MarketView for March 5

Summary 

Wall Street giveth and taketh away but it would have been nice if it waited a bit longer than one day before implementing the taketh away part. However, it was not to be and stock prices hit the skids once again on Thursday sending the Dow Jones industrial average and the S&P 500 indexes to 12-year lows.

The cause in part was a warning from General Motors that it could be facing a possible bankruptcy. General Motors was down 15.5 percent to $1.86 after its auditors raised "substantial doubt" about the automaker's viability if it fails to head off losses and stop burning through cash.  The effect of GM's collapse would likely send shock waves through the recession-hit economy, given that it is a major employer and buyer of supplies from auto parts makers.

In addition, there were continuing concerns regarding the future of the banking industry. The net result, to put it bluntly was continued distrust of stocks on the part of investors. Instead of looking ahead to what the various stimulus programs will do for the economy, investors were more focused on the possibility that troubles in the finance arm of widely held General Electric could lead to a debt rating downgrade for the entire company.

GE's ended the day down 0.5 percent at $6.66 after falling to its lowest since 1991 a day earlier. Uncertainty about the exposure of banks to GE remained a significant concern and the S&P financial index fell nearly 10 percent.

Shares of Citigroup, once the world's largest bank by market value, fell as low as 97 cents during the trading day for the first time ever. Complicating matters further were the rising concerns over whether the bank can be restored to health or whether it will have to be taken over by the government. Citigroup's closed at $1.02, down 11 cents, or 9.7 percent for the day

The Nasdaq closed at its lowest level since March 2003, a month remembered for the beginning of the Iraq war. Both the Dow and S&P 500 are down more than 24 percent for the year so far, with the broad S&P shedding 56 percent from 2007's all-time high. The stock market has lost around $11 trillion in value since hitting all-time highs in October 2007.

Indexes more than gave back Wednesday's rally, which was spurred by news of a Chinese economic stimulus plan. But those hopes were dashed on Thursday morning when Premier Wen Jiabao, speaking to parliament, did not announce any expansion of China's stimulus package.

Moody's Investor Service said on Wednesday it may cut its ratings on Wells Fargo and Bank of America, helping drive Wells Fargo down 15.94 percent at $8.12 and pushing Bank of America down 11.7 percent at $3.17.

Exxon Mobil was the  biggest drag on the Dow, falling 5.3 percent to $62.22 as crude for March delivery settled down $1.77 per barrel at $43.61, pressured by deteriorating global economic prospects.

On the upside, shares of Wal-Mart added 2.6 percent to $49.75 after the retailer posted solid monthly sales and raised its annual dividend by 15 percent. Of the 30 Dow industrials, only two, Wal-Mart and Pfizer, finished higher. Pfizer gained 1.4 percent to $12.67 after Goldman Sachs reinstated coverage with a "buy" rating.

Grim economic reports signaling more fallout from the recession added to the negative tone ahead of Friday's key non-farm payrolls report. Data is expected to show the economy shed 648,000 jobs in February, while the unemployment rate is expected to rise to a 25-year high of 7.9 percent. In fact, even the White House said that it doesn't expect to see good news out of the jobs report.

A report on Thursday showed new orders received by U.S. factories fell for a sixth straight month in January. The Mortgage Bankers Association said that one in every eight households with mortgages ended 2008 behind on their payments or in foreclosure.

Not Everybody Is Forecasting Doom and Gloom

Jim O'Shaughnessy, a well-known author and investor on Wall Street, is not pessimistic about the market. He believes stocks are trading at compelling prices after their plunge to 12-year lows this week and could rally 25 percent by the end of the year, he said. Stocks, as measured by the benchmark Standard & Poor's 500 Index, are likely to return after inflation 7.3 percent per year from now through 2019, said O'Shaughnessy, author of, "What Works on Wall Street."

A rising savings rate and an improved housing market, while not completely healed, point to brighter times ahead in the U.S. economy, O'Shaughnessy told Reuters. "I do think that as all that coalesces, you see a good chance for the S&P 500 (at) 900 out of the year. What are we right now? 713? That could be a very nice rally," he said, in reference to Wednesday's closing level for the S&P 500.

O'Shaughnessy, who makes investment decisions based on the quantitative analysis of 10,000 stocks and their prices over the past five decades, said the recent carnage in stocks only heightens what to expect over the next five to 10 years. A review of the 12 worst 10-year rolling periods since 1926, indicates that once you are on the bottom the bottom, there were no negative returns over the next decade. The first year out, stocks returned 25 percent; after three years, 11 percent; and after five years, almost 13.5 percent, O'Shaughnessy said.

Following are more of O'Shaughnessy's views and opinions on the state of the financial markets:

"The problem with today is everybody's fighting the 'Where's the bottom?' fight. If you try to keep a relatively longer-term perspective, which is three to five years, you get shouted out ... From our point of view the market is even more compelling than it was when we spoke at the beginning of the year.

"Yeah, we could go down some more here in the short term, but it only makes the ultimate valuation more and more compelling.

"We're going to have a rotten jobs (report) on Friday. We're going to have other bad news, and you just look at the market in that light as a discounting mechanism.

"Is it easy? Of course not. It's horrible. You look at the day to day in the market, and you shake your head and think, 'Well this is, of course, why there is that thing called the equity risk premium.'"

"We're kind of neutral, with the exception of consumer discretionary. We're buying every sector. Now our financials have gone down (in our portfolios), we got stopped out of the bigger ones, because one of our criteria is you got to have positive cash flow.

"Several months ago, I said the new bubble is Treasuries ... You got all that money going into the 10-year Treasury ... People in it are going to get very, very hurt. I was massively bearish on Treasuries a couple of months ago; I'm still pretty bearish. By the way, not on some intermediate corporate debt, some of it's getting priced to the point, well, OK."

"I certainly would love to see less histrionic talk coming out of Washington. Moods of people in markets do matter. I think that you have gotten to the point where we get it. We get that you're all mad, and we get that you think that people have been irresponsible."

Dow Chemical Hits 24-year Low

Shares of Dow Chemical fell to a new 24-year low on Thursday ahead of a trial next week to find whether Dow can get out of its more than $15 billion takeover of Rohm and Haas.

Alongside a broad-based pummeling of stocks in general, shares of Dow fell to $6.31, a price last seen in April 1985, before partly recovering to $6.70, down 5.1 percent.

Dow is now valued at about $6 billion, making it the second-largest domestic chemicals company. Shares of DuPont, the largest, were down 6 percent at $17.10.

Dow agreed to buy Rohm and Haas last July for $78 a share, a 74 percent premium, but balked at closing after a key joint venture with Kuwait fell apart. Dow had intended to use proceeds from that transaction, a $17.4 billion plastics joint venture, to help fund the Rohm deal.

Rohm and Haas sued in January to try to force Dow to close the takeover. Delaware Chancellor William Chandler will hear the trial, which is scheduled to open on March 9.