The market held up really well after two big winning days. Although caution should not be totally abandoned, it seems that a year end rally is very likely. This morning’s non-farm report came almost perfect as it indicated a not-too-cold but also not-too-hot job market condition. But more job losses should be expected after the Christmas holiday. As for next week, the biggest news is of course the interest rate decision on Tuesday. Other than that, we are also going to get PPI and CPI reports. Lehman Brothers will also set to report its earnings on Thursday.

Bulls are back, in full forces. For the second day in a row, all three major indices registered more than 1% gains with Dow closed only 4% below its historical high. More important, investors are once again embracing risky assets. Everything from commodities to insurance to semiconductor to homebuilders is up huge. Although some may argue it has more to do with shorts covering than real buying, we have to accept the fact that the current trend of the market is clearly up, as simple as that. There is also evidence that money is moving from treasuries to equities. It is very likely that some fund managers have no choice but to chase the market to make their returns look comparable to the rest of the market before the New Year’s Eve. It is not difficult to see why bulls have reasons to celebrate. They have both the Fed and the US government behind them. With today’s detailed sub-prime bailout plan, the previous fear that 2008 will see more foreclosures and therefore worse housing conditions is greatly relieved. Suddenly, it seems a soft-landing is not just possible, but probable.
Separately, ECB kept its key interest rate unchanged while BOE lowered the interest rate. I would like to point out that there is a key difference between ECB and other central banks. That is, ECB is not a central bank for a single country and its sole mission is to keep the EURO region’s inflation in check. For other central banks, they will be more or less influenced by political pressure and therefore have to worry about economic growth. The ECB policy clearly shows more monetary discipline but at the same time lacks the flexibility to experience various economic conditions. Only time will tell which policy is better.  

After two quiet sessions, Wall Street finally got a big day. Fortunately for the bulls, the movement was on the up side. Most news this morning was positive. Starting with the ADP report, it came much stronger than expected for November and also got a huge upward revision for the previous month. Based on its relationship with the non-farm payroll number, the ADP number suggests 200K+ increase in the payroll number. In short, it is a huge relief to those market bears worrying about an imminent recession. The productivity number for the third quarter was also revised up by a big margin, indicating more room for the Fed to cut interest rates. Oil price continued its recent slump after touching $99 after a mixed inventory report this morning. OPEC, without much surprise, didn’t increase production at its latest meeting. Of course, this was the decision on the table. Below the surface; most OPEC nations are quietly increasing their daily production above quota. It is a nice scheme that they have mastered to almost perfection. US dollar got strengthened against most major currencies while gold price dropped. We are going to get interest rate decisions from ECB and BOE overnight.

The market had another quiet session. Again, all three major indices gave back less than 1%. Financials were particularly weak after an analyst downgrading several brokerages. Dow Utility hit another record high. Oil price was weak ahead of tomorrow’s OPEC meeting. Bank of Canada cut its key rate by 25bps and the Canadian dollar is now traded below par at around 1.01CAD/USD. The market is still waiting for the decisions from ECB and Bank of England, which will come out this Thursday. After that, the most important news is this Friday’s non-farm payroll report. One week from today, we are going to get the Fed’s decision on interest rate. Currently the market has already priced in a 50% chance of 50bps cut.

Wall Street started December in a relatively quiet mood. After last week’s 3% gain, all three major indices gave back less than 1% in today’s session. Although most indices have been turbulent since the sub-prime issue emerged and are well off their highs, there is one index actually quietly climbing to a new historical high. And it is the Dow Utility Average Index. This shows two things: a). Fund managers are increasingly bearish towards US equity and hence move their funds to more defensive sectors such as utility; b). With the 10yr T-notes currently yielding below 3.90%, it is more and more difficult to find relatively safe assets that provide attractive returns (as can seen by $2.1 billion Berkshire investment in TXU junk bonds announced this morning).
The US Treasury Secretary Paulson made another speech this morning and basically outlined the detailed steps for his sub-prime bailout plan last Friday. It is quite rare that the US government took such a rapid action towards a plan just outlined days ago and this shows the urgency of the matter itself. On the economic front, the ISM index number came no surprise. Oil price, after touching $87 per barrel, rebounded and closed the day up by $1. It seemed that some traders are betting OPEC would not increase production after seeing more than $10 drop in the price. For those oil rich nations, higher oil price means more profits as well as more control over their governance. But eventually demand will wane if high oil price drags the world economy into a recession and now the chance is increasing on a daily basis. Late the week, we are going to get the non-farm payroll report for November and arguably, this will be the last piece of important economic data before the next Fed meeting on Dec 11th.