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Market Insider: The Week Ahead

Friday, 20 Jun 2008 | 7:39 PM ET

Stocks will struggle in the week ahead as they face the multiple threats of record oil prices, higher interest rates, a weak housing picture, and the fragile financial sector.

The big news event will be the Fed's two day meeting, which is not expected to result in any rate action when it ends Wednesday afternoon. But it's likely the Fed will crank up its rhetoric on inflation and possibly send signals about whether it is getting ready to move toward tightening. Traders say too much emphasis on a bias change toward raising rates could hurt stocks, especially the battered banks.

Oil too will be a factor, and the meeting in Jeddah, Saudi Arabia of oil producers and consumers this weekend could generate some important news for energy markets. The Saudis are expected to announce production increases, but traders are watching for other developments as well.

There is a series of important data releases on housing, consumer attitudes and manufacturing in the coming week. There are several earnings reports of note, including tech darling Research in Motion , and beaten down homebuilders KB Home and Lennar .

Wall Street is braced for a wave of negative comments on corporate earnings as the second quarter winds down. This past week, banks took the brunt of selling amid a barrage of negative news on that sector. Analysts cut estimates and issued new warnings about writedowns and dividend cuts. "You can't fight this credit story right now...You get the brokers cutting the big banks. You've got the the brokers cutting the brokers," said one trader.

Financials were down 4.7 percent in a week that saw the Dow lose 3.7 percent and the S&P 500, 3.1 percent. Nasdaq was down nearly 2 percent. The Dow closed at 11,842, its first close below 12,000 since March. There's certainly a growing dark mood among traders that only worsened Friday afternoon when S&P put the U.S. automakers on credit watch and Ford's restructuring news showed just how dire the impact of high gasoline prices has been for the struggling auto sector.

No Summer Fun?

"The next few months are going to be challenging," said Citigroup chief strategist Tobias Levkovich. "...Companies will have to indicate that it's not as good as it was, not that it's terrible."

"I don't think people understand the relationship between the credit markets and business activity," he said. Levkovich said the credit crunch, which began last summer, has had a lagging impact on some parts of the economy. Banks, we saw, were the first to feel the pain. "We're just about to hear companies in the industrial space telling you things are tough...That's one thing I worry about a lot because I don't think investors are prepared for this."

Global growth has helped pad the earnings of some of these companies but now that is beginning to slow down, particularly as you look at Europe. Levkovich has told us that he sees a W shaped downtrend for the economy. "We're inflecting into the next V of the W," he said.

"Earnings estimates are too high but once they get reasonable, we may rally again," he said. Levkovich said he believes though that stocks will end the year higher after this current rocky period. The sectors he likes are financials and retailers. Financials, he says, have already been oversold.

We checked in with Art Cashin late Friday for his latest technical target on the S&P. "People were wondering and worrying about 1310 on the S and P. That is the bottom of an interim downtrend line. If that were to break, it would almost assure a test of the St. Patrick's Day lows," said Cashin, who is the director of floor operations for UBS. Cashin said the VIX does not reflect the high anxiety seen in stocks right now, and the market needs to wash out in a sell off with some heavy volume behind it.

Fed Ahead

The Fed is not expected to move on the 2 percent target Fed funds rate, but it is expected to include hawkish comments about inflation when it releases its statement Wednesday. The market is pricing in a quarter point increase at the October meeting.

"The Fed will continue to its more hawkish tone in its statement, but not move until we get onto firmer economic ground. Recent signs of somewhat better economic conditions are a bit of a head fake, as it is more in response to tax rebates than improving fundamentals. That said, the hawks (largely Regional Fed Presidents) are gaining power, which means we will also see dissents," Mesirow Financial chief economist Diane Swonk wrote to us.

Mark Zandi, chief economist with Moody's Economy.com also agrees the Fed will not act and he does not expect them to start hiking rates until early next year. "It will be clear from the statement that they lean toward tightening because of inflation risks," said Zandi.

He said he believes the Fed is doing the right thing. "I think the house price declines start to abate late this year and early next. It feels like we're in some type of cathartic process right now. I think this process has to go through Arizona, Florida and some Northeast markets. I think he worst will be over by this time next year, by spring, and that will be the clear signal for the Fed to raise rates," he said.

"The irony is what's driving inflation fear is oil and what's driving oil is house price declines. It's creating so much angst in the financial system that investors just go to commodities" for returns instead of stocks and other instruments, he said.

Boiling Oil

At the meeting of oil producers and consumers Jeddah, the Saudis are expected to announce an increase in production. The Saudi oil minister confirmed that the kingdom will raise crude output to 9.7 million barrels per day in July, which would be 500,00 barrels above May's level. They may also talk about improving production and refining operations, traders say. Oil finished the week at $134.62 per barrel.

Oil inventory data is released Wednesday at 10:35 a.m.

Econorama

On the housing front, the Case Shiller home price index is reported Tuesday; new home sales are Wednesday and existing home sales are Thursday. Consumer confidence is released Tuesday and consumer sentiment is reported Friday. Durable goods orders for May are released Wednesday, and final fist quarter GDP is Thursday. Personal consumption and spending data is released Friday.

Earnings Central

Techs, retailers and homebuilders are among the handful of companies reporting in the week ahead. Research in Motion and Oracle report after the bell Wednesday. Retailers reporting include Walgreen on Monday; Kroger on Tuesday; Bed Bath and Beyond Wednesday, and Rite Aid on Thursday. Lennar reports Thursday and KB Home reports Friday.

In other corporate news, we'll be on the watch for news from Anheuser-Busch on its consideration of InBev's takeover bid. CSX Wednesday holds its shareholder's meeting, where a hedge fund is vying for board seats. Washington Mutual shareholders are set to vote Tuesday on TPG's $7 billion investment in WaMu.

- Questions? Comments? marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • Sharon Epperson is CNBC's senior commodities and personal finance correspondent.

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

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