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Wild ride for investors ahead: analysts

WALL STREET INSIGHT

But they expect rally once sub-prime uncertainty clears

IN NEW YORK

ON Wall Street, stock market analysts and money managers see stocks ready to register gains once the considerable cloud of dust kicked up by the turmoil in the world’s credit markets sparked by the sub-prime mortgage market settles in the weeks ahead.

But stock traders warned that investors should prepare themselves for potentially huge short-term dips and advances as the market reacts to a steady stream of data leading up to the all-important meeting of the Federal Reserve’s interest rate policymaking committee on Sept 18, which will coincide with the beginning of a pivotal third quarter earnings reporting season.

‘The only thing I’m ready to predict for this month is a wild ride for investors,’ said Hugh Johnson, chief investment strategist of Johnston Illington Investors.

The US stock market’s performance last week could have been a microcosm for the entire summer. Huge ups and treacherous downs leaving the major stock indexes, in the end, pretty much at the same point at which they started the week off.

‘There’s an old saying on Wall Street: go away in May, don’t buy until Labour Day,’ observed Joe Battipaglia, the chief investment strategist at Ryan & Beck, who has seen more than his share of stock market gyrations, volatile markets, bull runs and short term meltdowns over more than 30 years of stock market forecasting.

‘And if investors had followed that rule, they’d have made themselves some very nice returns from the beginning of the year, and be in a situation to enjoy what I think will be a strong run sometime this fall, once the uncertainty over the credit market meltdown, how it’s affecting the economy, and what the Fed will do in response, calms down,’ he said.

Mr Battipaglia’s prognosis sounds simple enough, but investors probably will have several more weeks of the kind of volatility witnessed throughout the summer months and typified in last week’s often frantic trading action, before answers to those three key questions become clear.

The market remains on the edge, poised to either jump in with both feet and start a buying frenzy like the one witnessed following the late February plunge, which eventually sent the Dow to new record highs in July; or to cut and run, pull money out of the market at the dizzying pace seen in August’s sell-off, which brought the stock indexes to the brink of a full-blown bear market.

‘It’s going to be a wild and crazy September,’ echoed Joe Kalinowski, chief investment strategist at Grace Financial.

‘You’re going to see a lot of speculative buying and selling until the dust clears on the economy.’

September is known as the worst month of the year for stocks, with the Dow losing an average of 1.2 per cent for the first month of fall since 1929, and it could happen again if the Fed does not act to cut rates, as the investment community is clearly expecting at this point. The Federal Open Market Committee convenes on Sept 19.

Speculation over the likelihood of the first cut in the Federal funds rate has been running hot and heavy since the Fed took the unusual action of raising the discount rate target by 50 basis points two weeks ago in order to keep liquidity from drying up in the credit markets and to reassure the world that it would not allow the financial system to be plunged into chaos by the greed and speculative behaviour that led to the sub-prime mortgage crisis, which has spread to all financial markets.

On Friday, Fed chairman Ben Bernanke’s much-anticipated comments at a conference in Jackson Hole only stoked those expectation to a higher degree. ‘Everybody thinks they heard what they wanted to hear from Bernanke,’ said Mr Kalinowski. ‘Bernanke said the Fed would not let the credit crisis spread to the economy. The market took that to mean he’s more than likely to cut rates at the Sept 18 meeting,’ he said.

Indeed, investors responded strongly to Mr Bernanke’s speech, sending the Dow Jones Industrial Average soaring 119 points, or up 0.9 per cent to 13,357.74. It was a broad-based rally, too: of the Dow’s 30 components, 27 finished higher. The S&P 500 rose 16.35 points, or 1.1 per cent, to close at 1,473.99. The Nasdaq closed up 31.06 points or 1.2 per cent, at 2,596.36.

For the week, the blue chip index advanced nearly 1.2 per cent while the S&P 500 finished with a loss of 0.4 per cent, and the Nasdaq gained 0.7 per cent.

All three indexes registered gains of more than one per cent for the month of August, with the S&P 500 leading the way with a 1.28 per cent gain. The Dow and the Nasdaq posted 1.1 per cent advances.

The coming holiday-shortened week will get off to a fast start for traders coming off their Labour Day break, concerns over the credit crunch and its effects on the economy remaining front and centre.

Tomorrow, the Institute for Supply Management’s August manufacturing index will be released. That will be followed two days later by the ISM services index, which gives a similar snapshot of the non-factory sector. ‘These are both important and timely indicators and are some of the earliest readings on economic activity for August and do include the period of market turmoil,’ said Joel Naroff, president of Naroff Economics.

Exactly how much the real economy has been affected will have a direct bearing on the Fed’s interest rate decision at its Sept 18 meeting. The Fed funds futures market is pricing in a 100 per cent chance of a quarter-point cut, with another quarter-point cut expected by year-end.

The credit markets will also face a big test starting tomorrow, when investment bankers will be looking to finance several major buyouts, including the US$26 billion buyout of First Data Corp by Kohlberg, Kravis, Roberts.

‘If that deal goes smoothly, it could give a big boost to the credit market and would be a step in the right direction of reassuring investors that liquidity is not still in crisis,’ said Mr Johnson.

 

Source: Business Times 3 Sept 07

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