The bulls ignored the much weaker than expected payroll report and managed to push the markets back into the green before the close.
The Non-Farm Payroll report on Friday surprised everyone. Unfortunately it was not an upside surprise as most expected. Jobs grew by only 39,000 in November and down from +172,000 in October. The number for October was revised higher to 172,000 from 151,000. September's job losses of -41,000 were revised upward to a loss of only -24,000. The consensus estimate for November was for a gain of +150,000. Moody's was expecting 160,000 and I was expecting closer to 180,000. Everybody was wrong this time around.
The private sector created 50,000 jobs but the public sector cut 11,000 leaving us with a minimal 39,000 gain. Unemployment rose to 9.8% from 9.6% because of workers who had previously dropped off the rolls coming back into the job market. Officially the BLS claims there are 15.1 million people currently unemployed. Those jobless for 27 weeks or longer stood at 6.3 million and 41.9% of the unemployed total. Those underemployed and working part time stood at slightly more than nine million. There were also 2.5 million "marginally" attached to the work force and 1.3 million "discouraged" workers. Those are not included in the unemployment rolls.
In the Household Employment survey the number of jobs rose by +114,000. This is a different survey conducted by the BLS. The Non-Farm Payroll numbers are produced from a survey of businesses. The household survey is produced by asking individual families about the employment status of their members.
Non-Farm Payroll Chart
Other than the payroll report the better than expected economics continued. The ISM Non-Manufacturing report for November rose to a six month high at 55.0 and slightly better than the 54.5 analysts expected. New orders did not increase significantly, gaining only a point to 57.7 but the uptrend stretched to 15 months.
The employment component rose to 52.7 from 50.9 and that was a significant increase. The sharp rise in the employment components from all the regional reports was the cause for the increased expectations in the nonfarm payroll report.
One really positive component was the new export orders, which rose to 59.5 from 55.5. That was the third consecutive month of gains. A negative component was the decline in the prices received component to 63.2 from 68.3. With raw materials prices rising and prices received declining there could be profit troubles ahead for the service sector.
ISM Non-Manufacturing Chart
October Factory Orders declined by -0.9% but still better than the -1.5% decline analysts expected. Orders fell to $420 billion in October. The decline came after an upwardly revised +3% gain in September. The decline in October was led by a -5.2% drop in transportation equipment. That was not surprising after the +16.5% jump in September. Excluding transportation orders the overall number showed only a -0.2% decline.
The Factory Orders report was lackluster at best but it is a lagging report and few investors paid attention. The real focus was still the payroll report.
Last week was a very busy economic calendar but next week has hardly anything worth noting. I believe the Bernanke interview on Sunday's 60 Minutes program is going to be the most important event for the week. Bernanke will attempt to explain why the Fed plans to spend $600 billion on quantitative easing and why it might be necessary for them to spend up to $2 trillion more. Goldman said a couple weeks ago that as much as $4 trillion might be needed but they have since backed off of that number because of the improving economic reports. Will we see QE3 or even QE4? Tune into 60 Minutes and read between the lines because you know Bernanke will not say it directly.
The next bump in the economic road is the FOMC meeting on the following Tuesday. With Bullard, Hoenig and Lacker making the rounds on the speaking circuit with comments critical of QE2 you can bet the FOMC meeting will be eventful.
Spain took steps to head off speculators and prevent a run on its debt like the ones that forced Greece, Ireland and Portugal to take loans from the IMF. The government approved new austerity measures and a limited economic stimulus package to ease investor fears. The equity market responded positively to the tax cuts for small businesses, increase in the tobacco tax and cutbacks to a key jobless benefit. Spain also discussed plans to sell 30% ownership in its national lottery. You know they are hurting if they are going to give up ownership in that cash cow.
Spanish and Portuguese stock markets rose for the third consecutive day and reversed severe losses from the prior week. Borrowing costs for EU countries also declined amid speculation the ECB was quietly buying the bonds for the troubles countries to put an artificial floor under the debt.
The markets shook off the weaker than expected jobs report and the strong potential for profit taking after two days of strong gains. This is extremely bullish and even more bullish because the indexes are breaking out to new highs. It appears the November selling is over and the Santa Claus rally has begun.
After Friday's surprise in the payrolls it appears the bad news bulls came back to the market. You would have thought a decrease in new jobs from 172,000 to 39,000 would have been a reason to take profits and find the nearest open bar. Instead the bad news is good news sentiment returned. If the country is growing slower than previously expected then the Fed will continue its QE2 program and possibly implement a new program.
In one of the teaser sound bites for Ben Bernanke's 60 Minutes interview this weekend has him saying the Fed could implement even more stimulus to make sure the economic recovery gains speed. Since the interest rates have gone up despite the QE2 it appears the market is not listening to his pledge to buy $600 billion in treasuries. In order to get the markets attention he may have to take more drastic action thus the teaser comment.
Bernanke is facing a crisis of confidence. He warned QE2 was coming and then announced it would be $600 billion. A tidy sum to be sure. However, instead of rates going down and the dollar shrinking everything went in the opposite direction. Rates went up along with the dollar because of events overseas that just happened to transpire at the same time as QE2. Now Bernanke has to talk even tougher and potentially announce a new stimulus program to get the market focused back on the Fed. Hence the 60 Minutes interview this weekend. The Fed Chief does not normally do interviews so expectations for this one are all over the place. Will it be a puff piece or a hardball in your face interview? Will Bernanke talk about the improving economy or the need for another jolt of the stimulus drug to shrink unemployment?
Whatever the tone of the interview the analysts will all be watching and you can bet his remarks will be dissected all day on Monday.
The Federal Open Markets Committee (FOMC) has been criticized lately as the Federal Open Mouth Committee because of the apparent chaos inside the group. I can't remember when there has ever been such disagreement and public venting of that disagreement. Analysts believe this is also weakening their QE2 efforts. If the Fed is believed to be going through the motions only half-heartedly then the market will not take them serious. That appears to be what is happening now. The market doubts the Fed will complete the $600 billion program because of the dissension in the ranks.
The dollar fell another 1.15% on the weaker than expected jobs and the Spanish austerity program. That was a 1.5% drop for the week. The decline in the dollar pushed commodities higher with gold closing the after hours session at $1413. Crude prices rallied again to the highest level since Oct-2008 to close at $89.44. Silver closed at a new 30-year high at $29.14.
Dollar vs Gold Chart
Crude Oil Chart
Bank of America (BAC) has recovered from the initial beating it took when WikiLeaks founder Julian Assange told Forbes it would release thousands of documents related to a U.S. bank that would bring the bank down for good. Through a little research on his claim analysts immediately pinned the label on BAC as the bank in question. Reportedly WikiLeaks had acquired a hard drive from a BAC executive's computer. Since Assange is not above hyping his big reveals the worry over BAC's fate has already faded. His charges on rape and various other sex crimes have him in hiding but he claims he has given copies of all the data in encrypted form and should anything happen to him the passwords will be released by a third party and all the data will immediately go public. That is obviously a plan to protect himself from an assassination attempt. Various governments and agencies are exploring criminal charges for his various leaks and his servers are under constant denial of service attacks. I would not want to be in his shoes today.
Bank of America Chart
Discount dealer Groupon has apparently turned its back on a $6 billion offer from Google. Reportedly the founders of Groupon were hesitant to become part of the global dominance machine and the Google lifestyle. Really I think they just wanted more money and did not want to have Larry Page and Sergey Brin for bosses. Groupon CEO Andrew Mason had the biggest vote as the largest shareholder and he had concerns about the strategic direction the company would take under Google management. Groupon is contemplating an IPO in 2011.
Reportedly the deal had some additional incentives if performance targets were met. Google wants to get into the local advertising markets and they thought Groupon would be an easy way to accomplish that feat. Google has $33 billion in cash so it is not like they are hurting for money. They announced an acquisition of Widevine on Friday. That is the 42nd acquisition for the year.
Comscore announced the Q3 winners in the U.S. cellular handset market on Friday. Of the 234 million Americans age 13 and up, Samsung was the top device maker with a 24.2% share of all mobile subscribers. That was a +1% increase from Q2. LG was number two with 21%. Motorola fell 2 points to 17.7% and RIMM gained slightly to 9.3%. Nokia brought up the rear with 7.1%.
In the smartphone market the breakdown was significantly different. RIMM fell -3.5% to 35.8%. Apple gained nearly a point to 24.6%. Android jumped +6.5% to 23.5% and Microsoft fell 2% to 9.7%. Palm was the also ran candidate with 3.9%. Android is coming on strong thanks to all the different phones using that operating system.
Goldman was pounding the table on the equity markets and commodities on Friday. Goldman issued its forecast for 2011 and it was pretty bullish. They said the U.S. was on the verge of a "very strong recovery." They believe the S&P will end 2011 at 1,450 for a +23% gain. Gold is expected to hit a high of $1,750 but close the year at $1,690. The U.S. GDP is expected to clock in at +2.7% for the full year.
Last year Goldman predicted the S&P would close 2010 at 1250 and they are going to be very close. It was in the 1100 range when they made the prediction. They guessed gold would rise to $1350. It was also in the $1100 range when they released the 2010 predictions. They guessed the GDP for 2010 to be 2.1%. So far in 2010 it was 1.7% in Q2 and 2.5% in Q3 with a YTD average of +2.6%.
Goldman is bullish on technology, energy and financial stocks for 2011. They expect financial earnings to rise +24% in 2011 compared to +12% for the S&P. Goldman expects oil prices to "average" $110 in 2011, up from a prior forecast of $100. The company said, "the stage is set for a return to a structural bull market in oil." Goldman expects a two million barrel per day increase in demand in both 2011 and 2012 and require OPEC to tap the majority of its "reported" 5.64 mbpd of spare capacity. I wrote last week in OilSlick that the "real" spare capacity is probably more in the 3.5 mbpd range. If Goldman's demand predictions are accurate we are going to be in real trouble in about two years.
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Jeff Saut, Chief Investment Strategist for Raymond James, said last week's rally will continue through year-end. He believes the pros will continue to buy stocks as they attempt to make up for the "worst year of underperformance by active managers" in his 40 years in the business. "Professional money managers are underinvested and underperforming." They are facing "performance risk, bonus risk and ultimately job risk." He recommended buying momentum stocks that have done well and making new highs. These are the stocks managers will want to own at year-end.
When the clock struck midnight on November 30th the market suddenly awakened from its month long nightmare and charged off to new highs. The motivating factors were the apparent bailouts of Ireland, Portugal and positive austerity moves in Spain. The U.S. economics were improving and the U.S. administration was talking about supporting an even bigger bailout program in Europe through the IMF. China's manufacturing was booming and the dollar finally lost its momentum and headed lower with a -1.5% decline for the week.
All of these factors were positive for stocks and another monster short squeeze began. On Tuesday night with the S&P closing on critical support at 1180 for what looked like the preview to Nightmare on Wall Street, I was ready to throw in the towel on my bullish bias. If that support broke I could easily have rationalized a drop back to 1125. Fortunately for the bulls every short with a dollar left had loaded up on positions in anticipation of that impending drop.
They were really surprised on Wednesday morning. Another perfect setup for the shorts had turned into the perfect short squeeze. This time it was different. In a normal short squeeze the market gaps higher and then flat lines for the rest of the day. On Wednesday the S&P gapped open to 1202 and just a hair over strong resistance and then held there for two hours. A buy program appeared and shorts were greeted with another +5 point gain to 1207. Now it was not just a token breakout but now some real points were starting to pile up on the board.
Thursday opened with another gap higher and real fear was beginning to overcome the shorts. Actually it was not just the shorts but everyone who was waiting for a move over 1200 to confirm a breakout. Now the train was leaving the station and everyone wanted to be on it. The market moved steadily higher all day.
When Friday's payroll report surprised so negatively I "knew" it was all over but the crying. The market gapped lower as it should have after two days of very strong gains. I am sure the shorts thought their prayers had been answered but the bad news bulls stampeded into the gap and the initial market drop began to improve almost immediately. Shorts were dumbfounded again when the market did not dive and began to gain strength towards the close.
The S&P gained +44 points in three days and overcame very troubling news on the way. The S&P is now on the verge of a significant breakout over 1228 and a new high for the year. We could easily see that year-end 1250 prediction by Goldman Sachs as a real possibility. Actually a breakout over 1228 could move a lot higher by year-end. This is the proverbial line in the sand that once crossed there should be no turning back.
The bad news bulls are back. The Payroll news did not faze them. The weaker Factory Orders were ignored. The ISM Manufacturing was being whispered at 60 and only came in at 55. Nothing seemed to matter to the bulls.
This lends credence to the quote above from Jeff Saut. Money managers have been in such denial and under performance they are now forced to chase stocks higher before year-end.
Can this continue through Dec-31st? Definitely! Can this bullishness evaporate we quickly as it appeared? Absolutely! However, assuming Bernanke avoids a bad case of foot-in-mouth on Sunday I believe we are going higher.
It will be Bernanke's job on Sunday to talk the market into a froth. He is going to threaten billions more in QE and talk about the improving economy. This is a perfect opportunity for him to pump up the markets and grow that wealth effect he is trying to create. He will be a cheerleader for the economy with a pep rally on the night before the big game. At the 9:30 kickoff on Monday we will know if he was successful.
For Monday the critical number is 1228 on the S&P. The index touched 1227 twice in early November and then fell off the ladder. The high back in April was 1220. That makes a move to 1228 a new high for the year and the highest level since September 22, 2008. This would be a Kodak moment! If Bernanke does his job right on Sunday night we should be well over that level at Monday's open. Initial support is 1217 but critical support is well below at 1175. Let's hope he does not come down with a severe case of foot in mouth disease.
S&P-500 Chart - Daily
S&P-500 Chart - Weekly
The Dow chart looks like it stepped on a tack. The velocity of the spike after two weeks of painful and very volatile consolidation gives the appearance of a very overbought index. However, the Dow consolidated for the entire month of November so the index had some serious pressure to release.
I am not as bullish on the Dow as the S&P but I believe it will follow the S&P higher. Once over the November high of 11,444 it should accelerate on its own and not require the S&P for a power boost. Support is well below at 11,000. I hope we don't have to test that level again in 2010.
Dow Chart - Daily
Dow Chart - Weekly
The Nasdaq bested its intraday high for the year at 2592 by one point on Friday but slipped at the close to just under that level at 2591. I know that is splitting hairs but the bears were struggling to defend that resistance high and they were marginally successful at least on Friday. Friday's close was the highest close since January 3rd 2008. That is a major victory all by itself.
Considering the Nasdaq was hampered by some major losses in some key stocks any gain should be appreciated. NFLX lost -8. Apple, Amazon, Panera, Broadcom, FirstSolar and Ebay were all negative. Those losses were overcome by strong gains in PCLN, UHAL, NILE, DECK, SOHU, BIDU and FFIV.
Like the other indexes I expect the techs to breakout if Bernanke does not make a major mistake on Sunday. Once over the resistance high we should see some short covering and some funds chasing performance in the big cap techs. It could be explosive.
Support is 2520 and resistance 2592.
Nasdaq Chart - Daily
Nasdaq Chart - Weekly
The Russell was the clear leader last week. Actually it has been the leader since that one-day drop to support at 700. The uptrend confounded the skeptics and even last Tuesday's market negativity barely registered on the chart.
If the Russell is in rally mode the other indexes will follow. That truism is as certain as day following night. However, the Russell has some serious resistance at 760 dating back to 2008. A breakout there would really light those rocket engines. Support is so far back at 720 it is not relative.
Russell Chart - Daily
Russell Chart - Weekly
The Dow Transports chart is the most bullish chart I have. This breakout over 2010 highs is confirming the improving economy and the better outlook for 2011. The next material resistance is the all time highs at 5500-5536.
When the transports are moving this strongly the Dow Industrials almost always follow. This breakout is a strong bull signal.
Dow Transports Chart - Daily
Dow Transports Chart - Weekly
In summary I believe the markets will move higher next week. However, it depends on Bernanke's interview and the continuing problems in Europe. You never know when the debt crisis will come back to bite us in the back. However, I think the U.S. economy has suddenly taken a decisive turn higher despite the payroll report. As this uptick in activity is confirmed with the December economic reports I believe the market will celebrate. If Bernanke is successful with QE2 in crushing the dollar the market has no place to go but higher.
Warren Buffett has been quoted many times about the reasons behind the last bull market.
"The great bull market from 1982 to 2000 was due primarily to four things. Those were low interest rates, low inflation, lower taxes and less government intrusion into business."
We have low rates, low inflation, low taxes and we are moving towards lower government intrusion into business. Add to that recipe an accelerating recovery out of the Great Recession and there is no reason to not expect a new bull market.
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