U.S. stocks began the session higher for a third-straight day but erased those gains yet again, this time taking it a bit deeper to actually close lower – in the previous two sessions the broad market found a way to hold onto enough of the gains to close positive.

The out of the gate rally appeared to be more of a follow through from gains in European bourses, but those stock indices began to falter after ECB President Draghi repeated his view that the eurozone won’t escape recession, and our indices mirrored the move.  There’s not much sign of that Santa Claus rally, maybe he’s said it just isn’t worth it, content with an extended period of jobless benefits.

Health care and consumer staples outperformed but couldn’t totally shake the overall decline as they closed slightly lower.  Financials, basic materials and energy were the heavy laggards.

In the world of commodities, the precious metals complex failed to gain any traction yesterday even as the CRB managed to rebound a bit (the CRB is an index of 19 commodity prices).  Gold has taken a beating over the past couple of months, trimming its 2011 gain to 12%.  Silver has been lambasted by 33% from its peak hit in August, down 7% for the year.   Crude rebounded a touch to $93.88/bbl, down from over $100 a week ago.  Wholesale gasoline halted a four-session decline that was good for trimming 14 cents from the price to settle at $2.49/gal.

I listened to much of that Draghi press conference yesterday and in addition to his views on the euro-zone economy, he also made a point of advising that automatic regulations are not triggered when/if more banks/governments have their credit ratings cut.  Some of those regulations mean higher capital requirements, collateral calls and margin rates. This was on top of the statement early in the day (touched on in yesterday’s letter) when he reminded banks that they can fund more sovereign debt purchases with the new and elongated ECB liquidity programs – a tacit call for them to engage in a carry trade with this very cheap and abundant funding.  (That is, use your ugliest collateral to borrow at a nothing rate from the ECB and use those funds to buy sovereign debt at yields considerably higher – which consequently results in adding more ugly collateral back onto your bank’s balance sheet).  It appears he’s moving to desperation mode.

Shifting to Congress and the fate of the payroll tax cut and extended jobless benefits beyond the click...

Market Activity for December 19, 2011

Sector Activity for December 19, 2011

Here we are again as Congress had to come up with another $1 trillion continuing resolution to avert a government shut down on Friday. We heard so much back in late July about how Washington was going to rein in spending and actually make real progress on getting the budget in some sort of order.  I’m not sure how many people actually bought those claims, but they were certainly expressed as perpetually is the case.

This continuing resolution cleared the way for the next agenda:  Extending the lower payroll tax rate and long-term unemployment benefits, which are set to expire on December 31.  The Senate passed those extensions, but humorously for only two months – yes, they would have re-expired in February leaving us all to go through the process yet again in very short order.  This now goes to the House, which says they’ll kill the bill.

I’m not going to get into whether or not I think a temporary tax cut – particularly one that does nothing concrete except put the Social Security shortfall further in the hole – is even worthwhile (well, I guess I just showed which side I’m on; while I’m at it, we’d all be better off if more politicians subscribed to Freidman’s Permanent Income Hypothesis).  But the fact is, most economists are banking on the extension of these items.  Until, we see which way this thing will go (my guess is they’ll end up extending it but maybe not on the first try), we’ll have to wait for yet another year of inaccurate economic growth estimates.

NAHB Housing Market Index

The latest from the National Association of Home Builder’s gauge of housing market conditions (for new homes) ticked higher for a third-straight month, rising to a reading of 21 for December.  That’s up from 19 in November and the highest level since printing 22 in May 2010.

Now, a reading of 50 is the dividing line that shows whether more respondents are stating the market is either in “good” or “poor” shape – below 50 means that more respondents consider conditions are “poor.”  And at the current level it shows conditions remain quite poor; it’s simply a result of the supply glut of distressed properties within the existing home market – a reality that makes it very difficult on new-home sales – builders can’t compete with these prices.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900