Details of bank repair are sought
This week, Washington gets another chance to prove to Wall Street it means business.
Investors are expecting details on the Treasury Department’s plans to fix the financial industry. The questions they want answered: How the government will decide which banks are healthy enough to be saved, how their toxic assets will be priced and how officials will persuade private investors to buy them.
The Obama administration has yet to galvanize confidence on Wall Street. November’s 11-year trading low of 741.02 for the Standard & Poor’s 500 index has not yet been breached -- but it could be if the government fails to show the market that its efforts are working and to tell it that more help is on the way, said Phil Orlando, chief equity market strategist at Federated Investors.
“We could be down 50% from here over the next couple of quarters depending on how much Washington disappoints us,” Orlando said. “We’re in this freeze right now. We need something to break this ice jam. Right now, Washington is the only one that has the power to break this jam.”
So far, the multitrillion-dollar efforts by the Federal Reserve, Treasury Department, White House and Congress have provided only short-lived bursts of optimism in the stock market. Investors, having been burned by buying on rumors and selling on news, are now refraining from any major moves until they see reliable, sustained data showing that the economy and financial system are getting back on track.
“They’re not going to become optimistic until they see these plans we spent so much money on start to work,” said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors.
It’s been a rough couple of weeks for stocks:
* The Dow Jones industrial average is at its lowest level since October 2002.
* Five Dow stocks are trading below $10 a share -- General Motors Corp., Citigroup Inc., Bank of America Corp., Alcoa Inc. and General Electric Inc.
* Only about 100 of the 500 stocks in the S&P; 500 index are up for the year.
* After suffering its worst January ever, the S&P; 500 is on track for its third-worst February.
Stocks are so weak because, simply, the economy is not stabilizing and no one knows when it will.
Last week, more companies revealed worse-than-expected results and forecasts. Government data showed the economy was still sliding. Investors grew more skeptical about the effectiveness of the $787-billion stimulus package signed into law. A foreclosure relief plan was met with doubt. And they fretted over not knowing how the Treasury intends to repair the financial system.
Because of these fears, people pulled money out of their stock mutual funds. According to TrimTabs, outflows from funds invested in stocks totaled $8.6 billion in the week ended Wednesday, up from $8.5 billion the previous week. Those were the biggest weekly outflows since the second-to-last week of 2008, when outflows amounted to $11.4 billion.
Instead, investors have been pouring what’s left of their money into havens -- particularly gold. The precious metal surpassed $1,000 an ounce Friday, approaching the record $1,038.60 it reached in March.
Treasury Secretary Timothy F. Geithner will have to give the market this week sufficient insight into his plans and help it figure out whether the industry’s most worrisome players are going to survive. Shares of Citigroup and Bank of America plummeted last week on worries that the two banks would need to be nationalized, at least temporarily.
“A lot will depend on what’s in the plan. Having been disappointed once before, we’re not going to make the same mistake again and bid it up on confidence, because we don’t have any confidence right now,” Orlando said.
Economic data also will come into focus on Wall Street, particularly now that earnings season is winding down. This week’s reports include the S&P;/Case-Shiller home price index; January reports on sales of new and existing homes; a January report on durable goods orders; and another estimate of fourth-quarter gross domestic product.
It’s possible that in a few weeks, investors will start seeing the signs of recovery they’re hoping for. But market participants are still coming to terms with the fact that any economic recovery will be a long and difficult one.
“We went on a borrowing binge. We’re going through a process of deleveraging the U.S. economy,” Johnson said. “The best we can hope for is that we’ll muddle through.”
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At a glance
TODAY
Quarterly earnings reports are due from Campbell Soup and Nordstrom.
TUESDAY
The Conference Board releases its consumer confidence index for February.
Standard & Poor’s/Case-Shiller releases its December and fourth-quarter 2008 index of home prices.
Federal Reserve Chairman Ben S. Bernanke testifies on monetary policy before the Senate Banking, Housing and Urban Affairs Committee.
Senate Homeland Security and Governmental Affairs subcommittee holds hearing on obtaining the names of U.S. clients with Swiss financial accounts.
Senate Judiciary subcommittee holds hearing on the proposed Ticketmaster-Live Nation merger.
Quarterly earnings reports are due from DreamWorks Animation SKG, H.J. Heinz, Macy’s, Target and Wynn Resorts.
WEDNESDAY
Senate Judiciary Committee holds hearing on television in the digital era.
House Natural Resources Committee holds hearing on offshore drilling from industry’s perspective.
National Assn. of Realtors releases data on home resales for January.
Quarterly earnings reports are due from J.M. Smucker, Limited Brands and Saks.
THURSDAY
Labor Department releases data on weekly jobless claims.
Commerce Department releases January figures on durable goods sales and new-home sales.
House Judiciary subcommittee holds hearing on the proposed Ticketmaster-Live Nation merger.
Quarterly earnings reports are due from Gap, Safeway, Dell and Kohl’s.
FRIDAY
Commerce Department releases fourth-quarter gross domestic product figure for 2008.
