Saturday, January 12, 2008

Baby It's Cold Outside

It didn't take much time for the market to hit official correction territory from its October 2007 high. After a dismal drop at the end of 2007 and two weeks of trading in the new year, the S&P 500 and the Dow Jones Industrial Average have managed to retreat to that 10% milestone. The January trading barometer, which states that the first 5 days of trading in January set the tone for the month is indicating a chilly month ahead. While the indicator, popularized in 1972 by Yale Hirsch of the Stock Trader's Almanac is quite accurate (91%) when the first five days are positive, the accuracy is only 45% when the first five days are negative. I guess it is really way to early to try to figure out what the year ahead may be bringing, although most of those participants in the Barron's Roundtable seem to think the market won't even begin to come back to life until the second half of the year.

The small nuggets of upbeat earnings news were pretty much drowned out by a continued litany of economic and financial problems. The Dow Jones Industrial Average fell 246 points, or 1.9%, to 12,606 on Friday, losing 1.5% for the week. Since the start of 2008, the Dow has now lost 658.52 points, or 5%. The S&P 500 index was off 1.4% Friday and fell 0.7% for the week. The Nasdaq Composite dropped 2% Friday for a weekly loss of 2.6%.

Fear of bankruptcy at Countrywide Financial led to a 238-point plunge in the Dow on Tuesday, followed by another big drop Friday, even as Bank of America said it would buy the troubled mortgage lender for $4 billion. A year ago, Countrywide's market value was $24 billion. Seems like Bank of America may have gotten a pretty good deal on this transaction, which will be an all stock deal.

Meanwhile, results at major financial firms are expected to continue to reflect the impact of bad bets in subprime mortgages. Citigroup is expected to report earnings on Tuesday, along with US Bancorp and State Street Corp. J.P. Morgan Chase reports on Wednesday, along with Wells Fargo Co. and Northern Trust. Washington Mutual, Merrill Lynch, Bank of New York, and PNC Financial report on Thursday.

Intel's earnings on Tuesday along with IBM's results on Thursday could also further test recent market hopes that the technology sector might continue to benefit from global growth even as the U.S. slows down. Yet, those hopes have waned in the market, with the tech-heavy Nasdaq Composite posting some of the worst losses of major indexes, losing 8% since the start of the year. Investors will also monitor the results and forecasts of industrials giant General Electric Co., which reports Friday, for clues on global growth.

Some key data will also be closely monitored next week, with investors on high alert for signs that the economy might slide into recession. Tuesday will bring reports on December producer prices, retail sales and a key business survey in the New York region. Wednesday will see the release of the December consumer price index, industrial production data, a housing market index, along with the Federal Reserve's Beige Book of economic conditions.

On Thursday, December housing starts, weekly jobless claims and the Philadelphia Fed survey will be released. Friday will bring a key consumer sentiment survey along with leading economic indicators. With oil sitting near $100 a barrel, gold topping $900 an ounce on Friday, and food prices surging, investors remain worried that inflation pressures might prevent the Fed from cutting interest rates as much as hoped. However, "the U.S. economy seems to be facing ever-greater risks of entering a recession, in the light of the latest statistics on unemployment, activity in the manufacturing sector and household confidence," said Philippe D'Arvisenet, an economist at BNP Paribas, in a note. "Under these conditions, the Fed should give priority to avoiding a recession, pushing its concerns about inflationary risks onto the backburner," he said.

I'm sure all eyes will be on the Fed at the end of the month when the Federal Open Market Committee meets. Investors are anticipating a 1/2 point cut in the Federal Funds Rate at that meeting. Unfortunately, it really doesn't seem like monetary policy will be enough to breathe life into the stock market in the short term. There are a lot of excesses which have to be wrung out of the system, and it could mean some short term pain.

John Kaighn

Jersey Benefits Advisors

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