Weekly US Market Update and Outlook'Bad bank' is best hope for beaten stock market
MarketWatch: Progress creating a government structure to absorb banks' rotten assets could provide some relief next week for the stock market, which otherwise faces a tough lineup of woeful corporate outlooks, plunging auto sales and big job losses.
Investors are hoping for more clarity from Congress and the White House on establishing a good bank/bad bank institution that would buy up the delinquent loans and illiquid securities corroding banks' books.
Traders will also be cued to policymakers' decision on how to spend the second half of last fall's $700 billion Troubled Asset Relief Program, or TARP.
"The market fully understands that the two largest problems we're faced with are the solvency of the banking system and bringing about the end to the real estate crisis," said Robert Siewert, a portfolio manager at Philadelphia-based Glenmede Trust Co., which manages about $17 billion in assets. "It could start to rally on any sort of indication of putting the banking system on a better footing," he said.
The market could use the good news. The S&P 500 and Dow Jones Industrial Average have lost about 9% this year, adding to last year's double-digit losses.
Any spark of hope from Washington faces a squall of negative reports from corporations around the country. Some 193 S&P 500 companies, 40% of the entire index, have already reported fourth-quarter results. Another 102, including Dow Jones Industrial Average components Merck Co., Kraft Foods, Inc. and Walt Disney Co. , are slated to report next week.
So far, earnings look bad and forecasts look worse. S&P 500 companies are on track for a 35% earnings decline. Companies are missing earnings' expectations at a rate not seen since the fourth quarter of 1995. These added to a gloomy jobs picture that next Friday's jobs report will likely illustrate.
Economists are expecting the economy lost 400,000 to 600,000 jobs in January. As in past months, the Wednesday release of payroll processor ADP's job forecast, followed by Thursday's jobless claims figures, could roil traders ahead of the Friday Labor Dept. release. January sales figures from the auto industry and retailers could also tip indexes, even though the theme of plunging auto sales and stingy shoppers is a familiar one. GM sales fell about 40%, Chrysler sales dropped 50% and Toyota Motor Co. sales lost more than 30%.
Devil's in the bad-bank details
The possibility that policymakers would take a page from the 1980s savings and loan crisis by creating an agency to buy institutions' bad assets sparked a rally in bank shares last week. After some jaw-jumping intraday rises, the Financial Select Sector SPDR Fund , which tracks the S&P 500 bank stocks, ended the week 2.8% higher vs. a 0.7% drop for the broader index. Many agree that the market won't rally until the financial system works through the toxic mortgage and related assets. These prompted the failures last year of Lehman Bros. and Washington Mutual, caused successive writedowns as big banks such as Bank of America Corp. and sent the industry running hat in hand to the U.S. government - repeatedly knocking down any chance of a stock market rally.
But even if policymakers pull together to form a new version of the 1980s' Resolution Trust Corp., investors say a sustained rally won't necessarily follow. A lot rides on the details of the structure. If a government "bad bank" buys up bank debts for a steep discount to par value, say at 23 cents on the dollar, those purchases could force struggling institutions to embark on another big round of writedowns and capital raisings. That process could send more down the path to bankruptcy. But if the government buys the assets at par value, in other words, for far more than they are worth now, the problem passes on to the government and ultimately, the taxpayer. "The idea that this will be such a sizeable pricetag to the taxpayer is certainly something investors are weary of," Siewert said.
Investors are hoping for more clarity from Congress and the White House on establishing a good bank/bad bank institution that would buy up the delinquent loans and illiquid securities corroding banks' books.
Traders will also be cued to policymakers' decision on how to spend the second half of last fall's $700 billion Troubled Asset Relief Program, or TARP.
"The market fully understands that the two largest problems we're faced with are the solvency of the banking system and bringing about the end to the real estate crisis," said Robert Siewert, a portfolio manager at Philadelphia-based Glenmede Trust Co., which manages about $17 billion in assets. "It could start to rally on any sort of indication of putting the banking system on a better footing," he said.
The market could use the good news. The S&P 500 and Dow Jones Industrial Average have lost about 9% this year, adding to last year's double-digit losses.
Any spark of hope from Washington faces a squall of negative reports from corporations around the country. Some 193 S&P 500 companies, 40% of the entire index, have already reported fourth-quarter results. Another 102, including Dow Jones Industrial Average components Merck Co., Kraft Foods, Inc. and Walt Disney Co. , are slated to report next week.
So far, earnings look bad and forecasts look worse. S&P 500 companies are on track for a 35% earnings decline. Companies are missing earnings' expectations at a rate not seen since the fourth quarter of 1995. These added to a gloomy jobs picture that next Friday's jobs report will likely illustrate.
Economists are expecting the economy lost 400,000 to 600,000 jobs in January. As in past months, the Wednesday release of payroll processor ADP's job forecast, followed by Thursday's jobless claims figures, could roil traders ahead of the Friday Labor Dept. release. January sales figures from the auto industry and retailers could also tip indexes, even though the theme of plunging auto sales and stingy shoppers is a familiar one. GM sales fell about 40%, Chrysler sales dropped 50% and Toyota Motor Co. sales lost more than 30%.
Devil's in the bad-bank details
The possibility that policymakers would take a page from the 1980s savings and loan crisis by creating an agency to buy institutions' bad assets sparked a rally in bank shares last week. After some jaw-jumping intraday rises, the Financial Select Sector SPDR Fund , which tracks the S&P 500 bank stocks, ended the week 2.8% higher vs. a 0.7% drop for the broader index. Many agree that the market won't rally until the financial system works through the toxic mortgage and related assets. These prompted the failures last year of Lehman Bros. and Washington Mutual, caused successive writedowns as big banks such as Bank of America Corp. and sent the industry running hat in hand to the U.S. government - repeatedly knocking down any chance of a stock market rally.
But even if policymakers pull together to form a new version of the 1980s' Resolution Trust Corp., investors say a sustained rally won't necessarily follow. A lot rides on the details of the structure. If a government "bad bank" buys up bank debts for a steep discount to par value, say at 23 cents on the dollar, those purchases could force struggling institutions to embark on another big round of writedowns and capital raisings. That process could send more down the path to bankruptcy. But if the government buys the assets at par value, in other words, for far more than they are worth now, the problem passes on to the government and ultimately, the taxpayer. "The idea that this will be such a sizeable pricetag to the taxpayer is certainly something investors are weary of," Siewert said.
And regardless of the details of a proposed bank fix, the market still faces a rocky road. Siewert said his firm continues to underweight equities in favor of more investments in bonds, such as high-yield and municipal securities.
Weekly KLSE Update and Outlook
Trading is seen to be supportive after the week-long holiday.
StarBizWeek/MarketWatch: OUTLOOK: With the return of market players after a week-long holiday season, trading on the Bursa this week is expected to be "supportive". Having said that, most dealers expect trading to be range bound throughout most of the week.
Maybank Investment Bank Bhd head of retail research and chief chartist Lee Cheng Hooi sees a strong support level of 867- 868 points for the KL Composite Index (KLCI) "which it is unlikely to violate" and resistance level of 887-900 points for the week ahead.
"I think this trading week is going to be okay and not as bleak as would be assumed based on overseas markets," he says, pointing out that the KLCI had managed to punch through into positive territory on Friday.
"I think this trading week is going to be okay and not as bleak as would be assumed based on overseas markets," he says, pointing out that the KLCI had managed to punch through into positive territory on Friday.
While the local bourse failed to sustain the window dressing activity that lent it a boost towards the end of the year, some say the Umno general assembly meeting in March may inject some vigour into the market, as historically the market sees support from local players in the run-up to the meeting. However, with February having two-shortened trading weeks, there may not be much time to structure a supportive equities market, he says.
Rotational play is already evident in the market with the run-up in water-utilities linked counters on Thursday and plantation counters on Friday.
Despite weakness in crude palm oil (CPO) futures that are trading at around RM1,760 per tonne, plantation stocks have drawn speculative interest and this may continue.
"It's not pretty because CPO futures have broken past the RM1,790 per tonne support level, but there is still a run-up in plantations counters which are index linked," he says.
Lee expects this week to be trapped between the support and resistance levels with trading opportunities in some speculative stocks, naming infrastructure firm MMC Corp Bhd.
* Wow!How time flies when you are having fun! Its the 7th day of the Chinese New Year already! Time to wish everyone a very Happy and Bullish Birthday and enjoy tossing“Yu Sang” (a special dish in Malaysia Chinese community).
* Wow!How time flies when you are having fun! Its the 7th day of the Chinese New Year already! Time to wish everyone a very Happy and Bullish Birthday and enjoy tossing“Yu Sang” (a special dish in Malaysia Chinese community).
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