Market Talk

Stocks post another session of gains, albeit in low, pre-holiday volume, despite a stronger US dollar.

Investors apparently unfazed by a bigger-than-expected downward revision to 3Q GDP, contraction in Richmond Fed’s December manufacturing survey, and instead focus on better-than-expected Nov existing home sales.

Session’s advance led by telecom, materials, tech, energy and consumer staples. Consumer discretionary stocks and industrials add more muted gains. Boeing and IBM are the Dow’s strongest dollar gainers, contributing roughly one-third of the average’s advance.

DJIA rises 50.79 to 10464.93, and Nasdaq Comp adds 15.01 to 2252.67. S&P 500 ends 3.97 higher at 1118.02.

Also of note, VIX volatility index reaches lowest levels since summer 2008, suggesting a high level of complacency in the market these days.

Data due tomorrow include November personal income & spending, new home sales and Reuters/Univ of Michigan’s final read on December consumer sentiment.

- CBS and Disney are said to be considering participating in Apple’s proposed plan to offer TV subscriptions over the Internet. “Traditional TV business is toast. It’s just a question of when and how,” Henry Blodget says.

- Appliance sales may not be best read on housing market.

- Final 3Q GDP reading comes in at 2.2%, meaning it’s tough to put much faith in the earliest GDP readings. “We’re in an economic recovery, but we still don’t know how strong it is or how sustained it will be,” Time’s Justin Fox says.

- Google’s not done on the deal-making front.

- Second-tier smart phone makers (Palm, Motorola) may struggle with profitability.

- Stores pin hopes on last-minute shoppers.

- To repay taxpayers, Wall Street banks raised billions of dollars in new capital, and they generated millions of dollars in fees doing so, Andrew Ross Sorkin says.

- Abnormal Returns rounds up thoughts on the past decade in equities.

- “I have never seen a great investment where the first information came through advertising,” Jeff Miller writes, referring to gold. “If investors could learn one thing, resisting TV ads would be the key choice.”

- Jeff Jarvis offers thoughts on what bankrupt newspaper companies should be doing.

Eduardo and I discuss the hot home sales, cold GDP and the final week for retailers to make their numbers.

Only 2.2% growth? Not too worried.

The economy’s recovery in the third quarter wasn’t nearly as strong as previously expected. But don’t look for evidence in today’s stock market action.

The government’s 3Q GDP reading was downwardly revised yet again due to lower construction and inventory investments than originally estimated. But stocks have been up throughout the day and briefly flirted with 14-month closing highs.

Go figure.

In its third estimate, the Commerce Department said 3Q GDP grew at an annual rate of 2.2%, down from its previous estimate of 2.8% in late November and the original 3.5% figure reported in late October. The new 2.2% estimate fell short of economists’ 2.7% growth expectations.

But what would’ve happened had the initial third-quarter GDP reading in late October come in at 2.2% instead of 3.5%, the Kid Dynamite blogger ponders.

“I’d have to think the effects on the stock market would have been dire – as it would have showed that our ‘strong rebound’ wasn’t so strong after all,” blog says. But stocks have “happily digested” the incorrect preliminary data and haven’t looked back.

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Here they come...here they come...

Like I wrote last night, the more news that comes in about retail sales, the more it seems like the weekend snowstorm did have an effect on sales, and retailers are going to be hard pressed to match even last year’s sullen haul.

Redbook Research this morning noted that sales through the first three weeks of December rose 1.5% from a year ago. But they were expected to be up 2.1%, which means retailers will have to work that much harder to make their numbers.

“With three weeks gone from the five-week month, retailers are increasingly hedging their sales forecasts for December, indicating that the finish will have to be considerably stronger than originally assumed in order to bring them on target, Redbook says,” Newswires Karen Talley wrote this morning.

But that could be harder than expected, Reuters reports: “The heavy snowstorm that swept the East Coast of the United States over the weekend may have cost retailers the potential for any upside to holiday sales, industry experts said on Monday.”

That may drive retailers to bust out the heavy discounts that they’d hoped to avoid this year. Talley also wrote this morning that Gap is already “pulling the trigger,” offering 60% discounts on some items, as well as a host of other discounts. Talley said a salesperson at a Gap store on 6th Avenue in midtown Manhattan (across the street from our office, as it happens) said the store has signs on hand that offer bigger discounts, and “it’s up to corporate” to decide if they’re brought out.

Remember, last year was the first year in about four decades that holiday sales dropped, and if memory serves correctly, they’ve never fallen two years in a row. That’s the depressing mark retailers hope to avoid.

Addendum: Talley’s been working overtime on this one, and here’s her latest out just this afternoon:

Retailers lost billions of dollars in business on so-called Super Saturday because of the big East Coast storm, but other parts of the country also struggled that day. US retail sales fell to $6.9B from $7.9B last year, with the 12.6% decline the biggest since ShopperTrak began gathering the data in 2002. The Northeast saw a 17% decline on Saturday, and the South a 15% drop. But areas not affected by the big storms also saw declines, with sales in the Midwest dropping 10% and 7% in the West, ShopperTrak said.

Prices are down, borrowing costs are cheap. We'd be foolish not to buy.

Existing home sales jumped in November, marking the third-consecutive month of gains, as tax incentives and low borrowing costs prompted the surge

Sales of previously owned homes rose 7.4% from a month earlier to a 6.54 million annual rate, according to the National Association of Realtors, marking the highest level since February 2007. The first-time home-buyer tax credit combined with cheap borrowing costs and historically low prices to push existing home sales ahead of economists’ expectations.

Home sales also rose an “inordinately high” 44% from a year ago, FusionIQ CEO Barry Ritholtz says.

“Now granted, we are comparing the heart of the credit crisis, a very weak seasonal period one year ago, with the present sub-5% mortgages and the (expected end of) a government home buying credit,” he  says.

Still, sales are up as prices keep dropping. “Bottom line: Improving sales numbers, falling home prices, reduced inventory, distresses sales still driving the narrative,” he says.

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You want me to borrow more? Like I'm not broke enough?

So some hay is being made about the Treasury yield curve hitting a record width, but it really may not mean all that much in the current economy.

The spread between the two-year and 10-year Treasury bonds was nearly 3% percentage points, and other measures are also hovering in record territory. From the Journal:

The interest-rate development is good news for banks, which normally borrow at short-term rates and lend at long-term rates. The bigger the difference, all else being equal, the bigger their profit. Higher profits mean banks can refill their coffers, which have been drained by bad debts, and return to health.

But all else is not equal. Short term rates have actually been on the floor for at least a year, and banks have enjoyed a fat spread, but that hasn’t spurred any return to lending; that’s been a major sore point for the economy and the White House, which has done everything but ordered banks to lend out money (ah, if only we had a command economy!) to no avail.

The problem isn’t the yield curve. The problem is banks are still sitting on a mountain of debt that could very likely still turn “bad,” and there just isn’t a lot of demand for credit when consumers and businesses are still working off that mountain of debt they acquired during the Big Con Decade.

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I hope he brings me Citi at $3.93.

US stock futures rising, and along with yesterday’s gains, you’re starting to hear talk of a Santa Claus rally.

There are rumblings that 4Q GDP is going to be strong, and people are taking notice that the yield curve has hit a record width, a usual sign of a strengthening economy. It’s an especially good sign for banks, which borrow short-term and lend out long-term. But, if bank lending continues to come in at the depressed levels it’s at now, the gap may not presage the same kind of growth it has in the past.

Today brings the third revision to 3Q GDP, expected to come in at a tepid 2.7%. Considering most of that’s coming via government stimulus, that’s not very impressive. If a real recovery is going to take hold, the economy is going to have to expand at a better clip, and for the proverbial “extended period.”

Also on tap, existing home sales for November, couple of readings on retail sales, and Richmond Fed manufacturing survey. S&P futures up 5.80, DJ futures up 44. Ten-year down, yield up to 3.725%.