Stocks End 2007 on a Down Note

Even with the last-day retreat, major indexes posted gains for the year. Data on existing home sales provided rare good news for the housing market

Major indexes fell on the last day of 2007, but stocks still posted their fifth straight year of annual gains despite a credit crisis and housing downturn that created a tumultous second half of the year on Wall Street.

The end of the year also brought a few merger and acquisition deals to completion, including a sale of units by Merrill Lynch (MER), which was hit hard by the credit crisis.

On Monday, the Dow Jones industrial average fell 101.05 points, or 0.76%, to 13,264.82. The broader S&P 500 index dropped 10.13 points, or 0.69%, to 1,468.36. The tech-heavy Nasdaq composite index lost 22.18 points, or 0.83%, to 2,652.28.

For every 17 stocks falling on the New York Stock Exchange, 15 rose in price. On the Nasdaq, the ratio was 16 to 14 negative.

For all of 2007, the Dow was up 6.4%, the S&P 500 rose 3.53% and the Nasdaq composite was up 9.8%.

This is the fifth positive year in a row for the S&P 500, a key benchmark designed to reflect the overall U.S. economy. In 2006, the index was up 12.8%, following a 3.01% gain in 2005, a 9% advance in 2004 and a 26.4% gain in 2003. The S&P 500 experienced three years of losses from 2000 to 2002.

"Few will regret seeing [the year] close after an almost unrelenting string of worries for markets," said Terry Sheehan of Stone & McCarthy Research Associations. "Although 2008 will open with much the same problems, it also presents a longer vista for their resolution and hopes for a better finish to look forward to in 12 months time," he wrote.

One problem has been a drastic slowdown in the housing market, and a new report Monday provided a glimmer of hope. Existing home sales rose 0.4% in November to a 5 million annual pace, the first increase since February. Sales are still down 20% from a year ago. There is a 10.3 month supply of homes on the market, down from 10.7 in October. The median sale price rise to $210,200, from $206,900 a month before.

The news seemed to help the stocks of mortgage companies and homebuilders. Fannie Mae (FNM) and Washington Mutual (WM) led the S&P 500 on Monday, with gains of more than 4%, while KB Home (KBH) rose 2.5%.

Given other recent housing data, "it is still too soon to talk about stabilization in the housing market," wrote Bear Stearns chief U.S. economist John Ryding. November new home sales dropped 9% in a report released Friday. "The process of returning to balanced market conditions will take a good deal of time and we see the housing slump continuing into 2009," Sireen Hajj of Calyon Securities wrote Monday.

Another problem has been worry about Americans' ability to repay their home mortgages. Rising defaults and foreclosures were a trend that started the year's credit crisis. On Monday, the Mortgage Insurance Companies of America said defaults on privately insured mortgages jumped 35% in November from a year ago to a record. More than 61,000 borrowers were more than 60 days late on payments, the trade group said.

"For those seeking a fresh start, the housing-mortgage sector baggage from 2007 seems destined to burden the outlook in the months ahead," said Michael Wallace of Action Economics.

In early 2007, a plunge in mainland China's volatile stock market spooked U.S. investors, but otherwise stockholders did well the first half of the year. Stocks peaked on July 19, just as worries surfaced about subprime mortgages and other risky debt. As parts of the credit market froze, financial firms reported billions of dollars of losses on the toxic investments.

The result has been months of wild gyrations in the market as investors and economists debate the true impact of the credit crisis and threats of an economic slowdown.

The impact on the year's corporate earnings is significant. In the first two quarters of the year, companies in the S&P 500 surprised with earnings gains of almost 9%, more than expected.

But losses in the financial sector took their toll in the third quarter, and, according to Reuters Estimates, losses may deepen in the fourth quarter, which ended Monday.

If thousands of analysts estimates compiled by Reuters Estimates are correct, S&P 500 earnings will rise just 0.9% in 2007. Profits in the financial sector will fall 62% in the fourth quarter alone, and 31% in the year overall.

The bond market closed early on Monday, and all financial markets will be closed on Tuesday, Jan. 1, in observance of the New Year's holiday.

This week's calendar includes the release of the minutes from the Dec. 11 FOMC meeting on Wednesday; initial jobless claims on Thursday; and on Friday the closely watched December employment report.

For the year, oil prices surged 57%. On Monday, oil futures fell slightly, with February NYMEX crude oil futures down 2 cents to close at $95.98 a barrel.

Among the stocks in the news on Monday, Merrill Lynch (MER) is selling its life insurance subsidiaries for $1.25 billion in cash to Dutch insurer Aegon. As part of the deal, Merrill will sell Aegon insurance products through its financial adviser network. Also, a British newspaper reports Merrill is in talks to raise more capital from Chinese and Middle Eastern sovereign wealth funds.

Delta Petroleum (DPTR) announced that Kirk Kerkorian's Tracinda would invest $684 million to take a 35% stake in Delta at $19 per share, a 23% premium.

IBM (IBM) is reportedly in advanced talks to buy an Israeli firm, XIV Information Systems, for $300 to $350 million.

Baidu.com (BIDU), the much-hyped Chinese Internet company, announced that its chief financial officer, Shawn Wang, was killed in an accident on Dec. 27. The stock fell more than 2%.

Mariner Energy (ME) will buy oil and gas drilling interests in the Permian Basin for $122.5 million and in the Gulf of Mexico for $243 million.

Salix Pharmaceuticals (SLXP) was reportedly downgraded to sell by a Piper Jaffray analyst after it announced a deal with Waton Pharmaceuticals WPI to market and sell an authorized generic version of Salix's anti-inflammatory drug Colazal.

The European indexes that were open were narrowly lower Monday. In London, the FTSE 100 index fell 0.31% to 6,456.90. In Paris, the CAC 40 index shed 0.23% to 5,614.08.

Open Asian markets were mostly higher. Hong Kong's Hang Seng index gained 1.62% to 27,812.65.

Treasury market

Bonds moved higher on Monday. Ten-year notes rose 11/32 to 101-25/32 for a yield of 4.03%; and the 30-year bond was up 20/32 to 108-27/32 for a yield of 4.46%.

According to a Merrill Lynch index, Treasuries returned 8.7% in 2007, the best return since 2002. Investors poured money into government debt after the credit crisis began in July.