Week Ahead: Settling Back In After the 'Geithner Rally'
President-elect Barack Obama's announcement of an economics team Monday may soothe some tensions in financial markets, but investors will keep their eye on the economy, credit crunch and most particularly, Citigroup.
Citigroup management spent the weekend working withregulatorsin an effort to restore confidence in the bank, which has seen its market value plummet as doubts surface in markets about its viability. Citigroup has said it would seek a plan to add capital or find a merger partner but as the weekend winds down, it appears federal officials could throw it a life line by helping backstop it against toxic assets on its balance sheet.
The Dow fell 5.3 percent in the past week but it was rescued from what could have been a more than 10 percent decline by news Friday that New York Fed President Tim Geithner will be named as President-elect Barack Obama's choice for Treasury Secretary Monday. The Dow rallied 6.5 percent on the news, taking it to 8046. The S&P 500 also rallied more than 6 percent Friday, but it was still down 8.4 percent, ending the the week at a round 800.
The Obama Administration is expected to pursue an ambitious stimulus package to jumpstart the faltering economy. In a radio address this weekend, the President-elect said he would direct his economic team to develop a two-year stimulus package aimed at saving or creating 2.5 million jobs.
The Obama economic team is expected to also include former Treasury Secretary Larry Summers as director of the National Economic Council, and New Mexico Gov. Bill Richardson, who will be Commerce Secretary.
"Just about any team that's different from what we have now should help some, because it offers hope of a new and different approach, which almost has to be better than what we have gotten," said James Paulsen, chief investment strategist at Wells Capital Management. Paulsen says he in the camp that does not want to see a lot more government intervention with the financial system.
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It is more important for the new team to show "some calm, confident leadership which reminds everyone less about 'how bad' everything is and more about 'how much has already been implemented and that it will work.' I guess I hope they reflect the 'no drama' Obama personality which I think may help the most," he said.
There's lots of data in the week ahead, starting Monday with existing home sales for October. There are actually three key pieces of real estate data in the shortened holiday week. The S&P/Case Shiller home price index is reported at 9 a.m. Tuesday, and new home sales for October are reported at 10 a.m. Wednesday.
"We've got a saloon full of data coming out Tuesday morning. That could be critical," said UBS director of floor operations Art Cashin. He said the market could find a reason to move up if the data is not terrible. "People want to go into Thanksgiving thinking about family, friends and food and things that really matter," he said. The Thursday Thanksgiving holiday is followed by a shortened half day trading session Friday.
On Tuesday, third quarter GDP is reported at 8:30 a.m. Consumer confidence is reported at 10 a.m. that day. Weekly jobless claims are reported Wednesday, as is personal income, durable goods, Chicago purchasing managers and consumer sentiment.
Friday is "black Friday," the traditional launch of the holiday shopping season, which analysts and economists expect to be bleak this year. Retailers sales will be watched for any signs of life. The consumer, hampered by the credit crisis and rising unemployment, has been on a spending strike since mid September.
In the past week, it became apparent than any progress in the credit markets is a fragile thing. Spreads for all types of instruments widened sharply against Treasuries, a signal to traders that there's still trouble lurking. On Thursday, the flight to safety in Treasuries pushed yields of all durations to record low levels but that action subsided Friday.
Brian Rauscher, director of portfolio strategy at Brown Brothers Harriman, says he sees nothing out there yet to change his bearish view of stocks.
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"I'm still concerned," said Rauscher. He said it might be better to "let the market go further, get the selling out of the way and then we can have an eight month rally. Rip the band aid off."
"At the risk of sounding bearish at the bottom, I keep coming back to the credit markets. I look at what the economy is doing. I look at what analysts are expecting for earnings and all these things are pointing straight down," he said. "Almost everything I look at is still pointed down...(spreads on) anything the central banks are not specifically backstopping, are widening again."
Rauscher said his institutional clients were not getting panicky about the market's behavior. "I talk to clients. I hear what they're telling me. Nobody I speak with is really bullish. But on the other hand, there are few people I've spoken to in the last couple of weeks that are truly bearish. Nobody's telling me: 'Look, I'm scared to hell of this market. I'm on the sidelines, and I'm scared," said Rauscher.
Rauscher said on Friday that the "Geithner" rally did not change his bearish view. In an interview Thursday, he had speculated the market could move higher in Friday's session, and he was right. "The real test is what happens next week," noting that the market has had a hard time staging multi-day rallies.
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