High finance makes for low expectations

By Madlen Read

July 14, 2008 12 AM PT

The Associated Press

For investors, stocks look like bad karma: Wall Street again starts a week with oil prices at their highest levels yet, and banks poised to reveal that they remain on shaky footing.

None of the troubles that have rocked the market over the last year have let up yet -- not the housing market, not high commodity costs, not the ailing financial system.

“We’ve got a fistful of drivers that are working against the market,” said Arthur Hogan, chief market analyst at Jefferies & Co. “And they’re all important.”

It’s a different collection of worries from those that hurled stocks lower at the beginning of the decade after the technology bubble burst and the Sept. 11, 2001, terrorist attacks sent the country reeling.

But many on Wall Street are worried that the effects of the country’s current problems could end up being just as devastating, or more so, for stocks.

The Dow Jones industrial average dropped below 11,000 for the first time in nearly two years before settling at 11,100.54 on Friday. The blue-chip index ended the week down 1.7%; the Standard & Poor’s 500 index fell 0.3% and the Nasdaq composite index fell 1.9%.

The three indexes are firmly entrenched in bear market territory, down more than 20% from their peaks last fall. The average bear market ultimately has involved a drop of about 30%, Hogan said.

Because stocks have tumbled recently, it’s possible that bargain buyers might reenter the market this week. And if this earnings season follows the same pattern as first quarter reports, second-quarter results that are not quite as bad as the pessimists anticipate could lead to brief relief rallies.

“We’re preparing for a worst-case scenario for the financials, for Freddie Mac and Fannie Mae, for the market in general. If we don’t get that, we may celebrate a bit,” Hogan said. However, “it’s a market that’s struggling to find anything that’s positive to rally on.”

On Friday, oil prices soared to a new trading record above $147 a barrel, following a pullback of nearly $10 a barrel Monday and Tuesday. After that massive reversal, Wall Street is likely to take any decline in oil this week with a grain of salt.

The effect of oil and other commodity prices on consumers and businesses will be seen in the Labor Department’s consumer and producer price indexes this week.

Investors also will parse the National Assn. of Home Builders’ July survey of housing market conditions Wednesday and the Commerce Department’s June report on new-home construction.

Meanwhile, Wells Fargo & Co. on Wednesday and JPMorgan Chase & Co. on Thursday are expected to report profit declines. Citigroup Inc., the nation’s largest bank by assets, is expected to post its third straight quarterly loss.

Wall Street also will be waiting to see whether the government will take action to rescue Fannie Mae and Freddie Mac. Shares of the two troubled mortgage giants plummeted by 45.4% and 46.6% respectively last week.

Until the housing market starts seeing signs of recovery, it is going to be difficult for the financial sector to see significant improvement in consumer credit conditions, the tight credit markets or the value of mortgage-backed securities. Lehman Bros. Holdings Inc., like Fannie and Freddie, saw its shares plummet last week.

“Without question, everyone’s terrified. I really couldn’t understand why there would be a rumor about a run on Lehman Bros.,” said Thomas J. Lee, a stock analyst at JPMorgan, noting that the Federal Reserve has said investment banks can borrow from the central bank’s discount window.

“It sounds like people living in fear and terror,” Lee said. “But as I put myself in the shoes of a portfolio manager, I can’t imagine them wanting to ride the stock down to zero.”

At a glance

Today

Treasury bill auction.

Quarterly earnings report due from Genentech.

Tuesday

Labor Department reports on producer price index for June.

Commerce Department reports on retail sales for June and business inventories for May.

Federal Reserve Chairman Ben S. Bernanke testifies about the economy before the Senate Banking, Housing and Urban Affairs Committee.

Quarterly earnings reports due from Intel, Johnson & Johnson and US Bancorp.

Wednesday

Labor Department reports on consumer price index for June.

Federal Reserve reports on industrial production for June.