Market Insider

Today's market rally: muddling through may be good enough for today, but sustainability is an issue.

Two issues:

1) high potential for sovereign downgrades from rating agencies, particularly Standard and Poor's. Indeed S&P has already said they expect to "resolve" its credit watch status shortly after the EU Summit concludes. 2) not enough firepower for the European rescue funds.

The EFSF is deploying, but with only a little more than 200 billion euros in uncommitted funds, fast tracking of the ESM to July 2012 is happening, but it has only 500 billion euros. Europe contributing an additional 200 billion euros to the IMF is a positive, but not clear how that will be deployed.

Time to turn our attention to the U.S.

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A rough year for the initial public offering market may end with a bang, as companies rush to get their offerings out the door before the holidays.

Getty Images A tour bus passes the Wall Street bull in the financial district January 22, 2007 in New York City.

With twelve deals on the calendar, next week is shaping up to be the busiest for U.S. IPOs since November 2007, when thirteen deals raised $2.5 billion the week of November 5, 2007, according to Renaissance Capital.

Among the offerings slated to price next week is social-networking software maker Jive Software, luxury brand Michael Kors and highly anticipated IPO from gaming site Zynga.

If at least nine deals price next week, it will be the most active week for IPOs this year.

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The statement out of Europe says the leaders will be working toward "a new fiscal compact and strengthened economic policy coordination," but the failure of the U.K. to sign on means that any treaty will likely be outside the EU. It will essentially be a multilateral agreement. It's not clear whether the institutions set up to service the EU — or the euro zone — will be able to service this new agreement.

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Investors await the final outcome of the European leaders' summit with lowered expectations, after Thursday's stream of disappointments out of Europe rattled markets.

Getty Images German Chancellor Angela Merkel and French President Nicolas Sarkozy.

The EU leaders Friday are expected to announce agreement on new rules for tighter fiscal integration, as agreed by German and France earlier in the week. According to news wire reports late Thursday, sources said the new rules were agreed by all 27 EU leaders and include requirements for balanced budgets and automatic sanctions for deficit offenders.

The first unsettling news came early in the day from European Central Bank President Mario Draghi, who discouraged market expectations that the ECB would serve as lender of last resort and balloon its balance sheet by buying sovereign bonds. Draghi said the current bond purchases would not be "infinite." The ECB did cut interest rates by 0.25 percentage points and extended lending programs to provide more liquidity to banks.

"It's a little scary," said Robert Sinche, head of G-10 currency strategy at RBS. "When there's a problem and a crisis, the Fed in a sense goes out of their way to outline the things they can do, and the ECB tends to outline the things they cannot do."

Also unclear Thursday was the fate of the European bailout funds, the 440 billion euro European Financial Stability Fund , and the ESM (European Stability Mechanism), the future, permanent rescue fund. A draft summit agreement circulated late in the trading session, saying the ESM would be launched in July, earlier than expected and that it would be given bank status. An unnamed German official was nearly immediately quoted as disagreeing with that use of the ESM, driving stocks to their lows of the day.

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Working Americans are now getting the smallest slice of the income pie on record — which, combined with high unemployment, could be behind the slow speed of the economic recovery.

The decline is not a new trend, but it shows up again in last week's release of third-quarter productivity and costs. The labor share — the amount paid to workers instead of businesses and other income-earning entities — was reported to have fallen to 57.1 cents on the dollar for the business sector, its lowest level since it was first reported by the Bureau of Labor Statistics in 1947.

J.P. Morgan economist Michael Feroli highlighted the decline in a recent note. He said the pre-2000 average for labor share was 63.9 cents, and if it were still at that level household income would be $780 billion higher, a helpful boost in a period of high unemployment. Even at more recent levels, income would have been $400 billion higher, he says.

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Update: Stocks have rallied off their lows as a draft of the EU communique has apparently leaked out. The communique talks vaguely about their determination to move toward a "new fiscal compact."

The draft did confirm earlier reports that the EFSF will run alongside the European Stability Mechanism (ESM), that it will have 500 billion euros on top of the EFSF, and that it will come a bit earlier than expected — in July 2012.

However, an anonymous German official has said that Germany will reject allowing the EFSF and ESM to run concurrently, as well as any proposal to allow a banking license for the ESM, and also rejects eurobonds. Confused yet?

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The markets midday drop: the fading of hope. After the ECB's Mario Draghi squelched talk of an expanded bond buying program, traders have now turned their attention to the EU Summit meeting. Here's the problem: many feel they know what is going to happen, and it still doesn't go far enough.

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A month or so ago, after Netflix delivered a dreary outlook, I wrote a piece headlined, “In Praise of Netflix CEO Reed Hastings.”

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Hastings had apologized for misstep after misstep, each one pummeling Netflix’s stock

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[NFLX  Loading...      ()   ], and conceded he had fallen into the trap of believing his own press clippings.

I figured it was time for a reminder that, through the noise, Hastings had created a heck of a company—and until this past year, executed almost flawlessly.

Then Hastings showed up last week at a media conference sponsored by UBS

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[UBS  Loading...      ()   ], where he conceded, “We got overconfident.”

But then—and this is where I start wondering whether he has learned anything—he said he only really worried about one competitor: HBO Go.

All I could think—is he kidding?

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Don't be surprised if gold falls to $1,700, according to some traders.

Comstock Images | Getty Images

When it comes to what markets wanted to hear from the European Central Bank it was all about money printing.

Without that, gold prices will fall along with other risk assets (oil, copper) and, of course, the euro, traders say.

The quick reversal Thursday from optimism to some pessimism in the gold market came after ECB President Mario Draghi's press conference, the ECB rate announcements and news that U.S. jobless claims fell to the lowest level since February, says RBC Capital Markets precious metals analyst George Gero.  "All of which coming at end of the year meant some more cautionary sellers."

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