Smart Investing/Trading for the week ending April 4 2008

US Markets Update and Outlook

Stocks seek earnings visibility as recession looms

MarketWatch: Stocks will seek to continue their recent recovery next week, with the market hoping that a likely U.S. recession will remain shallow, and with investors looking to the upcoming earnings season for an outlook on corporate profits. The market managed to close mostly higher Friday, locking in strong weekly gains, after a dismal March jobs report, which revealed a third consecutive month of declining payrolls and a jump in the unemployment rate. (The March nonfarm payroll saw a decline of 80,000 jobs as the unemployment rate of March hits 5.1%. Total lost of jobs for the 1Q08 is 232,000 with an average 77,000 jobs declined per month)

"The market has pretty much priced in a pretty good portion of the recession scenario," said Owen Fitzpatrick, head of U.S. equity at Deutsche Bank. "Given that the Fed is doing what it can to pull us out of this, the market is expecting a shallow and short recession, not a deep and extended one," he added.

On Friday, the Dow Jones Industrial Average closed down 16.61 points to 12,609.42, but it sat on a weekly gain of 3.2%. The broad S&P 500 Index rose 1.09 points, to 1,370.40, giving it a sturdy 4.2% rise from where it stood last week. The Nasdaq Composite Index climbed 7.68 points to 2,370.98, and it rose 4.9% from where the tech-heavy index stood one week ago.

Wishing the crisis away

Stocks rallied markedly Tuesday, with the market impressed by the ability of both Lehman Brothers Holdings Inc. and UBS AG to raise capital in the current depressed state of credit markets. Ever since the near-collapse and subsequent bailout of investment firm Bear Stearns Cos., the market is hoping that the worst of the credit crisis that has shaken global markets since last summer now is past. The full impact of the crisis, along with the continued slump of the housing market on the U.S. economy remain to be fully determined. On Wednesday, Federal Reserve Chairman Ben Bernanke for the first time acknowledged that the economy might enter into recession, which gave a brief pause to the market.

Earnings

The market's recovery, however, might be challenged by the first-quarter earnings season, which officially kicks off next week with Alcoa Inc.'s results Monday. Many analysts believe that earnings expectations remain too high for 2008, and the market will be on watch for lower forecasts or cloudy outlooks. With ailing financial firms weighing on the overall picture, first-quarter earnings for S&P 500 companies are expected to decline 10.9% from the year-ago period, according to a consensus of analysts estimates compiled by Thomson Financial. In the fourth quarter, aggregate earnings fell 25.1% then, the worse quarterly performance since at least 1991. Besides financials, consumer discretionary and many technology stocks will be in focus with lower consumer spending expected to affect overall results.

Economic data

The market also will continue to monitor data that might provide clues on the economy, and whether the Federal Reserve will continue cutting interest rates. Following Friday's employment numbers, the market increased its bets that the Fed will cut rates by half a percentage point at its next meeting at the end of April. Of note next week will be the minutes of the Fed's March meeting on Tuesday, weekly jobless claims and February trade figures on Thursday, along with March import prices and the Michigan consumer-sentiment survey on Friday.

Weekly KLSE Update and Outlook

ICap: In the current financial turnmoil, the correction in the Plantation stocks, coupled with the political uncertainties, will likely put more pressure on the KLSE in the coming months. Nonetheless, a favourable global economy would lend crucial support and should the political landscape improve decisively, it would not be suprising for buying interest to quickly emerge. ...For the KLSE, the US subprime problem is not the prime problem. The prime problem is the uncertain Malaysian political landscape. For the KLSE, the political paralysis must not become embedded as it would become economic and market paralysis.