Stocks will start the second half of
2008 staring into the jaws of a bear market.
At Friday's closing bell, it looked like there was little
relief in sight from runaway oil prices and the lack of
reassurances from bank about their already gloomy outlooks.
Investors will face a blitz of economic data in the
holiday-shortened week, with the marquee number coming in
Thursday's payrolls report for June.
Recession fears are rising with crude oil's dizzying spiral
to a succession of record highs and the relentless stream of
forecasts for more bank write-downs. When the second quarter
ends on Monday, the U.S. market may finish June with its worst
monthly percentage decline since September 2002.
"The combination of a banking system that is on its knees
and high commodity prices is just making investors nervous,"
said Ray Rund, managing director and head of research at Shaker
Investments in Cleveland, Ohio. "Even though we are not
technically in a recession, it certainly feels that way."
U.S. oil futures shot up to a record high just a penny shy
of $143 a barrel on Friday -- wrapping up a week when the
president of OPEC predicted that oil prices could rise as high
as $170 in the coming months. Gold hit a one-month high.
The Dow Jones industrial average (.DJI) finished the week
down 4.2 percent, while the Standard & Poor's 500 Index (.SPX)
slid 3 percent, and the Nasdaq Composite Index (.IXIC) dropped
3.8 percent. It was the worst week for the Dow and the Nasdaq
since February 10.
SHRINKING PAYROLLS, SLOWER FACTORIES
The outlook for the U.S. job market is grim, based on
forecasts for Thursday's payrolls report. Economists polled by
Reuters expect a loss of 60,000 jobs in June, compared with a
decline of 49,000 in May. The U.S. unemployment rate, however,
is predicted at 5.4 percent, a slight improvement from May's
5.5 percent, which was the highest since October 2004.
Thursday's data will include the Institute for Supply
Management's June reading on the vast services sector -- a day
before the market closes for the Independence Day holiday on
Friday. The ISM service-sector index is pegged at 51.0 in June,
compared with 51.7 in May, the Reuters poll showed.
On Tuesday, two reports will get scrutiny: the ISM's June
index on the U.S. manufacturing sector and U.S. car sales.
The ISM manufacturing index is forecast at 48.6 in June,
down from May's 49.6, with a reading under 50.0 signaling
contraction, the Reuters poll showed.
Gasoline prices at $4 a gallon are slashing the demand for
gas-guzzling sport utility vehicles. This week, the stock of
Dow component General Motors Corp (GM.N) plummeted to a 53-year
low after Goldman Sachs cut its rating on GM to "sell" and
warned it would have to raise capital.
Domestic car sales probably declined in June to an
annualized pace of 5.29 million units from May's rate of 5.36
million, while domestic truck sales are predicted to have
slowed to an annualized rate of 4.92 million in June from May's
5.12 million, the Reuters poll showed.
The ADP National Employment Report, a private employment
survey, is due out on Wednesday, along with a report on May
In contrast, earnings reports will be sparse.
Any data that shows some life in the economy will help
relieve some concerns for investors, analysts said.
But the market is eager to see that the impact of the
credit crisis on banks is abating before there can be any
meaningful rebound in stocks.
MORE MAALOX MOMENTS?
Adding to investors' queasiness is the Federal Reserve's
decision this week to take a break from cutting interest rates
as the threat of inflation becomes more ominous.
To analysts, the Fed's growing discomfort with inflation
suggests that it may choose to put its worries about growth on
the back burner and focus instead on price stability.
The Fed on Wednesday left its benchmark fed funds rate at 2
percent, breaking a cycle of cutting its target rate for
overnight bank loans by 3.25 percentage points since
"My personal opinion is that we could test 11,100 on the
Dow in the next couple of days," said Victor Pugliese, director
of listed equity trading at Broadpoint Securities in San
Francisco. "I think the market still trends down and if we can
hold at the 11,000 or 11,100 mark, somewhere in there, there's
a chance we can get a bear market rally for a few days."
During Friday's session, the Dow briefly tipped below the
threshold that market technicians define as a bear market,
falling more than 20 percent from its record closing high set
A bear market is marked by a prolonged period of falling
stock prices. It is not considered official unless there is a
market close of 20 percent below the most recent closing high.
The Dow Jones industrial average (.DJI) hit its lowest daily
close in 21 months on Friday -- less than 15 points away from
ending 20 percent below its record finish on October 9, 2007.
"Considering that the Dow is at its lowest since 2006, the
question is whether the S&P, Nasdaq and the Russell 2000 will
follow the Dow in breaking March and January lows," said Peter
Boockvar, equity strategist at Miller Tabak & Co in New York.
"The path of least resistance is down and those indices
will follow the Dow down in breaking those levels. Whether this
happens next week, or the following or even next month, I don't
know. I don't know when it's going to happen. I just know it's
going to happen."
Notable earnings reports next week among S&P 500 companies
will come from tax preparer H&R Block Inc (HRB.N) on Monday,
for-profit education company Apollo Group Inc (APOL.O) on
Tuesday and super-discounter Family Dollar Stores Inc (FDO.N)
Also set to command attention next week are speeches on the
economy by two key Fed officials: Federal Reserve Bank of
Atlanta President Dennis Lockhart is scheduled to give brief
remarks at an event on Tuesday evening in Washington, D.C.,
while Federal Reserve Board Governor Frederic Mishkin speaks on
Wednesday in Israel.
(Wall St Week Ahead runs weekly. Questions or comments on
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(Additional reporting by Walker Simon; Editing by Jan
As the Federal Reserve and
securities regulators neared an agreement on investment banks,
leaders of the U.S. Senate Banking Committee on Friday warned
them not to get ahead of Congress with any Wall Street reforms.
Investment banks, which have traditionally enjoyed light
regulation, are trying to boost capital in the wake of the
subprime mortgage crisis that triggered billions of dollars in
The Fed and the Securities and Exchange Commission have
been developing a formal agreement to share information about
investment banks amid an intensifying debate on what additional
regulation may be needed.
Connecticut Democrat Christopher Dodd and Alabama
Republican Richard Shelby sent a letter to the Fed, SEC and the
Treasury Department about the Fed-SEC agreement. Dodd chairs
the banking committee and Shelby is its top Republican member.
"We ask that no action regarding implementation of the
(agreement) be taken before we can determine that it is in the
best interests of our nation's economy and the well-being of
its citizens," the letter said.
The lawmakers' warning came as the Bush administration
deals with the aftermath of momentous decisions in March that
changed the Fed's relationship to Wall Street, perhaps
In that month, the Fed helped engineer a takeover of Bear
Stearns by JPMorgan Chase & Co (JPM.N) and guaranteed a $29
billion loan to facilitate the transaction out of concern that
a Bear Stearns bankruptcy could trigger a financial panic.
It was the first time since the Great Depression of the
1930s that the Fed, which regulates commercial banks, stepped
in to rescue a nondepository institution. The Fed also set up a
temporary, special credit line to make emergency loans to major
investment banks, which is due to expire in September.
Some critics contend if investment banks enjoy the shield
of the Fed, they should also be held to higher standards for
transparency and capital adequacy like those imposed on
PACT TO SHARE INFORMATION
SEC Chairman Christopher Cox hurried to assure lawmakers
that his agency and the Fed would not overstep their authority.
The planned pact would not in any way "create new legal
authorities or responsibilities," Cox said in a Friday evening
letter responding to the two senators.
The Fed-SEC agreement is expected to set out the scope for
sharing information related to the Fed's discount lending
window and other areas. It also would provide a mechanism for
regulators to get a broader perspective on institutions and
markets that could affect the financial system stability.
Currently, the SEC has oversight of the four largest U.S.
investment banks for liquidity and capital levels. However, the
program is voluntary and the SEC has urged Congress to give it
or another agency clear, legal authority to oversee the banks.
Treasury Secretary Henry Paulson, a former top executive at
Goldman Sachs, last week urged new powers for the Fed.
So far, Congress has focused on stemming a wave of housing
foreclosures that threatens to trigger a recession. Dodd and
Rep. Barney Frank, his counterpart who heads the House of
Representatives Financial Services Committee, have put off
until 2009 any overhaul of financial services regulation.
In their letter, Dodd and Shelby asked regulators not to
adopt any changes "given the limited authority of the Fed and
the SEC to regulate investment banks with primary dealer
status, and Congress's ultimate responsibility for formulating
financial regulatory policy."
Lawmakers sent the letter on the same day the Senate
approved the nomination of banker Elizabeth Duke to the Federal
Reserve Board but declined to act on two other long-stalled
nominees to the central bank. Duke is chief operating officer
of TowneBank (TOWN.O) in Portsmouth, Virginia.
Senators also confirmed three SEC commissioners, restoring
the agency to its full strength of five commissioners.
Meanwhile, the outlook for some big banks remains cloudy.
Merrill Lynch & Co (MER.N) may write down $5.4 billion of
securities in the second quarter, according to an analyst at
Lehman Brothers. Other analysts have expected write-downs to
range from $3.5 billion to $4.2 billion.
(Additional reporting by Patrick Rucker; Editing by Leslie
The Dow has fallen nearly 460 points in the last two sessions and reached its lowest point since September 2006.
Investors again contended Friday with a seemingly relentless stream of troubling news about the financial sector. Moody's Investors Service said it is reviewing investment bank Morgan Stanley for a possible downgrade. There were also more reports that Merrill Lynch & Co. might have to write off nearly $6 billion of risky mortgage-backed debt.
In addition to anxiety about the financials, the market watched oil's march higher — the price of crude rose to a new record of $142.99 a barrel on the New York Mercantile Exchange. Wall Street remains concerned that higher commodity prices will slam consumers with not only elevated costs for energy and food, but also for other goods if cash-strapped companies decide to pass along the rising costs.
"People are trading with a lot of emotion," said Alexander Paris, an economist and market analyst for Chicago-based Barrington Research. "I think the market is trying to make a bottom, but the question is will it hold there or just crash through. It feels just like the top of the technology bubble in 2000, you know there's something wrong but it is hard to time it."
Investors got little solace from economic data released on Friday. The Commerce Department said spending rose 0.8 percent in May, as taxpayers started receiving their stimulus checks. The increase was higher than the 0.7 percent economists predicted. The report also said personal incomes surged 1.9 percent -- significantly more than anticipated. After taxes, incomes surged 5.7 percent, the largest amount in 33 years.
The Dow fell 106.91, or 0.93 percent, to 11,346.51, compounding Thursday's 358-point skid. The blue chip index is down 19.9 percent from its record high close of 14,164.53 in October, and is on the verge of the 20 percent pullback that is considered the threshold for a bear market.
Broader stock indicators also closed lower. The Standard & Poor's 500 index fell 4.77, or 0.37 percent, to 1,278.38. The S&P, the index most closely watched by market professionals, is down 18.3 percent from its October high.
The Nasdaq composite index fell 5.74, or 0.25 percent, to 2,315.63.
The market was pounded this week not only by a resurgence of bad news about the financial sector and $140 oil, but by harbingers of problems to come in other parts of the economy. Poor outlooks for high-tech companies and the automotive sector reminded Wall Street that the troubles have the potential to become widespread.
There is also likely fear on the Street about upcoming second-quarter earnings reports and companies outlooks for the rest of the year. Oracle Corp.'s warning of difficult times ahead contributed to Thursday's huge drop.
For the week, the Dow gave up 4.19 percent, the S&P shed 3 percent and the Nasdaq fell 3.76 percent. With one trading day left in the second quarter, the Dow is down 7.47 percent, the S&P 500 is off 3.35 percent and the Nasdaq is up 1.60 percent.
Year-to-date statistics show how badly the market has suffered from the credit crisis and the impact of soaring oil: The Dow is down 14.46 percent, the S&P 500 is down 12.94 percent and the Nasdaq is down 12.69 percent.
Even if the economic numbers coming out soon — including the government's June employment report, to be issued on Thursday — look better, the market likely won't be reassured, because the impact of higher oil is still not known.
Declining issues outnumbered advancers by about 3 to 2 Friday on the New York Stock Exchange, where consolidated volume came to 5.74 billion shares, up from 5.11 billion on Thursday.
Bond prices moved higher. The yield on the benchmark 10-year Treasury note, which tends to move opposite its price, was at 3.97 percent, down from 4.03 percent late Thursday. The dollar was lower against other major currencies, while gold prices rose.
In other economic news, the University of Michigan's June index of consumer sentiment came in at 56.4, a bit lower than its reading in May and slightly below the average analyst estimate.
"The problem is that there's not one, single worry," said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors. He pointed to high gas prices, still-tight credit market conditions, and the contracting housing market. "If you're looking for problems that face investors, that face the U.S. economy, they're everywhere."
Also Friday, a Lehman Brothers analyst lifted his prediction of Merrill Lynch's asset markdowns in the second quarter. His write-down estimate rose to $5.4 billion from $3 billion. On Thursday, a Goldman Sachs analyst forecast a $4.2 billion write-down at Merrill and a nearly $9 billion write-down at Citigroup Inc.
Merrill shares fell 35 cents to $32.70, and Citigroup shares fell 42 cents, or 2.3 percent, to $17.25.
Morgan Stanley dropped 12 cents to $36.71 after Moody's said the investment bank's "financial performance and risk management has been inconsistent" since credit markets began last year. The company will focus its review on Morgan Stanley's ability to control risk and generate profit over the next one to two years — a period Moody's expects will be challenging for investment banks.
The Russell 2000 index of smaller companies fell 0.28, or 0.04 percent, to 698.14.
Overseas, Japan's Nikkei stock average fell 2.01 percent after Wall Street's tumble Thursday. Britain's FTSE 100 rose 0.21 percent, Germany's DAX index fell 0.58 percent, and France's CAC-40 lost 0.65 percent.
The Dow Jones industrial average ended the week down 496.28, or 4.19 percent, at 11,346.51. The Standard & Poor's 500 index finished down 39.55, or 3.00 percent, at 1,278.38. The Nasdaq composite index ended the week down 90.46, or 3.76 percent, at 2,315.63.
The Russell 2000 index finished the week down 27.23, or 3.75 percent, at 698.14.
The Dow Jones Wilshire 5000 Composite Index — a free-float weighted index that measures 5,000 U.S. based companies — ended Friday at 13,081.02, down 334.87 points, or 2.50 percent, for the week. A year ago, the index was at 15,210.65.
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