After bailout, stocks face economic, earnings woes

Author: Nick Godt, MarketWatch Posted: 05-10-2008 Collector:chngarment

NEW YORK (MarketWatch) -- Investors will enter next week relieved that a $700 billion financial bailout passed Congress, but still concerned about seized-up credit markets and a worsening outlook for the economy and earnings, as reporting season officially kicks off.
"The news over the past week is that the credit crisis continues to widen, affecting other industries and banks in Europe," said Ken Tower, senior vice president at Quantitative Analysis Service.
For the market, the bailout is "positive news that could lead to a short-term rally," Tower said. "But the longer-term picture is still that of an economy struggling with the impact of this credit crisis and the market is therefore not out of the woods yet."
Chart of $INDU
On Friday, the Dow Jones Industrial Average ($INDU:
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Last: 10,325.38-157.47-1.50%
4:11pm 10/03/2008
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$INDU 10,325.38, -157.47, -1.5%) ended down 157 points, or 1.5%, to 10,325, with traders selling positions following news that Congress had approved the bailout. Stocks had rallied in anticipation of the vote and traders "sold the news," a typical reaction in cautious bear markets.
The S&P 500 index ($SPX:
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Last: 1,099.23-15.05-1.35%
4:59pm 10/03/2008
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$SPX 1,099.23, -15.05, -1.3%) fell 15 points to 1,099. The Nasdaq Composite (COMP:
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Last: 1,947.39-29.33-1.48%
5:16pm 10/03/2008
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COMP 1,947.39, -29.33, -1.5%) lost 29 points to end at 1,947.
For the week, the blue-chip average ended down 7.4%, the S&P fell 9.4% and the Nasdaq lost 10.8%.
"This is a major market disruption," Tower said. "Even though we might be due for an interim rally, this is not the end of the problems. We're telling clients not to get over-invested in any rally that develops."
Another harrowing week
On Monday, the House of Representatives turned down the bailout, sending the Dow plunging by 777 points, its worst point drop on record.
On Tuesday, the rates at which banks lend money to each other surged. The overnight London interbank offered rate, or Libor, registered a record one-day increase, reaching 6.875% from 2.568% on Monday.
"A lot of what's going on in markets is confidence-related. At a bare minimum, the [bailout] bill should help with confidence," said John Miller, chief investment officer for Nuveen Asset Management, which oversees more than $60 billion in fixed-income assets.
While overnight lending rates eventually came back down by Wednesday, money markets have remained nearly frozen as banks remain unwilling to lend to each other amid fear that more bankruptcies might be revealed.
Many home-equity loans, lines of credit, student loans, small-business loans and credit-card rates uses Libor as a benchmark, further fueling worries about the wide economic impact.
"Something has to change meaningfully in credit markets to avoid the continued slide in the economic data," said Miller.
Markets and the R-word
On Friday, the latest employment report revealed the economy lost another 159,000 jobs in September. The economy has now lost 760,000 jobs this year, further evidence that the economy was in a recession even before the financial market crisis of the past few weeks. See full story.
"We are in a recession and the trend is in place to go to further job losses," said William Bellamy, who manages about $1 billion as director of fixed income at Thompson Siegel & Walmsley.
"The bailout is going to work on the margin, at best," Bellamy said. "It will be nothing near the silver bullet people are hoping for. It's just one more step in a series that's going to need to be put in play. It will help. Will is cure it? No."
With dire reports that the economy is shedding more jobs and that manufacturing continues to contract, investors have already started massively selling the shares of companies whose earnings depends on growth in the U.S. and globally.
Aluminum giant Alcoa Inc. (AA:
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Last: 19.24-0.14-0.72%
4:01pm 10/03/2008
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AA 19.24, -0.14, -0.7%) , which reports quarterly results on Tuesday, saw its shares slide this week, along with those of equipment-maker Caterpillar Inc. (CAT:
Caterpillar Inc
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Last: 51.21-1.01-1.93%
4:03pm 10/03/2008
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CAT 51.21, -1.01, -1.9%) .
Energy and materials shares also fell. Oil giant Chevron Corp. (CVX:
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Last: 79.38-0.18-0.23%
4:00pm 10/03/2008
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CVX 79.38, -0.18, -0.2%) reports interim results on Thursday.
This week, ConocoPhillips (COP:
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4:01pm 10/03/2008
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COP 66.14, -1.58, -2.3%) , the No. 3 U.S. oil major, said it sees lower prices for crude and natural gas in the third quarter and refining margins falling worldwide.
Separately, Merrill Lynch cut its 2009 oil price forecast to $90 a barrel from $107 a barrel and warned that a "synchronous global recession" could bring oil prices to $50 a barrel.
Among materials shares, chemical-maker Monsanto Co. (MON:
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Last: 83.26+1.25+1.52%
4:02pm 10/03/2008
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MON 83.26, +1.25, +1.5%) posts results on Tuesday.
Also hit this week was General Electric Co. (GE:
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Last: 21.57-0.59-2.66%
4:01pm 10/03/2008
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GE 21.57, -0.59, -2.7%) , due to report results on Friday. Its stock came under pressure Wednesday amid concerns about its financial arm. The international conglomerate also announced a $12 billion public offering and an investment from billionaire Warren Buffett.
Economic data
On Tuesday, data on consumer credit in August will be released. Minutes from the last meeting of the Federal Reserve also will be released. The market is currently expecting that the central bank will cut interest rates by 50 basis points to 1.50% when it next meets at the end of the month.
Wednesday will bring data on pending home sales for August, and on Thursday will be weekly jobless claims and wholesale trade data. Friday brings data on the trade balance in August, as well as the consumer sentiment survey by the University of Michigan. End of Story
Nick Godt is a MarketWatch reporter based in New York.

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