Late summer usually means a slow drift for stocks as traders head to the beach.
But with heightened concerns about the economy, investors will hone in on every piece of economic news and Fed Chairman Ben Bernanke's Friday speech on the economy (see page 2). Housing data, durable goods, jobless claims and a revised look at second quarter GDP will provide grist for the debate about how much the economy is slowing.
"We just came off a good earnings season, but we're not going to hear from corporate America for a long time now, and it seems that away from corporate profitability, there's not a lot of good news," said Wedbush Securities managing director Steve Massocca.
"Given the fact that equities are incredibly under-owned right now, and it's the last week of August, it's kind of traditional that nobody works, so I think it's going to be kind of slow," he said.
Stocks in the past week were mostly lower to mixed. The Dow was down 0.9 percent to 10,213, and the S&P 500 was down 0.7 percent to 1071. Yet, the Nasdaq was up 0.3 percent and the Russell 2000 was also modestly higher. Bonds, however, were riding high and strong buying drove yields lower. The 2-year saw a record low yield, and finished the week at 0.496 percent. The 10-year was yielding 2.614 percent.
The dollar had another up week, with the dollar index rising 0.8 percent. The dollar was up 0.4 percent against the euro at $1.27, and 0.8 percent against the yen. Risk assets, like oil, moved lower as the dollar moved higher on fears of slower economic growth. Nymex crude was down 2.6 percent to a six-week low of $73.46, as the government reported total petroleum inventories rose to record levels.
Already gloomy forecasts on the economy was notched down by several Wall Street economists, as the data continued to disappoint. The worst jobless claims report since November came on Thursday, and showed a move up to 500,000 new claims, the third weekly increase in a row.
"We're in this spot where we continue to be stuck in limbo. You've got neither data to prove you're going into another recession, nor the data to prove you're not," said Bill Stone, chief investment strategist at PNC Wealth Management.
"It's not exactly pleasant, but it's one of those times you have to stake your claim...If you believe earnings aren't going to completely melt, then valuations look rather attractive," he said.
Stone said stocks will probably bump along for while but he maintains a year end target of 1225 on the S&P 500. "There's plenty of downside risk. You don't have to go through the long list of what can go wrong. You have to weigh it against what you can invest in. The dividend yield on the S&P 500, compared to the yield on the 10-year, is the lowest spread between the two since the 1960s," he said, noting there was one exception during the height of the financial crisis.
In the week ahead, traders will also be watching some key technical levels.
"We seem to be holding the 1070 level (on the S&P), which we held earlier in the month," Massocca said. "I think unless we breach that significantly, it's kind of the bottom of the trading range at this point. But I'm more concerned that we're going to break this 1070 level than we're going to trade higher."
"There's so many cross-currents," he said.
Trying to Gauge 'Quantitative Easing'
The Kansas City Fed's annual symposium in Jackson Hole, Wyo. puts the spotlight on the Fed this week. This is one of the most important Jackson Hole events in some time, according to Pimco's Tony Crescenzi.
The Fed, in fact, has been in the spotlight since its last FOMC meeting. At the August meeting, it downgraded its view of the economy and said it would use the proceeds from maturing mortgage securities to purchase Treasuries, in essence maintaining the size of its balance sheet even as the mortgages roll off.
Those acts have created a stir in the market and heightened speculation that the Fed will ramp up its "quantitative easing" program with a heftier Treasury purchase program, in an effort to drive down rates on commercial and consumer loans. The Fed's target Fed funds rate is already at zero to 0.25 percent, and quantitative easing in theory helps it move other rates lower, including mortgages.
Economists have been speculating that Bernanke could use his Jackson Hole speech to help steer expectations on quantitative easing, which many in the markets believe will be expanded. The Fed began the smaller purchase program it announced after the FOMC meeting this week. Traders said the rise in Treasury prices (and the inverse move in yields) has been in part fueled by expectations of Fed buying.
"What we're trying to figure is to what extent the operation to purchase Treasurys is technical or the beginning of something much bigger," said Crescenzi, portfolio manager and senior strategist. "There are such implications for the markets. The Fed is now a player, not just a referee. It's a price-setter, and it's affecting markets."
"One could say it's swapping MBS (mortgage-backed securities) for Treasurys because it's seeing faster pre-payments of mortgages, because mortgage refinancing picked up. We don't know if it will expand into something much larger and the speculation of how large the Fed's balance sheet could be is wide-ranging. There are those that say it takes a trillion dollars to move the 10-year (Treasury) between a quarter of a point to a half," said Crescenzi.
Mark Zandi, chief economist at Moody's Economy.com, said he expects the Fed to embark on a larger quantitative easing program later in the year, and he sees it starting small with about $300 billion in purchases. "It depends obviously on what happens to the economy, but my view is (that) the recovery is weakening and unemployment is going to start to rise, and that's the key metric for them. If unemployment is rising, it calls for further easing, and their best option is quantitative easing," he said.
I don't think they need to buy a whole lot initially. The very fact that they say t he are going to increase their balance sheet is a big statement...given their druthers they would like to keep their balance sheet as small as possible for as long as possible," he added.
Zandi said the Fed does not use Jackson Hole to make policy so Bernanke's remarks will be limited.
Citigroup economist Steven Wieting said an important move by the Fed at Jackson Hole would be to limit its message, after its talk earlier in the spring of an exit strategy from its programs spooked the markets. That message has since reversed as economic conditions deteriorated.
"The message should be they are acting to support the recovery," he said. "By saying, look, we're still in an easing cycle, (the Fed) had a very measurable impact on easing. Forward rates are lower," he said.
Wieting said he downgraded his forecast for second-half GDP this past week. On Friday, the revisions for second-quarter GDP will be released. Wieting expects to see growth of just 1.1 percent, from the preliminary 2.4 percent. He changed his third quarter forecast to 1.6 percent from 2 percent.
"The revisions to incoming data were markedly negative for the quarter past, and that affects our starting point for where we are now," he said.
Other data expected this week includes existing home sales Tuesday and new home sales Wednesday. Durable goods are Wednesday and weekly jobless claims are Thursday. Consumer sentiment is reported Friday. There are also four days of government auctions for a total $109 billion in 30-year TIPS, 2-, 5- and 7-year notes.
"Durable goods could be interesting. Production was strong in the month, but the orders data could be interesting. June data was above May," Wieting said.
That number will be watched closely because manufacturing data is showing signs of sluggishness. The regional Philadelphia Fed survey this week was a surprise negative number.
Economists expect home sales to be weak and the existing home sales could set a new low, below the current low of 4.8 million, said Zandi.
What Else to Watch
Merger activity could continue to bubble in the coming week, after BHP Billiton's hostile $43.8 billion bid for Canada's Potash this past week. BHP Billiton reports earnings on Wednesday.
Thomson Reuters says it was a record week for mergers and acquisitions activity in August. Volume was $89.8 billion, the largest since Nov. 1, 2009 when worldwide merger activity totaled $103.2 in one week.
The corporate cash hoard is being increasingly used for small, strategic deals. One of the bigger deals in the past week was Intel's $7.7 billion bid for McAfee, but there have been many more recent deals that are under $1 billion.
Wieting said corporate spending on dividends, capital spending and buyouts is low right now, but he expects it to pick up. "The increases in cash equivalents and retained earnings is dramatic and it points toward something being done with that," he said.
Other earnings this week include Burger King on Tuesday, Toll Brothers on Wednesday and Tiffany on Friday.
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