Published December 22, 2008

WALL STREET INSIGHT
Cheerless year-end for US as hopes of rally peter out

Market's failure to sustain rally on Fed moves fans bearish views on economy

By ANDREW MARKS
NEW YORK CORRESPONDENT
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IF a US$17 billion last- minute bailout for GM and Chrysler, a historic interest rate cut and virtual declaration of war on the severe recession facing the US economy by the Federal Reserve can't produce a sustainable rally, what are the chances that a jolly fat guy in red pajamas carrying a sack of toys and pulled around by a bunch of reindeer can do it?

Not much, according to the increasingly pessimistic consensus of Wall Street stock market strategists. Just two weeks ago, these gurus were speaking optimistically of the possibility of investors in the US equities markets being treated to the traditional year-end Santa Claus rally as a small gift of cheer after an awful and frightening year.

'The inability to hold onto the gains last week from the Federal Reserve-inspired bounce we had on Tuesday tells me that investors have pretty much shut down for the year,' observed Marc Pado, chief investment strategist at Cantor Fitzgerald, speaking of the reaction to the Fed's cutting short term rates to near-zero per cent.

'The rally you typically see at this time of the year, especially after a bad year that's been low on good news, comes from investors starting to look ahead with some relief and optimism to the coming year, loading up on beaten down stocks or the biggest market leaders in hope and anticipation of a strong start to a new year. But the way stocks have traded this week, you see a very different stock market psychology - investors are exhausted and the relentless bad news on the economy is keeping them from generating enthusiasm for 2009,' he said.



Indeed, pessimism about the economy and the financial sector prevailed all week. Traders said the fact that stocks posted only modest gains for the week - and blue chips ended with a loss - after Tuesday's surge that saw the Dow Jones Industrials soar by more than 4 per cent and the S&P 500 climb better than 5 per cent, indicates that the major indexes will do well to finish out 2008 flat from this point on.

'There's very little to look forward to in the way of market catalysts in these last two weeks of trading except for the Christmas and New Year's holidays,' said Joe Battipaglia, investment strategist at Ryan & Beck.

On Wall Street the only thing people are excited about is getting away for a few days of rest from the turmoil, uncertainty and anxiety surrounding prospects for next year. 'You might very well see a delayed version of the Santa rally right after the New Year,' said Mr Battipaglia.

'Congressional leaders want to have the spending package ready for President-elect Obama to sign the moment he's sworn in to office, and if it's as big as the numbers being thrown around, that should generate some bullish enthusiasm,' he said. He was referring to the new Congress which convenes on January 6 and will start working on a massive stimulus plan for which President-elect Obama is now rumoured to be asking for as much as US$1.3 trillion.

On Friday, stocks attempted to rally on the announcement of the long- awaited short term rescue plan for the carmakers, consisting of US$13.4 billion in short-term financing from the TARP, with another US$4 billion available in February. But after registering intra-day gains of as much as 2 per cent, the major indexes finished mixed, with blue chips losing 26 points, or 0.3 per cent, to close at 8,579.11, while the S&P 500 advanced 2.6 points, or 0.3 per cent, to 887.88, and the Nasdaq Composite gained 12 points, or 0.77 per cent, to finish at 1,564.32.

For the week, the Dow Jones Industrials dipped 50 points, or 0.6 per cent, while the S&P 500 was up 0.89 per cent, and the Nasdaq gained 1.5 per cent.

With so much of Wall Street shut down as the year draws to a close, the lone gift the market may offer investors is a respite from the extraordinary volatility that has been the signature characteristic of the past four months.

Trading volumes are expected to be thin, and any momentum is likely to be short-circuited by the abbreviated trading weeks, punctuated by two holidays and two shortened trading days.

The coming week will be light on new indications of the depth and severity of the recession, but there are a few economic data points to draw investors' attention before Wall Street shuts down for Christmas.

Tomorrow, the Commerce Department is scheduled to release the final reading on third quarter GDP, while existing-home sales and new-home sales for December are also due out.

Durable goods orders are due out on Wednesday's Christmas eve-shortened trading session, along with data on personal income and spending.

Retailers and retail analysts may also provide some indications of how much of a hit they have taken in what is traditionally their cash-cow quarter.

Trading will also take its cue from this week's trickle of fourth quarter earnings reports and warnings from corporate America.

Investors can probably expect a few more of the already-record 497 negative earnings pre-announcements issued thus far for the coming quarter, the highest since 2001, according to earnings tracker Thomson Reuters.

Earnings growth estimates for the S&P 500 continue to drop like a rock, plunging from 5.9 per cent a week ago, to 0.5 per cent, a number expected to be firmly in negative territory when the fourth quarter earnings season gets into gear a few weeks from now.