The Week Ahead: Downside Risk Waning?

Despite Friday’s near 300-point decline in the Dow Industrials Index, the market has shown interesting resilience to bad news lately. Sure, Friday’s report from General Electric (NYSE: GE), indicating that it had missed forecasts sent the stock for its biggest one-day dive since the 1987 market crash. Of course, consumer sentiment readings that were off the charts on the low end reminded investors about the realities of recession. It is logical then that investors would want to protect their capital through the weekend and sell heavily on Friday.

However, up until Friday, the market had shown a new and very interesting characteristic through the week, that being resilience. Plenty of other bad news hit the wires this week, including the confessions of the Treasury Secretary and Federal Reserve Chairman that “contraction” was in store and “sharp decline” was in process. Good morning America! It seemed clear to us that Paulson and Bernanke were simply covering their tails now for the onset of recession.

Still, we think the market’s newfound courage (until Friday) might in fact be indication of a trough for stocks. In other words, downside risk might finally be evening out with upside potential.

The Week Ahead

The week ahead holds in store important metrics of inflation and the economy, as well as the sincere start to earnings season.

Monday offers the market opportunity to follow through on its fearful Friday closure. Retail sales threaten to be disturbingly bad when reported for the month of March before the market open. All indications point toward an ugly report. Last week, individual retailers noted mostly poor chain store sales for the same period.

Tuesday and Wednesday bring the Producer Price Index and Consumer Price Index in successive order. Within these reports we find important measures of inflation, especially within the consumer data. According to last week’s report from the ECB, European economic growth is holding up, and the ECB did not cut interest rates as a result. This is bad for Greeks planning a summer return to the motherland, and also poor for Greek/American merchants who import goods from Europe for sale here. The dollar cannot firm up against the euro without consistent movement from the ECB to match the American Federal Reserve.

However, Jean-Claude Trichet, the ECB chief, pointed to still decent economic growth and hot inflation in Europe as good cause to keep rates steady. Unfortunately for us, if his forecast holds true and Europe does not follow us into recession, there’s a tough pill here to swallow. This means global demand could hold up, and thus prices as well. So, the CPI report threatens to defy Fed Chief Bernanke’s assumption that prices will ease as a consequence of recession. If China still needs steel, rice and oil, and Europe continues growing, then how can prices ease for Americans who live within the global economy?

Just a handful of the week’s earnings reports include: Monday – Royal Philips Electronics (NYSE: PHG), Sun Bancorp (Nasdaq: SNBC); Tuesday – Intel (Nasdaq: INTC), Johnson & Johnson (NYSE: JNJ); Wednesday – Astoria Financial (NYSE: AF), Coca-Cola (NYSE: KO), Wells Fargo (NYSE: WFC); Thursday – Capital One Financial (NYSE: COF), E*Trade (Nasdaq: ETFC), Google (Nasdaq: GOOG), Merrill Lynch (NYSE: MER), Pfizer (NYSE: PFE); Friday – Caterpillar (NYSE: CAT), Citigroup (NYSE: C) and many more.

Comments

[karchad]

Friday's decline was a knee-jerk reaction, and the capitulation of the few weak hands that are left. The fact is, the market has bounced twice off lows. The headlines are so negative, the mutual fund redemptions so much, that I'm investing based on my notion that this is indeed near the bottom, give or take another 5% let's say. I'll probably get a million posts yelling at me, which only further backs up my supposition. I"m buying financials and homebuilders, because 100% of the people I spoke to say I'm crazy.

[User 175504]

I agree with you -what financials and homebuilders do you like? C, BAC, Lowes?

[galewhitaker]

The fly in the ointment for you guys is the price of oil. The consumers can't afford to fill up their Tahoes and thunder on down to the mall to load up on flat screen TVs and Victorias Secrets. The market cannot rally from here without the consumer and the price of oil is going higher because it is getting scarcer.

[bearfund]

karchad, you're not crazy, just wrong. I have only one question for you: where will these companies' earnings come from?

[cat & mouse]

Don't worry! The FED is waiting to give timely doles to the banks and traders, so that the market will always bounce back after every fall. The analysts opinions are flawed, because they do not have all the information on various securites and derivatives held by the banks. The banks are very secretive, and I do not blame them, as they depend on the investors for their money.

[User 126397]

HOV HAS MOVED UP FROM FIVE TO ELEVEN DOLLARS A SHARE IN THE LAST MONTH ALONG WITH OTHER HOME BUILDERS. I KNOW NOBODY HAS ANYTHING GOOD TO SAY ABOUT THIS GROUP, BUT SOMETHING POSTIVE MUST BE GOING ON OUT THERE.

[gordon]

Paulson and his Gang-sters have "BORROWED" $350 BILLION+ in about 4 weeks, just where do you think that money is being used? We have socialism of the stock market now, as Paulson promised Bush the market won't fall, as his "Working Group" continues to use this money by buying SPY/DIA cash futures in the premarket to reverse any selloff.
This is the most aggregious, stealth propping of markets and conflict of interest in US financial history, why are we Americans not demanding an accounting of this $35 BILLION PER DAY these non-FDIC investment banks, aka Primary TRADERS? MASSIVE profits by "investment banks" have been achieved by trading. M&A is dead, so are IPOs. Where is the Plunge Team deploying this money? How many 28-day periods can they roll it over? How many are FAILING TO DELIVER any securities for the money(Treasuries) they steal at 2.5% interest? What reward is the GOP promising Paulson and these primary dealers for propping the market?

[ponchovilla]

If you believe hope is a strategy then the market will go up by 15%. The Treasury/Paulson=hope. The FED/Bernanke=hope. George W Iraq War=hope.
If you believe there is illusion, delusion and conflict of interest the market will go down as some "skeptic" brings truth to the light of day. How can Lehman, Hovnanian and other suspects go up with little prospect for earnings? How does GE the "bellweather"... go down on a slight "dissapointment&q... (March blindside on the GE credit side, eh?). WHAT HAPPENS WHEN RECEIPTS TO THE TREASURY GO DOWN AND THE DEFICIT GROWS? Will all of this good news mean a DOW at 16000? How much more debt can we handle and sell to the unsuspecting "investors"?

[continuum]

For the whole "Week Ahead" section, which is the bulk of the article and entirety of concrete analysis, it says "down" all over. So where's the case for "downside risk waning"?

Yes, last two weeks have been "resilient". My words for it are irrational and wishful thinking. All the cash were trying to predict the bottom and get in before the market goes up, which is usually months before the economy recovers. But Friday reality finally sunk in a little. As eloquently argued by the article (except the title and first two paragraphs), there is no possibility of an economic recovery in sight.

Along the way, of course, we'll no doubt see a few sucker's rallies. I don't fight them. I play along. But I don't fool myself by asking myself the question once very couple of weeks: could this be the bottom?

After the earnings storm in next two weeks, we could very well have yet another sucker's rally. But no, it would not be the bottom.

[horse_sense]

In the final analysis, the reason stocks go up is because there is the reality of current and future profits. With food, energy and health care costs escalating much faster than paychecks, consumers are tapped out. And consumers drive this economy.

As for resiliency in the market, not a single bear market has gone
down in a straight line. Some of the most spectacular rallies take
place during a bear market. They are caused by bargain hunters coming in thinking this is the bottom and short sellers forced to cover.