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2006: A Bumpy Ride For Financial Markets

Polishing up their crystal ball, a team of UCLA economists at the Anderson School of Management are forecasting a volatile year for U.S. financial markets after a relatively calm 2005. During 2005, the high-low range of the S&P 500 was “an unusually low 10 percent, ending the year very close to where it began,” the UCLA team said in its quarterly Anderson Report. The report's authors cite “four fundamental factors that will work to significantly increase financial market volatility in 2006”

  • The new Fed chairman. “Recent history suggests that a change in the Fed chairmanship is accompanied by increased financial market volatility.”

  • The end of the zero interest rate policy in Japan. As Japan's economy continues to improve, it will likely abandon this emergency policy. “With that, one of the most significant sources of global liquidity will begin to dry up.”

  • The mid-term election cycle. “Historically, stocks do not do well in mid-term election years. For example, between 1960-2004 the annual compound rate of return for the S&P 500 was 10.5 percent.” But during mid-term election years between 1962-2002, the rate dropped to a negative 0.6 percent. “History suggests that it is better to buy stocks late in a mid-term election year than early.”

  • The waning of the housing boom. “The evidence is accumulating that the great housing boom of the past decade is coming to an end. Higher interest rates and declining affordability are exacting their toll.... The question is whether or not the damage can be contained to the housing sector.”

Credit Conditions Improve In November

The monthly Credit Managers' Index, a gauge of how credit granters scope out current business conditions and companies' ability to pay their bills, edged up modestly in November to a reading of 57.4 from an October level of 56.6. The gauge is now 1.2 percent higher than November 2004, “and represents solid economic growth,” said the National Association of Credit Management (NACM).

A lower rate of bankruptcy filings — 9.6 percent in manufacturing and 8.2 percent in services — contributed most to the gain — “a result of the rush to file for bankruptcy before the October deadline introducing more credit-friendly bankruptcy laws.” The improvement in bankruptcies, however, was offset by a sharp deterioration in November sales, “a pattern likely to be repeated in December as orders typically plunge after the peak holiday season,” the trade group said. Member companies said sales tumbled to a reading of 60.7 percent from 68.9 in October.

The NACM said, “It is worthwhile to note that both dollar collections and dollar amount beyond terms improved significantly, both for the month and the year. This data suggests that buyers are able to make payments more easily and are likely to be in better financial health, and that business and economic conditions are looking up.”

Lowe's To Build Distribution Center

Lowe's Companies Inc., the Mooresville, N.C.-based home improvement chain, said it is building a flatbed distribution center in St. Joseph, Mo., to supply products to its 75 Midwestern stores.

The retailer will retrofit a former Nestle pet food manufacturing facility at an estimated cost of $12 to $16 million, including land, construction and equipment costs. The 200,000 square-foot facility is located on a 20-acre site. Construction will begin immediately; the plant is expected to begin shipping operations in July 2006. The facility will initially employ about 35 workers.

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