Wednesday, November 30, 2011

Stock market set for a pop, but then what?

A decent ADP employment report (yes, the private sector is still hiring) as well as news of a global central bank move to boost bank liquidity should cause the stock market to pop on the open, but I'm not so sure what will happen after that. It will be completely dependent on whether the traders and short-term speculators take a "risk on" or "risk off" bias (bullish vs. bearish.) They could go either way, building on the initial rally and gains from Monday and Tuesday, or selling into the rally. In truth, some will do one and some will do the other, so it will be a matter of which side has the greater numbers and how it nets out. There could be some volatility as the two groups battle it out, pushing the market up and then down several times before the majority net bias is "discovered" by the market.
 
The ADP employment report is a positive economic report. ADP says that the "increase in November was the largest monthly gain since last December and nearly twice the average monthly gain since May when employment decelerated sharply."
 
The "globally coordinated central-bank response" is simply yet another small step in the drawn-out process of resolving the European debt crisis. It is a good step, but not definitive per se. I still believe that "the fix is in" and that it is more a matter of letting all of the political drama and theater play out before the pieces gradually get put into place. In some cases sovereign debt holders (including banks) will have to accept a "haircut" and in other cases the ECB may simply buy up a hefty chunk of sovereign debt. In all cases a hefty dose of "austerity" is required, which may mean recession, but that would simply be a side effect of cleaning up enough of the debt mess to move forward. None of this will satisfy the critics, but satisfying critics need never be the goal anyway. There will be no "grand" or "ultimate" resolution of European debt, simply enough of a fix to enable Europe to muddle on, as it always has and always will.

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