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Will Santa's Rally Be Naughty Or Nice?

Santa
AP
Santa

Stocks head into December with a tailwind, but the late November rally will quickly be put to the test by some gloomy economic reports and the next phase of efforts to save the struggling U.S. auto industry.

Traders say December couldn't be any worse than the preceding three months where steep declines have left stocks at seriously depressed levels, and they are betting now that December will deliver a rally. A multi-day rally in the past week, the first of note since April, gave the market a boost of confidence.

"There's a lot of people talking about a 20, 30 percent move up in stocks," said Kevin Ferry of Cronus Futures Management. (By Wednesday, the S&P 500 had gained 18 percent in four days and the Dow was up 15.5 percent - its best four day streak since August, 1932.)

December, on average, has been the best performing month for the Dow since 1915. It has averaged gains of 1.4 percent, according to Cleve Rueckert of Birinyi Associates. But Rueckert points out: "We've been careful about making historical comparisons because there really aren't any good ones," he said.

For the Investor:

But Birinyi Associates, in a note, points out that you have to look back to 1937 to see a market performing in a pattern as dismal as this stock market has performed since August, on a month-to-month basis. Stocks also declined in November and December of that year.

On the horizon in the coming week is the December jobs report Friday, expected to show a continuing deterioration in the employment picture. But even before that markets will focus on auto sales for November on Tuesday and the Fed's beige book on the economy Wednesday.

Auto industry executives once more head to Capitol Hill Thursday and Friday for two days of hearings before Senate and House committees on their request for a bailout package. They are expected to be armed with documentation on how they would revamp their companies.

There are also two appearances by Fed Chairman Ben Bernanke. On Monday, he speaks on the economy to the Greater Austin Chamber of Commerce. He speaks on housing and housing finance Thursday at the Presidents' Conference on Homeownership and Mortgage Initiative in Washington.

President-elect Barack Obama, who helped spark the past week's stock rally with his appointment of an economics team, meets with governors in Philadelphia Tuesday.

Investors, will also keep an eye on developments in Mumbai, India, where terrorists killed more than 150 people across India's financial capital starting Wednesday night.

Whither Markets
Brian Rogers, chairman of T. Rowe Price , was in New York this past week for his company's outlook presentation. Rogers, in a brief interview, discussed some of 2008's nasty surprises. "The thing we got wrong was none of us saw the valuation risk in the equity market," he said.

"It wasn't like '99 when everything was expensive. We all underestimated how severe the financial contraction was," he said. Rogers said he personally had also thought that housing could bottom in 2008, but now it looks like the bottom will come in 2009.

"The odds are pretty good that we see the lows in the S&P," he said. He named a few stocks he likes for those dipping back into the market. They include Cooper Industries , the merged Anheuser-Busch Inbev, and oil companies, like British Petroleum or Schlumberger .

For investors looking to buy, he warns to stay clear of consumer staples, a group that had its run as a defensive play. "I think you may want to take more cyclical risk without doing crazy things," he said.

"I think for an individual stock, it's easier to figure a buy price than a sell price," he said. "I think the same can be said for the markets in the aggregate."

Credit Crunch
The government in the past week rescued Citigroup with another $20 billion capital injection and a plan to backstop $300 in assets, plus the Fed pumped up its activity in the mortgage and consumer credit markets with a new $800 billion plan. As the Fed and Treasury turn their big fire hose on the credit markets, there's signs of improvement but also lingering doubts that the improvement is not the sign of a real cure.

By Wednesday, spreads on mortgages narrowed and at the same time, yields on auto loans and credit cards stayed at highs. At the same time, investors rushed into the Treasury market, creating an imbalance that took the yield on the 10-year to a level of less than 3 percent Wednesday for the first time ever.

"They've got to figure out a way to deal with these troubled assets. It's not enough simply to ring fence assets," said Joseph LaVorgna, Deutsche Bank chief U.S. economist. "Everybody is just treating the symptoms and not the root cause."

Ferry said while the Fed was trying to help the markets, there is still something wrong. "If I was the doctor I'm not looking at the stock market to take the patient's temperature. I'm looking at Libor/OIS, and I'm not seeing improvement."

Ferry said the start of December may create some new activity in the markets. "You look to everybody returning to the game in December with a clean trading sheet," he said, noting some major firms were not active as the month of November wound down.

Econorama
There is a full calendar of data in the week ahead, but the Friday jobs number is the highlight.

"November employment is going to look just awful," said LaVorgna. "We're minus 425,000 (non farm payrolls) and the unemployment rate we have at 6.8 percent. We're going up to 8 percent unemployment, probably a lot sooner than I had anticipated."

Other data includes ISM manufacturing data Monday. On Tuesday, auto companies release monthly sales for November, which should show a steep decline. The ADP employment report is Wednesday, as is productivity and costs, ISM non-manufacturing and the Fed's beige book on economic activity. On Thursday weekly jobless claims and factory orders are reported.

By Monday, we should also get a good look at early results for holiday retail sales.

Questions? Comments? marketinsider@cnbc.com

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