Jan. 2 (Bloomberg) -- Platinum rose to a record, extending a six-year rally, as the dollar's decline against the euro boosted the metal's appeal as an alternative investment. Palladium also gained.
The dollar weakened against 13 of the 16 most-actively traded currencies as traders bet the U.S. Federal Reserve will cut borrowing costs at least twice in 2008. The weaker dollar helped platinum to a 33 percent gain in 2007, outpacing gold's 31 percent increase.
``Demand should remain strong in 2008 and dollar weakness continues to support higher metal prices, including platinum at record highs,'' said Walter Otstott, a senior broker at Dallas Commodity Co. in Dallas. ``I expect palladium to follow.''
Platinum futures for April delivery rose $20.60, or 1.4 percent, to $1,546 an ounce on the New York Mercantile Exchange. The price earlier reached a record $1,552 an ounce.
Palladium futures for March delivery rose $1.70, or 0.4 percent, to $379.90 an ounce. The metal climbed 12 percent last year, gaining for the third year in a row.
Platinum and palladium are used to make automobile emission-control devices and jewelry.
``Platinum is behaving much a like a precious metal rather than an industrial one,'' said Ralph Preston, a strategist at Heritage West Financial Inc. in San Diego. ``I'm anticipating $2,000-plus platinum this year'' as the metal outpaces gold, he said.
The dollar fell as low as $1.475 per euro today in New York, from $1.4592 yesterday. The currency dropped to $1.4967 on Nov. 23, the lowest since the euro's introduction in 1999.
Wednesday, January 2, 2008
U.S. Stocks Drop, Sending Dow Average to Worst Start Since 1983
Jan. 2 (Bloomberg) -- U.S. stocks tumbled, led by banks and computer companies, after the biggest decline in manufacturing in five years sent the Dow Jones Industrial Average to its worst start since 1983.
Intel Corp., the largest semiconductor maker, fell the most in almost a year after Bank of America Corp. lowered its rating and investors speculated companies will spend less on technology. Caterpillar Inc., the largest maker of earthmoving equipment, and International Business Machines Corp., the biggest computer services company, led the Dow Jones Industrial Average to a 1.7 percent plunge.
The Standard & Poor's 500 Index lost 21.20, or 1.4 percent, to 1,447.16, the most to start a year since it fell 2.8 percent on Jan. 2, 2001. The Dow average slipped 220.86 points to 13,043.96. The Nasdaq Composite Index decreased 42.65, or 1.6 percent, to 2,609.63. More than three stocks fell for every one that rose on the New York Stock Exchange.
The decline in the Institute for Supply Management's manufacturing index ``increases the odds we're going to go into a recession, and recessions are associated with bear markets,'' Brian Gendreau, who helps manage $12 billion at ING Investment Management in New York.
The ISM index dropped to 47.7, the lowest since April 2003 and the first reading below 50 since last January. The report, combined with a rise in the price of oil to a record $100 a barrel, spurred concern that a slowdown in spending will halt the five-year economic expansion.
Treasuries Rally
Two-year Treasuries rose the most in more than three weeks after the ISM report, while the dollar fell against the euro and yen, as traders increased bets the Federal Reserve will lower the benchmark interest rate half a percentage point at its next meeting.
Concern that credit-market losses will curb bank lending and spur a recession sent the S&P 500 down 3.8 percent in the fourth quarter, cutting the gauge's 2007 gain to 3.5 percent. Financial shares in the S&P 500 fell 2.5 percent, extending a 21 percent slide in 2007 that was their biggest in 17 years.
Intel lost $1.31 to $25.35, leading semiconductor makers in the S&P 500 to a 3.7 percent retreat, the biggest since July 2006 and the most among 24 industry groups in the index. Profit growth that exceeds analysts' estimates ``will be hard to come by,'' Bank of America analyst Sumit Dhanda wrote in a note to clients today.
Bank of America trimmed its forecast for semiconductor sales growth this year to 7 percent from 11 percent.
Advanced Micro, National Semi
Advanced Micro Devices Inc., National Semiconductor Corp. and LSI Corp. were downgraded to ``sell'' from ``neutral.'' Advanced Micro fell 36 cents to $7.14, National Semiconductor lost $1.23 to $21.41, and LSI decreased 43 cents to $4.88.
Intel, Analog Devices Inc., Semtech Corp., Texas Instruments Inc. and Power Integrations Inc. were downgraded to ``neutral'' from ``buy.'' Texas Instruments fell $1.05 to $32.35 and Analog Devices sank $1.33 to $30.37.
The price-weighted Philadelphia Semiconductor Index fell 2.8 percent to the lowest since July 2006.
National City Corp., Ohio's largest bank, led declines in financial shares, falling 87 cents to $15.59 after cutting its dividend by 49 percent to offset losses in the housing market. Morgan Stanley, the second-biggest U.S. securities firm, fell $2.16 to $50.95. Fannie Mae, the largest provider of money for home loans, decreased $2.52 to $37.46.
`Second Shoe'
``If we get a cyclical drop in the economy then we have to worry about traditional credit losses coming in, which would be a second shoe to drop for the financials,'' said Alan Gayle, senior investment strategist and director of asset allocation at Trusco Capital Management in Richmond, Virginia, which oversees $17 billion of equities.
The Dow average gained 6.4 percent in 2007 and the Nasdaq rose 9.8 percent, its steepest yearly advance since 2003. The S&P 500's 3.5 percent increase extended to five years its streak of annual advances.
Wall Street strategists forecast gains for U.S. stocks in 2008. The S&P 500 may climb 11 percent in 2008, extending the five-year bull market, according to the average forecast from 15 strategists surveyed by Bloomberg.
Analysts are bullish even as economists predict a slowdown in the U.S. Gross domestic product probably grew at an annual rate of 1 percent in the final three months of 2007 and will expand 1.5 percent this quarter, according to the median forecast of economists polled by Bloomberg last month. That compares with 4.9 percent growth in the third quarter of last year.
`Not Good News'
``The manufacturing sector of the economy is indeed contracting and that's certainly not good news and contributes to the view that we're headed towards a recession,'' said Hugh Johnson, who oversees about $725 million as chairman of Johnson Illington Advisors LLC in Albany, New York. ``For the first part of this year when there's not a lot of confidence in earnings, the markets are not going to do well.''
Profits among S&P 500 members are forecast to rise 15.1 percent in 2008, the average estimate of analysts surveyed by Bloomberg, after growth slowed to an estimated 1.4 percent last year. Most of the gain is predicted in the third quarter, when analysts expect earnings to increase by 19.7 percent.
FedEx Corp., the second-biggest U.S. package-delivery company, slipped $3.01 to $86.16, a two-year low. Rising oil prices and slowing customer demand are ``meaningful risks'' this year, JPMorgan Chase & Co. said in lowering the shares to ``neutral'' from ``overweight.''
Crude Rally
Crude oil futures touched $100 a barrel for the first time, extending last year's 57 percent climb reflecting demand growth outpacing the industry's ability to find deposits. Schlumberger Ltd., the world's largest oilfield-services provider, rose $2.21 to $100.58. Energy shares were the only industry group in the S&P 500 to rise as natural gas futures also climbed, reaching a one- month high.
``My big worry is that fears of higher oil prices would continue to impact consumer confidence and it would continue to fall,'' said Barry James, president and portfolio manager at James Investment Research in Xenia, Ohio. The firm manages $2.1 billion.
Shares of department stores and discounters in the S&P 500 lost 2.1 percent. U.S. retail sales rose 2.3 percent last week at stores open at least a year as consumers slowed spending during what may have been the worst holiday shopping season in five years, the International Council of Shopping Centers said.
Retailer Stocks
Bed Bath & Beyond Inc., the largest U.S. home-furnishings retailer, fell $1.03 to $28.36, a five-year low. J.C. Penney Co., the third-largest department store chain, declined $2.34 to $41.65.
Amazon.com Inc. was the biggest gainer in the group, adding $3.61 to $96.25, after Citigroup predicted market share gains and recommended investors buy the shares.
Newmont Mining Corp., the world's second-largest gold producer, rallied the most in the S&P 500 as the falling dollar pushed gold futures to a record $859.20 an ounce in London. Newmont added $3.56, or 7.3 percent, to $52.38. Barrick Gold Corp., the largest producer, rose $3.97, or 9.4 percent, to $46.02.
Interest-rate futures show the odds of a half-point cut on Jan. 30 increased to 26 percent from nothing, with the remainder of the bets counting on a quarter-point cut in the Fed's target for the overnight lending rate between banks.
Minutes of the Fed's Dec. 11 meeting, released today, showed policy makers perceived a need to ``remain exceptionally alert to economic and financial developments and their effects on the outlook.''
The Russell 2000 Index, a benchmark for companies with a median market value of $578 million, dropped 1.6 percent to 753.55. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 1.4 percent to 14,613.63. Based on its decline, the value of stocks decreased by $257.4 billion.
Intel Corp., the largest semiconductor maker, fell the most in almost a year after Bank of America Corp. lowered its rating and investors speculated companies will spend less on technology. Caterpillar Inc., the largest maker of earthmoving equipment, and International Business Machines Corp., the biggest computer services company, led the Dow Jones Industrial Average to a 1.7 percent plunge.
The Standard & Poor's 500 Index lost 21.20, or 1.4 percent, to 1,447.16, the most to start a year since it fell 2.8 percent on Jan. 2, 2001. The Dow average slipped 220.86 points to 13,043.96. The Nasdaq Composite Index decreased 42.65, or 1.6 percent, to 2,609.63. More than three stocks fell for every one that rose on the New York Stock Exchange.
The decline in the Institute for Supply Management's manufacturing index ``increases the odds we're going to go into a recession, and recessions are associated with bear markets,'' Brian Gendreau, who helps manage $12 billion at ING Investment Management in New York.
The ISM index dropped to 47.7, the lowest since April 2003 and the first reading below 50 since last January. The report, combined with a rise in the price of oil to a record $100 a barrel, spurred concern that a slowdown in spending will halt the five-year economic expansion.
Treasuries Rally
Two-year Treasuries rose the most in more than three weeks after the ISM report, while the dollar fell against the euro and yen, as traders increased bets the Federal Reserve will lower the benchmark interest rate half a percentage point at its next meeting.
Concern that credit-market losses will curb bank lending and spur a recession sent the S&P 500 down 3.8 percent in the fourth quarter, cutting the gauge's 2007 gain to 3.5 percent. Financial shares in the S&P 500 fell 2.5 percent, extending a 21 percent slide in 2007 that was their biggest in 17 years.
Intel lost $1.31 to $25.35, leading semiconductor makers in the S&P 500 to a 3.7 percent retreat, the biggest since July 2006 and the most among 24 industry groups in the index. Profit growth that exceeds analysts' estimates ``will be hard to come by,'' Bank of America analyst Sumit Dhanda wrote in a note to clients today.
Bank of America trimmed its forecast for semiconductor sales growth this year to 7 percent from 11 percent.
Advanced Micro, National Semi
Advanced Micro Devices Inc., National Semiconductor Corp. and LSI Corp. were downgraded to ``sell'' from ``neutral.'' Advanced Micro fell 36 cents to $7.14, National Semiconductor lost $1.23 to $21.41, and LSI decreased 43 cents to $4.88.
Intel, Analog Devices Inc., Semtech Corp., Texas Instruments Inc. and Power Integrations Inc. were downgraded to ``neutral'' from ``buy.'' Texas Instruments fell $1.05 to $32.35 and Analog Devices sank $1.33 to $30.37.
The price-weighted Philadelphia Semiconductor Index fell 2.8 percent to the lowest since July 2006.
National City Corp., Ohio's largest bank, led declines in financial shares, falling 87 cents to $15.59 after cutting its dividend by 49 percent to offset losses in the housing market. Morgan Stanley, the second-biggest U.S. securities firm, fell $2.16 to $50.95. Fannie Mae, the largest provider of money for home loans, decreased $2.52 to $37.46.
`Second Shoe'
``If we get a cyclical drop in the economy then we have to worry about traditional credit losses coming in, which would be a second shoe to drop for the financials,'' said Alan Gayle, senior investment strategist and director of asset allocation at Trusco Capital Management in Richmond, Virginia, which oversees $17 billion of equities.
The Dow average gained 6.4 percent in 2007 and the Nasdaq rose 9.8 percent, its steepest yearly advance since 2003. The S&P 500's 3.5 percent increase extended to five years its streak of annual advances.
Wall Street strategists forecast gains for U.S. stocks in 2008. The S&P 500 may climb 11 percent in 2008, extending the five-year bull market, according to the average forecast from 15 strategists surveyed by Bloomberg.
Analysts are bullish even as economists predict a slowdown in the U.S. Gross domestic product probably grew at an annual rate of 1 percent in the final three months of 2007 and will expand 1.5 percent this quarter, according to the median forecast of economists polled by Bloomberg last month. That compares with 4.9 percent growth in the third quarter of last year.
`Not Good News'
``The manufacturing sector of the economy is indeed contracting and that's certainly not good news and contributes to the view that we're headed towards a recession,'' said Hugh Johnson, who oversees about $725 million as chairman of Johnson Illington Advisors LLC in Albany, New York. ``For the first part of this year when there's not a lot of confidence in earnings, the markets are not going to do well.''
Profits among S&P 500 members are forecast to rise 15.1 percent in 2008, the average estimate of analysts surveyed by Bloomberg, after growth slowed to an estimated 1.4 percent last year. Most of the gain is predicted in the third quarter, when analysts expect earnings to increase by 19.7 percent.
FedEx Corp., the second-biggest U.S. package-delivery company, slipped $3.01 to $86.16, a two-year low. Rising oil prices and slowing customer demand are ``meaningful risks'' this year, JPMorgan Chase & Co. said in lowering the shares to ``neutral'' from ``overweight.''
Crude Rally
Crude oil futures touched $100 a barrel for the first time, extending last year's 57 percent climb reflecting demand growth outpacing the industry's ability to find deposits. Schlumberger Ltd., the world's largest oilfield-services provider, rose $2.21 to $100.58. Energy shares were the only industry group in the S&P 500 to rise as natural gas futures also climbed, reaching a one- month high.
``My big worry is that fears of higher oil prices would continue to impact consumer confidence and it would continue to fall,'' said Barry James, president and portfolio manager at James Investment Research in Xenia, Ohio. The firm manages $2.1 billion.
Shares of department stores and discounters in the S&P 500 lost 2.1 percent. U.S. retail sales rose 2.3 percent last week at stores open at least a year as consumers slowed spending during what may have been the worst holiday shopping season in five years, the International Council of Shopping Centers said.
Retailer Stocks
Bed Bath & Beyond Inc., the largest U.S. home-furnishings retailer, fell $1.03 to $28.36, a five-year low. J.C. Penney Co., the third-largest department store chain, declined $2.34 to $41.65.
Amazon.com Inc. was the biggest gainer in the group, adding $3.61 to $96.25, after Citigroup predicted market share gains and recommended investors buy the shares.
Newmont Mining Corp., the world's second-largest gold producer, rallied the most in the S&P 500 as the falling dollar pushed gold futures to a record $859.20 an ounce in London. Newmont added $3.56, or 7.3 percent, to $52.38. Barrick Gold Corp., the largest producer, rose $3.97, or 9.4 percent, to $46.02.
Interest-rate futures show the odds of a half-point cut on Jan. 30 increased to 26 percent from nothing, with the remainder of the bets counting on a quarter-point cut in the Fed's target for the overnight lending rate between banks.
Minutes of the Fed's Dec. 11 meeting, released today, showed policy makers perceived a need to ``remain exceptionally alert to economic and financial developments and their effects on the outlook.''
The Russell 2000 Index, a benchmark for companies with a median market value of $578 million, dropped 1.6 percent to 753.55. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 1.4 percent to 14,613.63. Based on its decline, the value of stocks decreased by $257.4 billion.
Manipulation / Management: Controlling the Gold Price
There is much talk of price management/manipulation in almost all markets. These charges are met with denial, silence and scorn. There are several aspects of markets that can give the opportunity to manage/manipulate prices. Often we think of market manipulation solely in terms of heavy buyers and/or sellers overwhelming the markets. The following is a thorough explanation of the ways in which management/manipulation of markets can be achieved:
Ø Cornering the Market: In the 1970’s, the famous Hunt Brothers, huge oil barons from Texas, decided to corner the market in silver. They bought all the silver they could, driving the price of silver to new peaks. When scrap sellers offered their silver, they bought that as well. At that point, the Hunt Brothers had taken the price of silver to its all time peak of + $50/oz, a price never before seen. The problem: The Hunt Brothers were the only buyers, and after having cornered the market, buying all the silver, they inevitably became the only sellers.
Ø Dumping: The reverse of cornering the market is dumping. This occurs when a seller with huge quantities of almost any type of commodity enters the market to swamp the buyers to the point where the sellers have all they want and the selling continues unabated so that the price just keeps on falling.
The gold price from the early 1980’s was subject to something similar called, accelerated supply. This had the same effect as dumping but in a slightly different way. Companies found that they could mine profitably to the point where the price reached the area of upper $200. Now with the gold price starting at its peak of $850 there was a good deal of profit to be made on the way down. Add to that the money market facility of selling forward [earning interest until the due delivery date] and one could make far better prices than the ruling gold price. With the clear intent of discrediting gold as money, the gold bullion banks [having themselves borrowed gold bullion from the Central Banks] loaned gold to many gold mining companies. The mining companies then sold this gold as far forward as it would take to build the mine, extract their gold and bring it to market, repaying in gold, the gold borrowed. In this way they earned what is known as the “Contango” [the interest earned on the sale proceeds until delivery], which ensured that they could achieve over $400 an ounce when the market gold price was below $300.
This ensured that the mine was profitable and they could produce gold in time to repay the bullion banks. It was a neat, prudent way of mining for gold and ensured that the mines were profitable even while the price of gold was dropping. Accelerated Supply also made sure that the gold supply far exceeded the demand for gold, ensuring a declining gold price. In effect the market had newly mined gold ‘dumped’ on it.
Ø The Power of “Marginal” Demand/Supply: Wise buyers of anything try to secure their supply to the extent they can gauge their future needs. They can usually secure approximately 80% – 95% of their requirements. But the remaining 5% - 20% is the amount they must acquire directly in the open market. This forces them to accept the prevailing market conditions and, consequently, prices. Noteworthy suppliers, (not to be denied the full benefit of market prices), always ensure the price for which they are paid is the market and covers the full 100% of their sales at the time of delivery. It is this ‘marginal’ demand of 5% – 20% which controls the price of all production.
Controlling the price becomes easier than expected in the short-term. (Over the longer term, as new prices flow through the system the demand supply formula will adjust, in the light of market prices). Speculators, for instance, can buy heavily to reduce that supply, driving prices up. With the wisdom of hindsight, other buyers can wait until prices adjust, or they can buy forward or future delivery if they can postpone their needs. Then they will turn to the futures market and pay an extra interest rate to secure a better price in the future at which point they take physical delivery. Doing this also removes uncertainty of supply and cost. This can undermine speculators attempts to manage/manipulate prices.
There are times, however, when the demand is so strong and immediate. Prices for this immediate delivery [‘spot’ prices] rise higher than future prices. The result: backwardation. This is when it is most likely that we will see spikes in the price. The reverse is also true: A spike in the gold price would be in the interests of either a large buyer or one finalizing the price on the bulk of his requirements, to go into the market and sell, taking prices down for the short-term. Once these prices are fixed, they then close their open market positions. Any loss incurred will be far less than the benefits of the lower cost on the bulk of their needs. This type of action can and must be a source of price manipulation.
Ø Cornering the Market: In the 1970’s, the famous Hunt Brothers, huge oil barons from Texas, decided to corner the market in silver. They bought all the silver they could, driving the price of silver to new peaks. When scrap sellers offered their silver, they bought that as well. At that point, the Hunt Brothers had taken the price of silver to its all time peak of + $50/oz, a price never before seen. The problem: The Hunt Brothers were the only buyers, and after having cornered the market, buying all the silver, they inevitably became the only sellers.
Ø Dumping: The reverse of cornering the market is dumping. This occurs when a seller with huge quantities of almost any type of commodity enters the market to swamp the buyers to the point where the sellers have all they want and the selling continues unabated so that the price just keeps on falling.
The gold price from the early 1980’s was subject to something similar called, accelerated supply. This had the same effect as dumping but in a slightly different way. Companies found that they could mine profitably to the point where the price reached the area of upper $200. Now with the gold price starting at its peak of $850 there was a good deal of profit to be made on the way down. Add to that the money market facility of selling forward [earning interest until the due delivery date] and one could make far better prices than the ruling gold price. With the clear intent of discrediting gold as money, the gold bullion banks [having themselves borrowed gold bullion from the Central Banks] loaned gold to many gold mining companies. The mining companies then sold this gold as far forward as it would take to build the mine, extract their gold and bring it to market, repaying in gold, the gold borrowed. In this way they earned what is known as the “Contango” [the interest earned on the sale proceeds until delivery], which ensured that they could achieve over $400 an ounce when the market gold price was below $300.
This ensured that the mine was profitable and they could produce gold in time to repay the bullion banks. It was a neat, prudent way of mining for gold and ensured that the mines were profitable even while the price of gold was dropping. Accelerated Supply also made sure that the gold supply far exceeded the demand for gold, ensuring a declining gold price. In effect the market had newly mined gold ‘dumped’ on it.
Ø The Power of “Marginal” Demand/Supply: Wise buyers of anything try to secure their supply to the extent they can gauge their future needs. They can usually secure approximately 80% – 95% of their requirements. But the remaining 5% - 20% is the amount they must acquire directly in the open market. This forces them to accept the prevailing market conditions and, consequently, prices. Noteworthy suppliers, (not to be denied the full benefit of market prices), always ensure the price for which they are paid is the market and covers the full 100% of their sales at the time of delivery. It is this ‘marginal’ demand of 5% – 20% which controls the price of all production.
Controlling the price becomes easier than expected in the short-term. (Over the longer term, as new prices flow through the system the demand supply formula will adjust, in the light of market prices). Speculators, for instance, can buy heavily to reduce that supply, driving prices up. With the wisdom of hindsight, other buyers can wait until prices adjust, or they can buy forward or future delivery if they can postpone their needs. Then they will turn to the futures market and pay an extra interest rate to secure a better price in the future at which point they take physical delivery. Doing this also removes uncertainty of supply and cost. This can undermine speculators attempts to manage/manipulate prices.
There are times, however, when the demand is so strong and immediate. Prices for this immediate delivery [‘spot’ prices] rise higher than future prices. The result: backwardation. This is when it is most likely that we will see spikes in the price. The reverse is also true: A spike in the gold price would be in the interests of either a large buyer or one finalizing the price on the bulk of his requirements, to go into the market and sell, taking prices down for the short-term. Once these prices are fixed, they then close their open market positions. Any loss incurred will be far less than the benefits of the lower cost on the bulk of their needs. This type of action can and must be a source of price manipulation.
Gold hits record high above $850 per ounce
LONDON (Reuters) - Spot gold hit a record high at $855.10 an ounce on Wednesday in buying fuelled by a struggling dollar, surging oil and simmering geo-political tensions, traders said.
The metal was quoted at $855.10 an ounce by 11:03 a.m. ET, compared with $832.70/833.50 quoted in New York late on Monday.
Spot gold was fixed in London at a high of $850 an ounce on January 21, 1980.
(Reporting by Veronica Brown and Atul Prakash; Editing by David Evans)
The metal was quoted at $855.10 an ounce by 11:03 a.m. ET, compared with $832.70/833.50 quoted in New York late on Monday.
Spot gold was fixed in London at a high of $850 an ounce on January 21, 1980.
(Reporting by Veronica Brown and Atul Prakash; Editing by David Evans)
Euro gains on dollar in official reserves
The euro has fast gained ground against the dollar in international official foreign exchange reserves in recent months, according to official statistics highlighting the nine-year-old currency’s growing global importance.
Reflecting its increasing strength on foreign exchange markets, the euro’s share of known foreign exchange holdings rose to 26.4 per cent in the third quarter of this year, the International Monetary Fund reported late on Friday. That was up from 25.5 per cent in the previous three months and from 24.4 per cent in the third quarter of 2006.
Reflecting its increasing strength on foreign exchange markets, the euro’s share of known foreign exchange holdings rose to 26.4 per cent in the third quarter of this year, the International Monetary Fund reported late on Friday. That was up from 25.5 per cent in the previous three months and from 24.4 per cent in the third quarter of 2006.
Dollar fear sparks rush to oil and gold
Crude oil prices briefly hit the $100-a-barrel mark and gold prices jumped to an all-time high as investors poured money into commodities on Wednesday amid deepening fears about the weakness of the US dollar.
The oil price rally soured the first stock trading day of the year, with the Dow Jones Industrial Average closing 1.7 per cent lower, its worst start since a slide of 1.9 per cent on the first day of trading in 1983.
The oil price rally soured the first stock trading day of the year, with the Dow Jones Industrial Average closing 1.7 per cent lower, its worst start since a slide of 1.9 per cent on the first day of trading in 1983.
Dollar stumbles into 2008
The dollar will stumble into 2008 down but not necessarily out, according to many watchers of the world’s currency markets.
Last year the dollar continued its multi-year downward trend amid a toxic mix of negative cyclical and structural factors.
These included deterioration in relative growth and interest rate differentials between the US and the rest of the world as well as increased concerns over the health of the US financial system, which was in the eye of the storm as the credit crisis worsened and the US housing market faced collapse.
Diversification of central banks’ foreign exchange reserves away from the dollar and the potential exit from dollar pegs by Middle Eastern monetary authorities also took their toll.
Analysts say that, on top of all this, US officials in effect welcomed the fall as a means of supporting the economy, giving investors the impression that selling the dollar was a one-way bet.
Mitul Kotecha, at Calyon, believes that a number of the risks to the dollar have been overplayed and, in any case, may already be in the price. Looking ahead, he says, much will depend on the path of the US economy.
Should the weakness in the US economy turn into a full-blown recession, the likelihood of a rout in the dollar will increase substantially, analysts say.
Many analysts believe the Federal Reserve’s move to cut interest rates, combined with the past decline in the dollar and its boost to exports, will help the US economy avoid a recession.
“We believe that the rest of the world will not easily decouple from the slowing in the US economy and that, as growth expectations are revised lower outside of the US, the relative growth differential will move back in favour of the dollar,” says Mr Kotecha.
Analysts say that while there is broad consensus that the US economy will slow in 2008, there is less agreement on the effect on the rest of the world.
Hans Redeker, at BNP Paribas, says the idea that the US economy has decoupled from the rest of the world has been the main driver of the dollar’s recent decline. But as 2008 unfolds, markets will conclude that decoupling will be less distinct than previously thought, boosting the dollar.
“After years of being dollar bears, we see it coming into demand,” says Mr Redeker. “The dollar’s decline, especially from February to November, has been built on the decoupling idea. As it does not materialise, the dollar will catch up.”
US households have about $300bn invested in non-dollar denominated securities. When global growth disappoints, these funds will be repatriated into dollars, Mr Redeker says.
He notes increasing signs that Asian countries that manage their exchange rates, especially China, will allow their currencies to appreciate in the face of mounting inflationary pressures.
Once Asian currencies move higher against the dollar, other free-floating currencies will see less demand from Asia, triggering their decline not only against Asian currencies but also against the dollar.
David Woo, at Barclays Capital, expects the euro to be rangebound between $1.40 and $1.50 against the dollar in 2008. He says investors can profit from the fact that some countries, notably the UK and Canada, will be more affected by a US slowdown than others.
“We view the underperformance of the pound and the Canadian dollar as consistent with the fact that the business cycles of the UK economy and the Canadian economy have been historically more correlated with the US,” he says.
On the yen, analysts expect it to benefit from a slowdown in global growth in 2008. It has underperformed during the recent period of global expansion.
Derek Halpenny, at Bank of Tokyo-Mitsubishi UFJ, says declining interest rate differentials between the US and Japan and the upturn in volatility have undermined the appetite for carry trades, in which the low-yielding yen is sold to finance buying of riskier assets. And negative economic conditions in Japan are likely to discourage risk taking.
“Greater investor caution by Japanese households will reduce appetite for foreign currency at least until dollar/yen falls toward the key Y100 level,” he says. “Our 2008 target is Y103.”
Last year the dollar continued its multi-year downward trend amid a toxic mix of negative cyclical and structural factors.
These included deterioration in relative growth and interest rate differentials between the US and the rest of the world as well as increased concerns over the health of the US financial system, which was in the eye of the storm as the credit crisis worsened and the US housing market faced collapse.
Diversification of central banks’ foreign exchange reserves away from the dollar and the potential exit from dollar pegs by Middle Eastern monetary authorities also took their toll.
Analysts say that, on top of all this, US officials in effect welcomed the fall as a means of supporting the economy, giving investors the impression that selling the dollar was a one-way bet.
Mitul Kotecha, at Calyon, believes that a number of the risks to the dollar have been overplayed and, in any case, may already be in the price. Looking ahead, he says, much will depend on the path of the US economy.
Should the weakness in the US economy turn into a full-blown recession, the likelihood of a rout in the dollar will increase substantially, analysts say.
Many analysts believe the Federal Reserve’s move to cut interest rates, combined with the past decline in the dollar and its boost to exports, will help the US economy avoid a recession.
“We believe that the rest of the world will not easily decouple from the slowing in the US economy and that, as growth expectations are revised lower outside of the US, the relative growth differential will move back in favour of the dollar,” says Mr Kotecha.
Analysts say that while there is broad consensus that the US economy will slow in 2008, there is less agreement on the effect on the rest of the world.
Hans Redeker, at BNP Paribas, says the idea that the US economy has decoupled from the rest of the world has been the main driver of the dollar’s recent decline. But as 2008 unfolds, markets will conclude that decoupling will be less distinct than previously thought, boosting the dollar.
“After years of being dollar bears, we see it coming into demand,” says Mr Redeker. “The dollar’s decline, especially from February to November, has been built on the decoupling idea. As it does not materialise, the dollar will catch up.”
US households have about $300bn invested in non-dollar denominated securities. When global growth disappoints, these funds will be repatriated into dollars, Mr Redeker says.
He notes increasing signs that Asian countries that manage their exchange rates, especially China, will allow their currencies to appreciate in the face of mounting inflationary pressures.
Once Asian currencies move higher against the dollar, other free-floating currencies will see less demand from Asia, triggering their decline not only against Asian currencies but also against the dollar.
David Woo, at Barclays Capital, expects the euro to be rangebound between $1.40 and $1.50 against the dollar in 2008. He says investors can profit from the fact that some countries, notably the UK and Canada, will be more affected by a US slowdown than others.
“We view the underperformance of the pound and the Canadian dollar as consistent with the fact that the business cycles of the UK economy and the Canadian economy have been historically more correlated with the US,” he says.
On the yen, analysts expect it to benefit from a slowdown in global growth in 2008. It has underperformed during the recent period of global expansion.
Derek Halpenny, at Bank of Tokyo-Mitsubishi UFJ, says declining interest rate differentials between the US and Japan and the upturn in volatility have undermined the appetite for carry trades, in which the low-yielding yen is sold to finance buying of riskier assets. And negative economic conditions in Japan are likely to discourage risk taking.
“Greater investor caution by Japanese households will reduce appetite for foreign currency at least until dollar/yen falls toward the key Y100 level,” he says. “Our 2008 target is Y103.”
Dollar drops but yen bounces back
The dollar fell sharply Wednesday after data showed US manufacturing activity contracted last month, intensifying fears of impending recession in the world’s largest economy.
The much lower-than-expected figure – the weakest since April 2003 – triggered risk-aversion that rippled through foreign exchange markets.
The yen shot up and high-yielding currencies fell as investors unwound risky carry-trade positions.
“Today’s release suggests that corporate activity is weakening significantly, making a further 25 basis point cut by the Fed on January 30 look a very strong probability,” said Rob Carnell, at ING.
The dollar fell 1 per cent against the euro to $1.4738, and 1.4 per cent against the yen to Y110.
The yen also strengthened sharply against high-yielding currencies such as the New Zealand dollar and the Australian dollar.
“People are taking risk off the table,” said Hans Redeker, at BNP Paribas.
The yen’s sharp rise against these currencies indicates that investors are pulling out of the carry trade, which involves borrowing in cheap currencies such as the yen to buy higher-yielding ones.
The yen jumped 1.5 per cent against the New Zealand dollar to Y84.72 and 1.4 per cent against the Australian dollar to Y96.65. Against sterling it was up 2.2 per cent at Y217.41.
Sterling was undermined by weak purchasing manager’s data in the UK.
“With signs that growth and inflation pressures are moderating in the manufacturing sector there is the growing prospect of further policy easing in coming months. We suspect rates will be cut to 4.75 per cent by the end of the year,” said James Knightley at ING.
The pound fell 0.3 per cent against the dollar to $1.9791 by midday in New York.
In contrast to the US and UK data, European manufacturing numbers showed activity in the eurozone was resilient, boosting the euro to an all-time high against sterling.
“We expect the ECB to keep up its hawkish rhetoric, but to nevertheless leave its key interest rate at 4 per cent for many months to come,” said Howard Archer at Global Insight.
The single currency rose 1.4 per cent to £0.7450 by midday in the US.
The Kenyan shilling fell to a six-week low as violence intensified. It fell 5.5 per cent to the dollar to Ks67.20 in thin trade, with traders adopting a wait-and-see approach ahead of a large opposition march planned for Thursday in Nairobi.
China’s renminbi hit a post-revaluation high as the country’s central bank continued to set higher daily mid-points from which the currency is allowed to fluctuate. The renminbi ended 0.1 per cent higher at Rmb7.2934.
The much lower-than-expected figure – the weakest since April 2003 – triggered risk-aversion that rippled through foreign exchange markets.
The yen shot up and high-yielding currencies fell as investors unwound risky carry-trade positions.
“Today’s release suggests that corporate activity is weakening significantly, making a further 25 basis point cut by the Fed on January 30 look a very strong probability,” said Rob Carnell, at ING.
The dollar fell 1 per cent against the euro to $1.4738, and 1.4 per cent against the yen to Y110.
The yen also strengthened sharply against high-yielding currencies such as the New Zealand dollar and the Australian dollar.
“People are taking risk off the table,” said Hans Redeker, at BNP Paribas.
The yen’s sharp rise against these currencies indicates that investors are pulling out of the carry trade, which involves borrowing in cheap currencies such as the yen to buy higher-yielding ones.
The yen jumped 1.5 per cent against the New Zealand dollar to Y84.72 and 1.4 per cent against the Australian dollar to Y96.65. Against sterling it was up 2.2 per cent at Y217.41.
Sterling was undermined by weak purchasing manager’s data in the UK.
“With signs that growth and inflation pressures are moderating in the manufacturing sector there is the growing prospect of further policy easing in coming months. We suspect rates will be cut to 4.75 per cent by the end of the year,” said James Knightley at ING.
The pound fell 0.3 per cent against the dollar to $1.9791 by midday in New York.
In contrast to the US and UK data, European manufacturing numbers showed activity in the eurozone was resilient, boosting the euro to an all-time high against sterling.
“We expect the ECB to keep up its hawkish rhetoric, but to nevertheless leave its key interest rate at 4 per cent for many months to come,” said Howard Archer at Global Insight.
The single currency rose 1.4 per cent to £0.7450 by midday in the US.
The Kenyan shilling fell to a six-week low as violence intensified. It fell 5.5 per cent to the dollar to Ks67.20 in thin trade, with traders adopting a wait-and-see approach ahead of a large opposition march planned for Thursday in Nairobi.
China’s renminbi hit a post-revaluation high as the country’s central bank continued to set higher daily mid-points from which the currency is allowed to fluctuate. The renminbi ended 0.1 per cent higher at Rmb7.2934.
Oil and gold break new ground
Gold and oil prices hit record highs on Wednesday, while the Dow Jones Industrial Average suffered its worst start to a new year since 1983 and Treasury bonds surged after fresh signs of weakness in the US economy.
Gold climbed above its previous lifetime peak of $850 an ounce reached in January 1980 and oil hit $100 a barrel. The euro climbed above $1.47 and the yield on the 10-year Treasury moved back below 4 per cent amid mounting expectations for aggressive interest rate cuts by the Federal Reserve.
The catalyst for much of the day’s action came from a weak manufacturing report from the US Institute for Supply Management. The headline index fell to 47.7 last month, the lowest level since April 2003, compared with expectations for a modest increase from November’s 50.8. A reading below 50 indicates a manufacturing contraction.
“Overall, this is a seriously weak report though the headline is still not quite at recession levels,” said Ian Shepherdson, chief US economist at High Frequency Economics.
“But it is far too close for comfort and it reinforces our view that the Fed has a lot more easing to do.”
Alan Ruskin, chief international strategist at RBS Greenwich Capital, noted that the report’s weakness was concentrated in the new orders data, which he said was disturbing in that it was the most important forward-looking component.
Investors largely shrugged off a further easing of money market tensions on Wednesday as sterling, dollar and euro Libor rates continued to fall. The declines were most notable in sterling, with the one-month rate recording its steepest one-day fall for eight years.
Neil Mellor, currency strategist at Bank of New York Mellon, said it was clear that recent coordinated measures by several central banks had been successful in “greasing the wheels” of the interbank lending markets.
He added: “The crux of the issue is whether or not these trends will persist once the special year-end measures have run their course – trends thereafter will be testimony to the market’s disposition towards would-be borrowers’ balance sheets and hence a possible insight into the market’s likely tolerance of risk.”
Equity markets suffered sharp losses in the wake of the ISM report. Wall Street briefly stemmed some of the pain after the release of the Fed meeting minutes for December signalled the prospect of more rate cuts.
The minutes noted policymakers “agreed on the need to remain exceptionally alert to economic and financial developments and their effects on the outlook”.
The Dow Jones Industrial Average closed down 1.7 per cent, the S&P 500 fell 1.4 per cent and the Nasdaq Composite declined 1.6 per cent.
European stocks were pulled lower by Wall Street’s retreat and the FTSE Eurofirst 300 index fell 1.3 per cent to 1,487.23 points.
Asian trading was light as Tokyo remained closed for a holiday. The rest of the region was broadly weak, with Seoul falling 2.3 per cent and Taipei down 2.2 per cent, although Mumbai advanced 0.8 per cent to a record high.
Karachi fell for a third successive session after the assassination of Benazir Bhutto.
The equity sell-off helped prompt hefty gains for government bonds as investors looked for safe havens. The yield on the two-year Treasury was down 17 basis points at 2.88 per cent while the 10-year yield was 12bp lower at 3.91 per cent.
In Europe, the 10-year Bund yield was down 11bp at 4.21 per cent and that on the 10-year gilt was 6bp lower at 4.51 per cent.
The flight from risk extended to the currency markets, as the ISM report triggered a rally for the yen amid a broad withdrawal from carry trades – in which low-yielding currencies such as the Japanese unit are sold to fund purchases of higher-yielding assets.
The dollar weakened as the futures market moved to fully price in a quarter-point cut in interest by the Federal Reserve at the end of this month.
Expectations of lower UK rates sent sterling to a fresh record low against the euro after soft UK manufacturing data.
The focus in commodities might have been on gold and oil, but platinum reached a fresh record high and copper rallied as bargain-hunters shrugged off concerns about slower economic growth.
Gold climbed above its previous lifetime peak of $850 an ounce reached in January 1980 and oil hit $100 a barrel. The euro climbed above $1.47 and the yield on the 10-year Treasury moved back below 4 per cent amid mounting expectations for aggressive interest rate cuts by the Federal Reserve.
The catalyst for much of the day’s action came from a weak manufacturing report from the US Institute for Supply Management. The headline index fell to 47.7 last month, the lowest level since April 2003, compared with expectations for a modest increase from November’s 50.8. A reading below 50 indicates a manufacturing contraction.
“Overall, this is a seriously weak report though the headline is still not quite at recession levels,” said Ian Shepherdson, chief US economist at High Frequency Economics.
“But it is far too close for comfort and it reinforces our view that the Fed has a lot more easing to do.”
Alan Ruskin, chief international strategist at RBS Greenwich Capital, noted that the report’s weakness was concentrated in the new orders data, which he said was disturbing in that it was the most important forward-looking component.
Investors largely shrugged off a further easing of money market tensions on Wednesday as sterling, dollar and euro Libor rates continued to fall. The declines were most notable in sterling, with the one-month rate recording its steepest one-day fall for eight years.
Neil Mellor, currency strategist at Bank of New York Mellon, said it was clear that recent coordinated measures by several central banks had been successful in “greasing the wheels” of the interbank lending markets.
He added: “The crux of the issue is whether or not these trends will persist once the special year-end measures have run their course – trends thereafter will be testimony to the market’s disposition towards would-be borrowers’ balance sheets and hence a possible insight into the market’s likely tolerance of risk.”
Equity markets suffered sharp losses in the wake of the ISM report. Wall Street briefly stemmed some of the pain after the release of the Fed meeting minutes for December signalled the prospect of more rate cuts.
The minutes noted policymakers “agreed on the need to remain exceptionally alert to economic and financial developments and their effects on the outlook”.
The Dow Jones Industrial Average closed down 1.7 per cent, the S&P 500 fell 1.4 per cent and the Nasdaq Composite declined 1.6 per cent.
European stocks were pulled lower by Wall Street’s retreat and the FTSE Eurofirst 300 index fell 1.3 per cent to 1,487.23 points.
Asian trading was light as Tokyo remained closed for a holiday. The rest of the region was broadly weak, with Seoul falling 2.3 per cent and Taipei down 2.2 per cent, although Mumbai advanced 0.8 per cent to a record high.
Karachi fell for a third successive session after the assassination of Benazir Bhutto.
The equity sell-off helped prompt hefty gains for government bonds as investors looked for safe havens. The yield on the two-year Treasury was down 17 basis points at 2.88 per cent while the 10-year yield was 12bp lower at 3.91 per cent.
In Europe, the 10-year Bund yield was down 11bp at 4.21 per cent and that on the 10-year gilt was 6bp lower at 4.51 per cent.
The flight from risk extended to the currency markets, as the ISM report triggered a rally for the yen amid a broad withdrawal from carry trades – in which low-yielding currencies such as the Japanese unit are sold to fund purchases of higher-yielding assets.
The dollar weakened as the futures market moved to fully price in a quarter-point cut in interest by the Federal Reserve at the end of this month.
Expectations of lower UK rates sent sterling to a fresh record low against the euro after soft UK manufacturing data.
The focus in commodities might have been on gold and oil, but platinum reached a fresh record high and copper rallied as bargain-hunters shrugged off concerns about slower economic growth.
Commodities still a buy even after huge rally
LONDON (Reuters) - New investor money should flow into commodities such as oil and wheat this year, helping to extend the huge gains registered in 2007 and taking crude prices through the $100 a barrel mark.
By December 31, wheat WH8 prices had risen by 76 percent since the start of 2007, while U.S. crude gained 57 percent, according to Reuters data.
Mark Matthias of British investment specialist Dawnay Day Quantum said there was still scope for investors to capitalize on further gains.
"They (commodities) have the volatility and I still think they have the upward momentum," he told Reuters.
"I think there will definitely be new money and equities are definitely looking unattractive."
Last January when U.S. crude briefly dipped below $50 a barrel, Matthias recommended buying oil at any price below $60.
Now U.S. crude is trading above $97, just off a record of $99.29 touched in November, he said he would buy if it fell back to $90 a barrel.
"I think it's going to go through $100, though it might struggle to go much above $110 and obviously there has already been quite a lot of resistance ahead of $100," he said.
By December 31, wheat WH8 prices had risen by 76 percent since the start of 2007, while U.S. crude gained 57 percent, according to Reuters data.
Mark Matthias of British investment specialist Dawnay Day Quantum said there was still scope for investors to capitalize on further gains.
"They (commodities) have the volatility and I still think they have the upward momentum," he told Reuters.
"I think there will definitely be new money and equities are definitely looking unattractive."
Last January when U.S. crude briefly dipped below $50 a barrel, Matthias recommended buying oil at any price below $60.
Now U.S. crude is trading above $97, just off a record of $99.29 touched in November, he said he would buy if it fell back to $90 a barrel.
"I think it's going to go through $100, though it might struggle to go much above $110 and obviously there has already been quite a lot of resistance ahead of $100," he said.
Stock funds struggle in 2007 as leadership shifts
SAN FRANCISCO (MarketWatch) -- It's said that the stock market climbs a wall of worry. Mutual-fund investors smacked into that wall in 2007, and still have good reason to worry.
Uncertainty about the strength of the U.S. economy and corporate earnings had been building all year, and the dam finally burst in the fourth quarter. The housing downturn and the subprime-induced credit crunch ravaged the financial-services and homebuilding industries, and investors began 2008 with serious concerns about the potential for damage to the broader economy.
2007 funds/ETF review & outlook
MarketWatch gives you the most up-to-date news on stock and bond mutual-funds and ETF performance:
• Stock investors climb wall of worry
• Emerging markets grab spotlight
• Bond funds find safe havens
• ETFs innovate stocks, bonds
Get our free Mutual Funds weekly
The biggest unknown is whether consumers will cut back on their spending when confronted with declining home values and rising prices for food, energy and other essentials. Many investment strategists surmise that belt-tightening by consumers could tip an already battered U.S. economy into recession, and accordingly they recommend that investors move to protect several years of robust stock-market gains.
"You have to build your defenses," said Hugh Johnson, chief investment officer at investment manager Johnson Illington Advisors LLC, who like many of his peers is committing more assets to the relative predictability of large-cap multinational stocks. "You have to think about preserving capital, not increasing capital, now that the risks are higher."
Without a stable foundation, stock funds struggled to find footing in 2007. Diversified U.S. stock funds rose 6.4% on average for the year, buckling under a 3.1% fourth-quarter slide, according to preliminary data from fund-tracker Lipper Inc.
The annual harvest was the barest since 2002 and well-below the U.S. market's 10.4% historical average gain, but this year's top fund groups and sectors suggest that investors would do well to recognize that a new crop of market leaders is taking root.
Shifting sands
When profits are scarce and credit is tight, the market favors companies in fit financial shape that can deliver solid earnings, boost dividend payouts, and have minimal borrowing needs. These businesses come in all sectors and sizes, but they tend to be larger, established operators that ideally have a global footprint.
Stock funds in 2007 reflected this sentiment. Growth-oriented strategies and sectors soared, while bigger companies were generally better investments than smaller rivals. The year's best-performing group: Midcap growth funds, up 16.4%, with a 1% quarterly loss. Large-cap growth portfolios rose 14.2% for the year and ended the calendar's final 13 weeks with a flat finish. One surprise standout: Fidelity Magellan Fund (FMAGX:Fidelity Magellan Fund
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Last: 92.56-1.31-1.40%
6:06pm 01/02/2008
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FMAGX 92.56, -1.31, -1.4%) , which many investors had dismissed, turned in a striking 18.8% return.
By comparison, small-cap growth funds managed a gain of 8.8% on the year against a sharp 3.2% quarterly decline. Small-cap stocks had been the market's darling for the past seven years, but nowadays small is decidedly not beautiful. In a slumping economy where credit is both tougher and more expensive to obtain, small businesses -- most of which are domestically driven -- suffer the most. In 2007 small-cap value stock funds, heavily exposed to financial services and consumer-related stocks, were hit hardest of any major category -- down 5.5% on the year after a massive 6.7% drubbing in the quarter.
"We're in the late innings" for U.S. small-cap stocks, said Richard Bernstein, chief investment strategist at Merrill Lynch & Co. "As volatility picks up and economic conditions change, the old leadership is unlikely to continue."
Indeed, value seekers trailed their growth counterparts in 2007 for the first time in several years. Large-cap value funds squeaked out a 2.2% annual gain after a 4.7% quarterly loss, while midcap value funds finished the year up 2% against a 5% tumble in the quarter.
Specialized sector offerings showed clearly why companies with growing earnings and rising dividends are having their day. Funds dedicated to natural-resources companies -- many of which are commanding fixtures on the global stage -- surged 40.4% on the back of a quarterly 7.2% advance. Utility funds tallied a 19.8% annual gain and rose 5.1% in the year's final 13 weeks. Technology funds -- which also tend to invest in companies with global operations -- staged an impressive rally, up 15.4% on the year against a 1.9% decline in the quarter, and health-care funds added 8.9% for the year and slipped 0.9% in the quarter.
On the downside, the subprime debacle sacked real-estate funds for a 14.8% annual loss after a 12.1% quarterly hit. Financial-services funds fared only slightly better, down 13.3% on the year and losing 9.6% in the quarter.
The bear market for financials took a big bite out of U.S. stock-fund returns in 2007. Without the financial sector, the Standard & Poor's 500 Index (SPX:S&P 500 Index
News, chart, profile, more
Seeds of growth
Volatile and uncertain conditions that favor growth stocks are likely to persist well into 2008 and perhaps longer, market strategists contend.
"We're pretty cautious going into the beginning of the year," said Mike Avery, chief investment officer at Waddell & Reed Investment Management Co. "The crisis in the credit markets has been much worse than we would have thought."
Still, Avery says the U.S. economy can limp along without a recession. "But we're not sure about that, and I don't think we'll be sure until we get through the first quarter" of 2008.
Uncertainty about the strength of the U.S. economy and corporate earnings had been building all year, and the dam finally burst in the fourth quarter. The housing downturn and the subprime-induced credit crunch ravaged the financial-services and homebuilding industries, and investors began 2008 with serious concerns about the potential for damage to the broader economy.
2007 funds/ETF review & outlook
MarketWatch gives you the most up-to-date news on stock and bond mutual-funds and ETF performance:
• Stock investors climb wall of worry
• Emerging markets grab spotlight
• Bond funds find safe havens
• ETFs innovate stocks, bonds
Get our free Mutual Funds weekly
The biggest unknown is whether consumers will cut back on their spending when confronted with declining home values and rising prices for food, energy and other essentials. Many investment strategists surmise that belt-tightening by consumers could tip an already battered U.S. economy into recession, and accordingly they recommend that investors move to protect several years of robust stock-market gains.
"You have to build your defenses," said Hugh Johnson, chief investment officer at investment manager Johnson Illington Advisors LLC, who like many of his peers is committing more assets to the relative predictability of large-cap multinational stocks. "You have to think about preserving capital, not increasing capital, now that the risks are higher."
Without a stable foundation, stock funds struggled to find footing in 2007. Diversified U.S. stock funds rose 6.4% on average for the year, buckling under a 3.1% fourth-quarter slide, according to preliminary data from fund-tracker Lipper Inc.
The annual harvest was the barest since 2002 and well-below the U.S. market's 10.4% historical average gain, but this year's top fund groups and sectors suggest that investors would do well to recognize that a new crop of market leaders is taking root.
Shifting sands
When profits are scarce and credit is tight, the market favors companies in fit financial shape that can deliver solid earnings, boost dividend payouts, and have minimal borrowing needs. These businesses come in all sectors and sizes, but they tend to be larger, established operators that ideally have a global footprint.
Stock funds in 2007 reflected this sentiment. Growth-oriented strategies and sectors soared, while bigger companies were generally better investments than smaller rivals. The year's best-performing group: Midcap growth funds, up 16.4%, with a 1% quarterly loss. Large-cap growth portfolios rose 14.2% for the year and ended the calendar's final 13 weeks with a flat finish. One surprise standout: Fidelity Magellan Fund (FMAGX:Fidelity Magellan Fund
News, chart, profile, more
Last: 92.56-1.31-1.40%
6:06pm 01/02/2008
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
FMAGX 92.56, -1.31, -1.4%) , which many investors had dismissed, turned in a striking 18.8% return.
By comparison, small-cap growth funds managed a gain of 8.8% on the year against a sharp 3.2% quarterly decline. Small-cap stocks had been the market's darling for the past seven years, but nowadays small is decidedly not beautiful. In a slumping economy where credit is both tougher and more expensive to obtain, small businesses -- most of which are domestically driven -- suffer the most. In 2007 small-cap value stock funds, heavily exposed to financial services and consumer-related stocks, were hit hardest of any major category -- down 5.5% on the year after a massive 6.7% drubbing in the quarter.
"We're in the late innings" for U.S. small-cap stocks, said Richard Bernstein, chief investment strategist at Merrill Lynch & Co. "As volatility picks up and economic conditions change, the old leadership is unlikely to continue."
Indeed, value seekers trailed their growth counterparts in 2007 for the first time in several years. Large-cap value funds squeaked out a 2.2% annual gain after a 4.7% quarterly loss, while midcap value funds finished the year up 2% against a 5% tumble in the quarter.
Specialized sector offerings showed clearly why companies with growing earnings and rising dividends are having their day. Funds dedicated to natural-resources companies -- many of which are commanding fixtures on the global stage -- surged 40.4% on the back of a quarterly 7.2% advance. Utility funds tallied a 19.8% annual gain and rose 5.1% in the year's final 13 weeks. Technology funds -- which also tend to invest in companies with global operations -- staged an impressive rally, up 15.4% on the year against a 1.9% decline in the quarter, and health-care funds added 8.9% for the year and slipped 0.9% in the quarter.
On the downside, the subprime debacle sacked real-estate funds for a 14.8% annual loss after a 12.1% quarterly hit. Financial-services funds fared only slightly better, down 13.3% on the year and losing 9.6% in the quarter.
The bear market for financials took a big bite out of U.S. stock-fund returns in 2007. Without the financial sector, the Standard & Poor's 500 Index (SPX:S&P 500 Index
News, chart, profile, more
Seeds of growth
Volatile and uncertain conditions that favor growth stocks are likely to persist well into 2008 and perhaps longer, market strategists contend.
"We're pretty cautious going into the beginning of the year," said Mike Avery, chief investment officer at Waddell & Reed Investment Management Co. "The crisis in the credit markets has been much worse than we would have thought."
Still, Avery says the U.S. economy can limp along without a recession. "But we're not sure about that, and I don't think we'll be sure until we get through the first quarter" of 2008.
Gold rallies more than $20 to 28-year high
NEW YORK (MarketWatch) -- Gold futures soared $22 to end at their highest level since 1980 on Wednesday, as crude-oil prices hitting $100 a barrel, U.S. dollar weakness and global political tensions boosted demand for the precious metal.
Gold for February delivery surged $22 to close at $860 an ounce on the New York Mercantile Exchange. It hit an intraday high of $864.90 an ounce in electronic trading.
The record high for Nymex gold futures was $875, set on Jan. 21, 1980.
Crude-oil futures soared as high as $100 for the first time, underpinning gold prices. Crude was propelled higher by expectations of another drawdown in weekly U.S. crude supplies as well as by a fresh outbreak of violent clashes reported in oil-rich Nigeria. See Futures Movers.
"The main driver of gold seems to be a weak, and further weakening throughout the session, dollar," said Zachary Oxman, a senior trader at Wisdom Financial.
"Weaker ISM, weak building numbers and a general feel of malaise in the market are pressuring the dollar," Oxman said in emailed comments. "Furthermore, the huge rally in crude today off of the events in Nigeria and a predicted seventh week of inventory declines in tomorrow's report are all helping to fuel the market today."
The dollar extended losses against most major rivals, plunging against the yen after the Institute of Supply Management said the U.S. factory sector contracted in December for the first time in nearly a year as new orders collapsed. See Currencies.
The ISM index fell to 47.7% from 50.8% in November. Economists expected the index to slide to 50.5%. Readings below 50% indicate more manufacturing firms were contracting than were growing in December. It was the lowest reading since April 2003 and the first sub-50 reading since January 2007. See Economic Report.
"Gold prices celebrated the start of 2008 in high style, rising beyond the pinnacle they achieved last year," said Jon Nadler, an analyst at Kitco Bullion Dealers, in a research note.
"Although conditions remain on the thin side as part of the trade will not return until Monday, the move suggests that funds may have made additional moves into bullion with Pakistan remaining on edge and investors nervous about financial markets," Nadler said.
Rising tensions in Pakistan following the assassination of former Prime Minister Benazir Bhutto last week have drawn some safe-haven buying of gold over the past few days.
On Monday, gold futures closed down $4.70 at $838 an ounce. Gold, however, ended the year up $200, or more than 30%.
"Strong physical demand, heightened geopolitical concerns worldwide, a falling U.S. dollar and the inability of the shorts to cap the gold price are still the main factors behind gold's march to $1,000 plus in 2008," said Peter Grandich, editor of the Grandich Letter, in emailed comments.
Also on Nymex, March silver rallied 37 cents, or 2.5%, to $15.29 an ounce. Platinum for January delivery soared $18.60, or 1.2%, to $1,547 an ounce.
March palladium rose $1.70 to $379.90 an ounce and March copper rose 2.30 cents to $3.0640 a pound.
Gold for February delivery surged $22 to close at $860 an ounce on the New York Mercantile Exchange. It hit an intraday high of $864.90 an ounce in electronic trading.
The record high for Nymex gold futures was $875, set on Jan. 21, 1980.
Crude-oil futures soared as high as $100 for the first time, underpinning gold prices. Crude was propelled higher by expectations of another drawdown in weekly U.S. crude supplies as well as by a fresh outbreak of violent clashes reported in oil-rich Nigeria. See Futures Movers.
"The main driver of gold seems to be a weak, and further weakening throughout the session, dollar," said Zachary Oxman, a senior trader at Wisdom Financial.
"Weaker ISM, weak building numbers and a general feel of malaise in the market are pressuring the dollar," Oxman said in emailed comments. "Furthermore, the huge rally in crude today off of the events in Nigeria and a predicted seventh week of inventory declines in tomorrow's report are all helping to fuel the market today."
The dollar extended losses against most major rivals, plunging against the yen after the Institute of Supply Management said the U.S. factory sector contracted in December for the first time in nearly a year as new orders collapsed. See Currencies.
The ISM index fell to 47.7% from 50.8% in November. Economists expected the index to slide to 50.5%. Readings below 50% indicate more manufacturing firms were contracting than were growing in December. It was the lowest reading since April 2003 and the first sub-50 reading since January 2007. See Economic Report.
"Gold prices celebrated the start of 2008 in high style, rising beyond the pinnacle they achieved last year," said Jon Nadler, an analyst at Kitco Bullion Dealers, in a research note.
"Although conditions remain on the thin side as part of the trade will not return until Monday, the move suggests that funds may have made additional moves into bullion with Pakistan remaining on edge and investors nervous about financial markets," Nadler said.
Rising tensions in Pakistan following the assassination of former Prime Minister Benazir Bhutto last week have drawn some safe-haven buying of gold over the past few days.
On Monday, gold futures closed down $4.70 at $838 an ounce. Gold, however, ended the year up $200, or more than 30%.
"Strong physical demand, heightened geopolitical concerns worldwide, a falling U.S. dollar and the inability of the shorts to cap the gold price are still the main factors behind gold's march to $1,000 plus in 2008," said Peter Grandich, editor of the Grandich Letter, in emailed comments.
Also on Nymex, March silver rallied 37 cents, or 2.5%, to $15.29 an ounce. Platinum for January delivery soared $18.60, or 1.2%, to $1,547 an ounce.
March palladium rose $1.70 to $379.90 an ounce and March copper rose 2.30 cents to $3.0640 a pound.
US gold jumps 1.5 pct on oil surge; volatility seen
NEW YORK, Jan 2 (Reuters) - U.S. gold futures jumped 1.5
percent in heavy trading early on Wednesday, largely driven by
a surge in crude oil and a slide in the dollar. Platinum in New York also rallied to hit a contract high,
boosted by tight market fundamentals and lofty lease rates. Jonathan Jossen, an independent floor trader in New York,
cited simmering geopolitical tensions due to an unstable
Pakistan, a $2 spike in oil because of renewed violence in
Nigeria and a weak dollar. "Volatility is very high. It's the highest that it has been
for a long time," Jossen added. At 10:22 a.m. EST (1522 GMT), most-active gold futures for
February GCG8 rose $13, or 1.5 percent, at $851 an ounce on
the COMEX metals division of the New York Mercantile Exchange,
trading between $837.50 and $852.30. Spot gold, which traded just below its all-time peak
on Wednesday, also provided a psychological boost to the
futures market, Jossen said. Spot gold hit a 28-year high of $848.60 an ounce, just
below its record high of $850 set in January 1980. It traded at
$846.70/$847.40 by midmorning, against Monday's late quote of
$832.60/$833.40 in New York. Jossen said that buy stops could be seen above the $847
support level. However, option trading had slowed as
investors took profits, he added. "Although conditions remain on the thin side, as part of
the trade will not return until Monday, the move (in gold)
suggests that funds may have made additional moves into
bullion, with Pakistan remaining on edge and investors nervous
about financial markets," Jon Nadler, senior analyst at Kitco
Bullion Dealers in Montreal, told clients in a note. For platinum, tight supply combined with booming demand due
to an increasing use of the metal in auto catalysts stirred
fund buying, analysts said. Johnson Matthey (JMAT.L: Quote, Profile, Research), the world's main platinum refiner
and fabricator, said in November the platinum market would see
a deficit of 265,000 ounces in 2007. "As with the other precious metals, platinum remains
vulnerable to some long selling, should the dollar begin to
recover, but with the market still extremely tight and lease
rate firm the metal will remain underpinned, with chart support
expected at $1,515/1,490 (spot)," James Moore, analyst at
TheBullionDesk.com, told clients in a note. On the NYMEX, April platinum PLJ8 hit a contract high of
$1,552 an ounce. It was up $19.60, or 1.3 percent, at $1,545 an
ounce. Spot platinum was quoted at $1,542/$1,546, after
surging to a record $1,544. March silver SIH8 was up 26 cents, or 1.8 percent, at
$15.18 an ounce. Spot silver was at $15.04/15.09 an
ounce, compared with New York's late Monday quote of
$14.77/14.82. March Palladium PAH8 was down $2.70 at $375.50 an ounce.
Spot palladium fetched $369/$372.
(Reporting by Frank Tang; Editing by Walter Bagley)
percent in heavy trading early on Wednesday, largely driven by
a surge in crude oil and a slide in the dollar. Platinum in New York also rallied to hit a contract high,
boosted by tight market fundamentals and lofty lease rates. Jonathan Jossen, an independent floor trader in New York,
cited simmering geopolitical tensions due to an unstable
Pakistan, a $2 spike in oil because of renewed violence in
Nigeria and a weak dollar. "Volatility is very high. It's the highest that it has been
for a long time," Jossen added. At 10:22 a.m. EST (1522 GMT), most-active gold futures for
February GCG8 rose $13, or 1.5 percent, at $851 an ounce on
the COMEX metals division of the New York Mercantile Exchange,
trading between $837.50 and $852.30. Spot gold
on Wednesday, also provided a psychological boost to the
futures market, Jossen said. Spot gold hit a 28-year high of $848.60 an ounce, just
below its record high of $850 set in January 1980. It traded at
$846.70/$847.40 by midmorning, against Monday's late quote of
$832.60/$833.40 in New York. Jossen said that buy stops could be seen above the $847
support level. However, option trading had slowed as
investors took profits, he added. "Although conditions remain on the thin side, as part of
the trade will not return until Monday, the move (in gold)
suggests that funds may have made additional moves into
bullion, with Pakistan remaining on edge and investors nervous
about financial markets," Jon Nadler, senior analyst at Kitco
Bullion Dealers in Montreal, told clients in a note. For platinum, tight supply combined with booming demand due
to an increasing use of the metal in auto catalysts stirred
fund buying, analysts said. Johnson Matthey (JMAT.L: Quote, Profile, Research), the world's main platinum refiner
and fabricator, said in November the platinum market would see
a deficit of 265,000 ounces in 2007. "As with the other precious metals, platinum remains
vulnerable to some long selling, should the dollar begin to
recover, but with the market still extremely tight and lease
rate firm the metal will remain underpinned, with chart support
expected at $1,515/1,490 (spot)," James Moore, analyst at
TheBullionDesk.com, told clients in a note. On the NYMEX, April platinum PLJ8 hit a contract high of
$1,552 an ounce. It was up $19.60, or 1.3 percent, at $1,545 an
ounce. Spot platinum
surging to a record $1,544. March silver SIH8 was up 26 cents, or 1.8 percent, at
$15.18 an ounce. Spot silver
ounce, compared with New York's late Monday quote of
$14.77/14.82. March Palladium PAH8 was down $2.70 at $375.50 an ounce.
Spot palladium
(Reporting by Frank Tang; Editing by Walter Bagley)
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