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I do not see market plunge for December,a sharp slowdown looks very likely for 2008
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It's been five years since U.S. stocks took as big a beating as they did this month, but their climb out of the cellar this week has fed optimism that November may not be the dawn of a bear market after all.Although I expect a new correction phase in 2008, I do not see a bear market for now.
Just four days ago U.S. equity index benchmarks were all 10 percent or more below their 52-week highs, marking the first formal market correction in more than four years.
At the time, rattled investors appeared convinced that the unraveling of the housing and credit markets had much further to go, and stocks were not the place to be.
But in a wink, the mood changed. In a deal announced between Monday's market close and Tuesday's open, an Abu Dhabi government fund forked over $7.5 billion for a stake in Citigroup triggering four days of gains for the Dow and S&P 500 to close out the month.
I have a feeling the worst of the correction is behind us.The chances of this becoming a full-blown bear market are pretty small.
The Abu Dhabi deal appeared to advertise what some investors had been arguing for weeks: stocks were bargains, and financial sector stocks were doubly so.
Indeed, standard valuation methods suggested stocks were their cheapest in more than a decade. The S&P 500's forward price-to-earnings ratio, based on projected earnings for the coming 12 months, troughed below 13.7 on Monday, their least expensive since 1996.
Financial sector valuations had suffered more than others, dropping about 15 percent since mid-October to as low as 9.4 times estimated earnings as the outlook for bank profits eroded thanks to the credit crisis. At Monday's low, the S&P financial index was more than 25 percent below its record high in late May.
Even with the rebound since Monday, stock investors took a bruising in November, and not everyone is ready to say the worst is past.
The Standard & Poor's 500 .SPX and Dow Jones industrial average .DJI each fell about 4.4 percent on the month, their biggest monthly drops since December 2002 when the current bull market was in its infancy. The Nasdaq fell 6.9 percent, its worst monthly showing since July 2003.
When technology, industrial or consumer cyclical stocks head the pack, as was the case earlier in the year, it suggests the broader market will rise because these sectors point to confidence in the economic outlook.
Yet the standouts for most of November were consumer staples, healthcare, and utilities, encompassing companies providing the bare essentials, like food, medicine and electricity, that remain in demand even when the economy falters. S&P consumer staples rose 2.9 percent since October 31, while health stocks gained 0.9 percent and utilities edged up by 0.1 percent.
In fact, utilities and consumer staples are the only groups to have experienced earnings multiple expansion this month, meaning their share gains have outpaced earnings growth expectations, while healthcare has held steady.
The worrisome leadership aside, bulls point to tame inflation, expectations for additional Federal Reserve rate cuts, and compelling valuations against competing assets, notably bonds, as strong reasons to back equities.
The earnings yield on stocks is near 7.0 percent, compared with a 10-year U.S. Treasury note yield below 4 percent.
That is helping to attracting foreign buyers for stocks, as the Abu Dhabi deal with Citigroup illustrates. Fund flows tracking group EPFR Global noted that U.S. equities attracted $7 billion of new money this week, the only major regional equity group to attract inflows.
Furthermore, foreigners are looking and saying, 'Hmm, look at what we can buy cheap, look at where the dollar is, look at what we can do,'"
Where the dollar is headed to?
At a time when everyone from billionaire investors such as Warren Buffett and Bill Gross to celebrities want nothing to do with the dollar, a growing number of strategists say the stage is being set for a rally in 2008.
The U.S. budget and trade deficits are narrowing in tandem for the first time since 1995, when the currency gained 8 percent as measured by the Federal Reserve's U.S. Trade Weighted Dollar Index.
It is very possible that the dollar will have a significant rally next year, especially against the euro and the pound.The deficits are shrinking fast.
The dollar traded at $1.4666 against the euro as of 8:29 a.m. in London, from $1.4633 at the end of last week.
While Berkshire Hathaway Inc. Chairman Buffett and Gross say investing in U.S. financial assets is a losing proposition as the nation's economic and political dominance wanes, improvements in the deficits may provide a respite for the dollar after it tumbled 12 percent this year. Gross manages the world's largest bond fund as chief investment officer of Pacific Investment Management Co. in Newport Beach, California.
Currency Forecasts
The currency may appreciate 7 percent against the euro in 2008 from a record low of $1.4967 reached on Nov. 23, according to the median forecast of 38 strategists by Bloomberg. Frankfurt- based Deutsche Bank AG, the world's largest currency trader, expects the dollar to rise 4.3 percent. Royal Bank of Scotland Group, the U.K.'s second-biggest bank, reversed its outlook last week and predicts the dollar will appreciate.
A depreciating dollar has helped American exports rise to records in each of the past seven months, the longest streak since 2000. The trade deficit narrowed to $56.5 billion in September from the record $67.6 billion in August 2006, data compiled by the Commerce Department show.
Both President George W. Bush and Treasury Secretary Henry Paulson have hailed exports as a bright spot in an economy that's mired in the worst housing slump in 16 years. Paulson, who has said having a strong currency is in the national interest, added on Nov. 16 that the ultimate value of the dollar will reflect ``long-term strength'' in the American economy. A narrowing deficit means fewer dollars are being converted to foreign currencies through trade. The U.S. Treasury sets dollar policy.
No `Heat'
The budget deficit for fiscal 2007 ended Sept. 30 shrank to $162.8 billion, according to Treasury data. It is the smallest shortfall since $158 billion in 2002, and down from $413 billion in 2004, according to the Treasury.
``The twin deficits have been feeding a bearish dollar market over the past few years,'' said Michael Malpede, an analyst in Chicago at MF Global Ltd., the world's largest broker of exchange-traded futures and options. ``If the deficits continue to show improvement, they will definitely take some heat off the dollar.''
The dollar posted its largest weekly gain since August versus the euro, rising 1.4 percent, after Federal Reserve Chairman Ben S. Bernanke signaled he may lower interest rates for a third time since September to bolster growth, reducing concerns about recession. It strengthened 2.7 percent last week versus the yen, its biggest increase since the period ending Dec. 10, 2004.
Dollar Bears
Only New York-based Citigroup Inc. and Merrill Lynch & Co., Amsterdam-based ABN Amro Holding NV, the investment-banking unit of Toronto-based Bank of Nova Scotia, and Johannesburg-based Standard Bank Group Ltd. are predicting a drop next year for the dollar among the 38 securities firms surveyed over the past month. They each see it depreciating to at least $1.47 per euro.
Even if the current-account deficit would get smaller, it is still very difficult for the U.S. to finance it with interest rates falling.
Both Buffett, the world's third richest man as measured by Forbes Magazine, and Gross, who Forbes says is worth $1.2 billion, have said they're bearish because interest-rate cuts by the Fed dim the allure of U.S. assets.
Buffett told reporters in South Korea on October 25 that he bought stocks in companies that earn money in other currencies. Gross said he expected the Fed to cut borrowing costs to around 3.5 percent over the next 12 to 18 months. The central bank's target rate for overnight loans between banks is 4.50 percent.
Fed Rates
The dollar lost 40 percent of its value against the euro during its five-year slide as widening deficits raised concern over the capability of the U.S. to attract foreign money. Former Fed Chairman Alan Greenspan said in November 2004 that overseas investors will eventually tire of funding the current-account gap and may channel money into other currencies.
Plus, Buffett and Gross may turn out to be right if the worst housing market in 16 years pushes the economy into recession, further diminishing the dollar's appeal which I do agree.I do not see recession. |
| Tarih
: 03.12.2007 |
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© 2006 Mert TOKER All Rights Reserved. |
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