Published February 2, 2009

WALL STREET INSIGHT
Lack of progress on 'bad bank' plan weighs on investors

By ANDREW MARKS IN NEW YORK
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INVESTORS are not sorry to bid farewell to a miserable January, but as they turn the page to the first week of trading in a new month, the sense on Wall Street is not one of relief but rather the feeling that more of the same is still to come.

No let-up: The financial sector's 26.6% decline for January led the way to a 9% loss for the Dow Jones, a record loss for the first month of the year

'You look ahead over the next couple of months, and honestly, I don't see a lot of reasons to believe that the kind of news and data we've been getting this month that's been dragging the stock market down is going to be all that much different,' said market strategist Joe Liro.

With traders anticipating a bottom forming only after another 3 to 5 per cent decline in the wake of the nearly 10 per cent market slide last month, things are looking grim. But that's the case now, said John O'Donoghue, chief equity trader at SJ Cowen. 'It won't surprise anyone to see the Dow hit 7,500 in the first quarter,' he said.

The unrelenting waves of gloomy economic reports and dire earnings forecasts issued during the disastrous fourth quarter earnings reporting season have provided a fundamental picture that is giving fund managers nightmares, but it's the government's lack of movement on the forming of a 'bad bank' to absorb the toxic assets ruining the balance sheets of most major US banks that is weighing most heavily on the stock market.

'The stock market started out last week hopeful that with Geithner in place, we'd get an announcement of some kind about how the Obama administration is going to deal with helping the banks, but now the sense on Wall Street is that they've lost some momentum in Washington on putting a plan into place to use the second phase of the Tarp funds, and that's causing a great deal of distress for investors,' Mr O'Donoghue said.

Distress, indeed, for the financial sector which was once again the primary culprit behind the market's plunge last week. The financial sector's 26.6 per cent decline for January led the way to a 9 per cent loss for the Dow Jones, a record loss for the first month of the year, and you have to go back to 1916 for a comparably bad January. The S&P 500's 8.8 per cent decline was a record, too, and the Nasdaq Composite, loaded with the relatively healthier big technology companies, fell 6.5 per cent. The worst performers for January were, predictably, Bank of America and Citigroup, down 53 per cent and 47 per cent respectively.

Investors and market analysts have long sounded a note of strong regret that the Treasury Department under former secretary Henry Paulson chose not to take steps to relieve the banks of their illiquid assets back in September, as was the originally proposed plan for using the Tarp funding. 'We've wasted half a year and US$350 billion without getting anywhere on the credit crisis, and that's because the government put the cart before the horse with the decision to use Tarp to re-capitalise the banks first. The first step should've been to buy up those toxic assets so the banks could mark them down and the market could get the process of price discovery going,' said Mr Liro.

On Friday, news that the initial fourth quarter GDP numbers showed 'only' a 3.8 per cent drop, far less than the consensus estimate of a 5.3 per cent decline, briefly lifted shares, but rising inventory numbers within the report soon had economists talking of an even worse figure for the first quarter of 2009. 'It's likely that firms got stuck with goods they couldn't sell and they will probably start emptying warehouses at a dizzying pace over the next few months,' said Joel Naroff, president of Naroff Economic Advisors.

The gloom cast by the economy worsened on reports out of Washington that the Treasury Department might be waffling on the 'bad bank' plan, sending stocks into a day-long tailspin that ended with the Dow down 148 points, or 1.2 per cent, to 8,000.86. The S&P 500 gave up 19.3 points, or 2.3 per cent, and the Nasdaq skidded to a loss of 31.4 points, or 2.1 per cent.

A new government rescue plan to buy up the banks' non-performing loans could still be announced this week, but without it, stocks will face an uphill climb to avoid dipping below the psychologically important 8,000 level for the Dow. Another round of key economic data is due, along with the likelihood of more doom and gloom out of the corporate sector.

'Once again, it'll be up to Washington to give the stock market a lift in the coming trading sessions, because it's not going to be coming from the numbers, that's for sure,' said Mark Lilly, a portfolio manager at Cronus Asset Management.

Investors will also be keeping an eye on the progress of the US$820 billion fiscal stimulus package, which the Senate begins considering this week after its passage in the House of Representatives last week.

The big number for Wall Street this week is likely to come from Friday's January jobs report. Economists are expecting another 525,000 workers to be added to the unemployment line, bring the jobless rate to 7.5 per cent. Before then, earnings will take the spotlight, starting with reports today from Humana, Mattel, Rockwell Automation, Sysco, and Anadarko Petroleum.

Tuesday brings a round of reports from major pharmaceutical companies Merck and Schering Plough, along with Disney, Archer-Daniels, British Petroleum, Dow Chemical, Marathon Oil, and Motorola.

On Wednesday the line-up includes Cisco and Sunoco reporting after the closing bell, and Time-Warner, Kraft , Clorox, ITT, Visa and Alcatel-Lucent. News Corp leads off Thursday's earnings reports.

Friday's jobs report isn't the only major economic number investors will be sifting through this busy week. There's also the ISM manufacturing report, and personal income and construction spending data today, followed by January car sales, and pending home sales tomorrow.