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Monday, January 14, 2008

US Market in search of a solid footing


Indices end lower for the third consecutive week as recessionary signals pour in

It was another consecutive week of losses for the US Market for the week ending on Friday, 11 January, 2008. Market witnessed extreme volatile trading during the week in pursuit of some solid footing. It was the third weekly loss for the indices. The “recession” word once again cropped up in everybody’s mind and credit market continued to create trouble. Gold prices struck new highs almost on all the days of the week.

Pessimistic statements from AT&T CEO in between the week brought economic concerns back to the forefront. Capital One reduced its profit outlook due to increased loan delinquencies. Countrywide Finance, the country’s largest mortgage lender firm, was in the news for the whole week. Initially there was news of bankruptcy that the firm might be facing. Then on Friday, 11 January, 2008, Bank of America announced a $4 billion buyout of the firm.

The Dow Jones Industrial Average lost 195 points for the week. Tech - heavy Nasdaq lost 65 points. S&P 500 lost 10.6 points. Percentage wise, once again, Nasdaq suffered the maximum losses.

On Monday, 7 January, 2008, stocks ended mixed with Dow registering nominal gains but Nasdaq once again ending in the red. IBM weighed heavily on the technology stocks after UBS Securities downgraded the stock citing that the company’s hardware and services sales could be pressured because IBM has the largest financial services exposure in the sector.

On Tuesday, 8 January, 2008, AT&T's CEO reportedly said the company is disconnecting more home phone and broadband Internet customers for failing to pay their bills. After staying up by 100 points earlier in the day, the Dow Jones industrial Average finally ended the day with a loss of 238.3 points and Nasdaq Composite Index, finished lower by 59 points.

With the help of Financial and Technology stocks, US stock market made a sudden but modest comeback on Wednesday, 09 January, 2008 and all the three indices closed higher simultaneously for the first time in FY 2008.

Dow Component DuPont raised its earnings guidance for 2007 and 2008 and this gave stocks a good boost. The chemical company revised its forecast due to strong growth from its agricultural and nutrition business segment and strong demand in all segments in emerging markets, which more than offset a slower U.S. economy.

On Friday, 11 January, 2008, stocks resumed their slide as more problems in the financial sector and ongoing credit market troubles weighed on the market. American Express increased its loan loss reserves due to an increase in defaults and slower card member spending. The company’s guidance was lowered quite below expectations and the news came just a day after Capital One lowered its guidance.

On the economic front, November pending home sales reportedly fell 2.6%, compared to the expected decline of 0.7%. Initial jobless claims for the week ended 5 January unexpectedly fell to 322,000 from 337,000 the prior week. December same-store retail sales disappointed, and many retailers lowered earnings guidance. Wal-Mart was an exception which topped its expectations.

On the earnings front, Dow component Alcoa reported stronger than expected earnings.

Among other major events of the week, President Bush and Federal reserve Chairman, Ben Bernanke spoke about the economy. President Bush noted that the housing slump and high energy prices are among today's challenges. He also said he is determined to make sure taxes stay low. His comments did not have any dramatic effects on the stock market that day.

Ben Bernanke said that the Fed is not currently forecasting a recession, and the expectation is for sluggish growth but he did note the downside risks to the economy. He clearly stated that necessary steps would be taken to shave off a recession clearly hinting another interest rate cut at the month’s end.

Executive Summary

For the week, indices registered substantial losses for the third consecutive week. DJIx and S&P 500 closed down by 1.5% and 0.8% respectively. Technology sector was the most affected and Nasdaq went down by 2.6%.

Pessimistic statements from AT&T CEO in between the week brought economic concerns back to the forefront. Capital One and American Express reduced their profit outlook due to increased loan delinquencies. Bank of America ended up buying the much troubled Countrywide Financial in $4 billion, all stock buyout.

For the year, Dow, Nasdaq and S&P 500 are down by 5%, 8% and 4.5% respectively. A downgrade of IBM by UBS weighed heavily on Nasdaq for the week.