Monday, December 31, 2007

Stocks Stumble at Year's End

Recap of 2007 Predictions and 2008 Forecast Follows Regular Report

On the final day of 2007, stocks continued doing what they have been accustomed to in the final 5 months - they sold off from open until close.

In a market devoid of conviction over the past two weeks, stocks slipped at the opening bell, recovered some ground in the afternoon, but collapsed again into the close. If November and December are any harbingers of what's ahead, 2008 looks to be shaping up as a very challenging environment for value investors.

Dow 13,264.82 -101.05; NASDAQ 2,652.28 -22.18; S&P 500 1,468.36 -10.13; NYSE Composite 9,740.32 -63.57

Looking at just the Dow, which closed at 13,930.01, the index finished up the final two months - usually among the best for investors - nearly 700 points lower, including a ghastly close of 12,743.44 on November 26, the first "official" day of the holiday season. The number and date were notable, marking a 7-month low for the blue chips.

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While the final close was an improvement, December still registered a loss of over 100 points for the entire month, as markets took a huge bounce off that Nov. 26 low, stabilized in the mid-13,000s, but relented over the final two weeks.

On the day, declining issues stood ahead of advancers, 3435-2983. New lows closed out the year by demolishing new highs, by a 511-101 score.

Both the advance-decline line and new highs-lows have been decidedly negative for the final two months, indicating nothing but trouble heading into the new year. Stocks may be more fairly valued than they were during the summer, but the mood of investors has been significantly shaken by a continued stream of bad news from housing and credit markets.

Commodities were nearly at a standstill on Monday, with oil losing 2 cents to close at $95.98, gold off $4.70 to $838.00 and silver higher by 3 cents to $14.92.

NYSE Volume 2,440,879,750
NASDAQ Volume 1,516,866,750

How I did in 2007

Taking a look back at my market predictions for 2007, I should give myself some kind of award, because I not only was superbly close at the 2007 finish, but also foresaw much of the range. While my crystal ball anticipated highs for the Dow (~16,000) that were far ahead of reality, I caught the downdraft in the second half correctly. My analysis of the diverse indices was spot on, with, as expected, the NASDAQ leading the way, followed by the Dow and then the S&P.

Here's what I said at the end of my article on December 29, 2006:
Expected gains are 7% on the Dow, 12% on the NASDAQ and 5% on the S&P 500 at year end, though the range, especially the lows, could be dramatic.

Here's the reality:
DJIA: 12/29/06 close: 12,463.15; 12/31/07 close: 13,264.82; +6.43%
NASDAQ: 12/29/06 close: 2415.29; 12/31/07 close: 2,652.28; +9.81%
S&P 500: 12/29/06 close: 1418.30; 12/31/07 close: 1,468.36; +3.53%

My commodities forecast was so far off (I liked oil, gold and silver lower or stable) I'm not going to even comment and, since my niche is stocks, I won't make predictions on commodities any more.

2008 Forecast

With the housing market in the most severe slump in over two decades and a wrenching credit crunch limiting the lending stature of major financial institutions, 2008 looks to be the year the excesses of Bush/Greenspan policies finally begin to be paid back.

The hands-off, loose credit conditions which held sway over the first six and a half years of the promising new millennium have given way to frightened markets, shocked investors and a slew of scary predictions for the US economy and the stock markets in 2008.

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To blame Bush entirely for the current distress would be missing the point completely. It was Greenspan's Fed policy in the early years of the administration - especially his 1% "emergency" federal funds rate in 2002 and 2003 that set the stage for the subprime meltdown and credit crises in the banking sector.

2007 saw the unwinding of the mortgage market and the packaged loans that were the bread and butter of hedge funds as well as established financial institutions. Once mortgage borrowers began to default in droves, these SIVs (structured investment vehicles) fell out of favor, many of them selling off at pennies on the dollar.

The 2007 wound down, we were witness to major American financial institutions like Merrill Lynch, CitiGroup and others being forced to sell assets to foreign concerns from the Middle and Far East to secure their vary survival.

The worst is yet to come, however, as more subprime and adjustable mortgages are due to reset in 2008, which is likely to spark another round of regrets and losses from the very same banks and financial companies.

In turn, the mistrust in credit markets will lead to lower overall activity, especially in Merger and Acquisition activity while strapped consumer finally feel the pinch as well from higher energy and food prices. The only prices falling will be those of houses and stocks.

Credit concerns and the housing slump will dominate headlines though the first six months of the year, giving way to new hope for a Democratic president later in the year. But, the damage already having been done, Bush and Company will turn over to their successors an economy if not in a recession, certainly close to one.

For the full year, it's difficult to see stocks and indices any higher in 2008 than where they are right now. Life will go on, but in a much tougher environment for many Americans. The natural cycle of boom-bust will see companies from all industries laying off workers. By the end of either the first quarter or second, the US economy will almost certainly be in recession. GDP growth will be no better than 1.5% for the year and may actually turn in a negative performance.

With a recession broadly defined as two consecutive quarters of negative GDP growth, my money's on the 2nd and 3rd quarters being the worst as the Fed fights - to no avail - to fend off the inevitable.

Speaking of the Fed, it will be realized that they are somewhat impotent when it comes to using policy and rate changes to engender economic prosperity. Whatever the Fed does - and their most likely tack will be to lower rates to 3-3.5% - will be largely too little and too late.

There comes a point where pain must be spread around, and that point will occur most poignantly in the Spring and Summer of 2008.

My assessment of the year ahead is nothing short of dismal. Excesses must be wrung out and losses in US equities will be widespread. Profits will take a beating as consumer spending dries up and companies scramble to reorganize, downsize and redevelop.

The S&P 500 will lead the way lower, checking in at the end of 2008 with a 12% loss, though it's likely to be much worse during the Summer and into the fall. The Dow will end the year 9% lower, with the NASDAQ down 7%.

The mid-to-late-year losses will be more dramatic, however. Expect bottoms to be put in at roughly the 1230 level on the S&P, 11,120 on the Dow and 2250 on the NASDAQ. And even though markets may recover somewhat in the last quarter of 2008, it may take a while longer for investor confidence to return to markets. 2009 may just be the beginning of a long, slow tortuous recovery.

The US will not be the only country suffering. Europe, Japan, China and Japan will also be hard hit. Mostly spared will be resource-rich nations such as Canada, Russia and much of South America and the Middle East. Australia will muddle through, though they will still be dealing with an intense, decade-long drought.

Get ready. 2008 figures to offer a very bumpy ride for your money.

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