- The Washington Times - Tuesday, January 1, 2008

NEW YORK (AP) — Wall Street ended a painful year with another steep loss yesterday as investors glumly anticipated that 2008 would bring more of the uncertainty and turbulence of 2007.

The Dow Jones Industrial Average fell 101 points, the latest in a string of triple-digit moves that became commonplace in the just-ended year amid a continuum of bad news about housing, faltering mortgages and shrinking credit. Thanks to a big first-half advance, it managed to finish 2007 with a respectable increase of 6.43 percent — not as large as the 16.29 percent jump in 2006, but a better performance than the modest loss in 2005.

The Dow’s annual gain came even after it posted its worst fourth-quarter drop in 20 years, amid billion-dollar losses at the world’s biggest financial firms and falling spending by consumers whose budgets have been crimped by record-high oil prices and declining home prices.

“Considering all that’s going on, the market really acted pretty well,” said Todd Leone, managing director of equity trading at Cowen & Co.

It’s tough to say what the primary market driver of 2008 will be, but the stock market faces a slew of threats: more adjustable-rate mortgage resets, a still-tight credit market and the possibility of accelerating inflation. But Mr. Leone said the fourth-quarter earnings season in January should shed some light on how U.S. companies are surviving the recent slowdown and credit crunch.

Falling home prices have made it hard for struggling homeowners to refinance their mortgages, and the slump in construction activity has hurt home builders and other housing-related industries.

Still, there were some slivers of optimism. Britain’s Observer newspaper reported Sunday that Merrill Lynch was in talks over the weekend to line up capital from investors in China and the Middle East in exchange for stakes in the Wall Street firm.

Merrill, like many other financial houses, has seen its portfolio lose billions of dollar in value as a result of misplaced bets on mortgages. And as Citigroup Inc., UBS AG, Morgan Stanley and Bear Stearns Cos. have done, it has turned to investors in Asia for much-needed capital — Merrill has already gotten $4.4 billion this month from a Singapore fund, which bought a 9.9 percent stake in the U.S. brokerage.

The Dow fell 101.05, or 0.76 percent, to 13,264.82 yesterday. The blue-chip index remains below its Oct. 9 record high of 14,164.53, at which point it was up more than 13 percent year-to-date.

The Standard & Poor’s 500 index and the technology-dominated Nasdaq composite index also declined, but both posted annual gains for the fifth straight year.

The S&P; 500 index fell 10.13, or 0.69 percent, to 1,468.36, to end 2007 with a gain of 3.53 percent. It had reached a record close of 1,565.15 on Oct. 9.

The Nasdaq fell 22.18, or 0.83 percent, to 2,652.28, to finish the year with a 9.81 percent gain. Despite the market’s volatility, this was the best performance for the Nasdaq, still well below its tech-boom highs, since 2003.

The Russell 2000 index of smaller companies fell 5.73, or 0.74 percent, to 766.03.

Government bonds rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, slid to 4.03 percent from 4.12 percent late Friday, and is down nearly 17 percent for the year.

Declining issues narrowly outnumbered advancers on the New York Stock Exchange.

Last year was a remarkable one on Wall Street. The market began the year continuing the rally that propelled the Dow above 12,000 for the first time in October. Then, in late February, came a reminder that stocks were capable of turning tail and plunging — a skid on China’s stock market and an ominous economic outlook from former Federal Reserve Chairman Alan Greenspan sent the Dow down 416 points in one day.

That panic didn’t last long. In April, the Dow barreled above 13,000 for the first time and then glided past 14,000 in mid-July. But in late July, however, the market realized that the ongoing slump in housing, and a rise in mortgage foreclosures owing to resetting adjustable-rate loans, was taking a toll across the credit markets.

Investors bailed out of anything tied to mortgages, and soon Wall Street discovered that financial institutions in the United States and overseas were holding billions of dollars in assets that were losing value by the day. The biggest names on the Street — Merrill Lynch, Citigroup, Bear Stearns — announced billions of dollars in write-downs. Merrill and Citi lost their CEOs, and several financial firms sought out billion-dollar investments to clean up their balance sheets.

In the midst of this turmoil, the credit markets all but seized up, and all these interconnected events pummeled stocks. The Dow suffered triple-digit drops, recoveries and then drops again as Wall Street stumbled through months of volatility.

In August and September, the Federal Reserve began to act, with interest-rate cuts and injections of liquidity. It helped for a while, and in October, stocks were rallying again, taking the Dow to another set of record highs — only to succumb again to fears about the unknown extent of the credit mess.

Wall Street enters 2008 with that same concern, not to mention oil’s surge this year of about 60 percent to nearly $100 a barrel, and the U.S. dollar’s tumble to record lows against the euro. Yesterday, the dollar rose against most other major currencies, gold prices fell, and crude-oil prices slipped 2 cents to settle at $95.98 a barrel on the New York Mercantile Exchange.

“We’ve seen the return of volatility. I think that will be around for a while, and will govern trading for the new year,” said Scott Fullman, director of investment strategy for I.A. Englander & Co. “Stock selection and strategy will play a very important part in the success of anybody who is trading going into the new year. This is not a time where you throw a dart at the board.”

In 2007, the technology, energy, industrials and health care sectors did well, while the financial industry and small-caps — usually fledgling companies that rely heavily on loans to grow their business — lagged.

The biggest gainer among the 30 Dow components was Honeywell Inc., with an annual rise of 36 percent, and the biggest loser was Citigroup, with a loss of 47 percent.

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