Market Digest — Week Ending 12/23/2011

in Market Commentary by

[dropcap]E[/dropcap]conomic news was a mix of naughty and nice, but Santa Clause delivered a rally anyways. This speaks to the fact that markets remain largely priced on fear, and anything but the worst can have a favorable impact. Included in the positive news were suggestions of a strengthening US housing market. Treasuries declined as a result. In Europe, the ECB agreed to lend nearly unlimited funds to banks for a three year period. The move received less press than previous policy initiatives in Europe, but banks jumped at the opportunity on a bigger scale than expected, borrowing a massive 489 billion Euros.

Weekly Returns

S&P 500: 1,265 (+3.7%)

MSCI EAFE: +2.4%

US 10 Year Treasury Yield: 2.03% (+0.18)

Gold: $1,606 (+0.1%)

EUR/USD: 1.3043 (+0.1%)

Major Events

  • Weekend – North Korean leader Kim Jong Il dies. His 28-year old son is named successor, stoking fears of uncertainty on how the new regime will behave and if it will be able to maintain power.
  • Monday – ECB chairman Draghi said the law forbids him from increasing bond purchases to fight the debt crisis. Stocks fall.
  • Tuesday – US housing starts surged 9.3% in November (mostly multi-family units), well above expectations.
  • Tuesday – Spain sold 5.6 billion Euros of debt at lower than expected yields.
  • Wednesday – Oracle announced lower than expected sales. Shares drop.
  • Wednesday – The ECB announced that banks jumped on its offer for low-cost three year loans, borrowing 489 billion Euros. The program should solidify short term bank liquidity needs and create additional demand for troubled sovereign debt.
  • Thursday – US Q3 GDP was revised down to 1.8%, from 2.0%, but jobless claims for the recent month dropped more than expected.
  • Thursday – The University of Michigan US Consumer Confidence survey rose to 69.9, above expectations.
  • Friday – The House of Representatives broke deadlock to agree to a temporary extension of the payroll tax cut, with the intention of reaching a longer term extension in the near future.

Our Take

This week’s rally, albeit on low volume, was about two things:

  1. With the US employment situation improving and record low borrowing costs, it is difficult not to expect the dismal US housing market to get better. The numbers this week suggest it is already happening. If housing begins growing again, it will create a huge tailwind for the whole economy.
  2. The ECB bank lending program is a big deal, primarily because of the sheer size of it. It is not yet clear if banks will use the funds to buy troubled sovereign debt, thereby creating a loophole for the ECB to use a “backdoor bazooka”. Italy and Spain together need to roll over about 150 billion euros in the first quarter. If the banks use even a small portion of their new funds for this purpose, it will put a big dent in that number and buy Europe some time. Either way, it removes much of the short term risk surrounding bank liquidity.

From all of us at Personal Capital, we wish you a peaceful and enjoyable holiday weekend.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as the Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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