U.S. stocks joined overseas bourses on Tuesday in rejoicing over speculation that China will soon roll out a new stimulus program, thereby thwarting what’s been some serious weakness in the Pacific Rim   Oh, and dovish (biased toward more easing) comments from new FOMC voting member Sandra Pianalto didn’t hurt matters.

In addition, the latest survey on small-business sentiment (we get into more detail beyond the click) also helped the market as it returned to its best level since February.

Financials, basic materials and industrials outperformed.  Utilities and consumer staples continue to lag.  This is exactly how 2011 began, and then the overall market faltered, those cyclical turned down and the traditional areas of safety were golden.

The commodity complex, as measured by the CRB Index, is gaining ground again as it returns to its highest level since crumbling in November.  This isn’t necessarily a great move for the consumer, but traders like to see it; a Fed that’s still concerned about the return of deflation doesn’t mind it either.

The price of OJ led the CRB higher as that commodity went “limit up” to extend the two-day surge to 16% -- up 32% in two weeks, and the highest level on record (a combination a Florida freeze and the blocking of Brazilian imports after a fungicide that is banned by the U.S. was detected).  An upward move in industrial and precious metals along with crude oil also played a role in sending the overall index higher.

So out of Europe yesterday, stocks were up for the first session in five; key bond yields improved a bit (though not as much as the 2% move in stocks would lead one to believe); and Hungary looks like it’s ready to succumb to ECB/IMF demands as they are now willing to talk about reversing proposed changes that would have given its parliament more sway over the central bank.

(As I mentioned last week, it’s pretty rich for the ECB to criticize another central bank for losing independence by being joined at the hip of their legislative counterpart – the ECB is buying government debt with abandon.  And who can leave the Fed out of this mix?  They’ve bought more debt that any central bank and are going even further as Bernanke & Co. pressures Congress to support the housing market via deeper Fannie/Freddie losses – sorry taxpayer.)

Market Activity for January 10, 2012

Sector Activity for January 10, 2012

On this last point, Hungary had jeopardized its chances of receiving a bailout with those proposed changes, so if they cede to ECB demands then they’d probably end up joining the bailed-out crew.  That economy is small, but its debts are large relative to its economy at 85% of GDP.  The bailout fund has plenty left to provide the Hungarians a rescue, but it would soak up €80-100 billion; thereby, making the fund even more inadequate to bailout an Italy that matters much more.   Thus, Hungary may not be that trigger that takes the eurozone to a darker place (which we began to surmise last week).  So it’s back to Italy…or maybe back to Greece as a hard default (unless a second bailout package is approved or investors finally agree to a 50% haircut) remains in play by March and depositors flee the country’s banks.

NFIB

The National Federation of Independent Business’ gauge of small-business sentiment gained 1.8 points in December, rising to a reading of 93.8 from the 92.0 in November.  That’s four-straight months of improvement, yet the figure remains below the critical mark of 95 -- a level that in the past had revealed small-business conditions recovering from recession.  The measure has failed to hit this mark for longer than any time in its history.

The internals of the survey showed a mixed picture.  The expect a better economy, expect higher sales and positive earnings trends segments posted the biggest gains – although all remain below average, with that outlook for overall business conditions deeply below average.  Good time to expand also improved, but remains at pretty weak levels.

On the other hand, plans to hire declined – in November it did hit the highest level since September 2008, but that’s not saying all that much as it remains 30% below average.

Wholesale Inventories

The Commerce Department reported that wholesale inventories rose just 0.1% in November, which was significantly weaker than the 0.5% print that was expected but did come off of a strong 1.2% reading for October.   While that October reading was revised down from the 1.6% increase that was previously estimated, it’s enough to offset the weak build in November –assuming a big decline didn’t occur in December, inventories should help Q4 GDP.

Ultimately, we’ll have to wait for the business inventories report (released tomorrow) for a better read as to the degree inventory rebuilding will boost GDP, but so long as the previous reading isn’t revised down much the segment should offset what looks to be a weak business spending number for the quarter.

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Have a great day

Brent Vondera, Senior Analyst

Phone: 636-449-4900