MarketView for December 20

Summary

The S&P 500 continued to make headway on Monday, reaching a two-year high as Wall Street continues to look forward to a continuing economic expansion and higher earnings numbers well into 2011. Nonetheless, volume was light, as is expected through the rest of 2010. About 6.37 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, well below last year's estimated daily average of 9.65 billion.

The sectors turning the best performance are those that have led the December rally, including financials, energy and materials stocks. The S&P 500 is up 5.7 percent for the month and 11.8 percent for the year.

The financial sector, which has lagged the broader market, was up 0.4 percent on bets that the sector could be among the leaders next year after a strong December. Yet not every financial stock was a winner.

American Express closed out the day down 3.4 percent at $42.50 after Stifel Nicolaus downgraded the stock to a "hold" from a "buy." Amex shares are down 7.8 percent since last Thursday when the Federal Reserve proposed limiting debit interchange fees at 12 cents per transaction.

Boeing was also a negative influence, closing down 2.7 percent to $63.27 after the Seattle Times newspaper said a delivery delay could be announced for the plane maker's 787 Dreamliner aircraft.

Energy shares led the way up as the price of oil rose nearly 1 percent in choppy trading. Chevron closed up 0.4 percent at $88.88.

Amazon.com also helped boost the Nasdaq on optimism the company will benefit from improved holiday spending. According to research firm comScore, online sales are up 12 percent to $27.5 billion so far this season compared with a year ago. Amazon ended the day up 3.2 percent to close at $183.29.

Sara Lee has been in talks to sell itself to Brazilian meat producer JBS, but the two companies are at odds over price. Sara Lee shares ended the day up 2.5 percent to close at $17.69.

Note that the markets will be closed on Friday to observe the Christmas Day holiday on Saturday.

Holiday Spirit Rapidly Ending in Congress

IF there was a holiday bipartisan spirit in Congress, it is evaporating quickly. The Senate will try to pass a bill this week keeping the government operating through March 4, when the next Congress would have to work out spending priorities for the rest of the fiscal year.

A Senate vote to pass the temporary funding bill is likely on Tuesday, Senate Majority leader Harry Reid said, when existing funds to operate the government expires. The House of Representatives would then have to sign off on the measure and send it to President Barack Obama for his expected approval. Under the bill, most federal government programs would be funded at last year's levels through March 4.

The new Congress will be seated on January 5, with Republicans taking over control of the House. If this latest spending bill is enacted, Republicans will have a much greater say in spending priorities as they write legislation to fund the government from March 4 until October 1.

House Republicans already have said they want to trim $100 billion in spending for this fiscal year, which ends next September 30, by freezing programs at 2008 levels. That goal could run into White House opposition, leading to threats of government shutdowns if Democrats and Republicans cannot reach a compromise.

Next year, in fact, could begin with a series of fights in Congress over spending priorities and deficit reduction, bringing a fast end to the bipartisanship that was on display earlier this month when both parties agreed on an $858 billion tax-cut bill.

The friction could impede Obama's ability to implement his signature reforms of healthcare and financial regulation, which have been approved but not funded. It also could put thousands of federal jobs at risk, cut federal grants and strain the ability of agencies to function on a nuts-and-bolts level.

Lawmakers failed to pass a budget for the current fiscal year, which started on October 1, and have extended last year's budget to fund the operation of everything from outer space activities to operating national parks.

On Friday, Congress voted unanimously to extend government funding through Tuesday to avoid a shutdown after lawmakers failed to agree on a long-term solution to a stark partisan divide over spending.

Senate Democrats had hoped to pass a detailed $1.1 trillion bill to cover spending through the end of the fiscal year. But they abandoned that effort on Thursday in the face of unified Republican opposition.

Treasury Bill Rates Fall at Auction

The Treasury’s latest auction of Treasury bills saw the effective interest rate decline to its lowest level in six weeks. The Treasury Department auctioned $29 billion in three-month bills at a discount rate of 0.130 percent. That's down from 0.140 percent last week. Another $28 billion of six-month bills were auctioned at a discount rate of 0.185 percent. That's down from 0.190 percent last week.

The three-month rate was the lowest since these bills averaged 0.125 percent on Nov. 8. The six-month rate was the lowest since these bills averaged 0.180 percent on Nov. 15.

A discount rate reflects that the bill is selling for less than face value. For a $10,000 bill, the three-month price was $9,996.71 and the six-month price was $9,990.65. That would equal an annualized rate of 0.132 percent for the three-month bills and 0.188 percent for the six-month bills.

Separately, the Federal Reserve said Monday that the average yield for one-year Treasury bills, a popular index for making changes in adjustable-rate mortgages, rose to 0.30 percent last week. That's up from 0.29 percent the previous week.

Bullard Says Bond Buying Program At Least “Moderately Successful”

St Louis Federal Reserve Bank President James Bullard said on the CNBC TV business channel on Monday that the Federal Reserve's $600 billion bond buying program has been "at least modestly successful" so far.

Bullard said nominal interest rates alone should not be used to judge the program's success. He said economic growth would likely be stronger next year than was anticipated even a few months ago.

"I do think GDP growth will be stronger in 2011 than people thought, and a lot of it is because the holiday season is looking pretty good," he said. "But it is going to be a slow process."