Welcome to the MONEYLETTER Hotline for January 2, 2008

Happy New Year! Ouch. The market put a quick end to any lingering New Year's celebration today. The economic news in the form of the December manufacturing report was awful. With housing gone and the consumer weakening, a slipping manufacturing sector is all the economy needs. Manufacturing was the hope for the economy this year, joining exports as the twin supports as housing implodes. Based on the manufacturing numbers for the past three months, manufacturing is tottering.

Taking all the numbers together they are better than the headline number, but not that much better. Fitting today's numbers in with all the other numbers we have been getting, a picture of a very slow and weak economy emerges. Reading the Minutes of the last Federal Reserve meeting on December 1, none of this should come as a big surprise to the Fed. In fact, the Minutes, as we read them, indicates a worried Fed, worried that the economy is deteriorating faster than the Fed has been acting. We find it interesting that the concluding words of their discussion ended with the words that the Fed was prepared to act "if prospects for economic growth or inflation were to worsen."

Since the meeting, the prospects for growth have certainly worsened. That is why we see a further cut later this month, and a 1/2 percentage point cut to 3.75% would not surprise us. We think that the market is ignoring the coming help from lower interest rates. But we live in a very short-term oriented market world. Thank you, hedge funds.

There is no change in our recommended allocations.

New Fund Ratings – For domestic stock funds, two funds are now rated Buy: USAA Growth and American Century Growth. For international stock funds, T. Rowe Price Emerging Markets Stock is now rated Buy.

The Economy – The drop in the manufacturing report telling us that manufacturing activity declined last month came as a surprise to Wall Street pundits. It is the negative surprise that triggered the selling we saw today. We have no doubt that domestic manufacturers are holding back, concerned about the outlook. In fact, the Minutes reported that some firms were reportedly cutting back on investment plans. It will take more aggressive Fed action, which we expect, to unfreeze those plans. We have been expecting a very weak opening quarter, and that is what we are getting.

The Stock Market – We repeat what we said in the last Hotline. We have reserves, and now is the time to sit on them. As the market declines, and as the Fed cuts rates, the domestic market will become more and more attractive. But there are some months to go before the U.S. market will settle down. Meanwhile we continue to favor foreign equities, particularly Asia and the emerging markets. Growth will continue there.

The Bond Market --

The Select Portfolio – There is no change for this portfolio.

We wish you all a Happy and Prosperous New Year.

More articles...