Abet Chichi2

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Harding: A Nervous Market
by Sy Harding
Nov. 2, 2007


Is the market losing its nerve, and perhaps its momentum?

Four weeks ago the Dow closed up 171 points for the week, or 1.2%. That carried it up to a new record high at 14,164. But it seemed to find the atmosphere rarified at that altitude and has been gasping for air since.

It was unable to make any further progress the following week, closing basically unchanged for the week. The next week it plunged 577 points, or 4.1%. The following week, although investors seemed excited by its recovery, it actually only recovered half of the previous week's decline, closing up 284 points, or 2.1%, for the week.

And now this week, even though the Fed gave it what many thought would refill its oxygen tank for even loftier levels, a cut in the Fed Funds rate, the market continued to decline.

But not without plenty of day-to-day volatility. Its initial reaction to the Fed's rate cut on Wednesday was a rally of 137 points. But then, facing more bad news Thursday morning, it plunged a big 362 points on the day. Its problems on Thursday included earnings disappointments from Caterpillar, Honeywell, and Exxon Mobil among others. Those came on top of warnings over previous weeks from the likes of Harley Davidson, Hershey, Target, Lowe's, and others, raising concerns that consumers, which account for 66% of the economy, are pulling back on their spending.

But it was actually more bad news from the financial sector that really did it in on Thursday. CitiGroup was downgraded by a couple of brokerage firms, on expectations it will have to write down still more losses from the sub-prime mortgage mess. And Credit Suisse reported its September quarter earnings plunged 31%, and it will write down $1.9 billion in mortgage related losses.

It was an ugly day Thursday, a broad based sell-off in which 458 of the 500 stocks in the S&P 500 closed down on the day.

But there was still hope that the important employment report for October, due out Friday morning, would be able to salvage the week. Analysts projected that if 125,000 or more new jobs were created in October, the market would surge back up.

And Friday morning the Labor Department reported there were 165,000 new jobs created in October, much better than forecasts, much better than even hoped for.

However, just as the Fed's rate cut had failed to overcome the market's nervousness, the better than expected employment numbers, and even a separate report of higher than expected factory orders in October, had little effect. After an initial attempt to rally, the market turned south, with the Dow down more than 100 points by mid-day Friday.

Once again it was concerns about the financial sector that did it in, mostly fueled by rumors. One story floating around was that the Securities and Exchange Commission (SEC) is looking into how financial firms were able to price their debt-backed securities, for which there is no market, in order to come up with their recently announced write-offs and losses. And an article in the Wall Street Journal Friday morning alleged that Merrill Lynch has been selling some of its holdings in debt-backed securities to hedge funds to get the holdings off its own books for awhile, and avoid having to make more big write-downs. The rumor is that the hedge funds receive an agreement from Merrill that they can sell the holdings back to Merrill at a later date at a price that will guarantee the funds a profit. And then there was a story that Goldman Sachs, which was thought to be escaping the problems, will have to write down as much as $10 billion in mortgage mess losses. Goldman Sachs vehemently denied the rumor. But a nervous market can often move even further on rumors than on hard facts.

They did manage to bring the major indexes back from negative territory in the last half hour Friday, so that the Dow closed up 27 points for the day. That helped hide the fact that there were more stocks down than up in the broad market for the day. It did not blot out the fact that the Dow closed down 211 points for the week in spite of a Fed rate cut, and better than expected employment numbers.

The underlying problems obviously continue to rumble.


http://decisionpoint.com/TAC/HARDING.html