12/20/2011
By Carlos Guillen, Research Analyst

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Well, the fact that equity markets were down yesterday only means that they must be up today, right? Maybe not, but given the way the market has been trading, this conclusion would not be that far off. Nonetheless, today investors are receiving the current equity rally with open arms, and quite surprisingly stocks have held their ground. After a strong morning start, the Dow Jones Industrial Average has more or less held on above the 12,000 point level. Thanks to some good news flow from the European Union and to good housing data here at home, we have seeing the sharpest Dow increase so far for this month, up today 2.87 percent.

Part of the good news that came from Europe was that German business confidence unexpectedly rose for a second month in December. According to the Ifo institute's business climate index, German business confidence climbed to 107.2 from the 106.6 reached in November, landing higher than Economists estimates calling for a drop to 106. Moreover, two economic institutes predicted Europe's biggest economy will stave off the debt crisis and avoid a recession in 2012. The IfW institute said that GDP growth will slow to 0.5 percent in 2012 from 2.9 percent in 2011; concurrently, the RWI said that expansion will decelerate to 0.6 percent in 2012 from 3 percent this year. While these growth rates are still below German historic norms, the encouraging aspect is that there will be growth in the region despite the slowing demand in the eurozone.

Other good news from the eurozone was that Italian and Spanish yields declined as demand for their bonds climbed. Spanish 10-year yields touched a two-month low of 5.06 percent, down from the 6.78 percent reached in mid November, as the European Central Bank offered unlimited three-year loans to the region's banks. Also Spanish three and six month t-bill sales reached €5.64 billion, exceeding the maximum target of €4.5 billion. Italian two-year note yields fell for a fourth day and reached 4.91 percent, the lowest since the end of October.

The market is also holding well today as a result of the encouraging U.S. housing data that came out earlier this morning. Both housing Starts and building permits landed better than expected and both increased from their prior levels. While housing starts and building permits still remain at below historic levels, the better than expected result may be showing signs that the excess inventory may be decreasing further and faster. A recovery in the housing sector is of utmost importance as it will be a strong component in helping to reduce the unemployment rate in the long term, and hence help to increase consumer spending.

Given, given that today was an up day, we should conclude that tomorrow will be a down day, right? Well, not really, but tomorrow's ECB announcement of the results of its three-year loan operation, which began today, is sure to create some waves on equity markets.

Carlos Guillen
Wall Street Strategies