Weekly US Markets Update and Outlook
Stocks' direction hangs on Lehman's fate
On tap: Hurricane watch, Fed meeting, Goldman, Morgan Stanley earnings
MarketWatch: The direction of U.S. stocks next week will largely depend on the fate of Lehman Brothers amid widespread speculation that the beleaguered 158-year-old investment firm may be bought out or bailed out before the weekend is over. "That seems to be on top of everybody's minds," said Robert Pavlik, chief investment officer at Oaktree Asset Management. "People are expecting some kind of announcement by Sunday night." The Treasury Department and the Federal Reserve were working with Lehman to resolve its problems, including talking to potential buyers of the bank, according to The Wall Street Journal. Besides Lehman, investors will also monitor Hurricane Ike, which was last headed toward the Texas coast, carrying dire warnings from the National Weather Service. Next week also brings a Fed decision on interest rates and earnings from investment firms Goldman Sachs and Morgan Stanley.
Drama on Wall Street
Friday capped another dramatic week for stocks, starting with the government takeover of mortgage giants Fannie Mae and Freddie Mac last Sunday, the latest emergency move to try and control continued damage from the year-long credit crisis. While the move led stocks to rally Monday and led to a steep drop in mortgage rates this week, it wasn't too long until Wall Street was on the hunt again for the next potential shock to the system. Lehman Brothers, which heavily dabbled in assets linked to bad home loans, saw its shares plunge 77% this week and had put itself up for sale by Friday, according to three people familiar with the situation. "One way or the other, Lehman has to be taken care of," said Paul Mendelsohn, chief investment strategist at Windham Financial Services. "The [systemic] risk is too big to let it fail." In volatile action Friday, the Dow Jones Industrial Average fell 11 points to 11,421, which still left the blue-chip average with a 1.9% gain for the week. The S&P 500 index rose 2 points to 1,251 Friday and was up 0.8% on the week. The Nasdaq Composite climbed 3 points to 2,261, giving it a 0.2% weekly gain.
A post Lehman rally?
Even amid hopes of a resolution for Lehman Brothers, fresh worries emerged that insurance giant AIG might be downgraded by ratings agencies, and its shares sank more than 30% on Friday. "With what's going with AIG, that may be the next big thing dominating headlines next week," Pavlik said. "At $12 a share, is the firm going to be able to survive another week?" After a Lehman buyout, "we might get another one-day bounce," the strategist said. "But I think there's a bigger picture problem looming out there."
Contrary to the near-bankruptcy and subsequent bailout of investment firm Bear Stearns, which had led to a two-and-a-half-month rally, the market this time remains weary about the continued fall-out of the credit crisis. Still, some analysts hope that by taking out the big players, whose failure would threaten a collapse of the financial system, smaller victims will go out more quietly and the market will eventually look beyond its current problems. "Bear Stearns, Freddie Mac/Fannie Mae, and Lehman: All three had to be taken care of to prevent a possible chain reaction," Windham's Mendelsohn said. "We're taking out some dominoes so that the next thing that happens, it shortens the impact of the reaction."
Fed meets, Goldman reports
The Federal Reserve will also meet on Tuesday to decide on interest rates. The central bank is again widely expected to leave rates unchanged, but economists expect it to point to increasing signs of weakening economic growth, while noting that inflation pressures have receded, along with sliding commodities prices. Tuesday will also bring quarterly results from Goldman Sachs, followed by those of fellow investment firm Morgan Stanley on Wednesday. The two are thought to have escaped relatively unscathed from the bad home loans crisis that has hit many on Wall Street and elsewhere.
"The question for the market at this point is would the Fed cutting interest change anything," Mendelsohn said. "Because the problems in the mortgage market are not linked to the Fed's interest rates." Still, faced with rising unemployment and further evidence of economic weakness, the market has now erased previous bets that the Fed would raise rates by year end and has started pricing rate cuts instead.
Also on Tuesday, the August consumer price index will be released, providing another glimpse into inflationary pressures. "Softer commodity prices, a firmer greenback and weak demand will likely drive producer and consumer inflation lower in the months ahead," according to Sal Guatieri, senior economist at BMO Capital Markets. "This opens the door a crack for renewed Fed easing if the economy takes a turn for the worse," he wrote in a note. Crude-oil futures on Friday briefly fell below the $100-barrel mark for the first time since April, even as traders braced for potential harm to energy facilities from Hurricane Ike.
KLSE Technical Analysis and Outlook
ICap: The KLSE CI is below its 30-day, 50-day and 50-week moving averages. Its daily MACD is turning down and its DMI is bearish.
On Plantation index, it has fallen to its 50% retracement target with its monthly MACD and DMI decisively bearish. However the stochastic oscillator has yet to become oversold. The Plantation Index has suffered a sharp setback pressured by the sharp fall in crude oil price due partly to the greenback's appreciation against all other major currencies including the RM. Nevertheless, will OPEC's intention to limit oil supply in the market come to its rescue?
* Picture above courtesy of TheStar. Do they really know what they are doing? Sin Chiew reporter(first to report on "penumpang" news) released yesterday. According to reports, she was detained under ISA as the police was afraid she will no go for questioning! However, according to Syed Hamid, she was detained under ISA because her safety is under threat and needed protection. Can ISA be used for such matter? Now, who is right and who is wrong?
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