions. The Pentagon declined to make the changes and now Northrop is declining to bid. Northrop claims the bid shows a "clear preference for a smaller plane with limited flexibility." You could insert Boeing inside those quotes and be 100% correct. The Pentagon did rewrite the bid to favor an American company as opposed to an Airbus plane. The Pentagon said both companies can make a good tanker but we can't force them to compete. Of course they can and did change the bid requirements to favor Boeing. I seriously doubt there was any political arm twisting involved. (grin)

Comcast is apparently the winner in a new round of wheeling and dealing with GE. For 23 years GE has made jet engines, locomotives, dishwashers, light bulbs, sitcoms and movies. The NBC Universal division now appears headed for the Comcast stable after Vivendi agreed to sell the 20% stake it held. On Thursday GE and Comcast are expected to announce a joint venture on NBC Universal where Comcast will own 51%. That assumes they can get the deal past regulators and that is probably why they are calling it a joint venture. If they can get past the regulators and lay low for a couple years Comcast can quietly buy out the junior partner. NBC Universal includes Universal Pictures, Universal Studios theme parks and cable channels USA, Bravo and SyFy. GE bought NBC when it took over RCA in 1986. GE paid $6 billion in 1986. GE will get $5B-$7B up front for the venture and be able to transfer up to $10 billion in debt and retain a 49% share. CEO Immelt wants to stick with the core manufacturing lines and expand the medical equipment business. NBC was profitable but it was always a distraction to the manufacturing company. GE stock was flat on the news with the real announcement not expected until Thursday.

GE Chart

Financials bucked the rally with a neutral day after JP Morgan cut estimates on Bank America, Wells Fargo and Regions Financial. JPM said banks were hoarding money and could post some major writedowns with Q4 earnings. This should not be news to readers of these pages. I have been warning that banks were hoarding money for sometime. The commercial mortgage business is in the tank and housing foreclosures are still flooding the market and driving down prices, which creates more foreclosures. The key here is whether the banks can withhold lending and hoard enough cash to take the writedowns and avoid a capital call by regulators. Banks have raised so much capital the dilution is extreme. Selling more stock into this market would probably not be easy with the Q4 earnings writedowns on everyone's mind. JPM was just the biggest name on the street to mention it. Meredith Whitney and Richard Bove have warned repeatedly that banks are not yet out of trouble.

Commercial real estate bank loan defaults hit 3.4% last month and the highest in 16 years. Analysts believe they could peak at 5.3%. Commercial Mortgage Backed Securities (CMBS) defaults hit 4.01% in October. Analysts expect that to top 8% in 2010.

Fortunately the Dubai crisis did not become another bank bomb as many people speculated. The Dubai World crisis has faded and now it is just a story of a major corporation trying to restructure its debt. The UAE has come out in support of Dubai and regional banks and conditions are back to normal. It is not over but the next set of discussions will be on what assets they will agree to sell and how are they going to complete the deleverage process.

Barrick Gold (ABX) said today it had closed all its fixed price hedges and can now fully participate in the rising price of gold. "As of today we are a fully unhedged gold producer." The stock jumped +$3 on the news. Barrick began buying back its hedges on three million ounces of gold back in September. Barrick said their positive view on the price of gold had led them to accelerate the timetable, which was originally 12 months when the buyback was announced in September.

Barrick was losing money with every tick higher on gold. They had to take a $5.7 billion charge on the hedges in Q3 and would take another $300 million charge in Q4. I believe whatever the cost the ability to own another three million unhedged ounces in today's market is a tremendous benefit. Barrick expects to produce between 7.7 and 8.1 million ounces in 2010. The problem now is what will happen to the gold market without Barrick's hedge covering trades. If they were just closing futures positions in cash then there was an upward bias to the futures that will no longer exist.

Barrick Chart

The falling dollar again pushed commodity prices higher and gold traded over $1202 intraday. The dollar index is trading under 74.50 and has broken support at the 75 level more than once. The next support should be in the 72-73 range. We saw support at 72 hold for several months back in May-July 2008. Long term I don't think it will hold this time around.

Chart of Gold

Dollar Index Chart - Daily

Dollar Index Chart - Weekly

Philly Fed President Charles Plosser said the Fed should increase rates in the future in line with market rates when those rates rise with the strengthening economy. He expects the economy to grow by about 3% in Q4 and at a similar rate through 2010. He said investors will push market rates up as the economy grows in order to compensate for the higher risks of inflation. "To conduct monetary policy we need to be forward looking and looking ahead for the next two years." He is speaking out against the Fed pledge to keep rates low for an extended period of time. Plosser rejected the argument, put forth by Fed Chairman Ben Bernanke , Vice Chairman Donald Kohn , and New York Fed Bank President Bill Dudley that the economic slack implied by high unemployment and low inflation help keep prices in check. He cited "theoretical and empirical evidence" that shows low resource utilization is difficult to measure and an unreliable predictor of inflation. He said, "making policy decisions based on measures of such slack and particularly on forecasts of slack many quarters ahead becomes problematic." Fortunately Plosser will not have a vote on the FOMC until 2011 but he can still stir up trouble in his speeches. Also fortunately, the market ignored him today.

The market pretty much ignored everything today in a relief rally that the global banking system did not implode over the Dubai mess. The Dubai markets were down -8.5% on Monday but rebounded strongly today and calming everyone's nerves over a Middle East meltdown. The Dow rebounded after two days in the tank and closed at a new 52-week high at 10470 after trading over 10500 intraday. The Dow declined to support at 10300 on Friday and held that level for two days. This support pause gave investors the confidence to go back into the market and helped produce yet another short squeeze. Uptrend resistance is now about 10550 and baring unforeseen news we could see that this week before the worry about the payroll report depresses trading on Thursday.

Dow Chart - Daily

Dow Chart - 30 Min

I wish the S&P-500 had been as bullish as the Dow but that uptrending blue line in the chart is uptrend support not resistance as in the Dow chart. The S&P is struggling and has spent more time under that support in the last three days than above it. We also have the solid resistance at 1110 and those two levels converged today and again it was a dead stop at resistance. If the S&P could produce a breakout here I think the market would take on an entirely new character. Until then the bears continue to short that resistance and the bulls are buying support. It is a battle that one side will eventually win but today there is no indication of who that might be.

SPX Chart

The Nasdaq had a nice day but the day's high was still a lower high from the resistance test at 2200 back on the 17th. The Nasdaq has not even returned to the lower resistance line from September. This is a weak index and even an outstanding +3% gain on the SOX could not power it higher. Support remains 2120 and resistance at 2180 and 2200.

Nasdaq Chart - Daily

Now for the worst chart of the night we turn to the Russell. The 50-day average has smothered the Russell like a blanket for the last three weeks and today's rally did not even come close. The Russell has to really improve its image and quickly in order to improve market sentiment. The Dow set a new high because it is a highly liquid basket of big caps. Those are safe haven plays not investments. Fund managers are still afraid of the market and are parking cash in big caps. Until they decide to invest in small caps there is still trouble ahead. I was cautiously bullish on Sunday because of the oversold nature of the market on the Dubai news. Unless the Russell finds some traction soon I may be reversing to cautiously bearish. I really hope that does not happen. I would love to see December close at the highs of the year but that decision is not up to me.

Russell Chart - Daily

For the rest of the week I am neutral but hold long positions. I want to see the rally hold but the S&P has to break over 1110 and the Russell needs to hold its gains and more closer to initial resistance at 600. If those things occur I will remain cautiously bullish.

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