MarketView for December 29

Summary  

Stock prices were somewhat lower on Monday during this second consecutive holiday shortened week. However, you should not take what happens over the remaining days of 2008, in terms of market activity, too seriously. Whenever there is low volume, market moves are undeservedly magnified and trading is expected to be light throughout a week that is abbreviated by the New Year's holiday on Thursday.

Volume on the Big Board on Monday was about 875.4 million shares, far below last year's estimated daily average of 1.90 billion. On the NASDAQ, about 1.17 billion shares traded, well below last year's daily average of 2.17 billion.

Meanwhile, Kuwait cancelled a joint venture with Dow Chemical, citing slumping petrochemical sales and the global financial crisis due to the deepening global recession, with the result of a possible demise of Dow's planned takeover of Rohm & Haas. Dow’s shares fell to their lowest level since 1991 as a result of the end of the planned $17.4 billion joint venture.

The news raised concerns that Dow, the country’s largest chemical company, would not be able to complete its deal to buy rival Rohm & Haas, which Dow had agreed to acquire for about $15.3 billion in July. Rohm & Haas shares were down as much as 25 percent at one point during the day. Dow ended the day down 19 percent to $15.32, while Rohm & Haas fell 16.1 percent to $53.34.

The turmoil around Dow and Rohm & Hass added to the Street’s concerns about the chemicals industry, which has been struggling because of recessions in most developed countries and a sharp slowdown in emerging economies.

Rising energy shares tempered losses after oil prices rose 6 percent following Israeli air strikes in the Gaza Strip. The third day of fighting came as Israel prepared to launch a possible invasion. The NASDAQ was dragged down by large-cap tech companies including BlackBerry, which fell 5 percent to $38.81, and Cisco Systems, down 1.6 percent to $16.01.

Economic worries overshadowed gains in the energy sector as oil climbed on concerns that crude supplies could be disrupted by tensions between Israel and the Hamas-ruled Gaza Strip. Nonetheless, Chevron and Exxon Mobil were among the best performers on the Dow. Chevron ended the day up 1.7 percent to close at $71.55, while Exxon rose 1.1 percent to $78.02.

As 2008 draws to a close, there is hope that the incoming White House administration will offer another stimulus package in an effort to help steer the country out of a year-long recession. The broad S&P 500 is down about 40 percent for the year, second only to 1931's record drop of 47.1 percent. President-elect Barack Obama has said signing a major economic stimulus package will be his priority when he takes office on January 20.

Over the weekend, one of Obama's top economic advisers said financial policy should address both immediate job creation and longer-term investment needs. Lawrence Summers, Obama's pick to head the White House National Economic Council, said spending government money solely to stimulate consumer spending would be a short-sighted mistake.

Crude Rises

The price of domestic sweet crude oil futures for February delivery were up more than $2 on Monday on concern that Israeli attacks on Hamas could disrupt Middle East supplies. Domestic light, sweet crude settled up $2.31 per barrel at $40.02. London Brent crude settled up $2.18 at $40.55 a barrel, after touching a session high of $43.18. The price of crude oil is on track for a nearly 60 percent loss this year, the largest annual drop since futures began trading 25 years ago.

The Israeli attack on Hamas targets in Gaza for the third day has enraged Arabs across the Middle East, raising concerns that the conflict could threaten oil supplies from the region. At the same time, the dollar fell broadly on Monday, eroded by a grim outlook for the U.S. economy. Dollar weakness can increase the investment appeal of oil and other commodities.

Oil is down more than $100 a barrel from a record peak of more than $147 in July, depressed as the downturn in the world economy has hit demand for fuel. OPEC agreed its biggest ever production cut of 2.2 million barrels per day in December, to fight the market's slide. Libya and Abu Dhabi's National Oil Co have both joined leading producer Saudi Arabia, vowing to cut output by January. OPEC has cut output three times in an effort to remove about 5 percent of world supply to halt the slump.

China's energy chief said the world's second-largest oil user after the United States would take advantage of falling oil prices to boost imports and build up its fledgling oil reserves.

The Outlook is Not Good

Israel's assault on Gaza added another element of risk to the mix on Monday, sending oil, treasuries and gold prices higher. Consumers, investors, central bankers and politicians are hoping to see some signs of recovery next year from the worst downturn since the 1930s as governments pump over $1 trillion into their ailing economies.

Wall Street has felt the pressure as the collapse of a $17 billion joint venture between Kuwait and Dow Chemical threatened to unravel one of the large merger deals of the year and overshadowed gains in energy shares on rising oil prices. The planned Dow joint venture had angered some Kuwaiti parliamentarians who said it was not economically viable amid the global financial crisis and slumping petrochemical sales.

This year will see one of the largest ever stock market falls. The S&P 500 benchmark is down more than 40 percent with two trading days left in 2008. Its biggest yearly drop was in 1931 when it fell 47.1 percent.

The fallout has hit all sectors from banks to autos to commodities and resources. Unemployment has climbed, house prices have plummeted and cash-strapped consumers have curtailed spending, heaping more pressure on companies.

Three big Japanese insurance companies were the latest firms considering a merger, hit by weak demand for car and fire insurance in the world's second-largest economy. Shares of Mitsui Sumitomo Insurance Group Holdings, Aioi Insurance Co and Nissay Dowa General Insurance surged on Monday on hopes that a merger would increase profits and reduce competition.

A surging yen was cited by analysts as part of the motivation for the insurance merger, because it has eroded the value of the insurers' foreign-currency assets. Yen strength has prompted official concern, underscored on Monday by Finance Minister Shoichi Nakagawa, who told the Financial Times that he was watching volatility in the foreign exchange market with alarm.

The yen has surged more than 18 percent against the dollar this year, damaging Japanese exporters like Toyota and Sony and triggering speculation the government may intervene to halt the currency's rally.

In the latest twist in the Bernard Madoff scandal, a member of congress said the U.S. House Financial Services subcommittee will hold a hearing on January 5 on how the Securities and Exchange Commission failed to detect Madoff's alleged $50 billion investment fraud.

In Europe, sentiment among Italian businesses hit the lowest level recorded in a monthly survey dating back to January 1991. Russia devalued the ruble again on Monday and Kremlin leaders urged government unity to deal with the biggest economic challenge in a decade.