Money Morning's Three-Minute Review: How Last Week's Events Will Shape This Week's Action

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Investors can expect another tug of war between the Bull and the Bears in the U.S. stock market this week.

The bulls will take comfort from efforts to rescue the embattled U.S. bond-insurance industry. But several of the earnings reports slated for release this week will probably further stoke the bearish sentiment that has dominated the markets in recent months.

Efforts to rescue a distraught U.S. bond insurance industry could inject a positive note on Wall Street but the economic data and earnings reports on tap for next week are unlikely to change a downward trend for stocks.

Investors next week will get:

  • Minutes from the January meeting of the Federal Reserve's policymaking Federal Open Market Committee (FOMC).
  • Data on January inflation.
  • The Fed gauge of factory activity in February from the U.S. mid-Atlantic region.
  • Profit reports from top retailer Wal-Mart Stores Inc. (WMT) and computer-maker Hewlett-Packard Co. (HPQ) - both slated for release tomorrow (Tuesday) - could provide some new insights on the current sentiment of U.S. consumers

Any bailout plan for the troubled bond-insurance industry could touch off a so-called "relief rally" in U.S. stocks. Unfortunately, any rally is probably only temporary, since there little in the way of other bullish reports out there on the horizon to reverse the current bearish sentiment, Joseph Battipaglia, market strategist at Stifel Nicolaus in Yardley, Penna., told Reuters.

"The only thing near-term that can give the market some comfort is a comprehensive workout plan for the [bond] insurers," Battipaglia said. "Outside of that, however, the market is really trendless, with no leadership. Sentiment is still negative; there's a lack of commitment and conviction on the part of cash buyers to put money to work and the news next week is probably not going to excite anybody."

Here's a rundown on the week ahead and what we can expect.

Today (Monday): U.S. financial markets will be closed for the Presidents Day holiday today (Monday).

Tomorrow (Tuesday): Investors get yet another look at the ailing U.S. housing situation when the National Association of Home Builders (NAHB) releases its homebuilder sentiment index for February. The NAHB/Wells Fargo & Co. (WFC) Housing Market Index is expected to come in at 19, unchanged from January. Readings under 50 mean more builders view market conditions as less than favorable.

Investors also will get a look at earnings from both Hewlett-Packard, the world's largest PC-maker, and Wal-Mart, the world's largest retailer.

Although Hewlett-Packard is expected to report higher quarterly profits, demand is slowing for computer hardware as its customer companies trim spending on technology, meaning H-P also is expected to provide a muted forward look.

Profits also are expected to increase at Wal-Mart - in spite of a charge for its Japanese operations - as bargain-hunting consumers search seek out the lowest prices on such necessities as food and laundry detergent in the face of a sagging U.S. economy.

Wednesday: The Labor Department will release its Consumer Price Index (CPI) for January, and economists surveyed by Reuters are expecting an increase of 0.3%. Core CPI, which excludes volatile food and energy prices, is expected to rise 0.2%.

That same day, investors can expect the release of the minutes from the Jan. 29-30 FOMC.

Thursday: The Philadelphia Fed's business activity index for February is expected to show a reading of -11, an improvement from the showing of minus 20.9 in January.

Despite a dark cloud hanging over the stock market, there are pockets of the consumer economy that still have money, snapping up PDAs, GPS devices and iPhones, Zachary Karabell, senior economist at Fred Alger Management Inc., told Reuters.

Also, many companies have strong balance sheets and are ripe to make strategic purchases, and sovereign wealth funds are ready to invest, he said.

"The disconnect in these markets between things that are doing well and things that are doing badly is huge," Karabell said.

[For a related investment research report on sovereign wealth funds in this issue of Money Morning - part of our ongoing "Outlook 2008" economic-forecasting series - please click here. The report, which includes three potential stock ideas, is free of charge].

Market Matters

Just when did Warren Buffett become such a publicity hound?

Last week, the "everyman billionaire," took a shot at some financial-services executives with his comment that the subprime-spawned credit crunch is "sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end."

This week, Buffett and his company, Berkshire Hathaway Inc. (BRK.A, BRK.B) are back in the news with a reinsurance offer for those municipal bond insurers that are facing super-tough times. While Buffett is known for his philanthropy, he did not get to be one of the richest men in the world by merely lending a helping hand to some "unfortunate" corporate victims. He obviously sees opportunities in the financial challenges of others.

As Buffett said: "When I go to St. Peter I will not present this as some act that will entitle me to get in. We're doing this to make money."

In other corporate news, Yahoo! Inc. (YHOO) snubbed Microsoft Corp. (MSFT) and its paltry $44.6 billion acquisition offer and instead turned its attention to the deep pockets of Rupert Murdoch and News Corp. (NWS).

Research in Motion Ltd. (RIMM) suffered a major blackout with its Blackberry e-mail service, and business execs everywhere were unable to retrieve vital business correspondences [Besides, think about all the bad jokes, e-mail scams and spam that also didn't get to their intended destinations].

Swiss banks UBS AG (UBS) and Credit Suisse Group (CS) both released weak earnings reports as subprime claimed two more global victims. General Motors Corp. (GM) suffered the worst annual loss ever recorded by a car company. On the other hand, The Coca-Cola Co. (KO), Deere & Co. (DE), Hasbro Inc. (HAS) and Waste Management Inc. (WMI) strong quarterly profits. Likewise, retailer Abercrombie & Fitch Co. (ANF) went against the recent negative consumer trend by reporting a favorable quarter, thus revealing that kids and teenagers are either unaware of - or are unfazed by - the ongoing economic uncertainty that has their parents so rattled.

On the energy front, our "friend" in Venezuela - President Hugo Chavez - was in the news again last week, threatening to stop selling oil to the United States because of a disagreement between Exxon-Mobil Corp. (XOM) and the state-run oil company.  Exxon is attempting to freeze billions of dollars in Venezuelan assets "to get a just and fair compensation" as a result of Chavez's nationalization strategy. Meanwhile, domestic refiners have scaled back gasoline production in response to the current high energy prices and the declining consumer demand. After a short-lived reprieve from near-record prices, crude oil surged again last week and hit its highest level in over a month. 

Stocks rose early in the week on reports of the Buffett reinsurance proposal and some better-than-expected retail results. On the global stage, Japan's Nikkei 225 Stock Index soared by more than 4% in one day - its best showing in six years - on prospects for strong economic growth in Japan.

U.S. Federal Reserve Chairman Ben S. Bernanke rained on the parade by sharing his less-than-favorable assessment of the economy [although he did allude to more rate cuts] and the equity markets struggled late in the week. Bond investors worried that additional Fed actions could lead to inflationary pressures [especially in view of the already high energy prices], and the yield on the benchmark 10-year surged to the 3.80% level. Any more newsworthy comments, Mr. Buffett?

Market/Index

Previous Week
(02/08/08)

Current Week
(02/15/08)

YTD Change

Dow Jones Industrial

12,182.13

12,348.21

-6.91%

NASDAQ

2,304.85

2,321.80

-12.46%

S&P 500

1,331.29

1,349.99

-8.06%

Russell 2000

698.93

701.52

-8.42%

Fed Funds

3.00%

3.00%

-125 bps

10 yr Treasury (Yield)

3.65%

3.78%

-26 bps

 

Weekly Economic Calendar

Date

Release

Comments

February 13

Retail Sales (01/08)

Surprising increase in Jan. sales after dismal Dec.

February 14

Initial Jobless Claims (02/09/08)

Lower benefits' claims though labor concerns persist

 

Balance of Trade (12/07)

Strong exports led to decline in deficit for 2007

February 15

Industrial Production (01/08)

Slight increase on strength in utilities

The Week Ahead

 

 

February 18

President's Day

 

February 20

Housing Starts (01/08)

 

 

CPI (01/08)

 

 

Fed Policy Meeting Minutes

 

February 21

Initial Jobless Claims (02/16/08)

 

 

Leading Eco. Indicators (01/08)

 

The economic talking heads were at it again last week, only this time people seemed to be listening. President George W. Bush signed that $168 billion economic-stimulus package into law and proudly proclaimed that "we have come together on a single mission - and that is to put the people's interests first… money will be going directly to America -- workers and families and individuals."

President Bush took a break from the rare non-partisan high-fiving and backslapping to "demand" [that may be a tad strong] that the Democratic Congress move to make his tax cuts permanent. Meanwhile, U.S. Treasury Secretary Henry Paulson and Bernanke stood arm in arm in front of the Senate Banking Committee, each predicting that the country can avoid a recession, though conceding the U.S. economy will experience slower growth in the weeks and months to come.

Investors took some solace in Bernanke's consistent message that the Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks."

January retail sales highlighted a relatively quiet week for economic data as strong demand for automobiles contributed to a surprising rebound from a lackluster holiday season. While retailers experienced the worst holidays in five years, the New Year got off to a decent start, as sales jumped by 0.3% in January after plunging by 0.4% in December.

Still, Wal-Mart implied that nervous consumers are redeeming those gift cards for necessities like diapers and detergent and holding off on luxury purchases of such higher-dollar items as iPods and DVD players. [For a special investment bulletin by Money Morning Investment Director Keith Fitz-Gerald that considers the Wal-Mart retail sales numbers to be a key economic indicator investors must consider - please click here. The report is free of charge].

Meanwhile, the declining dollar led to stronger exports and a smaller annual trade deficit after five consecutive record breaking years [Not a bad streak to end…how about a few more non-partisan high fives?].

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