Here comes the Santa Claus rally

We could be on the cusp of a Christmas miracle as Main Street optimism overpowers Wall Street pessimism.

By Anthony Mirhaydari Nov 27, 2012 2:14PM

Image, Santa Claus copyright John Lund, JupiterimagesFor weeks, there has been a rather large divergence between growing measures of consumer confidence, strength in the housing market, and buoyant retail spending and increasingly nervous CEOs and investors. 


The latter have been obsessing over two large political unknowns: Will the eurozone get the Greek bailout back on track, and will Washington bungle the "fiscal cliff" negotiations?

 

So, as executives pulled back on hiring and spending, and traders sent stocks reeling, consumers kept humming along. As a result, with Greece getting another debt reduction deal, a batch of better-than-expected economic data Tuesday has the pessimists scrambling to unwind their bearish bets -- setting the stage for an end-of-year Santa Claus stock market rally.

 

Assuming, of course, Republicans and Democrats can agree on a short-term deal on the fiscal cliff.

 

 

Early Tuesday morning, leaders from the eurozone, the International Monetary Fund, and the European Central Bank -- after holding their third meeting on the Greek bailout/debt sustainability situation in as many weeks -- finally came to an agreement to extend more help to Athens after its conservative government passed painful new austerity measures.

 

Features include cutting the interest rate on Greek bailout loans, forgoing profits on Greek bonds, and other ideas that are projected to cut Greece's debt burden to below 110% of GDP in 2022.

 

While this won't solve all of Greece's problems -- it still needs to get its economy growing again and fend off ongoing political turbulence -- it's a step in the right direction and removes a major source of uncertainty in the markets.

 

This clears one of the two major hurdles we faced heading into the end of the year. Now, we just need a short-term extension of the "fiscal cliff" here at home so stocks and other risky assets can blast higher into 2013 fueled by a likely QE4 Treasury purchase stimulus out of the Federal Reserve in a few weeks.

 

Also contributing has been a bounce back in the economic data, which led Goldman Sachs to increase its Q4 GDP growth estimate to 1.8% from 1.4% today. Durable goods orders beat expectations in October. Manufacturing in the Richmond region rebounded in November. Home prices are steadily rising in the Case-Schiller index, up another 0.4% in September. And the Conference Board reported its consumer confidence index hits its highest mark since February 2008.

 

What's driving this? JPMorgan economists note that finished inventory levels have fallen to their lowest level since the current growth slowdown started early last year. In other words, when CEOs get nervous, they can try to insulate their businesses by doing things like pulling back on new orders. But if things don't fall off a cliff, and customers keep coming in, they will eventually need to replenish their warehouses.

 

So, somewhat begrudgingly, managers are restocking their shelves.

 

From a technical perspective, things are still looking good. The Nasdaq, after months in the doldrums, is finally enjoying some relative strength against the overall market. Save for a brief spell back in August, this hasn't been seen since March. Also, hedge fund types, based on the latest data from the Commodity Futures Trading Commission, are busily covering their most aggressive net short positioning against stocks in years and moving long. And options traders are feeling more confident, market breadth is improving, and cyclical economically-sensitive stocks are leading the way higher.

 

 

I continue to recommend my clients position for additional gains with a focus on energy and commodities. Ideas include Tesoro (TSO), up more than 10% since I added it to my Edge Letter Sample Portfolio last week. The ProShares UltraSilver (AGQ) is up 9.2% since I added it on November 9.

 

Disclosure: Anthony has recommended TSO and AGQ to his clients.

 

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

168Comments
Nov 28, 2012 5:18PM
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Anthony

 

Ho, Ho, Ho over the Fiscal Cliff we go!

 

The Politicians have their heads so far up their butt they forgot Politics is the Art of Compromise.

 

I'll buy more Gold while it's still on sale!

 

Nov 28, 2012 11:31AM
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Corporations sitting on collective cash in excess of a trillion dollar is seen as a liability and it's distribution to it's shareholders is also a tax avoidance maneuver to take advantage of the still current tax laws favoring those distributed gains while they can.
Nov 28, 2012 11:06AM
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Recent earnings have been bad and will likely be bad for the rest of the year.

 

Many companies will be giving special dividends before the end of the year, when that cash is no longer in the bank it will put downward pressure on stock prices. Since they’ll be paying special dividends they’ll have less cash to use to grow.

 

Where is the rally going to come from, it won’t be earnings or cash or projected earnings.

Nov 28, 2012 9:27AM
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This is exactly the problem. The Federal government has a 'spending' problem, not a tax revenue problem. Too many insolvent entitlement programs and a big government with huge overhead.
Nov 28, 2012 9:17AM
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Anthony,

You have to understand that real prosperity is based on the production of goods & savings, not consumption and credit. In other words you produce more than you consume. This is a dose of 'crack' from the last round of QE. This is not real growth or GDP. The only thing that was accomplished was millions of Americans bought things they probably couldn't afford on credit, deepening their debt while widening the national trade deficit on foreign goods.

Nov 28, 2012 8:57AM
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"D'humain troupeau neuf seront mis a part; De jugement & conseil separees, Leur sort sera devise en depart, Kappa, Theta, Lambda, morts, bannis, egarez."

Of the human flock, nine shall be set aside, Being divided in judgement and counsel, Their destiny shall be to be divided, Kappa, Theta, Lambda, dead, banished, scattered.

Century I, Quattrain 81
$$$$$$$$$$$$$

The US Supreme Court has 9 members set aside from the rest of us. They are of different philosophy and counsel. A matter of the highest importance is ahead- the elimination of College Faternities and Societies and Alumnus Associations. They are the stuff devices and division are made from.

Animal House was just a movie.
GOP House is a Reality that curses progress.

The Supreme Court has 2 matters before them that should not be there... a case prohibiting selling old textbooks because the Bushes own shares in all the publishing companies so they can dictate what their characters are for historic reference and old books can compromise lies. Another is the Church College in VA that challenges the HealthCare Act because it is using religion like a weapon of mass adverse influence and corruption. Scuttle these phony cases and let's dissolve the incubators of New World Order. Life, Liberty and the Pursuit of Happiness, Freedom for All. Degrees are not tickets to free rides for Faux Elitists.

Nov 28, 2012 7:09AM
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Man these comments are full of shorters,I guess if you sell a stock you don't own and then trash it till the price drops you don't have to do research. From the people that brought you EGHT at 3.50 and SBSA at 1.00 Take a look at CVBK, Central Virginia Bank, with a Beta of 1.55 and a P/E of 13.00 showing a small profit of between .06 and .11 a share this is one small bank that's definetly on the mend, with a past value of 4 to 16 dollars ,recently upgraded by BB&T,  with a Yahoo 1 year target of 27.06!! at 10% of that you could triple your money. Check it out for yourself 
Nov 28, 2012 2:16AM
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freedom is the only true religion. that's because the face of freedom is also the face of truth. but it also helps to be financially free.
Nov 28, 2012 1:59AM
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Get over it.  The market will come back whether you like it or not.  Housing is coming back, consumer spending is on the rise and that will push growth.  Maybe not jobs, but growth.  Whether you like it or not, the economy is taking a small turn in a positive direction.  Even if the rich pull all of their money from the stock market, how long do you think they will keep it under their mattress earning nothing?  Get real, the poor rich cry babies are going to have to put more money towards taxes and back in the market.  BooHoo!!!  It must suck to be a billionaire.
Nov 28, 2012 12:23AM
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so-under todays economic situation-the consumer is going to miraculously provide a huge spike in holiday spending---roflmao!-simply precious !lol
Nov 27, 2012 11:50PM
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Looks like Santa (an icon of the Christian holiday season) got whacked by the Muslim brotherhood.

 

Nov 27, 2012 9:17PM
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I just scrolled through the first 15 or so posts, and all I see are naysayers and bears. Must be time to buy!
Nov 27, 2012 9:05PM
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Royal:  I agree that passive income is the low hanging fruit on this whole thing.  My proposal:

 

End carried interest.  If you don't have money directly at stake and "earn" your keep by "working" for the investment.. it's earned income and should be taxed as such, complete with social security and medicare withholdings.

 

Capital gains should be averaged across the life of the ownership of the asset (I think FIFO should be used for multiple time frame aquisitions)  For instance, a 100K gain over 10 years results in an average gain of 10K.  That 10K is added to earned income totals to get the marginal tax rate.  The marginal tax rate applies to the entire gain.

 

However, just a couple things.  Small businesses have an interest expense and can deduct interest in all it's forms.  That's about the only justification for instituting the mortgage interest deduction.  Now that it's there, there's a great reason to keep it since removing it would drop a substantial amount from everyone's home value.  Limiting it to the owner's primary residence may be effective too. 

 

Small businesses are also generally organized as a sole prop, partnership, LLC, or S-Corp.  All of which file taxes as the owner's personal taxes, so personal tax rates hold.

Nov 27, 2012 8:41PM
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Volcker Fan

 

Labor is taxed the highest. The money making money is what they want to go after. However if  the investor can't make a profit starting up a business they won't take the risk. They could raise the capital gains rate a little, but taking away mortgage deductions would hurt small business and the middle class. The tax system is not fair to the people who have labor income. The middle class carry the poor, the government and the rich.   

Nov 27, 2012 8:28PM
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Anthony,  Can I borrow a million of yours to invest in your rosy Wall St. scenario?  Thanks!
Nov 27, 2012 8:22PM
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Old man

 

Some people live to exist, some want to exist to live .Life is a duality, rich or poor, sick or health

free or in prison. { the worst prisons don't have bars they are harder to get out of ) Life is choices. Make them wise.

Nov 27, 2012 8:10PM
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always with the charts and the rally - I think you have be wrong every time - you get paid to sell investing - you are not unbiased - you represent the Wall Street - sell, sell, sell on investing regardless. People went out and bought in hoards what that can't afford. Congress is in stalemate again. Someone needs to take you off the site
Nov 27, 2012 7:30PM
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I would not call them pessimist rather realists. And enough with this short term deal talk. Lets make some long term sound fiscal decisions in which we ALL will feel some short term pain, but in the long term America is better for it.
Nov 27, 2012 7:26PM
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Lets vote

 

Is the headless Santa Obama thumbs up, Thumbs down Bernanke is the headless Santa.

Nov 27, 2012 7:17PM
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usa,

 you're right Santa has no head, I thought it was Bernake, It must be, could it BEEE, OBAMA 

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