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WALL STREET INSIGHT: Investors brace for another harrowing week

Earnings, economic reports ahead add to worries over US economy’s health


IT was another dizzying and harrowing week for US stocks, and with Wall Street’s perception of the economy’s health turning sour, investors should brace for more of the same in the coming week, ahead of a wave of rough earnings and economic reports.

‘It’s hardly a surprise that the stock market keeps slipping back into selling,’ said Jim Herrick, head of equity trading at RW Baird. ‘It’s very hard to gain any kind of buying traction when you get another piece of data pointing to a recession or more financial troubles for the banks every couple of days,’ he said.

Indeed, while stocks seemed on the brink of putting together a rally in the middle of the week, advancing on Wednesday and Thursday, those two days were sandwiched between big losses on Tuesday amid fears of bankruptcy at mortgage lender Countrywide Financial, and again on Friday, despite Bank of America’s announced takeover of Countrywide.

Since the start of January, economists have on average raised their likelihood of a recession occurring from just below 40 per cent to 50 per cent as of the end of the week. Goldman Sach’s Jan Hatzius was the latest and most noteworthy economist to throw his hat into the recession ring, with a report that estimated a better than 60 per cent chance of an economic downturn of about one per cent a quarter, lasting about six months.

‘The market is still reconciling the fact that the economy is slowing and might be in a recession,’ said Paul Nolte, director of investments with Hinsdale Associates. ‘Valuations may be too high compared to the low earnings.’

Investors will have plenty of opportunity to begin judging just how out of whack valuations are on an earnings basis as the fourth quarter earnings season shifts into high gear this week. Last Friday, investors reacted with a big sell-off to a downbeat report from American Express which took a charge of US$440 million on missed payments and estimated lower profits throughout the year.

American Express’s 10 per cent decline helped drag the Dow Jones Industrials to a 246.79 points, or 1.92 per cent decline to 12,606.30. The S&P 500 did a little better with a dip of 19.31 points, or 1.36 per cent to 1,401.02, while the Nasdaq Composite did a little worse than blue chips, giving up 48.58 points, or 1.95 per cent, at 2,439.94.

The major averages each finished the week with heavy losses. The Dow shed 1.5 per cent, and the S&P 500 ended down 0.7 per cent. The Nasdaq was the worst performer with a loss of 2.6 per cent. Over the first 10 trading days of 2008, the Dow is down 5 per cent, while the S&P 500 is off 4.2 per cent, and the tech-heavy Nasdaq has plunged by 8 per cent.

Investors will have more big-name companies’ earnings reports and forecasts this week, with fourth quarter results expected from major banks and bellwether technology firms.

Genentech kicks things off today, followed tomorrow by Citigroup, US Bancorp and Intel. Wednesday brings reports due from JP Morgan Chase and Wells Fargo, Thursday from Merrill Lynch, Washington Mutual and IBM.

On Friday, it’s General Electric’s turn.

Thomas Lee, JP Morgan chief equities strategist, has a dour outlook on the fourth quarter profit season’s effect on the market. ‘The fourth quarter is unlikely to turn bears into bulls,’ he wrote in a research report, predicting a 10 per cent profit decline for the S&P 500 in the quarter, following a 5 per cent decline in the third quarter.

But investors will likely be paying as much attention to the week’s economic reports as the earnings reports, and that could prove to stocks’ advantage, as the Federal Reserve’s upcoming interest rate meeting looms larger.

The rising spectre of a recession has also raised the chances that the Fed will chop rates by 50 basis points at its Jan 30 meeting. Goldman also predicted that the Fed will cut the Fed Funds rate to 2.5 per cent this year to stimulate the economy.

Based on chairman Ben Bernanke’s comments last week, the Fed appears ready to knock rates down by half a per cent right away, but with oil prices in the US$90’s and other commodities soaring, strong inflation numbers could make it hard for the Fed to be very aggressive, said Lehman Brothers’ economist Ethan Harris.

Reports to be released this week include December producer prices and retail sales on Tuesday, the consumer price index, industrial production data, a housing market index, and the Fed’s Beige Book on Wednesday. On Thursday, housing starts, weekly jobless claims and the Philadelphia Fed survey will be released. Friday will bring a key consumer sentiment survey along with leading economic indicators.


Source: Business Times 14 Jan 08

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