UBS/Cashin 1/4


New Money Helps Santa Keep Giving – The classic Santa Claus Rally is said to consist of the final five trading sessions of the outgoing year and the first two sessions of the New Year. The first two sessions of any quarter are often benefitted by early funding of pensions, 401Ks and the like.

That tendency was noted in the early sessions of the two preceding years. In 2009, the first trading session saw the S&P rally 3.1%. In 2010, the S&P rose 1.6% on the initial day. So, yesterday’s action was somewhat traditional.

There were some minor oddities within the trading. The ETF sector was far more active than the stock sector.

The Dow rose 93 points but the S&P was up the equivalent of 127 Dow points. The clear winner was Nasdaq which shot up the equivalent of 173 Dow points. The techs may have benefitted from the aggressive valuation put on Facebook after the Goldman investment.

The opening day saw volume rise back above a billion shares for the first time in over a week. That was a touch surprising since markets in London, Tokyo and Shanghai were closed.

The bulls gave back only a mild portion of the rally as the session ended. A few Gann style cycle types had been calling for a sharp afternoon reversal which obviously did not arrive.

And So Say All Of Ye – CNNMoney did a year opening survey of 32 stock “experts”. They look for an average rally in the S&P of 11%. In fact, not one of the 32 thought the S&P might close down on the year. That gives you a little bit of a chill.

Do As I Say Not As I Do – If you were in the stock market as September began last year, you might not have been exactly elated. After a multi-month roller coaster, the averages sat, pretty much, where they had begun the year. But things were in the process of change.

In the final weekend of August, Chairman Ben Bernanke delivered his Jackson Hole speech which outlined a possible QE2 program. The stock market began a rally that would last to yearend (and maybe beyond).

The premise was simple. The Fed would expand its balance sheet in order to buy Treasuries and other debt instruments to make monetary policy easier (lower rates). QE2 would allow the Fed to get around the limitations of traditional policy in a zero interest rate environment.

The announced goal was to ease monetary policy (lower rates) enough to help lift the stock market and other assets promoting a kind of wealth effect.

The “targeted” assets began to rise almost instantly and obediently. At the time of the Jackson Hole speech, the Dow was approximately 10,000 and the S&P was around 1050.

Some non-targeted assets also began to rise. At the time of Jackson Hole, gold was around $1200; copper was near $3.40 and crude was about $78. So, we can see that the proposal and implementation of QE2 has had a dramatic impact on prices. But, what else would you expect from a much easier monetary policy that drove rates lower.

Yet, as Hamlet might say – Aye, there’s the rub. Despite the Fed’s purchases of billions upon billions in treasuries and other debt, rates have moved higher since Jackson Hole. The yield on the 10 year has risen from about 2.50% to near 3.25%.

So, it would appear that it is not the monetary mechanics that are moving markets; rather it is what John Hussman has described as rhetorical impact. Mr. Bernanke appears to have “jaw-bonded” the stock market higher, along with other assets.

So far the pundits are crediting QE2 with beginning to lift the economy (as evidenced by the stock market). We have yet to see what will be the effect on the economy of the unintended consequences (higher prices for oil, food, etc.). This is only the end of Act I.


  1. Leave a comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: