Sun 6 Jul 2008
Stocks To Fall Further Next Week On Credit Woes
Posted by Robin Bal under Investing , News , Risk , Stock Markets[6] Comments
U.S. stocks will continue to fall next week, in continuation of a sell-off that saw the Dow Jones Industrial Average experience its worst week in over four years, due to nervousness that the easy-money binge of the last few years has come to an end. No fireworks in earnings so far.
It will be tough for Wall Street to shake off the bear market blues next week if the price of oil keeps rising and the earnings season kick-off from Alcoa and General Electric disappoints investors. Stocks will remain vulnerable to any new signs of distress from hedge funds hit by their exposure to bad U.S. home loans, as well as from credit markets, where Wall Street firms and corporations are finding it harder and harder to obtain financing.
Oil has become the biggest wild card for growth and corporate profits. It jumped to a record above $145 a barrel on Thursday, driven by tensions between Israel and Iran, before the long holiday weekend to mark US Independence Day.
The price of crude is up 50 percent so far this year.
On Friday, US markets are closed on July 4th for the Independence Day holiday.
Financial results from Alcoa and GE will kick off the second-quarter earnings season next week. Aluminum company Alcoa, the first Dow component to report results, will release its quarterly numbers on Tuesday. GE, another Dow industrial and a bellwether for the US economy, will report earnings on Friday. Aside from second-quarter results, investors are anxious to see the companies’ forecasts for world economic growth and their own corporate sales prospects.
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More clarity on the economic outlook may come from Federal Reserve chairman Ben Bernanke. He is expected to speak twice, first at an FDIC mortgage lending forum on Tuesday and on Thursday, he will testify before on financial market regulation before the House Financial Services Committee.
But it’s oil that will remain a top concern.
“The price of crude oil is on the top of everyone’s list,” said Dan Peirce, a portfolio manager of the global asset allocation group at State Street Global Advisors in Boston.
“We saw a pullback one month ago, only to see it come back with a vengeance, which really pressured major equity markets.”
Expectation was high that a combination of a weak US dollar, lower US crude stockpiles and tension between Israel and major oil producer Iran would push prices to $150 a barrel before the close of trade, in line with a prediction made last month.
For the holiday-shortened week, the Dow Jones industrial average ended down 0.5 per cent, the Standard & Poor’s 500 Index slid 1.2pc and the Nasdaq Composite Index dropped 3pc. This was the fifth straight weekly decline for the S&P 500 and the Nasdaq, and the Dow’s third straight week of losses.
On Wednesday the Dow closed more than 20pc below its all-time closing high reached in October, crossing the threshold typically considered as the onset of a bear market.
The Dow closed above that mark on Thursday. But the broader S&P 500 index on Thursday slipped into bear territory during the trading session, unable to withstand the avalanche of gloomy global economic news and profit outlooks, surging inflation fears and weakening consumer confidence.
While the S&P 500 eked out a slight advance by Thursday’s close to climb out the bear market, optimism appeared scarce that there would be enough bargain hunting next week to help stocks decisively snap out of their slump.
“We’ve become nervous bulls,” said Brian Gendreau, a New York-based investment strategist at ING Investment Management Americas, which recently went “neutral” on US stocks.
“Equities have become a play on oil and we just do not know what oil will do. So we are on the sidelines for now,” he added.
General Electric, the second-largest US company by market capitalization, will garner a great deal of attention when it releases quarterly earnings at the end of the week.
The company is viewed as an economic bellwether because of the range of its businesses. Since financial services account for a large chunk of its revenues, GE’s results are also scrutinised for clues on the health of the financial sector, the biggest drag on the stock market this year.
Reuters Estimates sees GE reporting profit of $5.33 billion in the second quarter, or 54 cents per share, compared with year-earlier earnings of $5.4bn.
Results deviating from forecasts are expected to wield a disproportionate impact on the market, for better – if earnings are higher than expected – or worse, if the company misses earnings, such as occurred in the first quarter.
Fresh in the market’s memory is GE posting an unexpected drop of 6 percent in first-quarter profit, with an EPS of 44 cents a share, 7 cents below analysts’ forecasts.
The news drove GE’s stock down nearly 13pc, their sharpest drop in two decades, wiping out about $45bn of market value and dragging global markets down into the mud.
The earnings figures aside, the stock market will be looking for market direction by poring over what GE has to say about the next quarter or two, said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey.
“They (investors) don’t want to hear about a slowdown in any major economies,” he said. “They don’t want to hear about paring back revenue estimates. That would exacerbate already heightened fears of recession woven into the market.”
Alcoa’s earnings on Tuesday will be put under the microscope for comments about industrial demand in economies abroad, particularly Asia and South America, he said.
July 6th, 2008 at 8:01 pm
Does predicting that stocks will fall make it more likely to happen?
Sort of like the Uncertainty Principle in physics. The very act of observing changes what is being observed.
Stanley Bronstein
http://stanleybronstein.com
MrAchievement
July 6th, 2008 at 8:26 pm
Hi Stanley,
Thanks for your comment. I dont think a prediction increases the likelyhood of an events occurance. Stock predictions are based on technical and fundamental analysis, in reality however the opposite might happen. I will be going short next week, the markets are in a bear grip and no good news to cheer up the sentiment.
I didnt know about the Uncertainity Principle, interesting.
Take care and cheers.
July 6th, 2008 at 11:26 pm
Actually, Heisenberg’s uncertainty principle states that you cannot know the exact location and velocity of a particle to any degree of accuracy. You can only know one or the other. Quantum physics, does say however that a particle can be in what is known as a superposition of states, in which it is all possible states simultaneously, yet it will settle into a particular state when you view it. Thus by observing the state of said particle you are in effect influencing the state it will be in. Just though that would clear things up.
Interesting article btw 😛
July 6th, 2008 at 11:38 pm
Hi Seb,
Welcome to fortunewatch. Thanks for your interesting and informative comment.
Take care and cheers.
July 8th, 2008 at 10:02 am
Beat me … Is this an ostrich’s behavior or a positive-attitude reaction: “They (investors) don’t want to hear about a slowdown in any major economies,” he said. “They don’t want to hear about paring back revenue estimates. That would exacerbate already heightened fears of recession woven into the market.”
July 24th, 2008 at 11:16 am
Oil has become the biggest wild card for growth and corporate profits. It jumped to a record above $145 a barrel on Thursday, driven by tensions between Israel and Iran, before the long holiday weekend to mark US Independence Day.