For Friday, December 30, the market forecast is for growth

If you choose to invest now we recommend any leveraged ETF that grows with the US market.

Here are some options:

2x Leveraged ETFs

NASDAQ 100

Russell 2000

S&P 500

QLD

UWM

SSO

3x Leveraged ETFs

NASDAQ 100

Russell 2000

S&P 500

TQQQ

URTY

UPRO

Technical Comment:

Thursday the S&P 500 advanced 1.1% on volume below Wednesday and much lighter than the 30-day moving average volume.  On Friday the S&P 500 would have to drop about 20 points (1.6%) to flip our forecast back to uncertain based on our stop-loss algorithm.

Subjective Comment:

Very light volume continues to exist and likely will on Friday as well during this holiday week.  The daily US market data continues to offer no definitive clues regarding future market direction.  It is highly likely volume will be back to normal next week.  Unless and until US banks and large institutional investors think the debt crisis in Europe has calmed down, we doubt US equity markets will rally.  However, the potential for US markets to rally quickly is ever present given the very high level of excess reserves in the US banking system.  US banks have just under $1.5 Trillion of excess reserves available to lend.

We said yesterday it would be interesting to observe the performance of Italian bond auctions where maturities were greater than 3-years.  The shorter Italian bond auctions improved with lower yields from a month ago.  On Thursday, longer-maturity bonds were sold by Italy with much higher yields.  The 10-year bonds sold with a yield of 6.98%, slightly lower than last month.  It is now exceedingly clear that the European Central Bank’s 3-year LTRO loans at 1% are funding bond purchases, but only those bonds with maturities sooner than the expiration of the LTRO loans.  This is a clear sign the European banking sector is not financially healthy, and neither are the sovereigns.

Another sign European banks are not healthy is the high level of funds they are depositing with the ECB at 0.25% instead of lending to other banks.  Yesterday we discussed the lack of interbank lending.  Today we noticed loans from European banks to private businesses grew at 1.7% in November.  This growth is much slower than the 2.7% growth rate in private loans in October.  In addition to this slowdown in lending to business, the European Money Supply statistics for November were published today.  Euro M2 growth remains in the 2% to 2.5% range where it has been since August of last year.  Euro M3 dropped back down to 2% growth.  It had been up to 3% as recently as September, but both Euro M2 and M3 show a small growth rate going back to November 2009.  These growth rates had been in the 8% to 12% range from October 2006 to October 2008, followed by a decline to the current rate from October 2008 to October 2009.  Austrian Business Cycle Theory explains why a slowing growth rate of the money supply after a period of high growth triggers the crash following the inflationary bubble-boom.  The problem is the printing of money in the first place, causing the money supply to grow and distorting the capital structure of the economy.  The crash is unavoidable.  The ECB is attempting to get European banks to resume lending to businesses and each other to accelerate money supply growth via the factional reserve money multiplier.  If the Euro supply growth rate can be significantly accelerated, the crash might be delayed and another bubble-boom ignited.  The ECB has expanded its balance sheet over €800 Billion Euros (or over $1 Trillion Dollars) in the past 6 months.  Some of this expansion has been sterilized by various means, and the rest of it is being hoarded by European banks.  This is obvious because the M2 and M3 Euro money supplies are not growing beyond the 2% range that has persisted over the past 2+ years.  The ECB appears to have the backing from Eurozone politicians to conduct the 3-year LTRO loans because this will fund purchases of more sovereign bond auctions.  Clearly European banks are not yet in a position to resume the lending necessary to avoid stagnation and possibly a further economic decline in the Eurozone.

US money supply statistics have been updated and continue to show the M2 money supply growing at the same low rate of 4.2% annualized since early August.  Updated US banking reserve data also shows no discernible change in the growth of required reserves, meaning the rates of new loan originations by US banks remains low compared to the summer burst of lending that occurred in June and July.  M2 data published today is through December 19th, while the biweekly update to the banking reserve estimates data through December 28th.  Assuming the banking reserve estimates are accurate, the next M2 update will continue to show approximately a 4.2% growth rate.  To ignite and sustain a bubble-boom the money supply growth rates must climb and remain elevated above their present levels.  This will not happen as long as US banks fear losses from their exposure to European debt, which has been estimated at over $1 Trillion Dollars.  With US banks facing potential losses from the Eurozone debt in the $1 Trillion range, it is not surprising they are hoarding their $1.5 Trillion of excess reserves and currently lending at a very slow rate.  This is why we are watching Europe so closely.  If the ECB prints rapidly to recapitalize European banks, defaults can be delayed.  If US banks conclude the risk in Europe has declined, they are likely to resume lending more aggressively, perhaps as much as 7 to 8 times faster than they currently are.  If this happens, the US economy will experience another bubble boom and US stock markets will rally.  If the ECB fails to provide sufficient support to European banks, the situation will either stagnate or crash.  We’re not sure how much longer the uncertainty will remain before it becomes clear which way the markets will go.