Published November 17, 2008

WALL STREET INSIGHT
Wall St strains to break 'vicious cycle'

A tough week lies ahead as profit- taking wipes out each bout of gains

By ANDREW MARKS
NEW YORK CORRESPONDENT
Email this article
Print article
Feedback

AFTER another week of steep losses, high volatility and two separate dashed hopes for a turnaround on the same day, it is fair to say that the mood on Wall Street heading into the coming week is defeatist.

'You look at what's come this past week, and especially at the disheartening way we finished up,' Cantor Fitzgerald chief investment strategist Marc Pado, said shortly after the closing bell on the New York Stock Exchange last Friday, referring to the abrupt reversal US equities staged late in the trading day after the major stock indexes had slowly clawed their way into positive territory following a negative opening.

'And with several important economic reports coming out this week, which are likely to reinforce the very negative mood, it's very difficult to generate any optimism that we're close to turning this thing around any time soon,' he said.

Indeed, while the latest moves by the US Treasury Department to thaw frozen credit markets and prop up faltering lenders are aimed at reassuring investors, the problem for the markets now appears to be the fact that the worst fears for the economy are being realised.

'It's one thing to discount for a global recession and a severe economic contraction in the US, but it's another thing altogether when we're confronted with evidence that our worst fears are being realised for the economy and it could get even worse,' said Steven Mitchell, a portfolio manager at J.P. Stewart.



Even the technology sector, one of the last redoubts of earnings strength - aside from energy - is showing the strains of worldwide economic contraction, as Intel warned investors it was drastically reducing revenue forecasts and Sun Microsystems announced plans to cut up to 6,000 jobs, in the wake of a US$1.7 billion loss last quarter.

Friday's remarks by Federal Reserve chairman Ben Bernanke at a bankers' conference only served to reinforce the view of Wall Street investors and economists that the economy is in dire straits. The American economy, he said 'is under severe strain'.

Mr Bernanke's speech also signalled that the Fed's policy-making committee is likely to lower rates again at the Federal Open Market Committee's final meeting of the year, on Dec 16. The Fed's key rate is now at one per cent.

On Friday, it was clear that bear continued to reign supreme on Wall Street. A day after the stock market staged a huge snapback rally, closing more than 6 per cent higher after the Standard & Poor's 500 sank below it's Oct 10 lows in intra-day trading, Wall Street was unable to build on the gains, thanks to a massive sell-off in the final minutes of trading that wiped out most of Thursday's gains.

The Dow Jones Industrial Average closed down 337.94 points, or 3.8 per cent, to 8,497.31. The broader Standard & Poor's 500-stock index was 38 points lower, or 4.1 per cent, to 873.29. The Nasdaq fell 79.85 points, or 5 per cent, to 1,516.85.

'We're in a vicious cycle right now,' said Mr Pado. 'The market can't sustain any short-term gains because so many institutional investors, from mutual funds to hedge funds, are primed to take profits off the table as soon as they get them because they're afraid stocks will sink again.'

For the week, the Dow declined 5 per cent while the S&P 500 fell 6.7 per cent.

Carter Worth, chief market technician at Oppenheimer, reiterated his forecast that stocks have bottomed and will rise into the year-end even after Friday's losses, and with a slew of potentially bad economic news waiting for investors this week.

'The bad news isn't affecting the market the way it was just a few weeks ago. We're down at the point now where the values are holding up against the risks. Once we get past the forced liquidations by hedge funds and mutual funds in the next couple of weeks, we should be up by 15 per cent to 20 per cent into year-end,' he said.

But in the coming week there is likely to be bad news aplenty coming from the economic data. Today will be industrial production and capacity utilisation figures for October, and the release of a November manufacturing report from the New York region, the Empire State Index.

Tomorrow, the October producer price index will be released, to be followed by the consumer price index on Wednesday. Normally, investors focus on those two reports for their inflationary implications. But these are not normal times, and now the big question is whether deflation has struck the economy. Also on Wednesday, data on housing starts for October will be released, along with the minutes of the Fed's last meeting.

On the positive side, third-quarter earnings season is nearly over, with the S&P 500 on track for an 18.4 per cent decline from last year's numbers, and there are only a few names left to haunt investors' sleep with their doleful earnings and downcast guidance for the next quarter, including retailers Target, Gap and Home Depot, and PC maker Dell.

Stocks could also get a boost if the US Congress shows signs of being able to push through a stimulus package before the end of the year, or if it moves to support a government bailout for car makers GM, Ford and Chrysler.