MarketView for February 13

Summary

Stock prices were sharply lower on Friday, ahead of the President’s Day holiday on Monday as persistent worries regarding the health of the banking industry eclipsed news that the government would announce a plan next week to prop up the housing sector by helping homeowners avoid foreclosures. However, the initial enthusiasm over the prospect of relief on the housing front proved to be short-lived after the White House cautioned against unreasonable expectations and doubts lingered about how banks will cleanse their books of toxic assets.

The Dow on Friday had its lowest close since the bear market closing low of November 20, capping a week when financial stocks were repeatedly pummeled as the government's latest bank rescue plan failed to allay investor worries. Only three of the Dow's 30 components finished the day in positive territory. For the week, the Dow is down 5.1 percent, the S&P 500 is down 4.8 percent for its worst weekly showing since the bear market low of late November, while the NASDAQ is down 3.6 percent.

The only good news is that, some of the nation’s key manufacturing firms saw their share prices move higher by the closing bell, the result of expectations by Wall Street that those companies will benefit from the $787 billion economic stimulus plan that the Congress is expected to approve late Friday. For example, Boeing ended the day up 1.6 percent to $40.48, while United Technologies, the world's largest manufacturer of elevators and air conditioners, added 0.4 percent to $47.09.

Consumer stocks dropped on skepticism whether consumers will rush to spend the tax cuts that are part of the $787 billion stimulus package. Causing further grief was a report that consumer confidence fell to its lowest level in three months as sentiment grew increasingly gloomy over an economic downturn that most expected to last more than five years.

Wal-Mart Stores fell 3.3 percent to $46.53, making it the top drag in the Dow. Home Depot fell 3.5 percent to $21.22.

The NASDAQ was weighed down by a decline by Research in Motion after Credit Suisse cut its rating on the stock to "underperform" from "neutral" as it forecast lower average selling prices for the BlackBerry.

Government bonds, a safe haven for financial markets during times of economic turmoil, pared their earlier losses but still kept a decidedly negative tone on worries over high levels of government borrowing.

Crude Prices Rise As Stimulus Plan Moves Towards Approval

The price of Domestic sweet crude oil futures for March delivery rose sharply on Friday closing out the day, up 10 percent or $3.53 per barrel to settle at $37.51 on Friday on hopes the economic stimulus package could help pull the economy out of a 14-month recession. London Brent crude for April delivery settled up $1.22 per barrel at $44.81.

Further support came as traders booked profits by selling the spread between front and second month futures contracts. Domestic crude for April delivery fell 20 cents per barrel to settle at $41.97.

Meanwhile, OPEC cut its forecast for world oil demand, adding to a wave of demand cuts made by other forecasters this year. In an effort to make a case for further supply cuts, OPEC said in its monthly report that global demand would fall by 580,000 barrels per day (bpd) in 2009 to average 85.13 million bpd.

The cartel agreed to a series of deep production cuts in the second half of 2008 to combat the slide in prices and demand. OPEC is next scheduled to meet in March, with some members calling for another reduction in supplies.

The International Energy Agency said that global markets are already tightening, and that any moves by OPEC to further restrict supplies could send oil prices higher.

Economic News Remains Grim

The U.S. economy will shrink 5.2 percent in the first quarter on an annualized basis, its worst performance since 1982, according to a quarterly forecasting survey published by the Philadelphia Federal Reserve.

Consumer confidence fell to its lowest in three months in February as sentiment grew increasingly gloomy over an economic downturn that most expect to last up to five years, according to the Reuters/University of Michigan Surveys of Consumers.

"Confidence fell in early February as consumers came to the consensus that the economy would remain in recession throughout 2009," the report said. "Moreover, nearly two-thirds anticipated that the downturn would last five more years."

The Reuters/University of Michigan Surveys of Consumers said its index reading of confidence for February tumbled to 56.2 from 61.2 in January. That was the lowest since November. A separate reading in the report showed consumer expectations fell to their lowest since May 1980.

The University of Michigan confidence index dates back to 1952. Currently it is still near the record low of 51.7 that it hit in May 1980, when the economy was mired in one of the worst downturns since the Great Depression. The index managed to gain in December and January, but February's fall suggested the recovery  that had been hoped for is now in danger.

Reflecting the grim mood, the index measuring consumers' view of the 12-month economic outlook fell to its lowest ever. The February report showed mixed views on inflation.

One-year inflation expectations plummeted to 1.6 percent from January's 2.2 percent for the lowest since November 2001, highlighting worries that the United States might be headed for a deflationary period of falling prices, wages and economic activity. However, five-year inflation expectations edged up to 3.0 percent from January's 2.9 percent.

That was the highest since September 2008 and is consistent with concerns of some in the financial markets that massive spending and borrowing by the government to bail out the economy might prove inflationary.

In the Philadelphia Federal Reserve's previous survey, economists had foreseen an annualized decline of just 1.1 percent in first quarter U.S. gross domestic product.

The pain is now expected to last longer than before. The economy was seen shrinking an additional 1.8 percent in the second quarter, bringing the jobless rate to 8.3 percent. Previously forecasters believed GDP might eke out some growth in that quarter, about 0.8 percent.

Fourth Quarter Earnings Worst in 10 Years

The last quarter of 2008 is set to post the steepest decline in earnings in at least 10 years, as deep write-downs from banks continued to rise and companies slashed their outlooks. At the same time, earnings are well below expectations, suggesting Wall Street had failed to get its arms around the scope of the economic crisis.

Furthermore, we have not seen the end yet. Expectations for the coming quarters have been dampened as companies have slashed their own outlooks as they warn of slumping sales and job cuts.

Among those highlighting the depth of the economic gloom were Citigroup and Bank of America. Caterpillar said it would slash about 22,000 jobs, and Motorola suspended its dividend and forecast a deeper loss than expected for the first quarter. For the final quarter of 2008, earnings for companies in the broad S&P 500 are calculated at having fallen by more than 40 percent, which combines already reported numbers and estimates for companies yet to report.

This is sharply lower than the decline of 1.2 percent that was expected at the beginning of January, and a huge turnaround from October's expectations for growth of 46.7 percent. To make things worse, expectations for the first and second quarters are falling rapidly. Earnings in the first quarter are seen declining by almost 30 percent, compared to a decline of only 10 percent decline predicted at the end of December. Second-quarter earnings are expected to fall nearly 26 percent, compared to the 2.7 percent drop forecast in December.

Financials have seen the worse performance in the fourth quarter, unsurprising for a sector that has continued to post deep losses and write-offs as it grapples with the credit crisis that has changed the financial landscape.

Seven of the S&P's 10 sectors are poised to finish the quarter with declining earnings, making it the first time that many sectors have finished in the negative since the fourth quarter of 2001 as the tech bubble was evaporating and the economy suffered in the wake of the September 11 attacks.

The materials sector has had the second-worst performance, while the consumer discretionary group comes in third, underscoring slowing spending by cash-strapped consumers. Defensive sectors have fared better, with health care, consumer staples and utilities showing growth. The groups are typically viewed as better able to weather the economic storm because they provide products that consumers are unlikely to skimp on.