Wall Street focus: Autos and the Fed

Wall Street focus: Autos and the Fed

Investors consider the outlook for Detroit’s Big Three, a likely interest rate cut from the central bank and earnings from Goldman Sachs, Oracle and others.

By Alexandra Twin, CNNMoney.com senior writer

Investors return Monday for the last full trading week of what has been for many an unbelievable, and unbelievably difficult, year on Wall Street.

“I think, at the very least, the current stock market prices probably already reflect expectations of a depression or a type of recession that is worse than what we are likely to get,” said Ken Kam, portfolio manager of the Masters 100 (MOFQX) fund.

However, that doesn’t mean investors are ready yet to move back into the market more consistently, he said.

Reports are due this week on housing, manufacturing and consumer prices. Goldman Sachs, Best Buy and Oracle are among the companies expected to report weaker results than they did a year ago.

Also this week, the Federal Reserve is widely expected to cut the fed funds rate, a key short-term interest rate, by a half-percentage point to 0.5%. That would mark the 10th rate cut since 2007.

Amid the housing market collapse, credit market freeze and global recession, stocks have been hit hard.

As of Friday’s close, the S&P 500 is down 40% for the year and 44% since closing at an all-time high of 1565.15 in October 2007. The declines had been sharper though late November, with stocks hitting what some market analysts are calling a bear market bottom on Nov. 20.

After hitting that low, the S&P 500 rallied 21% in less than thee weeks. But last week it stalled, as a bailout for the beleaguered automakers hit government gridlock and corporations announced thousands of job cuts amid the recession. (For more details, click here)

Last week the Senate shot down a proposed $14 billion auto bailout bill. But the Treasury Department said it would be willing to give the automakers some of the $700 billion in the bank and Wall Street bailout already approved by Congress. Investors returning to work this week will likely have a better sense of where the automakers stand. And the removal of that uncertainty should help stocks in the short-term. (Full story).

Yet “beyond the automakers, we’re still dealing with a weak outlook for the economy,” said Bill Stone, chief Investment Strategist, PNC Financial Services Group

In the week ended Dec. 10, investors pulled roughly $2.8 billion out of equity mutual funds, after pulling $12.1 billion out of funds in the previous week. Investors have cashed out of equity mutual funds in 17 of the last 19 weeks.
Economy

Monday: The December NY Empire State index, a regional reading on manufacturing, is expected to improve modestly to a reading of minus 27 from a reading of minus 25 in November. The previous number was the weakest in the survey’s seven-year history.

The two-day Federal Reserve policy meeting begins.

Tuesday: Goldman Sachs and Best Buy report earnings before the start of trade. Goldman (GS, Fortune 500) is expected to have lost $3.51 per share versus a profit of $7.01 a share a year ago, according to Thomson Reuters estimates. Best Buy (BBY, Fortune 500) is expected to have earned 25 cents per share versus 53 cents a share a year ago.

Economic reports are due on housing and consumer inflation.

November housing starts are expected to slow to a 730,000 annual unit rate from a 791,000 rate in October. November building permits are expected to have slipped to a 700,000 annual unit rate from 708,000 in October. more

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Stocks: More pain, more gains?

Stocks: More pain, more gains?

Stocks rallied toward the end of last week despite abysmal news on the economy. This week brings readings on housing, consumer spending and the trade gap.

The worst monthly jobs report in 34 years failed to send stocks lower late last week, begging the question of whether the market has finally found that elusive bottom.

Not likely, analysts say. But the stock gains on Friday and over eight of the last 10 sessions, despite a barrage of increasingly awful economic news, are certainly notable.

The week ahead tests the trend, as investors digest reports on housing, inventories, jobless claims, the trade gap, producer prices, retail sales and consumer sentiment. All are expected to show weakness. (For details click here).

The week ahead also could bring a breakthrough for the automaker industry, with Congress expected to come up with some sort of proposition to help the Big Three. GM, Ford Motor and Chrysler went to Capitol Hill last week to plead for a $34 billion bailout for the troubled industry. (Full story)

Polls show a majority of Americans don’t want to see a government bailout of the automakers – not when so many other industries are ailing too. But economists say the impact to the economy and to the labor market should any one of the companies fail would be devastating.

And the last thing investors need is more abysmal news on the economy. On Friday, the government said the economy shed 533,000 jobs in November, and its September and October job-loss numbers were revised upward. In total, the economy has lost 1.9 million jobs in 2008, worse than what it lost in the 2001 recession. During the week, AT&T, JP Morgan and other companies announced more than 43,000 job cuts.

Early last week, the National Bureau of Economic Research confirmed what many have long assumed: that the economy is in a recession. NBER put the start date at around Dec. 2007.

“Given the economic environment we are in and the startling job loss in November, this would probably be as bad a time as I can think of to let the Big Three go without funding,” said Stuart Hoffman, chief economist at PNC Financial Services Group.

Even with some sort of loan package, the companies will still restructure and shrink, but it’s the difference between an orderly slowdown and a fast retreat, he said. And the economy is in no shape for a fast retreat.

Alternately, “if the auto funding matters get resolved, that is going to be a big boost for both consumer spending and the market psychology,” said Tim Speiss, head of the Wealth Advisory Practice at Eisner LLP.

Stocks don’t need any more bad news. Between closing at an all-time high on Oct. 9, 2007 and the recent low on Nov. 20, the S&P 500 shed 52%.

“The big question is how much of the negative news has been priced in,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. “Was that 52% enough?”

Stocks have rallied 16% since that November low. While that’s encouraging, Detrick said investors are bound to sell into year-end, with both individuals and professionals looking to cash out.

Last week, investors pulled roughly $12 billion out of equity mutual funds, after putting $!0.4 billion into funds in the previous week. Investors have cashed out of equity mutual funds in 16 of the last 18 weeks.
Economy

Tuesday: The Pending Home Sales index for October is likely to add to evidence that the housing market hasn’t bottomed yet. Sales likely fell 2.3% in the month after sliding 4.6% in September, according to Briefing.com forecasts.

Wednesday: October wholesale inventories are expected to have risen 0.2% after falling 0.1% in the previous month. more

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Dow, S&P 500 in 5-day win streak

Dow, S&P 500 in 5-day win streak

By Ben Rooney, CNNMoney.com staff writer

Major indexes advance at the end of a thinly traded, post-holiday session.

NEW YORK (CNNMoney.com) — Stocks rallied in a shortened holiday session Friday, with the Dow and the S&P 500 ending higher for the fifth session in a row, capping one of Wall Street’s best weeks in months.

The Dow Jones industrial average (INDU) rallied 1.2%, or 102 points, which brings the blue-chip average’s gains for the week to 785 points. For the month, however, the Dow has lost 489 points.

Friday’s advance marks the first time the Dow has held gains for 5 consecutive sessions since Nov. 17, 2007.

The Standard & Poor’s 500 (SPX) index ended 1% higher and the Nasdaq composite (COMP) rose 0.2%.

The S&P 500 advanced 96 points in the week and is up about 30 points for the month. The tech-heavy Nasdaq tumbled 191 points this week but gained a total of 151 points in November.

U.S. markets were closed Thursday for Thanksgiving, and Friday’s session ended at 1 p.m. ET. Trading was light with many market participants on vacation.

Friday’s advance comes at the end one of the best weeks Wall Street has seen in months.

“The upward movement has to do with the latest installment of the government’s bailout plan,” said Abigail Doolittle, a portfolio manager at Johnson Illington Advisors, which has nearly $700 million in assets under management.

Doolittle also pointed to the “psychological benefit” of President-elect Barack Obama’s nominations of key financial officials, which she said were “more conservative” than the market had anticipated.

The Dow surged nearly 400 points Monday, extending gains from the previous session, as investors cheered the government’s rescue of banking giant Citigroup (C, Fortune 500) and Obama named New York Federal Reserve Bank President Timothy Geithner as his choice for Treasury secretary.

Tuesday’s advance was less dramatic as dour economic reports vied with news that the government will provide roughly $800 billion to increase the availability of consumer and mortgage lending.

Stocks rallied across the board Wednesday after Obama said former Fed Chairman Paul Volcker will head his economic advisory board.

Looking ahead, weekly and monthly reports on the nation’s beleaguered labor market could pressure the market. And an initial reading on what is expected to be a weak holiday sales period could also push stocks lower.

“The market seems to have a very short memory,” Doolittle said. This week’s gains could be forgotten if next week’s economic news reflects “the dire fundamental picture,” she said.

Black Friday: Investors are closely watching the retail sector as the nation goes into holiday-shopping mode. On “Black Friday,” the day after Thanksgiving, retailers are offering deep discounts to kick off what is traditionally the sector’s most profitable time of year.

However, consumers have drastically cut back on spending as unemployment continues rising, home values are plummeting and financial markets remain tumultuous. The trend is expected to continue through the holidays.

The National Retail Federation (NRF) forecast holiday sales to rise just 2.2% this year, which would make it the weakest sales gain in six years.

With consumer spending accounting for nearly two-thirds of the nation’s total economic activity, a weak holiday sales period could further the market’s perception that a prolonged recession is on the horizon. more

Asian Stocks Rise, Set for Second-Biggest Weekly Gain This Year

Asian Stocks Rise, Set for Second-Biggest Weekly Gain This Year

By Patrick Rial and Saeromi Shin

Nov. 28 (Bloomberg) — Asian stocks rose, driving the region’s benchmark index to its second-best week this year, on optimism steps by governments to pull the world’s economy out of recession will boost demand for raw materials and heavy equipment.

BHP Billiton Ltd., Australia’s largest oil producer, added 7.6 percent as crude headed for the best week in five months. Komatsu Ltd. jumped 6.9 percent in Tokyo on speculation demand for its excavators will increase in China, which lowered interest rates this week. The cost of protecting bonds from default in the region fell.

“Sentiment is stabilizing,” said Kwon Hyeuk Boo, a fund manager at Daishin Investment Trust Management Co. in Seoul, which oversees about $1.4 billion in assets. “Investors are buying into expectations that support measures will keep coming. China’s strong will to support its economy is serving as a key catalyst to Asian markets.”

The MSCI Asia Pacific Index advanced 1.5 percent to 82.71 at 5:33 p.m. in Tokyo. The measure has rallied 6.8 percent this week, a performance only beaten this year by the 6.9 percent rally at the end of October, when central banks from Japan to Taiwan lowered borrowing costs.

China’s central bank cut interest rates by the most in 11 years, three weeks after the government announced a stimulus plan worth more than $500 billion. The Federal Reserve committed $800 billion to unfreeze credit markets, while Citigroup Inc. received a $306 billion government rescue and the European Union proposed a 200 billion euro ($258 billion) spending package.

The gain pared November’s drop to 3.8 percent, the seventh monthly decline and the longest losing streak since the gauge began in December 1987.

Panasonic Earnings

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan, including the Thai government and Hutchison Whampoa Ltd., fell 2.5 basis points to 365 at 12:45 p.m. in Hong Kong.

Japan’s Nikkei 225 Stock Average added 1.7 percent to 8,512.27 today. Gains were limited as Panasonic Corp. slumped to a five-year low after slashing its profit outlook as the country’s recession deepened. U.S. markets were closed yesterday for the Thanksgiving holiday.

India’s Sensitive Index dropped 0.3 percent as stocks traded for the first time since militant attacks that started on Nov. 26 in Mumbai left as many as 125 people dead. Hotel operators and airlines led declines.

“The aim of the attackers will have been to deter foreign businessmen and indeed foreign fund managers from visiting India,” CLSA Ltd.’s chief strategist Christopher Wood wrote in a report. “Sadly, those efforts will in part be successful.”

Commodity Producers

BHP rose 7.6 percent to A$31. Rio Tinto Group jumped 8.8 percent to A$46.60 after Morgan Stanley resumed coverage of the world’s third-largest mining company with an “overweight” rating. Mitsui & Co., which generates the most profit from oil among Japan’s trading companies, advanced 8.3 percent to 846 yen. more

Most European Stocks Drop, Led by STMicro; Asian Shares Advance

Most European Stocks Drop, Led by STMicro; Asian Shares Advance

By Michael Patterson

Nov. 28 (Bloomberg) — Most European stocks fell as a reduced sales forecast from STMicroelectronics NV overshadowed Merrill Lynch & Co.

European Stock-Index Futures Rise; Shell, Air Berlin May Gain

European Stock-Index Futures Rise; Shell, Air Berlin May Gain

By Adam Haigh

Nov. 27 (Bloomberg) — European stock-index futures rose, following gains in the U.S. and Asia, as crude rallied after the close of European markets, boosting the earnings prospects for oil producers.

U.S.-traded securities of Royal Dutch Shell Plc and BP Plc, Europe

Woolworths Near Collapse, Risking 30,000 U.K. Jobs

Woolworths Near Collapse, Risking 30,000 U.K. Jobs

By Howard Mustoe

Nov. 27 (Bloomberg) — Woolworths Group Plc was left on the edge of failure and MFI Retail Ltd. collapsed, putting more than 30,000 U.K. jobs at risk, after the economy’s slide into a recession caused consumer spending to slump.

Woolworths, which opened its first shop in 1909, said this morning that it filed petitions for administration after an attempt to sell its retail stores ended. MFI appointed administrators yesterday.

Retailers are under pressure as a spending slump ripples through the U.K. economy. Higher food and energy bills are draining incomes as plunging stock and house prices erase wealth. The government pledged 20 billion pounds ($30 billion) of loans and tax cuts this week to spur the economy.

“The consumer economy got bad enough, fast enough,” David Stoddart, an analyst at Altium Capital in London, said yesterday evening. He advises selling Woolworths stock, which was suspended yesterday for the second time in a week.

Woolworths has more than 800 stores across the U.K. selling goods from candy to appliances. It employs almost 30,000 people, according to data compiled by Bloomberg. Furniture chain MFI, which was hurt by weaker demand as house sales plunged, had about 190 British stores and 2,500 employees.

Fewer House Sales

“The housing market has been the straw that broke the camel’s back,” said Bryan Roberts, an analyst at Planet Retail in London. “MFI is not the sharpest on pricing, and with people not moving house, that’s massively hit them.”

U.K. home sales are at the lowest level in at least three decades, the Royal Institution of Chartered Surveyors said Nov. 11. A seizure in credit markets has restricted banks’ ability to lend even as the Bank of England cut interest rates to the lowest since 1955.

The spending dropoff claimed victims from Ilva Furniture Ltd. to home wares retailer Rosebys Ltd., which both collapsed in September. Fashion chain MK One came under the control of administrators this month for the second time in 2008.

“This is a worrying time for employees, but part of the role of administration is to seek to save the business,” a spokesman for the Department of Business, who refused to be identified in line with U.K. government convention, said yesterday of Woolworths.

Debt Load

As sales crumbled, the retailer was hampered by debt that totaled 295 million pounds when its first half ended on Aug. 2, more than 16 times its current market value. Woolworths had interest costs of 18.6 million pounds in the period, more than today’s market capitalization. The stock has plunged by nine- tenths this year after falling 62 percent in 2007.

“If they didn’t have any debt, things would have been short of expectations, but there would have been nothing to tip them into administration,” Stoddart said.

The retailer also was hurt by a deterioration at its stores, which had a 72.5 million-pound first-half operating loss on sales of 660.7 million pounds. Revenue dropped 3.2 percent at outlets open at least a year in the period. The company said this week it was in talks on a potential bid for the shops without commenting on reports that they might be sold for 1 pound.

In addition to its stores, Woolworths has units that publish and distribute goods from DVDs to books. Those divisions lost 3.3 million pounds in the first half on sales of 446.3 million pounds.

Market Share

“I strongly suspect there is a profitable Woolworths chain within the loss-making business,” Altium’s Stoddart said. more

Asian Stocks Advance on China Rate Cut; Indian Trading Halted

Asian Stocks Advance on China Rate Cut; Indian Trading Halted
By Patrick Rial

Nov. 27 (Bloomberg) — Asian stocks advanced for a third day after China lowered interest rates by the most in 11 years to spur economic growth.

hina Vanke Co., the country’s biggest builder, jumped 6.5 percent on speculation lower borrowing costs will encourage home purchases. BHP Billiton Ltd. gained 5.7 percent in Sydney as commodities rallied for a second day. Komatsu Ltd., which controls 17 percent of China’s excavator market, added 4.4 percent. Markets in India were closed after terrorists killed more than 100 people in Mumbai, the nation’s financial hub.

The MSCI Asia Pacific Index gained 1.8 percent to 81.55 as of 4:12 p.m. in Tokyo, a third consecutive advance. More than three stocks advanced for each one that declined.

“Countries like China still have the weapons and flexibility to control the economy,” said Masahiko Ejiri, who manages Asian equities at Mizuho Asset Management Co., which oversees $26 billion in Tokyo. “For some countries the political risk seems too big, so I would avoid them even if I see value. It’s much safer to have exposure to stable countries.”

The People’s Bank of China yesterday cut its one-year lending rate by 108 basis points to 5.58 percent, less than three weeks after announcing a 4 trillion yuan ($586 billion) economic stimulus plan.

China’s economy is deteriorating more quickly as the impact of the global financial crisis spreads, underscoring the need for “forceful” measures to support growth, the nation’s top planner said today. The country foreign-exchange reserves topped $2 trillion for the first time, the statistics bureau’s chief economist said, giving the nation more resources to take action.

China Trading Partners

China is the largest trading partner for Japan, South Korea and Australia and was the biggest contributor to global economic growth last year. The Nikkei 225 Stock Average advanced 2 percent to 8,373.39, while China’s CSI 300 Index added 3 percent. All other equity benchmarks open for trading rose, except Vietnam and Thailand.

Taiwan, which counts China as its biggest market, posted the region’s second-steepest gain as Hon Hai Precision Industry Co. led a 4.3 percent advance in the Taiex index.

Indian S&P CNX Nifty Index futures for November delivery fell 1.5 percent in Singapore after terrorist shootings and blasts across the city killed 101 people and left 287 injured. Regulators in India closed the Bombay Stock Exchange and National Stock Exchange, along with bond, foreign exchange, commodities and money markets, following the violence in Mumbai.

U.S. stocks jumped yesterday as the Standard & Poor’s 500 Index erased an early decline to rally 3.5 percent, bringing its four-day gain to 18 percent. President-elect Barack Obama named former Federal Reserve Chairman Paul Volcker to head an economic advisory board, boosting investor confidence. Futures on the S&P lost 0.8 percent in Asian trading and the nation’s markets will be closed today for the Thanksgiving holiday.

Share Values

Shares in the MSCI Asia index trade at 5 times cash flow, compared with 5.6 times for companies in the S&P 500. During the last three years Asian stocks have traded at an average of 9.5 times and fell to a record low of 4.3 times last month. more