Daily State of the Markets 12/02: Unconventional Measures?

December 2, 2010 9:22 AM EST
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Good morning. After flirting with what would have been a rather disastrous short-term breakdown on a chart basis for the past two days, the bulls finally closed the door on their opponents yesterday and wound up stepping lively to a breakout of their own. However, the real key to the 250 point romp on the Dow wasn't widely publicized. While most of the popular media focused on the better-than-expected economic data both here and abroad, the real driver to the joyride to the upside was the use of the words "unconventional measures" relating to the ECB's next move.

Sure, the numbers from ADP on private sector employment were good. And to be fair, the ISM/PMI data has been coming in above expectations from everywhere from China to the U.S. But faced with a second coming of a global banking meltdown in the form of a rolling debt contagion across the pond, the fact that the economies of the world are moving forward had been taking a backseat to the worries about debt and banks.

One of the biggest lessons I've learned over the past 25 years is that markets usually don't get hammered for the same reason more than once. And since the market had already experienced a -16% correction this summer based at least in part on the European debt crisis, I couldn't help but wonder if this time would be different. Yet at the same time, the thought that I kept coming back to when pondering the big picture was that the central banks of the world were likely to "do something" in order to try and stop the debt contagion from getting out of hand.

Sure enough, it was the expectation that the Jean-Claude Trichet was about to implement the Bernanke Model and get creative with the European Central Bank's powers that pushed the stock market up and out of the danger zone yesterday. While there was no official announcement on the subject, the word on Wednesday was that the ECB would jump into the fray by (a) buying more bonds (aka QE - quantitative easing), (b) using "unconventional measures," and (c) perhaps enlist the help of some of Trichet's central banker buddies around the globe.

While there was no mention of specific measures that Trichet & Co. might take, traders around the globe assumed that any and all measures taken would be "a good thing" for the markets. I liken this thought process to the "anticipation trade" in the U.S. that occurred from the beginning of September through November 5th. The key here is the ECB doesn't have to spell out exactly what it is going to do in order to send the shorts scurrying, it just has to suggest that like Bernanke, the bank will do "whatever it takes" in order to keep things from unraveling at the seams.

It also didn't hurt that the U.S. provided a not-so subtle message of support to the ECB on Wednesday. If you were wondering what prompted the late-morning pop to new highs, we're of the mind that it was the Reuters report stating that the U.S. "supported" an extension of the EFSF (European Financial Stability Facility). Reading between the lines, one might take this to mean that the U.S. stands ready to jump into the game if needed.

While the Dow and S&P both enjoyed a very nice day, we've been suggesting for a while now that readers turn their attention to the middies and small caps as it appeared (well, to us at least) that this is where the current leadership resides. Thus, we would be remiss if we failed to point out that both the S&P Midcap and Russell 2000 indices broke out to new highs for the current bull cycle.

In sum, as long as the central bankers of the world remain committed to not let anything too terribly bad happen to the banking system, it might be a good idea to avoid "fighting the Fed" here.

Turning to this morning... The ECB left rates unchanged, which was expected and made no mention of new initiatives. However, this is the way the game is played with central bankers. In addition, we've got some important economic news on tap this morning so let's get to it.

On the economic front... The Labor Department reported that initial claims for unemployment insurance for the week ending November 27 rose by 26,000 to 436K. The week’s total was 13K above the Reuters consensus for a reading of 423K. Continuing Claims for unemployment for the week ending November 20 were above consensus at 4.27M vs. expectations for 4.203M and last week’s revised (higher) 4.271M.

Finally, consider raising your expectations. As Michelangelo said, the danger is not that your hopes are too high, but rather...

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

* Major Foreign Markets:
o Australia: +1.82%
o Shanghai: +0.71%
o Hong Kong: +0.86%
o Japan: +1.81%
o France: +0.44%
o Germany: +0.28%
o London: +0.99%

* Crude Oil Futures: - $0.24 to $84.92
* Gold: + $1.90 to $1390.20
* Dollar: lower against the Yen, Euro and Pound
* 10-Year Bond Yield: Currently trading lower at 2.996%

* Stocks Futures Ahead of Open in U.S. (relative to fair value):
o S&P 500: +2.19
o Dow Jones Industrial Average: +7
o NASDAQ Composite: +3.78

Wall Street Research Summary


* Suntech Power (NYSE: STP) - AURIGA

* Research In Motion (Nasdaq: RIMM) - Canaccord Genuity

* Starbucks (Nasdaq: SBUX) - Mentioned positively at Credit Suisse, Target increased at Deutsche Bank

* Stifel Financial (NYSE: SF) - Goldman Sachs

* CVR Energy (NYSE: CVI) - Goldman Sachs

* CF Industries (NYSE: CF) - Estimates increased at Soleil Securities

* Oracle (Nasdaq: ORCL) - Estimates and target increased at UBS


* Athenahealth (Nasdaq: ATHN) - FBR Capital

* Bucyrus (Nasdaq: BUCY) - Goldman Sachs

* Jack In The Box (Nasdaq: JACK) - Mentioned cautiously at Oppenheimer

* A-Power Energy (Nasdaq: APWR) - Oppenheimer

* Leap Wireless (Nasdaq: LEAP) - Piper Jaffray

* Biomarin Pharmaceutical (Nasdaq: BMRN) - UBS

Long positions in stocks mentioned: none

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Credit Suisse, Piper Jaffray, Deutsche Bank, UBS, Jean-Claude Trichet, Ben S. Bernanke, Soleil Securities, Standard & Poor's, European Central Bank, Crude Oil, Auriga

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