Published March 9, 2009

Stocks look cheap but expect more selling

By ANDREW MARKS
NEW YORK CORRESPONDENT

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WALL Street is expecting more declines despite a deeply oversold market. Traders looking at companies sporting clearance sale price tags on their shares are saying that while investors are ready to fire at the first sign of a break in the doleful market psychology, a persistent fear of unknown losses lurking in companies' ledgers continues to outweigh the cheap valuations.

Fear is the key: 'The bargain hunting mentality doesn't stand a chance against the fears that another big shoe is due to drop,' says a Wall Street trader

'The bargain hunting mentality doesn't stand a chance against the fears that another big shoe is due to drop, be it from amongst one of the big banks, the automakers - who knows,' said Mark Newman, a trader at GlobeWealth Capital Management.

The KBW Bank Sector Index closed below 20 for the first time ever last week. In addition to Citigroup's penny stock levels, several financial companies now trade below US$10 a share, including Wells Fargo, Bank of America, US Bancorp and UBS.

'On a traditional valuation basis, stocks do look cheap, but that doesn't mean we won't see them fall even more over the next few weeks, or even longer,' said Mr Newman.

Washington DC remains the best chance for a break in the clouds in coming days, despite Wall Street's high level of disenchantment with the Obama administration's financial team and Congressional lawmakers.

In the next two weeks, Treasury Secretary Timothy Geithner should be releasing the long-awaited details of the bank rescue plan, a source of both frustration and concern for the stock market.

'No one's holding their breath on the bank rescue any more, but there will still be a big reaction, for better or worse, once they finally do give us some clarity on what exactly they're going to be doing about the banks,' said Joe Battipaglia, chief market strategist at Stifel Nicolaus.

The consensus on Wall Street these days is that the government should allow the weakest of the major banks to fail, but any plan including federal seizures and takeovers must be accompanied by a strong solution for the healthier banks, one that gets their non-performing assets off their books and gets them lending again in a meaningful way.

On Friday, stocks staged a last hour rally, despite the government's jobs report showing that another 650,000 jobs were lost last month, bringing the total to 4.4 million.

Investor interest in energy stocks helped both the Dow Jones Industrials and the S&P 500 bounce off new 12-year lows touched in intra-day trading. The blue chip index finished the day up 32.5 points, or 0.49 per cent, to 6,626.94, while the S&P 500 eked out a 0.83 point, 0.12 per cent gain, to finish the day at 683.38. The technology-laden Nasdaq didn't join the brief rally, however, drooping 5.74 points, or 0.44 per cent, to 1,293.85.

The rally did little to offset one of the worst weeks for stocks since November - the Dow lost 6.2 per cent, the S&P 500 slid 7 per cent, and the Nasdaq dropped 6.1 per cent.

This week, investors should brace themselves with little in the way of scheduled news or reports likely to provide a bullish catalyst to a heavily bearish mindset.

The biggest hope for relief rests with Thursday's hearing before the House Financial Services subcommittee on a bill that seeks to create the Federal Accounting Oversight Board, a new government body that would wield the power to change the so-called mark-to-market accounting rules.

The banks contend that the current rules force them to mark down assets to artificially low prices in the current financial crisis, even when they intend to hold the assets past the current reporting period.

Temporarily relaxing the mark-to-market rules, which have forced the banks to report hundreds of billions of dollars in writedowns over the last 18 months, would give lenders some breathing room to get their houses in order.

On the economic front, retail sales due on Thursday, is the big data point. Economists have noted that consumer spending may be reaching a bottom, and if the retail sales report provides more evidence in support of this, it could spark hopes that a year-end turnaround in the economy remains a possibility.