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By William Patalon III
Money Morning/The Money Map Report
Don't let the stock market get you down.
The so-called January Effect – the old adage that the first five trading days of the year usually determine whether or not the markets are headed for positive annual gains – certainly didn't fuel investor optimism.
Now we must closely watch how the three major U.S. indices do for the full month. Here's why: Yale Hirsch of the Stock Traders Almanac discovered that every time the Standard & Poor's 500 Index posted a loss for the full month of January, a flat market – or a new, extended bear market – always followed.
What's more, Hirsch also found that a loss for January is followed by a market decline for the year that averages 13%.
Given all this, if we were to base all our expectations only on what we've seen in January, investors might be inclined to open up a certificate of deposit (CD), and leave it at that.
The first five trading days of the New Year were lousy. The Dow Jones Industrial Average dropped by 5.1% during that stretch, its worst five-day performance [measured in terms of the percentage decline] since 1978. The broad-based S&P 500 declined 5.3%, and both the tech-heavy NASDAQ Composite Index and small-cap Russell 2000 plunging by 8%. The remainder of the week did not represent much of an improvement for investors, thanks to the emergence of new credit worries, spiraling concerns about current/future consumer activity, and growing prospects for a weak earnings season.
So far in January, the Dow is down 4.96%, the S&P is off 4.59% and the NASDAQ has skidded an alarming 8.01%.
Fortunately, however, we here at Money Morning aren't deterred by such numbers, or by the dire outlook for U.S. stock prices that these figures portend. The reason: They deal with U.S. stocks only, and with the broad averages, at that.
As Money Morning readers know, we scour the globe for investment opportunities. And, knowing that liquidity is what drives stock prices, we "follow the money" to ferret out the best-possible plays.
Nor will we ignore the U.S. market. There are plenty of U.S.-based "Global Titans," companies with their headquarters in the United States, but which derive a big percentage of their income from fast-growing markets overseas. [One such player is Yum! Brands Inc. (YUM)]. And there are some excellent Contrarian "turnaround" plays – such as Citigroup Inc. (C) – in among the subprime rubble.
So where most investors see only a cause for concern, we only see opportunities.
10 yr Treasury (Yield)
While aluminum giant Alcoa Inc. (AA) kicked off the 4th quarter earnings season with better-than-expected results, most analysts remain very worried about the reporting season's overall results. Last quarter, S&P 500 companies reported that earnings declined 4.5% from the same quarter the year before and "the Street" consensus currently calls for the current quarter's profits to drop 10%, with financial institutions leading the way.
Merrill Lynch & Co. Inc. (MER) and Citigroup Inc. (C) each report this week and rumors have both mega-firms seeking additional capital infusions from foreign sources to help cover their escalating write-offs. [Surely, Abu Dhabi and China still have interest, but at what cost to current shareholders … but then, what choice do they have?]. JPMorgan Chase & Co. (JPM) also is on the schedule to report this week, and the scuttlebutt is that the company is in merger talks with Washington Mutual Inc. (WM), another big-name victim of the subprime-mortgage fiasco.
When it comes to these rumors, it's often a case of the old adage "where there's smoke, there's fire" – although the story can change from one day to the next. Early last week, for instance, traders were speculating that Countrywide Financial Corp. (CFC) would seek bankruptcy protection; by the week's close, however, Bank of America Corp. (BAC) stepped forward as a "White Knight," and agreed to buy the beleaguered mortgage lender for an estimated $4 billion [BAC will likely inherit a ton of headaches as part of the deal].
In the meantime, consumer activity may be coming to a standstill as both American Express Co. (AXP) and Capital One Financial Corp. (COF) warned of slower credit card spending (and higher delinquencies) and AT&T Inc. (T) claimed customers aren't paying their bills [For more detail on this controversial claim by the former Ma Bell, please click here].
Retailers are still grousing about how poorly they fared in the recently concluded holiday shopping season, especially after learning that same-store sales for December were much weaker than most expected. According to some reports, it was the worst holiday retail season in five years.
Though Wal-Mart Stores Inc. (WMT) benefited from a new [and growing] breed of discount shoppers, Macy's Inc. (M), AnnTaylor Stores Corp. (ANN), and Limited Brands Inc. (LTD) [among others] all suffered as higher gas prices and a sluggish housing market continued to compress the amount of money that consumers actually have available to spend.
While the December results were quite disappointing, some analysts point to the extra week of shopping in November following Thanksgiving, and believe that the two months should be viewed together to present a more-accurate picture of the 2007 holiday-shopping season.
Fast-food giant McDonald's Corp. (MCD) is apparently trying to capitalize on this newly emergent consumer frugality: The company announced it will install coffee bars in 14,000 of its locations to compete against its new, higher-priced rival, Starbucks Corp. (SBUX). We can see it now: "Would you like a decaf MacFrappuccino to go with your Egg Mac Muffin?
By any yardstick, the markets have gotten off to a horrendous start in 2008 – unless you invest in gold, which late last week hit an all-time high around $900 [For a related news story on gold's surge to record levels, please click here].
The economic and financial outlooks appear somewhat dire, with fears of inflation, a recession – or both – circling higher by the day. But some among the "Bulls" see reasons for an improved outlook. One such cause for optimism came last week in the form of some comments from U.S. Federal Reserve Chairman Ben S. Bernanke, who said the nation's central bank was ready to take "substantive additional action" in the face of a weakening U.S. economy [for additional details, read on….].
The policymaking Federal Open Market Committee, or FOMC, is scheduled to meet Jan. 29 and Jan. 30. Some experts wonder if the central bank might not cut interest rates even before that meeting.
Weekly Economic Calendar
Consumer Credit (11/07)
Higher level of borrowing means more retail spending
Initial Jobless Claims (01/05/07)
Lower number of claims, though year-end adjustments
Balance of Trade (11/08)
Surging oil prices led to highest deficit in 14 months
The Week Ahead
Retail Sales (12/07)
Industrial Production (12/07)
Fed Beige Book
Housing Starts (12/07)
Initial Jobless Claims (01/12/07)
Leading Eco Indicators (12/07)
With very little data reported last week, attention shifted to the policymakers, analysts, and pundits for their perspectives of the economy. According to the latest WSJ.com survey, 42% of economists polled believe that a recession is inevitable. Goldman Sachs Group Inc. (GS) is in that camp, and expects U.S. Gross Domestic Product (GDP) to turn negative in both the 2nd and 3rd quarters of 2008. Merrill Lynch pointed to the recent labor numbers and claimed that the rising rate of unemployment will serve as a catalyst for recession. While U.S. Treasury Secretary Henry Paulson thinks the "R" word is still avoidable [though we wonder if he has to say that in order to appease his boss?], he warned that the mortgage debacle is now hurting more mainstream homeowners – and not just those with subprime loans.
In response to all of his, Fed Chair Bernanke said that the central bank stands ready to take "substantive additional action as needed to support growth and to provide adequate insurance against downside risks."
A key cohort, Philly Fed President Charles Grassley, thinks that "the weak U.S. economy will improve appreciably by the second half of the year" – although he noted his concerns about "worrisome signs of underlying price pressures." Many Fed-watchers are now expecting a rate cut of half a percentage point – or more – at the Jan. 30 FOMC meeting.
If not before that time, as we noted above.
While the RBC Cash Index – yet one more measure of all-important consumer confidence – dropped to a new low last week, consumer credit actually climbed in November to its highest level in three months. [Bear in mind, again, that the extra shopping week after Thanksgiving may have skewed some of these retail numbers].
While a weaker dollar led to record U.S. exports in November, the skyrocketing oil prices contributed to the highest trade deficit in 14 months.
If nothing else, with the Super Bowl looming and news that race-car testing is already under way for the big, season-opening February NASCAR race at Daytona International Speedway [watch Money Morning favorite Sterling Marlin], baseball's spring training will be here before you know it. With the arrival of spring, there will be no more worries about heating-oil prices, blizzards that interrupt commerce, and the general gloom that invariably seems to accompany the post-holiday, cold-weather months.
And that always seems to make economic sentiment a bit better.
News and Related Story Links:
- Money Morning Investment Analysis Story:
January Effect Chills Investors with Gloomy 2008 Outlook
- Money Morning Investment Analysis:
2007: The Worst Holiday Shopping Season in Five Years?
- Money Morning News: z
- Bernanke Says Fed is Ready to Act
- Money Morning News:
Goldman Sachs Predicts Recession… in Japan
- Money Morning News:
Pending Home Sales Sink In November Indicating a Weak Start to the New Year
- Bloomberg News:
|Citigroup May Turn to Alwaleed, China for Cash to Offset Losses
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. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.