Special Online Event – A Year In Review and the Year Ahead!
The stock market is giving us a "Santa Claus rally" and the quadruple witch is helping to fuel the action. It is futile to try and guess which way prices might swing during next week's light action and abbreviated holiday week. Consequently, let's reflect on 2007.
As we conclude the year, we can look back and see some definite patterns developing. Trading in 2007 was characterized by steady rallies and very sharp declines. Going into the year, option implied volatilities were near historical lows. Each successive decline was deeper and lasted longer. Consequently, option implied volatilities increased substantially.
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There are signs of an economic slowdown and the Fed is trying to be preemptive. They have lowered the Fed funds rate, they have lowered the discount window rate and they are pumping liquidity into the monetary system by holding special auctions. The Treasury Department jumped in with a voluntary mortgage rate adjustment program to address the rising number of foreclosures. The European Central Bank chimed in with a half-trillion dollar of liquidity and that lowered the LIBOR rate.
Economic conditions are not so dire everywhere. In fact, China has raised rates five times this year and they have increased the banking reserve requirements 10 times. They want to slow down a runaway economy. Their stock market has rallied 600% in three years and they are mandating that pension funds diversify their assets. The country is sure to have its best foot forward during the Olympics, but after that I would be a cautious investor there.
Global economic expansion has come at a cost - inflation is on the rise. Last week the CPI and the PPI posted huge gains. The demand for raw materials worldwide is pushing up prices. Meanwhile, loose monetary policy in the US has devalued the dollar. It currently trades near 30 year lows compared to most major currencies. A weak dollar is inflationary because it costs us more to import goods (like oil). The Fed is handcuffed and they will not be able to lower interest rates in an inflationary environment even if the economy continues to slip.
An interesting year lies ahead. On the bullish side of the coin, after-tax fixed income yields are barely keeping up with inflation and the stock market represents a good relative value with reasonable P/Es. The spread between the dividend yield on the S&P 500 and the 90-day T-Bill Rate is narrowing. Corporations are benefiting from global expansion and their balance sheets are strong. They continue to buy back shares at a record pace and that is also supporting prices. On the negative side, financial stocks make up a huge percentage of our market cap and they are extremely weak. The US consumer accounts for about 18% of the world's GDP. If we get a sniffle, the rest of the world catches a cold.
During hyper-growth periods, inefficient companies can compete. When those conditions change, only the strong survive as profit margins contract. Imagine the excess that must exist in a country like China where growth has been "off the charts". If our current credit woes are a black hole of uncertainty, what bestows a market where transparency is low, lending practices are unknown and the market gains are parabolic? I’m certain that the financial institutions in China are not as savvy as those found in the US and look at the pile of @#$% we stepped into.
I haven't even mentioned the election or the war in Iraq/Afghanistan. The 2007 spike in option implied volatility is likely to last well into 2008. I trade stocks with relative strength and weakness and I'm looking forward to many opportunities on both sides of the market.
As a sidenote, on Friday December 28th at 8:00 pm CT I will be hosting a special 2-hour webinar. I will start by reviewing the market on a technical and fundamental basis and I will reveal my market forecast for 2008. Next I will give attendees a tour of the Daily Report. We will spend most of our time on the Live Update page. I will analyze many of the stocks in my bullish and bearish watch-lists and I will highlight my favorite plays for 2008.
The event will only be available to paid subscribers (any OneOption, LLC service) and the invitation is going out Sunday night (December 23rd). I will arm you with many trading ideas and this webinar alone is worth the price of a quarterly subscription. Customers that can’t attend will receive a special e-mail with a link to the archived event. Don't miss this event, subscribe today!
.
There are signs of an economic slowdown and the Fed is trying to be preemptive. They have lowered the Fed funds rate, they have lowered the discount window rate and they are pumping liquidity into the monetary system by holding special auctions. The Treasury Department jumped in with a voluntary mortgage rate adjustment program to address the rising number of foreclosures. The European Central Bank chimed in with a half-trillion dollar of liquidity and that lowered the LIBOR rate.
Economic conditions are not so dire everywhere. In fact, China has raised rates five times this year and they have increased the banking reserve requirements 10 times. They want to slow down a runaway economy. Their stock market has rallied 600% in three years and they are mandating that pension funds diversify their assets. The country is sure to have its best foot forward during the Olympics, but after that I would be a cautious investor there.
Global economic expansion has come at a cost - inflation is on the rise. Last week the CPI and the PPI posted huge gains. The demand for raw materials worldwide is pushing up prices. Meanwhile, loose monetary policy in the US has devalued the dollar. It currently trades near 30 year lows compared to most major currencies. A weak dollar is inflationary because it costs us more to import goods (like oil). The Fed is handcuffed and they will not be able to lower interest rates in an inflationary environment even if the economy continues to slip.
An interesting year lies ahead. On the bullish side of the coin, after-tax fixed income yields are barely keeping up with inflation and the stock market represents a good relative value with reasonable P/Es. The spread between the dividend yield on the S&P 500 and the 90-day T-Bill Rate is narrowing. Corporations are benefiting from global expansion and their balance sheets are strong. They continue to buy back shares at a record pace and that is also supporting prices. On the negative side, financial stocks make up a huge percentage of our market cap and they are extremely weak. The US consumer accounts for about 18% of the world's GDP. If we get a sniffle, the rest of the world catches a cold.
During hyper-growth periods, inefficient companies can compete. When those conditions change, only the strong survive as profit margins contract. Imagine the excess that must exist in a country like China where growth has been "off the charts". If our current credit woes are a black hole of uncertainty, what bestows a market where transparency is low, lending practices are unknown and the market gains are parabolic? I’m certain that the financial institutions in China are not as savvy as those found in the US and look at the pile of @#$% we stepped into.
I haven't even mentioned the election or the war in Iraq/Afghanistan. The 2007 spike in option implied volatility is likely to last well into 2008. I trade stocks with relative strength and weakness and I'm looking forward to many opportunities on both sides of the market.
As a sidenote, on Friday December 28th at 8:00 pm CT I will be hosting a special 2-hour webinar. I will start by reviewing the market on a technical and fundamental basis and I will reveal my market forecast for 2008. Next I will give attendees a tour of the Daily Report. We will spend most of our time on the Live Update page. I will analyze many of the stocks in my bullish and bearish watch-lists and I will highlight my favorite plays for 2008.
The event will only be available to paid subscribers (any OneOption, LLC service) and the invitation is going out Sunday night (December 23rd). I will arm you with many trading ideas and this webinar alone is worth the price of a quarterly subscription. Customers that can’t attend will receive a special e-mail with a link to the archived event. Don't miss this event, subscribe today!Daily Bulletin Continues...