Daily Market Reports | Dec 08 2009
 By Greg Peel
The Dow gained one point. The S&P fell 0.2% to 1103 and the Nasdaq fell 0.2%.
What’s wrong with this picture? Last night the chairman of the Federal Reserve assured America that its economy was not about to bounce back quickly into strength and all of Wall Street breathed a sigh of relief. High unemployment will perhaps linger for years, Bernanke suggested, and tight credit was keeping any improvement to moderate levels. Wall Street cheered. Inflation would remain low, he said, and a double-dip recession was not beyond the realms of possibility. Wall Street was ecstatic.
It really is a sad indictment on the tangled mess the US has found itself in. Since the rally began in March, Wall Street investors have been trying to convince each other the driving force behind 60% gains is undervaluation of otherwise profitable companies in a time of clear economic recovery. Clearly this is an ignorant view. Stocks have rallied for one reason and one reason only – because the US dollar has fallen. The US dollar has fallen because the Fed cash rate is zero and thus borrowing money is as good as free. This money can then be invested in those assets which benefit from a weaker dollar, such as US exporters, commodities, economies that own those commodities, and economies which have trade surpluses they’re willing to spend as stimulus.
So now we have the ridiculous situation in which any rise in the cost of borrowing could potentially cause a major reversal of those investments. And the greatest threat to low interest rates is a recovering US economy. Ergo, the best thing that could happen to Wall Street at the moment is a US economy which remains weak. That’s why a dip in unemployment put a spanner in the works. It was great news for five minutes, but then a realisation dawned.
Bernanke did not see this dip as any reason for the Fed to alter its dour expectations. Wall Street initially began to rally on this news, then once again checked itself. Perhaps traders caught their own images in the mirror and saw themselves buying on news a double-dip recession may yet occur. Perhaps they suddenly felt very tired.
Bring on Christmas. Bring on 2010. Investors have booked possibly the best annual gains of their lives in 2009 and it would be foolish to blow it so close to end of year accounts-close (and bonus payments). A Santa rally? All yours.
Bernanke’s pessimistic warnings came hot on the heels of the October consumer credit numbers, which showed the ninth consecutive month of contraction at down 1.7%. If consumers are deleveraging, not only are they not spending, they are anti-spending. This is bad news for Wall Street because investors want Americans to borrow, borrow, borrow and spend, spend, spend, just like the good old days. They don’t want America to solve its debt problem by reducing debt – that will never do. That’s why high unemployment is bad…but then less than high unemployment might mean an interest rate rise…oh I give up.
A quick perusal of a five-year US gold chart reminds one that previous exponential price surges always encounter sharp and sudden drops along the way, so there is no reason to call Friday’s plunge the clear end of this latest gold bubble. Gold was steady last night at 1155.40/oz. Oil traders decided that Bernanke’s warnings of a still fragile economy was reason enough to sell crude down US$1.54 to US$73.93/bbl. That’s today of course – tomorrow they’ll buy it for the same reason.
Base metals in London went largely nowhere except for lead and zinc which decided to fall 2%. Base metal prices are driven only by commodity funds at present. See opening paragraphs.
The failure for any market to move much on Wall Street last night was quite simply that after a few fluctuations, the US dollar index closed virtually unchanged at 75.77. The Aussie responded by being down slightly to US$0.9127.
The SPI Overnight gained one point.
Get some shopping done.
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