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Investors looking for some clarity on the economy

WALL STREET INSIGHT

Focus on consumer price report, results of retail giants

AFTER somewhat of a comeback week for US stocks following the previous week’s heavy losses, investors will be forgiven if they feel as though they’ve got no idea what’s coming next.

Indeed, the events of the past week alone would normally be enough to keep Wall Street talking for a month: Yahoo’s rejection of Microsoft’s unsolicited takeover offer, Warren Buffet’s offer to assume US$800 million of bond liabilities from the three major bond insurers, Fed chief Ben Bernanke’s dour outlook for the economy, and the lowest consumer sentiment reading reported by the University of Michigan since February 1992.

‘I wouldn’t read very much into last week’s gains insofar as what it means for how the stock market is going to be trading in the coming week,’ said Joe Battipaglia, chief investment strategist at Ryan & Beck, who attributed most of the week’s advance to buying into an oversold market.

‘I see stocks bouncing up and down like they’ve been doing until we get some clarity on the economy and on how much more in writedowns are still to come from the financial sector,’ he said.

The uncertainty over the economy’s fate was mirrored in several reports last Friday, two of which pointed toward a recession, the other showing the economy holding up. In addition to the slump in consumer sentiment, Wall Street got the lowest reading in the Empire State manufacturing survey since May 2003.

But the January industrial production report showed a rise of 0.1 per cent putting it back to the record level hit in September, hardly a sign of recessionary contraction.

‘Most people believe that we’re either already in a recession or that a recession is an inevitable occurrence, but we’re still getting enough contradictory evidence to support an argument that we might not slump into negative growth,’ said Joel Naroff, president of Naroff Economic Advisors, who believes that the chances of a recession are now better than 50 per cent. Perhaps that signal that a recession is not necessarily such a foregone conclusion is what enabled the S&P 500 to eke out a 1.13 point, or 0.1 per cent gain, to 1,349.99 points.

However, the Dow Jones Industrials did not fare as well, slipping by 28.8 points, or 0.2 per cent, to end at 12,348.212. The Nasdaq Composite also finished in the red, giving up 10.74 points, or 0.5 per cent, to 2,321.80.

All three indexes registered gains for the week. The Dow and the broader S&P 500 advanced 1.4 per cent each while the Nasdaq was up 0.7 per cent.

The ongoing credit crisis and the recession fears that continue to dog the stock market will make a repeat performance difficult.

Meanwhile, crude oil has been on a comeback of its own of late, gaining 4.1 per cent last week to US$95.50 per barrel, its biggest weekly gain since November.

The US stock market will be closed on Monday for the President’s Day holiday, so investors will only have four days of trading to decide on whether stocks will rise or fall this week.

With signs growing that consumer spending, which is responsible for 70 per cent of the US economy, is waning, Wall Street will be keeping a close eye on fourth-quarter earnings reports from JC Penney and retailing king Wal-Mart Stores for further indications of a slowdown.

Wednesday’s consumer price report will also be under the investor spotlight, as inflationary pressures have been rising, which could further weaken consumer spending.

Reports from the beleaguered housing sector, which Fed chief Ben Bernanke noted remains the key to just how bad the US economic slowdown will become, are due tomorrow. Investors will hear more from the Fed on Wednesday when minutes from its most recent meeting will be released.

Wall Street also will get a look on Friday at the Philadelphia Federal Reserve’s manufacturing survey, whose poor showing last month set off alarm bells to many on Wall Street that recession was on its way.

On the fourth-quarter earnings front, tech heavyweight Hewlett-Packard also reports this week, as do Whole Foods, Newmont Mining, PG&E, Trump Entertainment and MGM Mirage, amongst others.

But earnings reports from several foreign banks could draw the most interest from investors, who are on high alert for more sub-prime mortgage related write-downs. Barclays, UBS and Societe Generale, whose US$7 billion trading scandal erupted two weeks ago, are due to report.

 

Source: Business Times 18 Feb 08

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