Published February 9, 2009

WALL STREET INSIGHT
Investors pin hopes on stimulus, bank deals

All eyes on pivotal Geithner plan to buy toxic loans from major banks

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

THIS looks like the week Wall Street has been waiting for since early November.

Crucial moment: Fears are abating that Citi and other banks will face nationalisation, with bank stocks registering solid gains on Friday

Washington DC lawmakers are apparently closing in on the passage of what will likely be at least an US$800 billion spending plan. And the new Treasury Secretary Timothy Geithner is set to formally unveil the outline of President Barack Obama's plan to use the remaining US$350 billion of the Troubled Asset Relief Plan fund to buy toxic loans strangling major US banks.

'It's been a long time since President Obama won the election and started offering up the promises of how he'd take on this banking crisis and the frozen credit markets and the severe recession we're facing.

'There's been a lot of up and down and back and forth on what shape these rescues would take, which has certainly contributed to the steep drops we've experienced in the market since the beginning of the year,' observed Joe Battipaglia, chief investment strategist at Stifel Niclaus.

'Now that it looks like we're finally there, especially with the bank rescue plan, I think we've got a sigh of relief and a little celebration ahead of us,' he added.

Indeed, if the arrival of more than US$1 trillion in government aid and rescue dollars isn't enough to convince investors to build on last week's solid rally in the coming five trading sessions on the New York Stock Exchange, it will be hard for many on Wall Street to imagine a scenario in which the US stock market can make any kind of a dent in its recent losses in the coming three months.

'We've got the makings here of February rally,' said Larry Adam, chief market strategist at Deutsche Bank and managing director of it's private wealth management division.

Noting that the bank stocks led the way up in Friday's rally on Wall Street, Mr Adam echoed the consensus amongst money managers that the key to a sustainable market-wide advance lies with whether investors feel ready to start putting their money into the embattled financial sector stocks, which have followed an historically disastrous final quarter of 2008 by being flattened in the opening month of this year.

'You've got the two biggest banks in the country trading like penny-stocks, below the levels that many institutions are required to divest themselves of securities,' Mr Adam said, referring to Citigroup and Bank of America, both of whose share prices were trading under the US$5 per share minimum for pension funds to keep them in their portfolios for more than one fiscal quarter of the year.

A key factor in the most recent financial sector sell-off has been the growing storm clouds of rumours that the new Treasury Department 'bad bank' plan will move banks on the brink of insolvency into which the government has already poured billions, like Citigroup, closer to nationalisation, a dreaded thought for investors who would stand to have their already depressed stakes wiped out completely.

'It sounds like we're out of the woods, at least for now, on the fears of seeing Citi and other banks nationalised, from the previews we're getting on the Treasury's rescue,' said Mr Battipaglia.

That sigh of relief helped push stocks to a day of solid gains on Friday despite another month of nearly 600,000-plus job losses reported by the Labor Department, the biggest since 1974, in fact, bringing the unemployment rate to 7.6 per cent.

The Dow Jones Industrial Average gained 217.52 points, or 2.7 per cent, to end at 8,280.59, a result matched by the broader S&P 500 Index's advance of 22.75 points, or 2.7 per cent, to 868.6, and outdone by the technology-heavy Nasdaq Composite's upward surge of 45.47 points, or 2.9 per cent, to 1,591.71.

Last week marked the first full week of gains for Wall Street in 2009, and coming on the heels of the market's worst-ever January, first week of February saw the Dow leap 3.5 per cent, the S&P gain 5.2 per cent, and the Nasdaq soar by 7.8 per cent, enough to bring the tech-laden index to the brink of positive territory for the year.

The coming week is full of major economic news and earnings reports as well as Congressional wrangling over the final form of the stimulus package, but the pivotal day for Wall Street is likely to come this week, when Treasury Secretary Timothy Geithner unveils the plan to restructure the US$700 billion bailout programme for the country's ailing banks and lenders in a noon address.

'The only thing anyone cares about right now is what Geithner's going to tell us,' said Nick Baker, a trader at Venture Analytics.

Investors are expecting the plan will emphasise getting the toxic assets off the banks' books a so-called 'aggregator bank' or 'bad bank', which could carry a price tag of as much as US$500 billion, along with another round of capital injections. 'The only potential negative is any immediate consequences for shareholders, whether the government is going to move on its preferred equity position,' he said.

The economic data features wholesale inventories and the NFIB's survey on small business activity tomorrow, but investors will likely be more focused on congressional testimony that day from both Secretary Geithner and Fed chief Ben Bernanke.

Wednesday offers up the US trade balance, but Thursday brings the biggest reports, both retail sales and business inventories. On Friday, the Commerce Department reports consumer-sentiment numbers.

Investors may very well have already written off the first quarter earnings season, and indeed the second quarter, as well, but those earnings reports keep rolling in and this week brings some major consumer companies to the forefront, stocks whose business tends to be a strong reflection on the heath and willingess to spend of the consumer.

Beverage kings Coca-Cola and Pepsi are due to report and a major retailer, Abercrombie & Fitch, will cap off the week.

Today, Barclay's earnings is scheduled before the opening bell, followed by reports from Hasbro, Nissan, NYSE Euronext, and Whirlpool.

Tomorrow, it's big day for tech, with Qwest, Applied Materials, Computer Sciences, and Nvidia reporting. Wednesday features Allegheny Energy, Genzyme, Ingersoll-Rand, and Marsh McLennan.

In addition to the two big cola companies, Thursday's docket of earnings includes Aetna, BT Group, Marriott, and Viacom.