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WALL STREET INSIGHT: Fear of prolonged credit crunch hangs over market

Investors expect to get glimpse of 2008 outlook from earnings reports of 3 major broking houses


BY many measures, the global credit crisis is back to its worst levels since August. The prospects for a prolonged credit crunch that limits lending to businesses will be hanging like a black cloud over Wall Street this week, despite the efforts of the US central bank, which announced it is coordinating efforts with other central banks to add liquidity through a series of auctions of term funds and currency swap lines to help ease current credit market pressures.

The prospects for a so-called Santa Claus rally in US stocks, which just finished their worst weekly drop in five weeks despite a quarter percentage point interest rate cut by the Federal Reserve, or rather because of the Fed’s decision not to cut rates by fifty basis points, were also not helped by ugly inflation data last week.

The consumer price index rose 0.8 per cent, as against expectations of a 0.7 per cent increase. This roiled the markets as investors fretted that the Fed won’t be able to act as aggressively in cutting rates as it would otherwise be able to if inflation was lower. The Fed funds futures market’s odds for a rate cut at the January Federal Open Market Committee meeting slid to 84 per cent from 100 per cent following the release of the data.

The market’s only chance to reverse the downslide afflicting stocks in the week ahead could very well be earnings reports from three major Wall Street firms, which are at the very heart of the financial sector that has been beset by – and helped to cause – the sub-prime mortgage fiasco that set off the credit crunch.

It’s hard to imagine US stocks moving beyond the turmoil that has besieged markets since the end of November, but traders and investment strategists said that the outlook for 2008 provided by the big brokers in their fourth quarter earnings announcements could hint at an end in sight for the heavy-duty write-downs and losses at the banks and provide optimism for investors.

‘I would expect stocks to move more on what the future looks like for financials than what they say has already happened to them in the last quarter,’ said Art Hogan, chief market strategist at Jeffries & Co. ‘The forward looking statements are probably going to be the biggest driver for the market this week,’ he said.

On Friday, the Dow Jones Industrials tumbled by 178.11 points, or 1.32 per cent, to 13,339.85 and the S&P 500 gave up 20.46 points, or 1.37 per cent, following the higher than expected consumer inflation data. The Nasdaq Composite gave up 1.23 per cent.

For the week, blue chips slumped 285 points or 2.1 per cent to 13,339, the lowest close since Dec 4 and their worst week since early November.

The Dow is up 7 per cent for the year. The S&P 500 erased 36.71 points in the past week, or 2.4 per cent, finishing Friday at 1,467.95. For the year, it is up 3.5 per cent. The Nasdaq fell 70 points or 2.6 per cent, and is up 9.1 per cent for the year.

While two of the three major brokerage houses reporting this week – Morgan Stanley on Wednesday and Bear Stearns on Thursday – are likely to post major writedowns, investors will be looking beyond their fourth quarter reports to get a glimpse into their expectations for the first quarter of 2008. Goldman Sachs, which is expected to log a healthy profit, reports tomorrow.

After last week’s troubling producer and consumer price data, hopes for more rate cuts will rise and fall on every new inflation indicator. That will come on Friday, when the Fed’s preferred measure, the core personal consumption expenditures report, is scheduled for release.

Analysts expect core prices by that gauge will have risen 0.2 per cent in the month.

The same day brings reports on personal income and personal consumption gains, which will also be closely watched.

Today, the Fed conducts its first US$20 billion auction of new term loans under the plan it announced this past week with four other central banks to ease liquidity and credit concerns. The second auction is Thursday.

‘If the Monday auction goes well, it could be a real confidence booster for financial markets, and thus for stocks, which have been beaten down by fears that credit markets will continue to seize,’ said Kathy Camilli, president of Camilli Economic Advisors.

Other economic news includes the Empire State Manufacturers survey today. Final third quarter GDP is reported on Thursday as are leading indicators for November.


Source: Business Times 17 Dec 07


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