Published December 15, 2008

Wall St walks away from car wreck stronger

Analysts heartened by Friday rally but brush off impact of expected rate cut

By ANDREW MARKS
NEW YORK CORRESPONDENT
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WHAT if the US central bank lowers interest rates this week and no one cares?

A respite: Analysts are upbeat about a rebound this week if financial help for carmakers materialises

That could well be the case, for the Fed will be pushing against a string with yet another short- term interest rate for a credit system already awash in cheap money when it meets tomorrow.

'A rate cut will accomplish approximately nothing,' says Joel Naroff, president of Naroff Economic Advisors.

The US stock market will likely remain fixated on the embattled car industry. It is hoping that President George Bush will step into the void that Congress left last week when Senate Republicans killed legislation that would have given GM and Chrysler, the two sickest members of Detroit's Big Three, enough of a financial band-aid to see it through the next two or three months.

The most significant event for Wall Street last week, in fact, involved the stock market's reaction to another round of awful economic data and Congress's decision to spurn the increasingly desperate carmakers.

Investors could easily have used the rejection of the US$14 billion in loans to GM and Chrysler, and its dangerous implications for not just several hundred thousand workers but the entire economy, as an excuse to send the stock market on another of its several-hundred-point, multi-per cent sell-offs.

Instead, stocks recovered from an early plunge on Friday that saw the Dow Jones Industrials sink as low as 200 points in intra-day trading to finish with solid gains for the day.

The rebound wasn't enough to make up for a bigger plunge on Thursday as the Congressional bailout plan for the Big Three neared collapse. But the resilience - helped by word from the Treasury Department that it was considering using the remaining US$15 billion of the first, US$350 billion allocation of TARP bailout money to keep the carmakers afloat until the new congress convenes late next month - heartened market analysts.

'The stock market is showing a greater ability to shrug off bad news, and that's helping us make lower lows, bringing a sense of relative stability to the trading environment,' observed Marc Pado, chief investment strategist at Cantor Fitzgerald, who expects stocks to stage a modest Santa Claus rally in the final 12 trading days of the year.

'I think the rally would already be underway if not for the trouble with the automakers' bailout last week. Assuming the administration offers them the financial help to make it through the next month or so, stocks have a good shot at a bounce this week,' he says.

He is quick to add that while he's encouraged by the recent trends, he's not prepared to call a bottom. This is a sobering thought, considering that even a rally of 20 per cent would leave stocks in bear market territory, in light of the 25 per cent losses the major market averages have suffered since September.

'No matter what happens in the next two weeks, this will still be a bear market when we start 2009, and that will probably hold through for most of the next twelve months,' he says.

But on Friday, neither the grim prospects of the coming year, nor the possibility that GM or Chrysler might file for Chapter 11 in the coming weeks, which would surely set off a wave of bankruptcies and layoffs in related industries, was enough to keep investors from buying all the way to a 65-point, or 0.75 per cent, advance for blue chips, which closed the day at 8,629.28.

For the week, the Dow still ended down by 0.1 per cent, but both the broader S&P 500 and the tech-heavy Nasdaq chalked up a weekly gain.

Investors will have to show similar resilience in the face of bad news this week if stocks are to continue to build on last Friday's bounce. This week major economic numbers are expected to offer further proof of the economy's distress. The numbers will counter upbeat news of any funding for GM and Chrysler and an expected interest rate cut of 50 basis points tomorrow or Wednesday, bringing the Federal Funds rate down to half a per cent.

Wall Street is also bracing for the first trickle of fourth quarter earnings this week. The year's final quarter is still not done for most companies, but several of this week's early reporters are of significant interest to investors, offering an early view on what analysts are expecting to be a fourth quarter growth rate of 5.9 per cent, down by nearly half, from 10 per cent just a week ago.

'We'll likely be into negative growth numbers by the time we really get into reporting season in January,' says Thomson Reuters' John Butters.