Market Outlook: 11-28-07

Robert Hsu, November 28, 2007

There certainly hasn't been a dull moment in the markets lately. The global stock market sell-off continued through Monday. And in Monday's final hour of trading, a wave of panic selling sent the S&P 500 Index down to 1,407 -- about 0.5% below where the market started the year.

After the sharp sell-off this month, many of my proprietary indicators are showing that the U.S. market is heavily oversold and ready to bounce. I believe that Monday's close is a short-term bottom, and we should get a market rally in the next two to four weeks, just in time for Christmas. As a result, I believe it's safe to start buying again as long as you're careful. You can go ahead and add to your positions or start new ones if you feel comfortable. In fact, I have a new buy for you that we'll talk about in just a minute.

Even though I'm expecting a quick rally -- perhaps as much as a 10% bounce in our Asia Edge stocks from their recent lows -- I still want you to be cautious with your investments. Fundamentally, the earnings and economic picture for the U.S. market continue to be weak. According to a report by the Organization for Economic Cooperation and Development, losses from U.S. subprime-mortgage foreclosures, coupled with slowing economic growth and falling house prices, could reach as much as $300 billion. And in the minutes from its October policy meeting, the Fed lowered its 2008 growth forecast for the U.S. (which happens to be the largest market for Asian exports) to as little as 1.8% from a previous estimate of 2.5%–2.75%.

Asia's Recent Performance

Meanwhile, in Asia, stocks fell for a third straight week, dragging the Morgan Stanley Asia Index to its longest weekly losing streak in three months. The dip in share prices is due to two things: First, there's widespread concern that growing credit-market losses will slow economic growth, and secondly, investors are worried that rising fuel costs will erode earnings. Let's take a quick look at how Asia's major benchmarks have performed lately.

The MSCI Asia Pacific Index fell 2.5% last week, its third consecutive weekly decline and the longest weekly losing streak since the period ending August 17. And all major regional indexes fell, with Japan's Nikkei 225 Stock Average sliding 1.8%. South Korea's Kospi Index dropped 8%, the biggest pullback among the main Asian benchmarks. But despite the losses that Asian benchmarks have experienced this month, most Asian markets are still up quite a bit for the year, with the exception of Japan.

According to Goldman Sachs' chief strategist in Tokyo, sophisticated global investors are moving out of Japan because of lower returns and poor corporate governance in Asia's biggest economy. The Nikkei 225 Stock Average is down 4.3% this year (measured in terms of dollars) and might be headed for its worst year since 2002. This is why we don't own any Japanese companies in our Asia Edge portfolio.

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