Money Morning's Three-Minute Review: How Last Week's Events Will Shape This Week's Action

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Last week, investors worldwide were hoping for a holiday respite from the financial-market uncertainty and geopolitical turmoil that was the hallmark of 2007. They wanted to forget about the imploded U.S. housing market, the subprime-mortgage debacle, the ongoing credit crisis, escalating oil prices, the yearly "gloom-and-doom" forecasts issued by retailers every year at this time.

 They wanted to focus on time with family and friends, and to enjoy holiday cheer - and to escape the uncertainty and nervousness of the U.S. economy and U.S. stock markets.

But it didn't happen.

Nor will there be an easy escape in 2008.

Indeed, the watchword of 2008 will be "decoupling." Increasingly, we're going to see how the U.S. market is no longer the catalyst for the remainder of the global economy.

For instance, as of the end of last week, the Dow Jones Industrial Average had returned 7.19% for 2007. The tech-laden NASDAQ Composite Index had returned 10.83%, while the broader Standard & Poor's 500 Index returned 4.09%.

But many indexes overseas - especially those in Asia - did much better. China's Shanghai Composite Index returned 96.7%. Jakarta's JSX Index returned 52.1%. South Korea and Malaysia both advanced by about a third in 2007.

[For a Money Morning Special Investment Research Report on the outlook for U.S. stocks in the New Year, please click here. The report is free of charge].

Market/Index

Previous Week
(12/21/07)

Current Week
(12/28/07)

YTD Change

Dow Jones Industrial

13,450.65

13,365.87

7.24%

NASDAQ

2,691.99

2,674.46

10.73%

S&P 500

1,484.46

1,478.49

4.24%

Russell 2000

785.61

771.76

-2.02%

Fed Funds

4.25%

4.25%

-100 bps

10 yr Treasury (Yield)

4.17%

4.10%

-61 bps

The Week in Review

Last week, instead were reminded that the world still is a very dangerous place and that geopolitical developments can be even more devastating than fraudulent mortgages or earnings warnings.  Former Pakistani Prime Minister and current opposition leader, Benazir Bhutto, was shot and killed last Thursday and suddenly that already volatile region was thrust into even greater turmoil.  Pakistan sits right next to Afghanistan and, as a recipient of billions in government assistance, the country is considered among the most crucial U.S. "partners" in the war on terror.  The Pakistan economy, and its markets, were performing incredibly well as of late and offered some stability to a very frightening part of the world.  Pakistan's gross domestic product (GDP) growth had averaged almost 7% over the past five years, and its benchmark KSE-100 was up 40% this year - even after plunging 4.7% on Monday.

Oil prices climbed above $96 a barrel on the news of her death and concerns about new regional (rather global) instability.  Earlier last week, skirmishes between Turkey and the Kurds prompted added uncertainty about future supply issues.  To exacerbate matters, inventories of crude and heating oil declined last week by larger-than-expected percentages, and oil prices suddenly were again on the rise and talks about that dreaded $100 mark were back on the front burner.

The $8 billion in expected mortgage write-downs that Citigroup Inc. (C) investors were fretting about earlier in the year are now looking like bargains.  These days, analysts believe that $18 billion may be a more accurate estimate [what's an extra $10 billion between friends, after all?], and the bank is rumored to be trimming its dividend by about 40%, a trend that may become quite common during 2008. Even so, Citi has gained the financial support of a sovereign wealth fund - to the tune of $7.5 billion - and  may well represent a bargain-basement investment [For a Money Morning investment research report on Citigroup, please click here. The report is free of charge].

Recently UBS AG (UBS) issued a stock dividend instead of a cash dividend, a move designed to bolster its liquidity position.  And, in another recent report, Merrill Lynch & Co. Inc. (MER) went even more global by shoring up its balance sheet through a sovereign-wealth-fund private placement - thanks to Singapore's Temasek Holdings Pte. Ltd.

Investors were hoping that the prior Friday's strong equity market performance would lead to a year-end Santa Claus Rally [see below].  Instead the devastating news out of Pakistan put a damper on the holiday season and brought renewed caution and uncertainty.  With many traders and investors taking the week off, volume was far lighter than usual, a phenomenon that often leads to increased volatility and exaggerated price swings.

Economically Speaking...     

*  Reflects changes in interest rates over various time frames. 

Weekly Economic Calendar

Date

Release

Comments

December 25

Christmas Day

Hope you had a "Merry" one

December 27

Durable Goods (11/07)

Slight increase for 1st time in 4 months

 

Initial Jobless Claims (12/22/07)

Surprising jump in filings last week

 

Consumer Confidence (11/07)

Best showing since July

December 28

New Home Sales (11/07)

Fell to lowest level in 12 years

The Week Ahead

December 31

Existing Home Sales (11/07)

 

January 1, 2008

New Years Day

 

January 2

Construction Spending (11/07)

 

 

ISM Manu Index (12/07)

 

 

Fed Policy Meeting Minutes

 

January 3

Factory Orders (11/07)

 

January 4

Unemployment Rate (12/07)

 

 

Nonfarm Payroll Additions (12/07)

 

 

ISM Services Index (12/07)

 

Just a week ago, stock-market bargain hunters seemed to be on the prowl, hoping to get a jumpstart on the January Effect, a theory that stocks rise during the first five trading days of the New Year.  In general, many investors take some end-of-year profits, harvest some "unfortunate" losses [which may mean fewer taxes], and raise some much needed cash to pay for those expensive holiday gifts.

These market moves have little-to-nothing to do with the overall U.S. economy or with corporate fundamentals. So when January then rolls around, investors put their dollars back to work and the markets tend to trade higher, at least, during those first few days.  The Santa Claus Rally implied that the "brightest of the bright" anticipate the January Effect and buy just a few days earlier.  That notion appeared to be right in line this year...until the afore-mentioned untimely death of Bhutto.

Though few folks were probably watching last week, housing continued to struggle with a report that home prices plunged more than 6% in 20 major domestic cities, according to the Standard & Poor's Corp.'s Case-Shiller Home Price Index.  Additionally, new home sales in November dropped to the lowest level in more than 12 years.

The holiday season remained worrisome with discount giant Target Corp. (TGT) warning that December sales will come in well below prior expectations.  Durable goods orders increased by a slight 0.1%, although economists had been calling for a more-substantial increase.

And a greater number of workers [technically, now ex-workers] filed for unemployment benefits in the prior week. [On a positive note...thankfully, few were paying attention].

Here's to a Happy New Year, one of peace on earth, and greater stability in the economy and in the stock markets, both here in the United States and in markets overseas.

And please know this: We'll be here for you throughout 2008. May good fortune be yours.

News and Related Story Links:

  • NewsDaily:
    Turkey Hit Kurd Rebels Hard.

  • Science News Online:
    A Super Bowl Lift.

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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