Headlines (Scroll down for complete stories):
1. Analysts: Rally on Deck for New Year
2. Wholesale Inflation Surges
3. Housing Starts Build; Permits Collapse
4. Soros Backs India's Currency Controls
1. Analysts: Rally on Deck for New Year
Stock analysts at 12 of Wall Street's preeminent firms say the U.S. stock market
will rally next year, according to Bloomberg. But is their optimism actually a
contrarian signal that the market will crash?
Well, says Bloomberg, "the last time Wall Street unanimously predicted an
advance for the S&P 500, in 2001, preceded a 33 percent slump over the next two
years. The U.S. economy fell into recession and the Sept. 11 attacks battered
financial markets."
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In fact, Bloomberg points out a growing complacency in the stock market among
investors, Wall Street firms, and independent financial newsletter writers.
Wall Street's historically bearish analysts, Merrill Lynch's Richard Bernstein
and Bear Stearns' Francois Trahan, both forecast a record year for the S&P 500.
An index that measures investor concern dropped to a 13-year low last week,
notes Bloomberg.
And a survey of newsletter writers showed the least pessimism this year.
Financial Intelligence Report, on the other hand, instructed readers to raise
stops on many recommendations to lock in profits in the event of a market
correction.
"Everybody lining up in the bull camp makes me more than a little nervous, and I
was nervous anyway," said Malcolm Polley, who helps manage $1.3 billion as
president of Stewart Capital Advisors in Indiana, Pennsylvania. "There are
enough potential pitfalls to take us to the downside." Polley tells Bloomberg
he's finding few stocks worth buying now.
However, Bloomberg points out that a cloudier earnings and economic picture is
on the horizon. According to Thomson Financial, the fourth quarter of 2006 could
mark the end of consecutive double-digit earnings in the S&P 500 since 2003. The
U.S. gross domestic product, which measures economic activity, had already
slowed to a crawl this year and is expected to do so into next year.
Editor's Note:
2. Wholesale Inflation Surges
Just when you thought the inflation beast had been tamed, it's back. Wholesale
inflation spiked to its largest gain in more than three decades in November,
according to the Labor Department.
U.S. producer prices vaulted a whopping 2 percent in November due in part to
higher energy prices. The 2 percent gain was the biggest since November 1974,
according to the government report.
Core prices, which exclude the volatile food and energy prices, jumped a
bigger-than-expected 1.3 percent. That was the largest increase since July 1980,
when the U.S. was in the grips of stagflation.
Analysts had been expecting overall wholesale prices to rise 0.5 percent and
core prices to inch up 0.2 percent, according to a Reuters poll.
Energy prices climbed 6.1 percent in November, while gasoline prices surged 17.9
percent. Other factors adding to inflation were a 13.7 percent increase in light
truck prices and a 2.2 percent gain in passenger car prices.
Last week, the consumer price index showed tame inflation and raised hopes for a
Fed cut in 2007. But rising inflation in the midst of a slowing economy - the
definition of stagflation - will surely make the Fed think twice before cutting
interest rates. In fact, if confirmed next month, this report could lead to a
rate increase.
"It (the PPI) pretty much removes any thought of a rate cut anytime soon. The
Fed seriously can't be talking about cutting rates with inflation measures
running higher," Richard Yamarone, chief economist at Argus Research, tells
Reuters.
Rising producer prices indicate that inflation pressure is in the pipeline. As
the costs to producer goods rises, companies will be forced to pass on the
higher costs to consumers. Look for the flat consumer price index to surge
higher in the coming months.
Editor's Note:
3. Housing Starts Build; Permits Collapse
Is the housing market attempting a comeback? Construction of new homes and
apartments rebounded in November, but applications for permits to build new
homes fell for a 10th consecutive month.
According to the Commerce Department, housing starts increased 6.7 percent to a
seasonally adjusted 1.588 million units in November. But that was hardly a
reversal of October's 13.7 percent decline. In addition, housing starts are down
25.5 percent from a year ago when builders were building 2.131 million units.
Permits for future builds, which indicate builder optimism, fell 3 percent to an
annual pace of 1.506 million units compared to a 1.553 million pace in October.
That's the lowest pace since December 1997. Analysts surveyed by Reuters were
looking for a 1.540 million pace.
Applications for permits are off by nearly a third compared to last year, down
31.3 percent from November 2005.
Analysts pointed to favorable weather conditions for this time of a year as a
reason for the jump in starts, but said falling permit applications aren't
encouraging.
"Mild weather plus more attractive pricing on the part of home builders probably
helped lead to this bounce in starts," Kevin Logan, senior market economist at
Dresdner Kleinwort in New York, tells Bloomberg. The decline in permits shows
builders "are continuing to plan for less construction."
The housing starts report also shows the housing slowdown is leading to layoffs
in the construction field. According to the report, builders axed 29,000 workers
in November following a reduction of 26,000 construction jobs in October.
Bottom line: Despite the market's embrace of today's housing report, the housing
situation isn't as rosy as it seems.
Editor's Note:
4. Soros Backs India's Currency Controls
Global financier George Soros, a strong proponent of open economies, doesn't
think the time is right for India to free its currency of controls because its
economy is showing signs of overheating.
At a meeting Tuesday with Indian business leaders, Soros said India should also
"be careful about the inflow of foreign capital" that has taken the country's
stock prices and foreign currency reserves to record highs.
"You are in a boom economy, in a booming financial market," Soros said. "It's
the role of the authorities to prevent the boom from becoming excessive, to
avoid overheating (of the economy)."
His comments come at a time when policy makers in India are debating moves to
make the rupee fully convertible.
Supporters of economic liberalization argue that lifting capital account
controls would make India more attractive to foreign investors and also help
Indian firms doing business overseas.
But, when asked if India should go for a fully convertible rupee at this point
of time, Soros said: "No. I do not think so."
Soros, who has always pushed for open economies and is often blamed for
triggering the Asian currency turmoil of 1997-98, said he now feels that
countries could use capital controls during times of crisis.
However, "in general capital controls can be rather harmful," he said.
Soros did not comment on the plunge in Thai stocks after the Thai central bank
imposed new controls on foreign investment, rattling markets around the region.
A panel of experts appointed by India's central bank has recommended a five-year
roadmap to make the currency fully convertible and the government is considering
its implementation.
India's rupee is only partially convertible, meaning that most capital account
transactions — investment money flowing in and out of the country — are subject
to approval by the central bank. Other transactions related to merchandise trade
are handled at market rates and without official approval.
© 2006 Associated Press.
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