Published December 1, 2008

WALL STREET INSIGHT
US investors nurse hopes of turning point

But analysts remain cautious even as Dow surges 17% in just 5 sessions

By ANDREW MARKS
NEW YORK CORRESPONDENT
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AS Wall Street put the wraps on one of the stock market's best five-day performances of all time, a sense of optimism was clearly staking out a place in traders' hearts amid hopeful talk of a turning point for stocks and the strong possibility of a December rally.

'I think everyone knows that the next couple of quarters are going to be awful, but even with the powerful bounce we had the last few days, the market seems to still have discounted for that scenario,' said Joel Naroff of Naroff Economic Advisors. 'But with all the money that the government is committing to the banks and the economy, investors can start looking to the second half of 2009 with the expectation that the economy will be growing again.'

That sort of logic has been voiced many times over the past 10 or 11 months, and several times during the stock market's frequent swoons of the past 11 weeks.

Unfortunately, logical or not, investors' subsequent behaviour has not supported this train of thought. 'I'd call that a bull market kind of perspective, or at least a logic that applies to an orderly market, which makes it very suspect for this current environment, in my mind,' said James Awad, managing director at Zephyr Management.

'In a bear market or a very volatile market, you can still get selling on the news itself, even when there's been plenty of selling in anticipation of the bad news, which people refer to as 'discounting'.'



Indeed, in the week following the presidential election, stocks tanked when employment data and other economic news came out showing that a recession was indeed at hand, and it mattered little that the stock market had supposedly been discounting for a recession and worsening employment for months.

Still, one of these times will prove to be different. Might this be the time? Maybe, said Hugh Johnson, chief investment strategist at Johnson Illington Advisors, 'If the market has finally flushed out all the panic and can get back to making decisions based more on fundamentals than fear. If that happens, then I can see an argument for stabilisation here. I'm not yet convinced we're safe from a resumption of the panic selling we saw in the two weeks previous to last week's rally, but I am encouraged.'

Mr Johnson is hardly alone in his caution. The latest Merrill Lynch survey of major institutional fund managers found 'most to be embedded in a defensive mindset' with the overwhelming consensus expectation that 'the world will continue to encounter recession for the coming year', according to the report.

What will it take to convince money managers like Mr Johnson that the market reached a real turning point with the government's latest moves and the announcement of President-elect Obama's economic team, making the investing climate sufficiently stable to start putting their clients' assets back into stocks?

'The proof is in the pudding,' said Mr Johnson. 'I have to see that the Fed's attempts to unthaw the credit markets is having measurable effect over the next couple of weeks. Until then, you can just as easily say the huge rally we just had was as sentiment-driven as the huge sell-off that preceded it.'

On Friday's holiday- shortened trading session, investors continued to bet that the combination of the Citigroup bailout, the Fed's US$800 billion programme to buy debt in order to lower borrowing costs for consumers and home buyers and the president-elect's plans for the economy will bring stability to the fragile financial system. The Dow Jones Industrial Average finished up 102 points, or 1.2 per cent, at 8,829, pushing its five session surge to a record gain of 1,277 points, or 17 per cent, in just five sessions, also its best five-day percentage gain since 1932.

The S&P 500 Index climbed 8 points, or 1 per cent, to 896 on Friday. The Nasdaq Composite Index gained 3 points, or 0.2 per cent, to 1,535.

For the week, blue chips piled on 9.2 per cent, while the S&P 500 gained 12 per cent and the Nasdaq soared 11 per cent. The tally for the month of November told a far grimmer tale, however. Despite last week's resounding rebound, the Dow lost 5.3 per cent, the S&P 500 slumped 7.4 per cent, and the technology-heavy Nasdaq fell 10.8 per cent.

Whether investors can continue to dig the stock market out of the steep bear market hole that's been dug for it over the last six months in the coming week will depend on their ability to keep that hope alive in the face of more bleak economic news without further dramatic pronouncements of government cash injections into the credit markets or the private sector.

Starting off the week, US retailers are expected to offer up their assessments of Black Friday, the traditional start of the all-important holiday-shopping season. Investors should be bracing for the worst, in the face of steep job cuts, huge investment losses, and recession fears for consumers who are holding more tightly to their wallets.

The Institute for Supply Management's manufacturing survey for November, and construction spending figures for October will also be released.

Tomorrow, US car sales are scheduled for release, then on Wednesday it's the Fed's Beige Book of economic conditions, along with the November ADP employment survey of the private sector, productivity figures for the third quarter and the ISM's November survey of the service sector of the economy.

On Thursday, Federal Reserve chairman Ben Bernanke is scheduled to speak on housing at a Fed conference in Washington.

Weekly jobless figures are also expected to be released that day, but it's Friday's November employment report that should prove to be the week's highlight-or lowlight, depending on whether the numbers come in even worse - as many economists expect - than the Wall Street consensus expectation for 268,000 more layoffs in November, which would send the unemployment rate up to 6.7 per cent.

Wall Street will remain braced for more of the unscheduled kind of news, either from the government or the private sector, that has dominated the stock market for the better part of three months now.

The possibility of a bailout - or a dashing of those hopes - for the Big Three carmakers continues to be debated in Congress, and a deal could still happen before the new year.

On the negative side, many Wall Street insiders are expecting a failure of a high profile hedge fund sooner than later. 'It won't take much to send investors running for the exits again, and that would do it,' said a Citigroup analyst who withheld his name.