Published November 10, 2008

WALL STREET INSIGHT
Traders are in for another roller-coaster ride

By ANDREW MARKS
NEW YORK CORRESPONDENT
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IF investors were hoping that the tentative return to function - if not full health - of the credit markets would signal a bottom for the bear market and bring some much-needed stability to the US stock market, they found that they were sorely mistaken last week.

Although some of the record-high volatility that has plagued the markets the past two months receded as the commercial paper market - which businesses tap for the shortest of short-term loans to fund day-to-day cashflow needs - has thawed, the dark clouds of uncertainty and fear remained firmly in place, and forecasts call for more stormy trading sessions ahead.

Stock market strategists warned, in fact, that the coming weeks will likely remain highly volatile and the major US market indexes will again threaten to break into ever lower territory as the extent of the damage to the economy here and abroad unfolds.

'All that's really happened at this point in the stock market is that we've traded one set of concerns for another,' said Hugh Johnson, chief investment strategist at Johnson Illington Advisors. 'The actual fear that the credit crisis might cause an outright collapse of the global financial system has receded markedly since the massive government interventions to recapitalise the major banks, and that's been a big relief, obviously.'



But he observed: 'Now, we're just starting to see the first concrete signs of the terrible damage that the financial crisis has wrought on the economy, and the market is reacting strongly to the indications that show we're in for a very difficult time here.'

Difficult indeed. The release of the October jobs report last Friday stunned Wall Street by coming in significantly weaker than economists' already glum expectations. They showed a labour market already in trouble, and with job cuts spreading throughout almost all sectors of the economy, they were a sign that the unemployment rate is likely to rise well above the 6.5 per cent rate that it recorded last week, its highest reading since March of 1994.

'The biggest problem for stock market investors that the ugly data we received last week poses is not how bad a situation we're in, but how much worse it's going to get,' said money manager Paul Krieg, who runs a large cap domestic equity fund for Seville Investments.

He was referring to both the jobs report and glum data on the services and manufacturing sector, and a horrible retail sales report boding ill for the holiday shopping season, also released last week.

'The problem is nobody really knows, and when you've got that kind of uncertainty looking three to six months out, on top of having a credit market that's still unhealthy and a long list of major companies, like GM and Chrysler, that are still in danger of going under, the only people willing to dip their toes in the water right now are short-term trading-oriented investors, who pull their money out as quickly as they put it in,' said Mr Krieg, who added that he is keeping a very high proportion of his fund's money in short-term debt and cash, where it has been for the last few months.

'I see nothing on the horizon that would convince me we're going to emerge from a bear market anytime soon,' he said.

Even the solid bounce-back that stocks enjoyed last Friday following two awful days of selling did little to encourage Wall Street traders.

'Today's action was just one in response to an oversold condition after a 10 per cent drop in just two days,' said Mr Krieg, referring to the biggest two-day sell off in the history of the Dow Jones Industrial average that occurred last Wednesday and Thursday. 'It's hardly as though we got any good news.'

In fact, the bluechip index rose 248.10 points, or 2.9 per cent, to close at 8,943.89, even as the jobs report showing 240,000 new layoffs came out and GM announced a US$2.5 billion loss for the third quarter and said that it may have to halt assembly lines to deal with a cash shortfall. The Standard & Poor's 500 index also gained 2.9 per cent, while the Nasdaq added 2.4 per cent.

For the week, all three major market indexes lost just about 4 per cent.

The coming week is unlikely to be as difficult to bear, with a light schedule of economic data, and the disastrous third-quarter earnings season limping to a close. But investors will be on the lookout for new indications of how president-elect Barack Obama intends to address the severe economic downturn.

Last Friday, following a meeting with economic advisers including former Fed chief Paul Volcker and former Treasury secretary Lawrence Summers, Mr Obama promised that 'immediately after I become president, I will confront this economic crisis head-on by taking all necessary steps to ease the credit crisis, help hardworking families and restore growth and prosperity'.

Mr Summers and Mr Volcker are among the reported favourites for roles high up in Mr Obama's administration, as is Timothy Geithner, current president of the New York Fed. Appointments of any of those three would be welcomed by Wall Street, as would concrete signs of the economic stimulus plan that Mr Obama is reportedly discussing with congressional leaders and President George W Bush.

Although few companies are left to report earnings in a season that has seen a 14 per cent profit contraction thus far, several major retailers - a sector expected to bear a significant brunt of the impact of the recession - will report earnings, including Wal-Mart Stores Inc, Starbucks, Nordstrom and Penney. Beleaguered insurer AIG is also expected to report today, as is Microsoft tomorrow.