MarketView for December 27

Summary 

The major equity markets ended the day flat after fluctuating between small gains and losses in a light-volume session. About 3.59 billion shares exchanged hands on the three major exchanges, a number that was sharply below the year's daily average of about 7.9 billion shares. Keep in mind that with Monday being a holiday for the markets and little work being done in general between the Christmas and New Year holidays, Wall Street becomes a very unpredictable animal.

Nonetheless, the S&P 500 turned positive for the year on Friday, with improving economic data sending stock prices higher. Gains were amplified by better-than-expected data on consumer confidence, which hit an eight-month high in December, as Americans grew more upbeat about the labor market and their financial situations.

One of the day's few big movers was Sears Holdings only it was a downward slide in price. The company’s shares fell 27.2 percent to end the day at $33.38 after falling to a new 52-week low of $33.26. The retailer said it plans to close 100 to 120 Kmart and Sears stores and said fourth-quarter earnings would fall by more than half from a year ago.

The outlook from Sears dragged on other retailers with JC Penney down 1.1 percent to close at $35.29. Sears' travails also hit shares of Whirlpool, which last year received 8 percent of its sales from Sears Holding. Whirlpool shares fell 8.9 percent to $46.62.

For the year, the Dow is up 6.2 percent and the Nasdaq is down 1 percent. The S&P's performance is turning out to be the flattest in more than 40 years. The index is up less than 1 percent, its smallest move in either direction since 1970.

The CBOE Volatility Index, Wall Street's fear gauge, moved upwards by 5.7 percent to 21.91. But the gains were mostly technical due to adjustments in positions ahead of the three-day holiday.

Single-family home prices fell slightly more than expected in October, according to S&P/Case-Shiller data, coming after better-than-expected data on the sector last week.

Confidence Improves – House Prices Do Not

Consumer confidence rose to an eight month high in December as households grew more upbeat about job prospects, but other data showed the housing market likely remains a drag on economic growth with house prices falling 3.4 percent in the October year. The rise in sentiment offered hope for a rise in consumer spending from November’s tepid performance.

Consumers are more optimistic that business conditions, employment prospects and their financial situations will get better," the Conference Board said. The Conference Board said its . According to the Board, "While consumers are ending the year in a somewhat more upbeat mood, it is too soon to tell if this is a rebound from earlier declines or a sustainable shift in attitudes." The index of consumer confidence rose to 64.5 in December from a downwardly revised 55.2 in November.

Labor market conditions have improved in recent months, with the unemployment rate falling to a 2-1/2 year low in November and applications for first time jobless benefits are the lowest they have been since April 2008.

The Conference Board's present situation index rose to 46.7 this month --- the highest since September 2008 -- from 38.3 in November. The expectations index surged to 76.4 from 66.4 in November.

However, according to the S&P/Case Shiller index, single-family home prices fell more than expected in October, data showed Tuesday, raising doubts that recent signs of improvement in the housing market would be sustained. The data on Tuesday showed prices declined in October in 19 of the 20 cities, dropping 1.2 percent on an unadjusted basis. Prices fell 0.6 percent in September. For the year, home prices were down 3.4 percent in October.

Recent data have shown an improvement in home sales volumes and rising confidence among builders who have been breaking ground on new projects. Home sales rose in November, adding to hints of recovery.

The National Association of Realtors said last Wednesday that sales of previously owned homes increased 4.0 percent from October to an annual rate of 4.42 million units. The median sales price in the NAR survey rose 2.1 percent from October, but was still down 3.5 percent from a year ago at $164,200.

Debt Limit to Increase

The White House plans to ask Congress for an increase in the debt limit before the end of the week, according to a senior Treasury Department official. The debt limit is projected to fall within $100 billion of the current cap by December 30. President Barack Obama is expected to ask for additional borrowing authority to increase the limit by $1.2 trillion.

Under the new budget, Congress can only vote to block the debt-ceiling extension with a disapproval resolution. Lawmakers have 15 days within receiving the request to vote down the debt limit increase. The debt limit currently stands at $15.194 trillion and would increase to $16.394 trillion with the request.

Nervousness Sends Oil Prices Higher

Oil futures closed above $100 a barrel for the first time in two weeks Tuesday, driven higher by Iranian saber-rattling, improving U.S. consumer confidence and thin holiday trading volume.

Light, sweet crude for February delivery ended the day up $1.66, or 1.7 percent, at $101.34 per barrel on the New York Mercantile Exchange. Brent crude on the ICE Futures Europe exchange settled up $1.31, or 1.2 percent, at $109.27 per barrel.

Volume was about one-fourth normal level, with fewer than 178,000 contracts traded. The thin volume contributed to price volatility, with buy orders leading to in price increases.

Futures have now gained nearly $8 a barrel, or 8.3 percent, in the last week, rising for the last six sessions in a row.

Iran on Saturday began 10 days of naval exercises in the Strait of Hormuz. On Monday it warned that the flow of crude could be stopped from the Strait of Hormuz, one of the world's most strategic oil transit channels. in the event of sanctions against its oil.

"If they (the West) impose sanctions on Iran's oil exports, then even one drop of oil cannot flow from the Strait of Hormuz," official news agency IRNA quoted Iran's first vice-president Mohammad Reza Rahimi as saying.

Broader oil sanctions against Iran have been one of the main fears in the oil market in the past months, although hopes are high that Saudi Arabia and other Gulf OPEC producers might help replace those supplies.

Syria said on Saturday its oil production had fallen by a third due to international sanctions imposed over its nine-month crackdown on anti-government protests.

Worries about supply disruptions were offset by concerns that Europe's debt crisis might have broad consequences on oil demand going far beyond just crippling consumption in Europe. Leaders of Germany's major business and industry groups said they expected the economy to lose momentum, although there will be no recession in 2012.

In an illustration of how far problems could go in a crippled European refining sector, Swiss refiner Petroplus said lenders had frozen about $1 billion in borrowing allowances it uses to buy oil, meaning supplies for Europe's largest independent refiner could dry up within days.

In a sign of growing uncertainty, speculators cut their net long positions in Brent crude and gasoil futures and options in the week to December 20, data from the Intercontinental Exchange showed.

It mirrored similar U.S. data released last week, which showed that the number of hedge funds on the speculative long side of U.S. crude was at its lowest level since the end of August 2010, when the second round of U.S. quantitative easing was announced, according to Petromatrix.