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Hurry Up and Wait December 3, 2007 By Mat Johnson "Patience and perseverance have a magical affect before which difficulties disappear and obstacles vanish." — John Quincy Adams Despite a stronger than expected start to the holiday sales shopping season, the market began last week by tumbling lower. The sell-off was attributed to continued concerns surrounding credit and housing market conditions and how this two-headed monster would impact consumer spending as well as the overall economy through the remainder of the holiday shopping season. Of note, while last week's focus was squarely on consumer sentiment, individual investor sentiment was hitting multi-year lows. Historically, extreme lows in individual investor sentiment have coincided with market bottoms, and last week's readings of "bullish" and "bearish" sentiment hit levels seen when the market bottomed all the way back in early 2003. Given the market's 10% correction in November and trebling of recession stories hitting the newswires, it is little surprise that investor attitudes have reached such pessimistic levels. Ultimately, the market's sell-off last week was short-lived. The equity market rebounded first on reports of a stake in Citigroup being sold to the Abu Dhabi Investment Authority, which is wallowing in cash thanks to the surging price of oil. This was followed on Wednesday with the Federal Reserve's Vice Chairman hinting that they may cut rates again on December 11th. On Thursday evening, Fed Chairman Bernanke gave even greater weight to this outcome as he echoed his colleague's remarks regarding renewed market turbulence over the past month seeming to merit additional attention. Interestingly the continued bent of the Fed to lower rates came just as third quarter GDP was revised higher to a 4.9%, annualized, up from the earlier reported 3.9%, and the largest gain in four years. True to form as of late however, the interpretation seemed to be that this will setup the fourth quarter against a difficult comparison, rather than "Wow, the economy weathered the third quarter 'credit crunch' well, and will grow further in the fourth quarter." When it was all said and done, the equity market finished broadly higher, with the Dow Jones Industrial Average (DJIA) closing 3% higher, followed by a 2.8% gain for the S&P 500 and a 2.5% advance on NASDAQ. Small cap stocks, as measured by the Russell 2000 rose 1.7% on the week. Looking ahead, it seems the market action will be held hostage to how the Fed's decision on December 11th might be altered by economic data. This week all eyes will be on Friday's November Nonfarm Payrolls report, which is expected to show an increase of just 70K jobs. Should this occur, not only would it lend support to the belief that the Fed will cut rates, but it will also represent the smallest monthly gain since June of this year, and prior to that, November 2004. Given all of the negative news in advance of the Christmas retailing season, there very well could be a self-fulfilling prophecy at work, where retailers held back their seasonal hiring, in what is normally a large increase for the holiday shopping season. The way it stands now, near term market prospects may be held in check until the November jobs figures are out, while the next gating factor will likely be the Fed's decision on December 11th. While there could be some upside surprise factors between now and December 11th (a further decline in oil prices for example), it seems unlikely that they would get priced-in until the uncertainty surrounding the Fed's decision is removed.

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