Stocks finished an up and down week in a swoon and look headed for another bumpy round as investors wade through hundreds of earnings reports and some big economic numbers in the week ahead.
The Dow cracked, and then closed above 14,000 this week for the first time. For the week, the Dow was off 0.4%, after a week of volatile swings. The Dow is up 11.1% for the year. The S&P 500 lost 1.5% for the week, and the Nasdaq slumped 0.7%.
Stocks fell sharply Friday, with the Dow losing 149 points, in a selloff driven in part by worries in the credit markets. As rumors swirled about further subprime weakness, credit spreads widened to multi-year levels as investors jumped into Treasurys and sold corporate and mortgage debt issues. A parallel fear surfaced that private equity firms could have problems placing deal debt or have to sweeten terms. The result was a drop in Treasury yields to the lowest level since early June.
Cramer Turns Cautious
Mad Money's Jim Cramer has been warning investors away from the financials and homebuilders, groups affected by the housing slump and credit worries. He's now warning that it's time to take some profits out of the market.
"Look, I'm just making a call right here. Don't buy anything. Sell, sell , sell. We're still going to see Dow 14,500 (by year end), and I'm just saying we're going to take some profits" for now, he said.
Cramer has said before he expected some choppy times this summer. "I'm cautious near-term because of the private equity breakdown and the housing breakdown," he said, noting that other parts of the market are really fine. He said Google and Caterpillar earnings misses weren't as bad as the market perceived.
He said investors have turned on the financials. "You just have to recognize that people hate a group, and they hate this group," he said.
"My view is you cannot fight that part of the tape," he said.
Otherwise, he said things are good and he would be putting money into foreign stocks. "You really need to reduce your exposure to this market," he said. "I'm talking domestically."
Flight to Quality
After a turbulent week in the credit markets, the 10-year yield finished the week at low of 4.95% in a flight-to-quality trade.
"It's about the spreads. It's not about the yields. The spreads are at extremes. The yields aren't really that high. It's the risk premium, or the difference between the yields on lower quality issues and Treasurys," said CNBC's Rick Santelli. "This trend worries stocks because it could mean higher borrowing costs for companies and for corporate buyouts that are already announced but not yet financed."
Santelli said a big deal in the market's path is the Chrysler debt offering to cover private equity Cerberus Capital's purchase of the auto maker. "That's one of the deals that would give us a first look. It's going to be a good litmus test to see if these anxieties are warranted," said Santelli
The dollar, meanwhile, continued its slide, hitting a new low against the euro Friday.
CNBC's Larry Kudlow said he thinks Friday's market shakeup was a positive.
"The selloff in financials is a great buying opportunity because the credit problems are going to turn out to be mild and not damaging. You saw these earnings. Citigroup had great earnings, and the stock went down. It's really not subprime. It's leveraged loan credit markdowns. KKR couldn't price a deal, and the Chrysler Cerberus deal could have some issues," he said.
Oil Drill
Oil ended the week at $75.74 a barrel, crossing above $76 per barrel on Friday. Crude was up 2.2% for the week, and has risen 16.7% over the past six weeks.
"I think the market is certainly focused on the demand question and the challenge of meeting demand. It started with the IMF raising its global growth forecast, the IEA forecast and then China's latest GDP numbers," said Cambridge Energy Research Chairman Daniel Yergin.
"On top of that, these rather small disruptions add up, like the shutdown of the Japanese nuclear plant, the disruptions in Angola and the damaged pipeline in the North Sea. When you add all of those up, you could be talking about as much as 500,000 barrels a day," he said.
A Japanese nuclear plant was shut because of damage from last week's earthquake. Yergin said to replace its output with oil would require an additional 130,000 barrels a day.
"What you're seeing in futures buying is the power of expectations. This right now is an expectations-driven market and also an events driven market," said Yergin.
Econorama
Housing and manufacturing data and a first look at second-quarter GDP are the big economic events in the coming week. On Wednesday, existing home sales for June are reported, and new home sales are released Thursday. Durable goods for June is reported Thursday, and the first look at second quarter GDP is Friday.
The Richmond Fed survey is due Tuesday. On Wednesday, the Fed's beige book on the economy is released at 2 pm New York time.
University of Michigan consumer sentiment for July is released Friday.
CNBC real estate reporter Diana Olick will be taking a close look not just at housing data but home builder earnings this week. "There are six home builders reporting earnings Wednesday and Thursday. We already know Pulte pre-released, and it was astounding how bad they were. They are losing 10% of their book value. KB's CEO said today he didn't expect the market to bottom until the end of 2008," Olick said.
"Home builders are just finally owning up to reality that it's going to be a weak market for a long time," Olick said. "The home builders are offering many incentives now. The problem is there is way too much inventory of new homes. You have way too many homes for sale. You have many skeptical buyers. The investor group has left housing."
As for housing numbers, the trend will probably continue weak.
"As we keep looking at the market and we look at the sales numbers, the question is, 'Are those first time home buyers willing to jump back in?' If prices continue to slump, we would expect to see sales bump up. The question in this market is going to be the very skeptical buyer...it'll be that buyer that will determine when it hits bottom," she said.
Earnings Central
So far, 125 S&P 500 companies have reported. Another 168 report next week. According to Thomson Financial, earnings growth for the second quarter is running at 6.7%, and revenue growth is 9%. Earnings are 2.7% above estimates on average. Of the companies that have reported, 59% have beaten analysts' estimates, and 21% missed.
Merck, Schering-Plough and American Express report Monday. AT&T, Dupont, Eli Lilly, McDonald's, EMC, Pepsi, Lockheed Martin and Amazon report Tuesday. Apple is the highlight on Wednesday, but earnings will also be reported by Glaxo, General Dynamics and Boeing. Thursday's reports include 3M, Anheuser-Busch, Exxon, Ford, Kellogg, Aetna, Amgen and Wendy's. Chevron reports on Friday.
"I think earnings are going to be fine and may surprise on the upside...The global growth story is fabulous...Fed policy is on hold...and Goldilocks is in great shape. I liked today's correction," Kudlow said Friday.