Stocks will continue to wobble until Washington finds the right prescription to help fix the ailing financial sector.
Traders say economic data in the coming week is important for markets, but the most important headline investors await would be news of a plan from the U.S. Treasury to remove the troubled assets from banks books. There is so far no announcement planned though Treasury Secretary Tim Geithner has promised more details in the next couple of weeks.
The mood on Wall Street is about as gloomy as it gets. Yet, the debate continues to rage on whether stocks are ridiculously cheap or whether the market is just finding another stopping point on its way south.
Financial stocks were bashed in the past week, with the S&P financial sector losing 19 percent, compared to the 7 percent decline in the overall stock market. The S&P 500 crumpled, losing 51 points to 683, while the Dow lost 435 to 6626. The Nasdaq slumped 83 points on the week or 6.1 percent, to close at 1293, its biggest decline since the Nov. 21 week when it last set a new low.
Some key stocks, like General Electric [GE], American Express [AXP] and Citigroup [C] traded in single digits as investors punished financial companies across the board. GE owns CNBC.
"Fundamentally, the market should be higher, but the market will only be higher with confidence and clarity," said Tim Smalls of Execution LLC. "I think the market's going to trade the same way it's been trading. I suspect that over the next two weeks, you're going to start getting some more concrete stuff coming out of Washington."
In the coming week, President Barack Obama will set the stage for new investment in stem cell research when he signs an order reversing restrictions on government funding for embryonic stem cell research. Also, the White House auto team continues its review of General Motors and Chrysler, starting with a visit to the industry's technical centers in Detroit Monday.
On Thursday, the House Financial Services holds a hearing on mark-to-market accounting, blamed by some for sinking the banking sector. An alteration of the rule would have a big upside impact on banking stocks.
Fed Chairman Ben Bernanke speaks Tuesday at the Council of Foreign Relations on financial reform and systemic risk, and Treasury Secretary Tim Geithner testifies before another Congressional committee on the Obama budget Thursday. .
There may also be developments in two big merger sagas. Roche Friday raised its hostile bid to $93 per share, or $45.7 billion, for the 44 percnet of Genentech it does not yet own. Also, Dow Chemical and Rohm and Haas are in talks to to try to settle differences over Dow's $15 billion bid for Rohm and Haas.
There's not an investor to be found who is not rooting for the prosecution of alleged ponzi scamster Bernie Madoff. On Thursday, he may be in court. The prosecution Friday indicated it was working on a plea deal with Madoff.
Econorama:
Retail sales, released Thursady, is the big data point economists are watching in the coming week. The NFIB small business survey is issued Tuesday, as is wholesale trade. Weekly jobless claims and business inventories are reported Thursday, and international trade, import prices and consumer sentiment are Friday.
RBS Greenwich Capital's chief U.S. economist Steven Stanley said retail sales and international trade are two releases he's waiting for in the coming week.
"We've seen less bad numbers on the consumer since the turn of the year. The Christmas season might have been the worst of that," said Steven Stanley, chief U.S. economist at RBS Greenwich Capital. "I think things are still falling, but falling at a slower pace than in the fourth quarter."
"It doesn't look like the consumer is worsening at an accelerating rate. That's a good thing, but everything is worsening," he said. Stanley said the trade numbers should show a big drop off in imports. "We're looking for a narrowing of the trade gap, mainly because we think imports are going to contract more than exports."
TO BUY OR NOT TO BUY?
PNC Wealth Management this past week recommended investors shift some assets more toward corporate bonds and away from equities markets, particularly international. "We're just taking a step up the capitalization ladder, getting a little more safety, getting more income," said Bill Stone, chief investment strategist for PNC Wealth Management. "We took out international because the policy response there hasn't been so hot. It's been slower in the EC, and Japan is an absolute mess."
Stone said the stock market typically leads the way, ahead of a recovery but the economy is worse than expected and government programs have moved slower than anticipated. "I think a lot of stuff we thought would have been up and running by this point has gotten bogged down," he said.
"These markets are rioting for answers right now. We're going to take a step back. We think we can still get risk-adjusted returns out of the fixed income area," he said.
MFS Investment Management executives visited CNBC Friday, and said they were buyers of select stocks. "Everybody should understand the government is doing everything they can to help stabilize the system. It's not going to be perfect, but ultimately this is the most flexible economy in the world. The markets have discounted a worse case scenario. We don't think there's a great depression, and we think it's time to buy," said Robert Manning, CEO of MFS Investment Management.
But he also said Washington is part of the stock market's problem. "the problems coming out of Washington is they act like they want to destroy capital formation instead of creating it," he said.
David Antonelli, MFS chief investment officer global and non-U.S. investments, said he looks for companies that are well-capitalized and without a lot of debt."You don't get paid to take high risk right now because the low risk companies are cheap," he said. Some of those opportunities are in health care he said, and he specifically pointed to defense company Lockheed as a cheap stock. "You're buying it for eight times free cash flow," he said.
Antonelli said the market is nearing a point where investors will probably start to value companies by the amount of sales they generate rather than earnings. He also said the biggest reward looking out over the next several years will probably be in distressed debt. "that's where the mega returns will come from," he said.
Fear of Financials:
The meltdown in financial company stocks in the past week comes on the heels of the government's deal to up its stake in Citigroup, a deal that pushed Citi preferred shareholders into common.
Late Friday, the U.K. government struck a deal with its Lloyds Banking Group in which the British government would insure more than $350 billion in assets and increase its stake in the bank to as much as 75 percent, according to Dow Jones.
Stanley said the affect of the Citi deal is still rippling through the U.S. market and investors are worried it's a blue print for other banks. "The problem for the stock market is that you can earn equity-like returns in some of the debt products. In some ways, the policy response is kind of nudging things that way, the latest round of policy response has really hinted at a bright red line between the creditors and the equity guy," said Stanley.
(The Financials) and the adjustment of mark to market rumors could be the ticket for Hedgies to squeeze early in the week. GE & Grannie Goldman should be good tells on wheather the Hedgies still have game. Never forget CNBC is a GE baby and will gladly play the game with a slant. If "they" get them moving I expect "they" will try to keep that ball rolling until end of quarter and pull the market with them.
Of course the world is littered with Financial landmines that have to be respected for anyone playing financials long. No news will be good news, even less than horrific news will likely get the spin as good news.
It would be nice to have A 1000 point rally over a few days / that would be a Mini bear rally , not making any predictions, but could be enough {if it happens} to pay some bills,, eom
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