Easy Money in Europe, America Revive Investor Sentiment

As we close this volatile year, a combination of the following�has lifted the stock market back to positive territory for the year:

The ECB�s generous offer of massive amounts of easy money at low rates.

A hint that the Fed will keep U.S. rates near 0% until at least 2014.

A new wave of better-than-expected economic news.

The S&P rose 3.75% last week and is at a slight 0.6% year-to-date gain, while the Dow is up 6% and NASDAQ is off 1%. Maybe this wild and crazy year will end on a positive note after all.

The ECB�s New Leader Offers $641 Billion in 1% Loans

The biggest news last week was that Mario Draghi, the new head of the European Central Bank, offered 523 euro zone banks up to $641 billion of up to three-year loans at only 1%. European banks are grabbing this 1% money to buy higher-yielding sovereign bonds in Italy, Spain and the other troubled euro zone countries. This arbitrage will help shore up capital at euro zone banks and curtail the massive interest-rate burden in Italy, Spain, and the other countries with high and rising debt loads.

Essentially, by flooding the euro zone banking system with these cheap three-year loans, the ECB has avoided conducting controversial quantitative easing, while also shoring up the capital at euro zone banks and reducing the interest burden on troubled euro zone countries. As a result, respect for the new ECB president is soaring. His bold action also will help restore the international credibility of the euro.

The new IMF director, Christine Lagarde, and some major U.S. economists have predicted a European financial collapse next quarter, followed by an �economic depression.� Now, thanks to the ECB�s essentially unlimited lending to banks via low interest three-year loans, a credit crisis has been avoided. For example: Spanish bond yields quickly fell below 5%, and Spain suddenly was able to sell its short-term debt at substantially lower interest rates.

Also helping boost euro zone confidence is the fact that last Tuesday, the German Ifo business climate index rose to 107.2 for December, up from 106.6 in November — a second straight rise. The other piece of good news from Germany, reported by The Wall Street Journal on Friday — that third-quarter consumer spending in Germany rose 0.5% (vs. the second quarter, i.e. a 2% annual rate). Also, German household spending rose 0.8%. As a result, Germany looks poised to generate stronger GDP growth in the upcoming quarter and calendar year. This should help the entire euro zone avoid entering a recession in 2012.

The Fed Might Keep Short-term Rates near Zero through 2014

Meanwhile, back in the U.S., the Fed�s zero interest-rate policy is keeping a lid on the costs of funding our rising deficit, while helping the housing market recover. Now, it looks like this ultra-low interest rate environment will persist for years. The Fed already has confirmed it will keep the Fed Funds rate �near 0%� through mid-2013. And now, on Friday, The Wall Street Journal reported that the Fed might be signaling it will keep short-term interest rates near 0% well into 2014, or maybe beyond. These ultra-low rates are great for stocks, since frustrated savers must now turn to high-yielding stocks.

Politically, we�re entering the key year of the four-year election cycle, a time when both parties pull out all the stops on courting votes. Last week, the House of Representatives (which wanted a one-year payroll tax cut extension) and the Senate/White House (which were pushing for a two-month extension) argued in public about who cared the most for working Americans. President Barack Obama apparently had to cut short his 17-day Hawaiian vacation and stay in the White House thanks to this bizarre act of Congressional infighting.

The truth is that both sides were trying to thoroughly embarrass each other. Fortunately, the two-month payroll tax extension deal got approved on Friday after the House of Representatives caved — probably because everybody wanted to go home for the holidays. The bad news is that this kind of petty political posturing will resume fairly quickly, in February, before the short-term extension expires again.

The good news is that the stock market usually rallies in an election year, especially when an incumbent is running for re-election. In the spring, when we get down to the two final presidential candidates, the presidential hopefuls typically take turns �sucking up� to the voters, which helps boost both consumer and investor confidence.

I realize there will be some negative ads, similar to what we�re seeing in Iowa, but by next summer, you will see a more positive, upbeat tone. I predict that the most positive candidate will become our next president. You cannot get elected President of the United States unless you are a happy, positive person, so I predict that the presidential candidates will continue to smile — even as they insult their opponents.

Stat of the Week: Leading Indicators Up 0.5%

The U.S. economic news remains very positive for the most part — aside from the recent negative housing news. On Thursday, the Conference Board announced that their 10 Leading Economic Indicators (LEI) rose 0.5% in November — well above the economists� consensus expectation of 0.3%. Also, seven of the 10 LEI components rose. This strong rise supports my expectations of continued economic recovery throughout 2012, so the 0.5% LEI gain qualifies as my �Stat of the Week.�

Also on Thursday, we learned that the new weekly jobless claims fell by another 4,000 to 364,000 — much better than the economists� consensus estimate of a rise to 375,000. The closely watched four-week average of new jobless claims declined by 8,000 to 380,250 — reaching the lowest level since July 2008.

Lastly, on Friday, the Commerce Department reported that November durable goods orders surged 3.8%, for the best monthly gain since July. A rise in transportation orders, especially aircraft, was largely responsible for the big gain. But if you exclude transportation orders, November durable goods orders still rose 0.3% — following a revised 0.8% in October. This strong trend in durable goods orders is indicative of improving business and consumer confidence, which bodes well for rising GDP growth during this quarter and the next.