Market Outlook: 03-05-08

Robert Hsu, March 05, 2008

U.S. stocks tumbled again on Friday, the last day of February, marking the American stock market's fourth-straight monthly drop. The Dow plunged more than 300 points during the trading session after American International Group, the world's largest insurer, posted the biggest quarterly loss in its 89-year history.

The S&P 500 also dropped on Friday, falling 2.45%. The Leap Year Day loss ended a month in which the S&P fell 3.5%, its longest monthly losing streak since September 2002.

The sharp sell-off in the S&P 500 pushed the index down to the low end of our forecasted trading range of 1320–1440. Yesterday, the S&P closed at 1326 -- just barely within our range.

In the past three weeks, the U.S. equity market has been driven by speculation surrounding bailouts of mortgage bond insurers. This morning, a plan was finally announced for Ambac, the second-largest mortgage bond insurer, while MBIA, the largest mortgage bond insurer, received a capital injection. Ambac plans to raise $1.5 billion by selling its own equity. In a classic sell-the-news reaction, U.S. stocks sold off sharply this afternoon following an early morning rally. I believe that the S&P 500 will stabilize near its current level unless we get more bad economic news, like a negative surprise from Friday's unemployment report.

Now let's take a look at how the markets in Asia have done recently.

Asian Markets Boosted by Hong Kong Tax Cut

In contrast to what happened in the United States, Asian stocks gained last week. The MSCI Asia Pacific Index climbed 2.7%. The index was up 2.8% in February even though U.S. stocks continued to weaken. I believe that this decoupling of U.S. and Asian stocks is just beginning, and we have many profit opportunities ahead of us in Asian and commodity stocks. (In fact, I have a new buy for you this week that we'll get to in just a minute.)

One of the reasons behind the Asian markets' recent strong performance is a tax cut in Hong Kong announced last week. After another strong year of 6.3% GDP growth in 2007, the government of the Chinese city had a budget surplus and decided to cut its flat income tax rate from 16% down to 15%. Capital gains from trading stocks and real estate continue to be tax-free. Hong Kong's neighbor, the city-state of Singapore, also announced a strong budget surplus in 2007. Like Hong Kong, Singapore also has a low income tax policy, capping the maximum tax rate at 20%.

In an era when more than $3 trillion moves around the globe every single day, Singapore and Hong Kong understand that low taxes will help attract capital and talent. When a country overtaxes its most talented and productive citizens, today's technology makes it easier than ever for people and their money to move overseas. For politicians, there are important lessons to be learned from the economic successes of Hong Kong and Singapore.

Despite the economic slowdown in the United States over the past four months, very little has changed in the growth trajectory of leading Asian economies. China's economy, led by domestic consumption and investments, continues to grow rapidly, with a predicted growth rate of 9.5% this year. For many years to come, through both bull and bear markets, Asia will continue to be the fastest-growing and most dynamic economic region in the world. Asia Edge investors, with our combination of long-term vision and short-term flexibility, will be handsomely rewarded as this economic boom continues in full force. Does this sound good to you? Join in on the profits that Asia Edge subscribers have been enjoying by clicking here.

To get the latest updates on the market and which stocks Robert Hsu is recommending now, join Asia Edge.