Itz Week End Review 12-11-10

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Equities are finally starting to break higher this week. Helping push the markets higher was a stronger than expected Consumer Sentiment report for December. The headline number jumped to 74.2 from 71.6 in November. This is the highest level we have seen since June's 76.0 reading. The summer decline ahead of the elections appears to have ended and sentiment has surged +6.5 points in just the last two months. Although the Bush Tax cuts have not passed, as some Dem's need to vent their disapproval. President Obama even gave former President Bill Clinton the podium Friday to make the case for passage. Bubba looked so happy to be back in the spot light. Most expect passage in the coming week, which should give the markets another boost into the New Year. On the negative side the budget deficit for November was -$150.4 billion. That was a 25% increase over November 2009 and the largest November deficit on record. Revenues were up +12% but outlays increased by +18%. The government's fiscal year begins in October and for the first two months the deficit has totaled $290.8 billion. The government is projecting a $1.3 trillion deficit for the entire year or 9% of GDP.
Edward Yardeni said in an interview on Friday his 2011 year-end target is between 1400-1500 because of improving global fundamentals and expected earnings on the S&P of $100 in 2011. At 16 times earnings that would equate to 1,600 on the S&P.
Pimco, the world's largest bond fund, is raising its forecast for U.S. growth next year as policy makers pump in a "massive amount" of stimulus into the economy, according to CEO Mohamed El-Erian. Pimco raised their estimates for growth to the 3.0-3.5% range from 2.0-2.5%. JP Morgan's Thomas Lee raised their estimate to 3.5% and Morgan Stanley raised estimates to 4% from 2.9%. On a historical statistic, the third year of a presidential election cycle has averaged a 20% gain since 1962.

Friday evening China announce that their CPI hit 5.1%. The news was not good. China's consumer prices rose +5.1% driven by higher costs for food. That was well above the 4.7% consensus by analysts. It was also significantly higher than the 4.4% rate in October. Producer prices rose by 6.1% and a full point over estimates. Industrial output rose +13.3%, also stronger than analyst estimates. Retail sales jumped +18.7% and fixed asset investments rose by 24.9% year to date, also higher than expected. Their trade surplus was $22.9 billion. (That compares to our trade deficit of $38.7 billion) Broad money supply or M2 rose by 19.5% and the fastest gain in six months. M2 has risen +55% over the past two years and yuan denominated loans have risen 60% to 47.4 trillion yuan from their low in November 2008. China wants to limit that to 7.5 trillion yuan in 2011. The People's Bank of China raised bank reserve requirements by half-a-percentage point on Friday as a way of clamping down on inflation. It was the sixth reserve hike this year and the third in the past five weeks. So will China raise interest rates? As of Saturday midnight, no news as of yet. China can’t raise interest rates because of the risk of attracting inflows of cash that would fuel inflation, said Wu Xiaoling, a former deputy governor of the central bank. >>Read

So how does one play China's decision? If the do raise rates, expect a knee jerk reaction, which should rally the US Dollar sending commodity prices lower, albeit short term. ITZ has been projecting a pullback in crude oil, OPEC met this Saturday. OPEC discounted last week’s $90 oil price and kept its output targets unchanged, betting supplies in storage and a fragile global economic recovery will prevent crude from surging. >>Read Full Story

The pullback should be minor in commodities, bottom line China demands on them will not diminish but continue to grow. Use the pullback as an opportunity to buy or add to positions.