Investors who have profited from the early gains are taking their profits now

World Outlook
As Shanghai goes, so goes the world economy. Since its collapse in 2008, the Shanghai Index has been in recovery mode and the thermometer for predicting the level of world economic activity because it is now an engine of product production.

Two months ago this Middle Kingdom was the most active region of a country full of growth and investment potential. But then we pointed out that the Shanghai Index had plummeted more than 20% and had flat-lined at that level of activity. We suggested that the American markets were also beginning to flat-line especially when you looked at the declining level of volume activity. Unfortunately the correction does not seem to be over. The market peaked in August and has been unable to make a single new high since then.

For one thing the Chinese “Growth Enterprise Market” is now causing a liquidity squeeze for existing enterprises as capital is being reallocated to new investments. There’s a glut of public offerings. This isn’t a good time for the rush of IPOs as there just is not enough liquidity to accommodate the amount of planned new offerings.

It appears that China’s stimulus package has peaked and that the effects are starting to fade. The National Bureau of Statistics reported yesterday that profits at China’s major industrial companies fell 10.6% in the first eight months of 2009 compared to the same period last year. Premier Wen Jiabao said the country’s economic recovery is not stable. The near-term outlook is not optimistic, as there are significant and serious risks that need to be addressed. Investors who have profited from the early gains are taking their profits now as better buying opportunities will likely be presented in the coming weeks.

Market Outlook:
This Week
Monday, the Treasury Department auctioned $30 billion in three-month bills at a discount rate of 0.070 percent, up from 0.040 percent last week. An additional $31 billion in six-month bills was auctioned at a discount rate of 0.170 percent, up from 0.160 percent last week. The three-month rate and six-month rate were the highest since October when the amounts auctioned were greater. The Fed held its final meeting of the year last week and once again voted to keep its target range for its bank lending rate at zero to 0.25 percent, where it's stood since last December. Most economists predict the Fed won't begin raising rates until the middle of 2010 when they are predicting that rate increases will be slow and gradual to ensure that inflation stays under control and do not derail the economy's tenuous recovery.

Tuesday, Dec. 22:
Q3 GDP Revision
Corporate profits
Existing Home Sales

Wednesday, Dec. 23:
Consumer Income
Consumer Sentiment
New Home Sales

Thursday, Dec. 24:
U.S. Market closes early
Unemployment Claims
Durable Goods Orders

Friday, Dec. 25:
U.S. Markets closed for Christmas Day

Market forces December 22

The economy of the U.S. expanded in the third quarter at a slower pace than anticipated as companies curbed spending and cut inventories at an even faster pace. The 2.2 percent increase in gross domestic product from July through September compares with a 2.8 percent gain previously reported by the Commerce Department in Washington.

We estimate the NYSE must still rise 3.7% from yesterday's close to be interpreted as a continuing rally not a declining head and shoulder sell signal. That reflects both the price change and volume of shares being traded.

Asian markets were mixed over night; China down -2.3%, Hong Kong up 0.7%, India up 0.6%, and Japan up 1.9%.

European markets are up with the average in a range from 0.3% to 0.9% this morning about half way through their day.

US pre-market futures up by about 0.3% today at 9:00 AM EST.

We are preparing for a market decline in early 2010 that could take prices down to where they were at the end of May seven months ago.