Financial Options

All the comparisons of US to international markets should consider the strong performance put in by the dollar this year in the foreign exchange markets, up 11% versus the euro, 7.7% against the pound, and 14.5% against the yen (based on average prices for December vs. January). At year end, the dollar bought 117.75 yen, up from a January average of 103.341 yen. The euro was worth $1.1849 dollars down from the January average of 1.31227 and the British pound sterling was worth $1.723 down from the January average of $1.87973.

Gold ended the year at $516.60/ounce, up over 20% from the beginning of the year. In oil markets, WTI Cushing ended the year at a spot price of $61.13, up 30.5% for the year.

The Dow Jones Industrial Average ended the year half a percent down in its worst performance since 2002. The broader S&P500 ends the year up less than 3 percent and the NASDAQ picked up just over 1 percent. The US enjoyed relatively strong economic growth with around 3.6 percent GDP growth and corporate profits were at their strongest during the current economic expansion.

Japanese stocks rebounded after over a decade of anemic economic performance in Japan as foreign investors poured a record 10 trillion yen into Japanese stocks. The Nikkei average opened the year at 11,458.27, hit a low of 10,770.60 and closed the year at 16,111.43, up 40.6% (approximately 25% for dollar investors because of the strong dollar). Asian stocks overall did similarly well with the Morgan Stanley Capital International Asia Pacific Index up 22 percent in 2005, its third straight gain.

European stocks had their best year since 1999, with major indexes up in double digits. The FTSE 100 gained 17 percent for the year, Germany's DAX rose 27 percent and France's CAC-40 rose 24 percent.

The Federal Reserve raised interest rates at every meeting of the Federal Open Market Committee and the European central bank raised rates slightly. The Japanese central bank indicated that the Japanese deflation is over, signaling a possibility of interest rate increases sometime next year.

Stocks drop, blue-chip Dow erases 2005 gains

«Some of the year's biggest fears, such as higher oil prices and an inverted Treasury yield curve, seem to have been revived during these last trading days,» said Michael Metz, chief investment strategist at Oppenheimer & Co. «A lot of investors are squaring their positions as the year comes to a close and they are doing it so by selling some of the year's biggest gainers.»

U.S. Stocks Decline, Sending Dow Jones Average Down for Year

Economic growth in the U.S. is expected to slow to 3.4 percent from 3.6 percent this year, based on the median estimate of economists surveyed by Bloomberg. S&P 500 profit growth will ease to 12.5 percent next year from 14.5 percent, according to a Bloomberg analysis of Thomson Financial data.

For 2006, Wall Street strategists on average forecast that the S&P 500 will rise about 6 percent. That would be its third straight annual percentage gain of less than 10 percent, which has never happened before.

For the third time this week, a rare occurrence in the bond market weighed on stocks. Short-term yields on the two-year Treasury note were at 4.35 percent, more than the yield of 4.34 percent on the 10-year note. The so-called inverted yield curve has come before each of the last four U.S. economic recessions. Before this week, it last happened in 2000.

Dow Closes Down 67, Ends Year in Negative

Looking ahead, investors hope the Fed will stop raising rates as early as possible in 2006 to avoid slowing the economy unnecessarily, and nervousness on this point has kept stocks in check through December.

«It's really the Fed at this point that's kept the market in check,» said Hans Olsen, managing director and chief investment officer at Bingham Legg Advisers. «The historic conversation between the Fed and the markets has become a bit of an argument over whether there's really inflation, and whether we need those rate hikes.»

London shares close lower after 4-1/2 year highs yesterday

On the economic front, house prices in the UK rose by more than anticipated during December, though the annual rate of growth ended the year in single digits for the first time in five years, according to a survey by the UK's largest building society Nationwide.

Nationwide found that house prices during December rose 0.5 pct from the previous month, up on November's 0.3 pct and expectations of another 0.3 pct rise

European Stocks Slip; Exporters DaimlerChrysler, L'Oreal Fall

European stocks fell on the last trading day of 2005, led by DaimlerChrysler AG, Bayerische Motoren Werke AG and L'Oreal SA amid speculation a declining dollar will curb profit growth for exporters in 2006.

``Everything points to a weakening of the dollar,'' said Ion-Marc Valahu, a fund manager at Agilis Gestion in Paris, which oversees $150 million. ``It's a risk for exporters.'' Valahu hasn't bought any stocks recently.

Asian Stocks Advance for Third Year, Longest Rally in a Decade

``Signs of economic recovery continue to boost investor sentiment on stocks,'' said Choi Min Jai, who helps oversee about $1.5 billion at KTB Asset Management Co. in Seoul. ``Earnings at exporters will continue to grow next year.''...
`Returns will likely be more restrained going forward,'' said Rohan Walsh, who helps manage about $1.7 billion as the head of Australian equities at Invesco Asset Management Australia Ltd. in Melbourne. ``A lot of the good news has been factored in already.''

Sources:
Energy Information Administration
Kitco.com
Yahoo Finance
Bloomberg
National Association of Securities Dealers (NASD - NASDAQ.com)
New York Stock Exchange