Bullfight: Why the financial market rally looks vulnerable

Bullfighter Francisco Rivera Ordonez 'Paquirri' of Spain performs during the first bullfight of the 2011 season after the bullfight ban at the Monumental bullring on June 26, 2011 in Barcelona, Spain. Bullfighting in Catalonia will be banned as of January 1, 2012.
Photo by David Ramos/Getty Images

COMMENTARY Stock market futures were flat Thursday as investors looked for direction a day after the Dow surged 490 points, good for its best one-day point and percentage gains since March 2009.

Although the futures market doesn't always predict how stocks will trade during the session, the uncertainty ahead of the opening bell was characteristic of recent action. The financial markets are in holiday mode -- one full of glad tidings, but with a distinct undercurrent of anxiety.

Uncertain is whether investors will maintain the festive spirit through the rest of the year. Bulls got an early present this week when the ADP jobs report showed a strong gain in private-sector employment. Other signs of life for the U.S. economy: strong consumer spending over Black Friday; surging motor vehicle sales; manufacturing growth; a rise in pending home sales; robust corporate profits; and an influx of tourists in places like Atlanta and New York. Investor confidence -- or at least hopes -- also have edged up in recent days.

The Federal Reserve's latest Beige Book report (an anecdotal compilation of regional economic conditions) underscores that the recovery, while hardly robust, is real. The bank said that economic activity increased at a "slow to moderate" pace in all but one of its 12 districts. 

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Time to crack open the eggnog? Not quite. For all the cheer Wednesday after central bankers in North America, Europe and Asia slashed borrowing costs for large financial institutions, many market watchers warn that the unusual intervention by monetary authorities to shore up the global banking system merely buys time:

"Unless this is followed by a move from the European leaders to address the real, fundamental problems I think the rally will fade," says Fred Cannon, an analyst with Keefe, Bruyette & Woods.

Previous rallies this year have faded shortly after eurozone officials tried to inoculate the 17 member-bloc against the debt crisis coursing through the region. For example, stocks in the U.S. rose more than 3 percent on Oct. 27 after European officials agreed to inject money in struggling lenders and pad a regional bailout fund. But the rally fizzled out as concerns grew about Italy, Spain and the eurozone's other so-called core economies.

That pattern -- jubilation, followed by disillusion -- has been the norm during the debt crisis. No surprise, then, that Goldman Sachs (GS) is advising investors to bet against not only high-yield European sovereign debt next year, but also against ostensibly safer 10-year German government bonds. Say researchers with the investment bank in a new report listing the firm's top three trading ideas for 2012:

"We think Euro-area economic and financial risks are likely to remain center stage for now. So our strongest market views are based around the notion that this pressure will dominate early on. We envisage further near-term downside to European assets, increased banking pressure and a likely further increase in Euro-area bond yields, including in the core economies."

Since winter is here, let's also not forget the frigid winds that continue to buffet economies around the globe. Economic growth is faltering in most of the developed world, and beginning to slow in China and other emerging markets critical to sustaining the recovery. Households remain buried in debt. Despite the uptick in U.S. job-creation, forecasters predict that the unemployment rate will still top 8 percent in 2013. Clearly, it's not only about the eurozone.

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Nor will the larger problems dogging the global economy be remedied by central bankers mainlining dollars into the financial system. Why? Because as Bank of England chief Mervyn King recently said, "Four years into the crisis it is surely time to accept that the underlying problem is one of solvency, not liquidity -- solvency of banks and solvency of countries."

Cheap bank funding courtesy of central banks may well ease investor fears for a time. But it doesn't alter the generally bleak economic picture that, as my colleague Allen Roth notes, threatens to make this year the first since 2008 in which stocks have declined.  

Season's greetings, everyone.

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    Alain Sherter covers business and economic affairs for CBSNews.com.