Published October 20, 2008

WALL STREET INSIGHT
Worn out US investors want to see off see-saw

But volatility not likely to ease until credit markets return to normalcy

By ANDREW MARKS
NEW YORK CORRESPONDENT
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IT will come as little surprise to any stock market investor who's witnessed the seemingly endless days of huge swings that Wall Street is hoping to see a moderation of volatility.

Keeping eyes peeled: The week ahead will see a slew of Q3 corporate profit reports and outlooks. Overall earnings estimates for Q3 stand at negative growth of 9.1%

Last week saw both the biggest single-day gains since 1933 and the worst single-day loss since 1987. An end to the wild gyrations may allow the stock market to continue last week's first steps toward working its way out of the deep bear market hole it has dug for itself.

'Until we get some kind of stabilisation in the markets, some sense that investor psychology isn't going to explode in the margin call selling fear or bargain hunting frenzies, there's no way to get a handle on where we really are,' observed Joe Battipaglia, chief investment strategist at Ryan, Beck.

Whether that volatility will moderate this week is largely dependent on the credit markets, which last week finally began showing signs that they are loosening the lending noose.

The overnight Libor rate fell to 1.67 per cent on Friday, down from a recent, crisis high of 6.88 per cent. And the gap between the 3-month Libor and the 3-month Treasury bill, known as the 'TED' spread a key indicator of risk, is down to 3.52 per cent from its record high of 4.65 per cent just a week earlier. The higher the spread, the more unwilling investors are to take risks. The spread was 1.04 per cent just a little over a month ago.

'If the short term rates keep improving, showing that banks are starting to lend some money, that will be a big boost to the market,' said Mr Battipaglia. 'Many investors are keeping their money out of stocks until the markets calm down and volatility simply won't ease until the credit markets return to at least a semblance of normalcy,' he said.

Investors need to feel like they can look away from the breaking news screens long enough to assess the economic fundamentals of many companies as the third quarter earnings season offers up one of its peak weeks of corporate profit reports and outlooks.

'Corporate earnings estimates are still too high, despite cuts,' said Mike Ryan, head of UBS Wealth Management-Americas. 'The troubles now extend outside the financials,' which is prompting him to recommend holding off on wholesale buying.

'Still, we feel the current market environment offers opportunities for investors who are willing and able to bear the risk of further setbacks.'

That tension was evident last Friday. Bullishness generated by Google's estimate-beating earnings vied with and eventually lost out to a report showing housing starts fell to a 17-year low. The Dow Jones Industrial Average fell 127 points, or 1.4 per cent, the S&P 500 lost 0.6 per cent and the Nasdaq Composite slipped 0.4 per cent .

For the week, however, both the Dow and S&P 500 advanced 4.7 per cent and the Nasdaq rose 3.6 per cent. Ten Dow components and 136 S&P 500 companies are due to announce earnings this week.

It may not be hard to find many instances of estimate-beating performance with expectations so low. Overall estimates for the third quarter stand at negative growth of 9.1 per cent, but if the financial sector, for which analysts project a negative-84 per cent growth rate, were stripped out of the S&P 500, third quarter growth would be 10.7 per cent, according to earnings tracker Thomson Reuters.

Credit card giant American Express kicks things off today, along with chip maker Texas Instruments and Apple. Tomorrow features earnings from Pfizer, DuPont, 3M and Yahoo.

On Wednesday, the tech sector is represented by Amazon.com, and investors will also be treated to earnings from McDonald's, Merck, and ConocoPhillips.

Thursday's highlights include Microsoft, Bristol-Myers Squibb, Eli, Altria and UPS. Ericsson heads Friday's slate. There's also less economic data to distract Wall Street from third quarter earnings.

Leading indicators for September are due today, weekly jobless claims are due on Thursday, and existing home sales for September are scheduled for Friday. Weekly oil inventories will be reported on Wednesday morning.

The highlight will be another speech by Federal Reserve chairman Ben Bernanke which could offer up clues as to whether the Fed intends to make an additional rate cut.