Saturday, 1 December 2007

Santa Rally arrives too late to stop November slide

Against all odds last month I speculated that the All Ords (XAO) would finish down in the month of November and miracle of all miracles for only the second time in the last 11 years it did. The All Ords dropped 2.7% in November beating the drop of 2.3% in Novemeber 2003. The November drop is the biggest fall in any month since May 2006.

In the US last week we learned that housing prices and sales are falling on a national basis, consumer spending was flat and if inflation was measured properly it consumer spending would be in negative territory. Personal income growth was lucklustre and jobless claims are ticking higher.

However the junkie markets rallied on the expectation that their interest rate cut addiction will be satisfied by the Fed on December 11th. Going by Fed speak in recent days including Bernanke himself a 25 point basis cut seems a given with possibly more.

Markets have poor memories. Since the 75 basis points in cuts so far this year the economy has gotten worse in every aspect especially the credit markets. The idea that more rate cuts is the answer is delusional however suspension of belief is the markets specialty in the short term.

So it seems that the santa rally may have made a belated arrival in the last week. Just how long it continues will be largely affected by the Fed's decision on December 11th. December has traditionally been good for stocks, the XAO fell only twice in the last 10 years in the month of December and given the large possibility of US rate cuts it would seem unlikely it will this year.

However, I'll take the opposite side of that bet and speculate that the XAO will fall in December as US markets wake up to the fact that the economy is sliding into recession and rate cuts won't do anything to save it. That's probably more wishful thinking than anything else, the markets propensity for delusion is strong, as Keynes once said, "the markets can stay irrational longer than you can stay solvent"