This is The Wall Street Digest Hotline Update for Friday, December 14, 2007, at 6:00 p.m. EST.
Rising inflationary pressures surprised stock traders this morning. Stock prices fell on fading hopes of future rate cuts by the Fed. At the close, the Dow plunged 178 points, closing at 13,339, while the Nasdaq dropped almost 33 points, closing at 2,635. Oil closed $0.90 lower at $91.31 per barrel, and gold closed $4.50 lower at $799.50 an ounce.
The November Consumer Price Index (CPI) was released this morning at 8:30. November prices soared by 0.8 percent, while the core inflation rate (minus food and energy) was up 0.3 percent. Both figures were higher than expected. By now, I’m sure the Fed would like to take back the December 11th 25-basis point cut in the Fed Funds rate. Bond prices fell sharply immediately after the announcement, followed by plunging stock prices from the opening bell at 9:30. However, hopes of further rate cuts were dashed at the same time. Rising inflation and a slowing economy is not an easy problem for the Fed. More volatility in the U.S. stock market will unfold going forward, which could push both foreign and U.S. investors offshore for better profits.
While slowing growth in the U.S. is becoming more obvious, there is no talk, not even a whisper, of slowing growth in China, India or Asia. China’s inflation rate is at the highest levels in 15 years, with the money supply growing at 18.5 percent. China’s retail sales were up almost 18 percent in November. As a result, the China ETF, iShares FTSE/Xingua China 25 Index (FXI), is forming what could eventually be a double top. Rising inflation is creating labor unrest, but police are not arriving on the scene to restore order. Almost a year ago, Fed Chairman Bernanke warned Chinese leaders that monetary inflation would produce increasing labor unrest. We are watching the China charts for a technical sell signal, which could come next week.
In the U.S., I would continue to avoid the following sectors: financial, brokerages, banks, and the insurance companies. No one knows how much collateralized debt obligations (CDOs) these companies still own; nor do they know what the CDOs are worth. I would also avoid the housing sector. I would not purchase a home or a condo, nor would I bottom-fish the housing stocks. The housing market will not bottom during 2008 in most markets.
Stay fully invested! Stock prices in India, Asia and the emerging markets will outperform the U.S. stock market. Stay close to our telephone/e-mail/website Hotline Updates.
The next Hotline Update will be on Tuesday, December 18, 2007, at 6:00 p.m. EST.