Let's Talk Turkey

The US was talking turkey and football last week but shopping is the real tell tale sign as to whether the turkey will get across the road as we head to year end.

Looking at XSP (iShares S&P 500 hedged into Canadian dollars) the technicals have been positive since early March. The price of XSP has risen from a low of $8.03 to $12.69 (58% increase). The current price crossed the 50-day moving average back in March, the 100-day in April and the 200-day in July and has kept its position with relative strength rising of late.

Let’s look at a few perspectives from different groups to see how they view the market in the US.

Credit Suisse reported “historically December is the best performing month for the S&P 500 as measured by the stock market. Additionally, stock market performance in December tends to be in the same direction as the market moved from January to November. When the Jan-Nov return is positive, the market performance in December tends to follow through with positive returns 80% of the time.”

Mostafa El Messiri writes in CIBC World Markets “The Week Ahead” news release on November 30, 2009. “While stock markets haven’t gone anywhere in the last decade, profits on a national accounts basis are 80% higher, raising doubts that markets are overvalued.”

Last week the markets reacted negatively to the news that Dubai wanted some relief on the $80-90 billion owed to its lenders. John Mauldin put things in perspective in his article “Why I am an Optimist” on Nov 28, 2009. He wrote, “Dubai is one of the Arab Emirates; but unlike its neighbour Abu Dhabi, oil is only about 6% of the economy. While the foundations of the country were built with oil, the country has diversified into finance, real estate, tourism, trading and manufacturing. It is a small country, with a little under 1.5 million residents, but less that 20% being natural citizens – the rest are expatriates. The gross domestic product is around US $50 billion…Dubai has become a byword for thinking large. The world’s tallest building, underwater hotels, manmade islands, indoor skiing in the desert, etc… Now here’s the deal. Abu Dhabi has the world’s largest sovereign wealth fund, at over $650 billion. Abu Dhabi could write a small check and make all the problems disappear. It just seems they are not ready to do that, at least not yet…. Given the massive losses that world banks have already taken, this is rather small potatoes. So why the reaction by the markets? Because I think many participants know that the potential for there to be serious correction is quite real. When anything as relatively small as Dubai spooks the market, it should serve as a warning sign.”

Scotia Capital wrote, “The turkey has been eaten and the Black Friday weekend is over. Investors weren't too happy with the Dubai World situation on Friday sending U.S. indices lower, but not by a large margin and volumes were understandably light. Today the focus moves from Dubai to the U.S. consumer as we get initial sales numbers from the shopping weekend. According to the National Retail Federation (which is sticking to its forecast 1% drop in spending this holiday season), more consumers went shopping over the Thanksgiving holiday weekend, yet spent less than last year. While Black Friday has significant importance as holidays sales make up about a third or more of retailers' annual profit, we must emphasize that today's Cyber Monday is gaining in importance every year as shoppers are more than happy to avoid the hassle of visiting bricks and mortar operations and shop online. So while we can claim that the shopping activity over the weekend was relatively neutral, there is more to come today, as we should see one the busiest online shopping days of the year. It's inevitable that consumption will pick up, but the past weekend suggests that the time when it picks up is not now. The one piece of good news we can take away from the weekend is that the U.S. consumer is not dead…. he or she may not be thriving, but they're not staying home on a permanent basis.”

The consensus is that the turkey will cross the road in dangerous traffic conditions.