Published September 29, 2008

WALL STREET INSIGHT
Will reality rain on the bailout parade?

By ANDREW MARKS
NEW YORK CORRESPONDENT
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WALL Street ended last week under a heavy cloud of uncertainty, but traders will return to business today in a celebratory mood, after an early Sunday morning announcement from the US Treasury Department and Congressional leaders that they have reached a tentative agreement to buy at least US$700 billion worth of distressed assets.

With a resolution agreed to and ready to be put into place, the sigh of relief should lift an anxious Wall Street to a big day today. Just the hint late last Friday that Congressional leaders and Bush administration officials appeared to be back at the table negotiating the rescue after a near-agreement fell apart last Thursday night boosted stocks to a strong finish at the day's end.

On Friday, the Dow Jones Industrial Average rose 118.20 points, or 1.1 per cent, to close at 11,140.26. The blue-chip index fell 2 per cent for the week. The S&P 500 registered a weekly decline of 3.2 per cent , while the Nasdaq Composite Index ended the week with a loss of 4 per cent .

Getting an agreement, 'will give the market a big lift', said SG Cowen & Company chief equities trader John O'Donohue. 'Just the relief of being able to watch trading screens instead of CNN to find out the latest on what's happening in Washington will bring out some of the investors who've pulled their money out of the market while they waited to see what the outcome would be.'

But once the celebration over reaching an accord is over, and that's likely to happen within days if not less, investors will have to start asking 'Now what?' and that's when things will get interesting again.



As Michael Parson, an equity analyst at stock market research firm Bull/Bear Equities put it: 'Once the market can turn away from Washington and start focusing on the state of the economy and what this upcoming earnings season is going to look like, we're going to have a very difficult reality to deal with. The fact is we're in a bear market and fundamentals have been steadily eroding the last few weeks and that's going to be reflected in company earnings for the third quarter and more importantly for the company outlooks for the next quarter.'

The government can do a great deal in terms of reassuring stock market investors that the financial system is safe from failure and it can get the credit markets flowing again back to some semblance of normaility with the rescue as a backstop, Johnson Illington Advisors chairman Hugh Johnson said. 'But that doesn't take away the fact that we're still in the midst of an uncertain and deteriorating condition for both the economy and corporate profits.'

Marc Pado, chief investment strategist at Cantor Fitzgerald believes that stocks have already built into prices a recession and another poor profit reporting season.

It's unlikely that light will be glimpsed once the furore over the rescue plan fades. Investors will have a week full of key economic data on a troubled economy, including the employment report for this month on Friday, to digest.

Before that, Monday brings personal income data, followed by the Chicago purchasing managers report and the consumer confidence index on Tuesday. The widely followed S&P Case/Shiller home price index is also released that day.

On Wednesday, ADP's private sector employment report is released, as is ISM manufacturing data. Construction spending and the auto industry's monthly sales reports are also that day. On Thursday, weekly jobless claims and factory orders are reported.

Friday's jobs report will show more job losses, but Wall Street is expecting that it won't be enough to worsen the unemployment rate of 6.1 per cent.

The progress of merger or takeover negotiations for Wachovia Corp, with Citigroup reportedly close to reaching an agreement with the troubled bank, should be the only major event coming from the private sector this week.