Monday, 31 December 2007

Santa Takes a Holiday in December

Last month I threw caution to the wind and speculated that the All Ords would finish down in the month of December and low and behold it did falling -2.6%. Santa failed to show in November or December and I believe he'll stay home in January. In fact over the last 24 years (yes that's right I discovered more data on Yahoo Finance, I'm a bit slow you see) the month of December has only produced negative returns on 6 occasions as shown below.

So what will January bring? Probably the first economic data point of note will be the US nonfarm payroll report next Friday. With the steady rise in initial unemployment claims in recent weeks the number could come in to the low side. If that happens, no doubt the stockmarket will go into schizophrenic mode between 'this is bad news because it might mean recession' and 'this is good news because it means the Fed will have to continue to cut the Fed funds rate'.

Also in the US, 4th quarter earnings season will get underway in earnest. Earnigns are forecast to come in negative. Expect some more large writedowns from Merrill Lynch and Citibank and no doubt some more equity injections. Also the ratings agencies may be forced to end the charade surrounding the AAA ratings of the large bond insurers like Ambac and MBIA. That event could have some serious repercussions.

However at the end of month the Fed may ride to the rescue and save the day. Although their last rescue attempt didn't fare too well. Stockmarkets usually have a decent correction before recessions get underway and thus if the US is moving into recession we could see some rather large moves downward. That said stockmarket corrections are characterized by a series of sharp upward movements that fail to move the market higher over the medium term (sucker rallies).

So as always the choice is not an easy one but being the glass is half empty kind of guy I am when it comes to the current economic environment I'm betting the All Ords will continue to slide in January. incidentally the last time the All Ords fell for 3 consecutive months was Dec 2002 - Feb 2003.