Market Commentary 12/09/08

Good evening,

The days of seemingly long ago beckon as I type what used to be the once-a-month update in a relatively mild market.

Since I have WWII on my mind, General Patton comes barreling to the forefront. I have to admit I am looking forward to the day I can say outrageous things and quell the raised eyebrow because of a few gray hairs. After the war, Patton continued on his previous colorful and what we would call politically incorrect rampage. In a meeting with Hugh McColl earlier this year, who is also known for outrageous comments, he made several about illegal immigration, this from a man who had a bus station moved because it obstructed the view from his office in downtown Charlotte. I digress. After the war, Patton sidestepped removing every previous government official with a smudge of Nazism in his past and publicly contended communism as the next global threat. As a reward for forecasting the next 40 years of American experience, the Army stripped him of his Bavarian Command. He contemplated his resignation from the Army and on his way to go pheasant hunting with his chief of staff was in a car accident. As a result, he loss the use of his legs. Eleven days later, when apprised of the fact he would never ride a horse again, he went to sleep never to awaken again.

Yesterday the bulls were not asleep and quite rightly built on their momentum from the previous two trading days. An infrastructure frenzy abounded, Art Cashin of UBS shared a great comment of Dennis Gartman’s – “…“things that if dropped on your foot will hurt” were suddenly en vogue. You would have thought America was about to be turned into one huge parking lot by July 4th.” The market seemingly likes what the President-Elect has proposed from an infrastructure standpoint. In his emerging pragmatic style, he clearly stated that in infrastructure dollars he’s looking to grant, will be allocated where the most return will be felt for taxpayers. Democracy loves an egalitarian prospect and capitalism will support it as long as it’s profitable.

The technicals were important yesterday and today. We broke through the floor of 895 in the S&P but didn’t have any panic selling at the end of the day which is heartening for the future. Tomorrow watch the three year Treasury Auction. Anticipate the sales to go okay until the dollar starts to weaken. Too much is being put on Retail Sales which I believe is putting too much stock in the rearview mirror.

Merrill’s network of research sent this gem to me last week: Paul Leming’s work showed that in the 14,284 trading days since January 1, 1950, there were 68 days that had moves of 4% or more. Further, 28 of those 68 (41%) have occurred in the last three months. Since I received that we’ve had two more 4% days. Now it’s 30 out of 70 (43%). The volatility remains historic and gut wrenching. Jim Cramer shouted-out this afternoon on CNBC that the uptick rule would NOT solve any volatility, the Mad Hatter has joined the tea party again. We contend that 1/3 of the volatility would go away if the SEC reinstated the uptick rule to short sales and naked calls.

Lastly, communism is re-emerging as a possible contender for space in the global outlook again. The Financial Times had a great editorial today noting that the Russian Ruble is once again approaching the shaky ground of 1998. Couple this with the fact that Russia actually loses money when oil falls below $55 a barrel and there’s some unsettled activity there. China also reported significant and sudden drops in exports. As the policy makers meet this week they may have more than economic growth in their rice bowls. The Guangdong province, notably one of the largest manufacturing provinces, had riots last month as a result of layoffs. Zhang Ping, the nation’s top planner, warned of massive unemployment and social unrest. Why do I bring this up ?! Stay domestic, while we have our own anomalies at hand, our politics are much more transparent and baked in to the market.


The rally has a lot of technicals in its favor ! Price movement has been steady not hyperactive. Keep you eye on volume. And, when the Big 3 finish their bargaining the market will respond accordingly.

Stay away from cascade information and adaptive decision making, this is the time for independent thoughts and solid, proven practices. Avoid the irresistible pull of irrational behavior.


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Sources: Art Cashin-UBS, The Financial Times, ML- Research, and CNBC. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of December 9, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing.