Stock Market Insider: Week Ahead - Stock Market Could Face Headwinds

Topics:Earnings | Banking | Currencies | Stock Market | Investment Strategy


Stocks are likely to encounter headwinds as the market tries to keep pushing 
higher in the week ahead.

The S&P 500 has gained in seven of the past eight weeks, and is positioned to 
keep rising after closing above a key resistance level Friday. The S&P finished 
the week up 1.3 percent, at 877, a level not seen since Jan. 9.

Yet, traders say there are a number of risks in the coming week, the biggest of 
which will be the results of the government's stress tests on 19 banks, now 
expected to be released Thursday. There are also a number of economic reports, 
some major earnings, and testimony from Fed Chairman Ben Bernanke before the 
Joint Economic Committee Tuesday.

A real wild card for the markets is the swine flu outbreak, which has so far 
been ignored but could become a factor if it is seen as a more deadly threat in 
the U.S.

Berkshire Hathaway's [BRK  92005.00 -1995.00  (-2.12%) ] annual meeting was 
scheduled for Saturday, and that could be a catalyst for stocks Monday 
depending on what its CEO and legendary investor Warren Buffett tells investors.

At the top of the list for markets though are those stress tests of the biggest 
banks that took funds under the government's Troubled Asset Relief Program. The 
results for each of the institutions were expected Monday but the release was 
moved to Thursday. Several banks are expected to need capital but it is not 
clear how that information will be reported and what solutions for capital 
raising will be included with the reports.

"They postponed the stress test again so people are saying they want to tiptoe 
into next week," said Art Cashin, director of floor operations for UBS. "The 
floor has always thought the stress test was a no-win situation...from the 
minute it was conceived it was thought to be a a not so hot idea. They're just 
worried about the presentation now."

David Kotok of Cumberland Advisers said it's important the tests are seen as 
credible. "If some pass and some fail, the market will adjust the prices 
between the two groups," he said.

Steven Stanley, chief U.S. economist at RBS, said it appears the government's 
negotiations with the banks are what stalled the release of the tests. "I think 
the government just assumed the banks would take whatever results were 
presented to them, and the banks are complaining they did it wrong. As far as 
big events next week, that's clearly one and the other one is the payroll 
number on Friday," he said.

Stanley said he expects that April employment report to show unemployment has 
climbed to 8.8 percent. As for the pace of job loss, "we do expect to see some 
improvement.. a decline of 535,000 (non farm payrolls). It's gargantuan but an 
improvement relative to March. Our sense is, as with other indicators, that 
things are still pretty bad but they are starting to decelerate," he said.

"We're now starting to see evidence that suggests that things, at a minimum, 
are getting worse at a slower pace but perhaps stabilizing in certain areas," 
said Stanley. He said he will also be watching chain stores' April sales 
Thursday, which will provide a good look at the consumer.

Another big market event will be the Treasury's issuance of more than $70 
billion in 3-year, 10-year and 30-year notes in three days of auctions. The 
yield curve steepened in the past week as the long end came under pressure on 
supply concerns. The yield on the 10-year rose to 3.174 percent, its highest 
level since Nov. 24.



Whither Stocks?

Kotok believes swine flu could become an issue for stocks if there are more 
deaths in the U.S. or other parts of the world. "The stock market has ignored 
swine flu for all intents and purposes. It's busy with its green shoots," said 
Kotok. "Do you weigh risk proactively or reactively? If proactively, you have 
to manage risk events before they are understood."

If the public does start to have a greater fear of the flu, the resulting 
social behavior would have the potential to cause an economic shock. "When 
things are good, large shocks are dealt with...This shock would come when the 
economies around the world are weak, and the U.S. is particularly weak," he 
said.

Kotok said there are other risks for the market in the economy, including the 
growing problems in commercial real estate and commercial mortgages. Unlike 
housing, there is no political sympathy for commercial property owners and now 
the shuttering of auto dealerships puts more pressure on the sector which 
already faced oversupply.

Richard Bernstein, former chief investment strategist at Merrill Lynch, also 
sees some hurdles for the stock market. He said investors are not considering 
the type of economic impact that could come from the ripple effect of General 
Motors [GM  1.81    -0.11  (-5.73%)   ] shutting down its production for nine 
weeks, a process that starts Monday. He said that shutdown will show up in 
economic statistics as it impacts suppliers and other related parts of the 
economy. Chrysler, which filed for bankruptcy Thursday, is also shutting down 
its production while in bankruptcy.



The Currency:

Euro, British Pound, Australian Dollar All to Face Rate Decisions

"Another thing people aren't considering when trying to anticipate the 
turn...is that it's not just lower interest rates. It's lower interest rates 
and pent up demand. it's hard to imagine there's pent up demand for housing," 
he said.

Bernstein, like many, thinks the market has gotten ahead of itself. "I think a 
pull back is pretty likely," he said. "I think consensus has changed quite 
quickly that we're out of the soup, and things are getting better...I think he 
only one that's showing real improvement is the stock market."

Bernstein said though there are some positives, including the slope of the 
yield curve. "There's no doubt about that. The question is how bad are the bank 
balance sheets," he said. The dollar's strength is also a positive. "I think 
people should be more bullish about the dollar. I think people forget what it 
is financial institutions and banks do, that is create dollars. We had a credit 
bubble, and the dollar was exceptionally weak. If you are a bear on credit, you 
want to be a bull on the dollar and vice versa," he said. 

Reserve Bank of Australia Rate Decision – May 5
The Reserve Bank of Australia is anticipated to leave their cash rate target 
unchanged at 00:30 ET on Tuesday, after surprisingly cutting the rate by 25 
basis points to 3.00 percent,  but the Australian dollar may only respond to a 
surprise rate cut or a biased monetary policy statement. After the central 
bank’s last meeting, RBA Governor Alan Bollard said, “The stance of monetary 
policy, together with the substantial fiscal initiatives, will provide 
significant support to domestic demand over the period ahead,” suggesting that 
further reductions were unnecessary. As a result, it will be important to look 
to Bollard’s statement, as signs that the RBA may consider cutting the cash 
rate target again eventually could weigh on the Australian dollar, while 
indications of a broadly neutral bias could support the currency.

European Central Bank Rate Decision – May 7
According to a Bloomberg News poll of economists and Credit Suisse overnight 
index swaps, the ECB will cut rates by 25 basis points to 1.00 percent on 
Thursday morning. A reduction in line with Bloomberg's estimates could exert 
bearish pressures on the euro, but where the currency ends the day may have 
more to do with what ECB President Jean-Claude Trichet says during his 
post-meeting press conference at 08:30 ET. Many ECB members have indicated that 
they will announce “unconventional” measures following this meeting, which many 
have taken to mean credit easing, and if Trichet makes such an announcement, 
the euro could tumble. On the other hand, if the ECB leaves rates unchanged, 
indicates that they have no intention of bringing interest rates lower in the 
near term, or if they put off credit easing, the euro could rally.



"Econorama"

Jobs data is the big one, but there is plenty to watch in the coming week. On 
Monday, there is pending home sales and construction spending data. The ISM non 
manufacturing number is reported Tuesday, and Wednesday is the ADP employment 
report, a kind of preview to Friday's number. On Thursday, more hints at the 
jobs number come when the latest weekly unemployment claims data is reported. 
Productivity and costs and consumer credit are also reported that day. In 
addition to employment on Friday, wholesale trade data for March is reported. 

Besides Bernanke's Congressional testimony earlier in the week, the Fed 
chairman speaks at the Chicago Fed's conference on bank structure and 
competition Thursday at 9:30 a.m. Chicago Fed President Charles Evans speaks at 
the same conference, as does FDIC Chair Sheila Bair.

Other Fed speakers include Fed President Thomas Hoeing who speaks in New York 
on the financial crisis Monday, and Richmond Fed President Jeffrey Lacker 
speaks in Charlottesville, Va. Monday afternoon. San Francisco Fed President 
Janet Yellen speaks at U.C. Berkeley Tuesday on financial turmoil.



Earnings Central:

Nearly 80 S&P 500 companies report earnings in the coming week. On Monday, 
Tyson Foods, Sysco, Sprint Nextel, Loews, Entergy, Estee Lauder, Chesapeake 
Energy and McKesson report. Disney, Kraft Foods, CVS Caremark, Duke Energy, 
UBS, Archer-Daniels and Teva report Tuesday.

Wednesday's reports include News Corp, Anadarko, Devon Energy, PG&E, 
Transocean, and Marsh and McLennan. On Thursday, Axa, Dynegy, D.R. Horton, 
Thomson Reuters, Unilever, Sara Lee, Nasdaq OMX, CBS, Public Storage, Allstate, 
and Nvidia report. Friday's major companies are Toyota and Berkshire Hathaway.




      

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