Wall St Week Ahead-FOMC grabs spotlight (including the pros and CON's...pun pun!)
;-)
By Elizabeth Lazarowitz
NEW YORK, Aug 9 (Reuters) - All eyes will be on the Federal
Reserve next week to see if it delivers a much-debated interest
rate cut after anticipation of a move sparked rate-cut fever
and a blazing rally on Wall Street.
Investors will likely be treading carefully in coming days
amid a slew of potential minefields and nagging worries about
corporate corruption, all of which could make the market ripe
for a pullback after some stellar gains.
"It's been a pretty impressive rally," said Rich Nash,
chief market strategist at Victory Capital Management. "We're
going to have to give some of this back."
The blue-chip Dow Jones industrial average <.DJI> and broad
Standard & Poor's 500 index <.SPX> racked up a third straight
week of gains, as investors speculated that lower interest
rates could be in the cards and snapped up beaten-down shares.
But the market may have set itself up for disappointment if
the Fed does not cut rates, which could take the fizz out of
the rally, analysts said.
Concerns about Corporate America's credibility have mounted
steadily, and investors may be dodging bullets with the looming
Aug. 14 deadline for executives to take a "clean-book" pledge.
The flood of quarterly earnings reports has slowed to a
trickle, but a few marquee technology and retail names, such as
Dell Computer Corp. <DELL.O> and Wal-Mart Stores <WMT.N> could
grab the spotlight when they report next week.
TO CUT OR NOT TO CUT
Reports earlier this month indicating the U.S. economic
recovery might be shaky helped fuel speculation the Fed might
have to ride to the rescue by lowering borrowing costs again.
Those expectations were heightened after Lehman Brothers
and Goldman Sachs said they expect the Fed to cut rates by 75
basis points to 1 percent by year-end. On Friday, Morgan
Stanley's chief U.S. economist said he expects a half-point
rate cut on Tuesday.
However, Morgan Stanley's U.S. strategist and stocks guru
Byron Wien said on CNBC late Friday that the Fed does not need
to lower interest rates further and that a cut could give the
impression the central bank is worried about the economy.
Many economists expect the Fed to leave rates unchanged
next week. Out of 21 dealers recently polled by Reuters, 17
expect no change in rates for the rest of the year.
The chances of an Aug. 13 easing are less than one in five,
according to federal funds futures prices, which are used as a
gauge of market expectations. Given those odds, stock investors
hoping for a rate cut could be disappointed.
"We will get a knee-jerk selloff that will be Wall Street
saying to the Fed, 'We're disappointed that you don't see what
we see,'" Charles Payne, a market analyst at Wall Street
Strategies, said of possible reaction if there is no cut.
But it would not take long for the market to realize that
no news might be good news when it comes to cuts, Payne said.
"We do want an economy where the Fed doesn't have to cut rates,
and maybe that message will resonate one or two days after."
Analysts said the most the market can expect is that the
Fed might acknowledge in its post-meeting communique that the
risks to the economy have shifted toward economic weakness and
away from inflation.
Data including July retail sales and industrial production
and the consumer price index will be in the spotlight as
investors search for clues to the economy's health.
Investors will also be eyeing housing starts and consumer
sentiment, both due Friday, for signs that housing, which has
been an area of strength in the economy, is holding up, and
that consumers are not ready to rein in spending.
and--->
CLEAN-BOOK PLEDGE
Corporate credibility will also stay in the forefront as
many companies run up against the deadline for executives to
pledge that their books are on the up-and-up.
Nearly 1,000 firms are required by the U.S. Securities and
Exchange Commission to certify that their recent financial
statements are accurate. As of midday Friday, 112 companies had
signed oaths out of the 947 required to do so, according to the
SEC's web site.
Wall Street is worrying that making executives sign on the
dotted line could force companies to restate results, wreaking
havoc on earnings expectations, and that those who cannot or
will not sign will be punished by investors.
"There will definitely be a focus on companies that don't
certify," said Nat Paull, a portfolio manager at New Amsterdam
Partners.
But executive pledges designed to help weed out Corporate
America's bad apples may not be enough for investors.
"I don't think a reasonable investor can say, 'Alright this
CEO and CFO have certified their statements, they're clean,"
Paull said. "You still have to look and see what's going on in
the statements."
The barrage of events next week will mix a volatile
cocktail for a market still uncertain about the economy and, by
extension, corporate earnings. Trading volumes will also begin
to taper off as the market slips into its late-August lull.
"All these variables can swing the market 100, 200 points
either way," said James Volk, director of institutional trading
at D.A. Davidson & Co., adding that the fundamental picture has
changed little since the market's recent plunge to multi-year
lows.
The Dow Jones Industrial Average <.DJI> jumped roughly 8
percent Tuesday to Thursday and ended the week up 5.2 percent,
its best one-week gain since last autumn.
The broad Standard & Poor's 500 index <.SPX> finished the
week up 5.1 percent, and the technology-packed Nasdaq Composite
<.IXIC> ended with a gain of 4.7 percent, reversing after five
weeks of decline.
Along with results from Dell Computer, earnings are due
next week from technology companies Network Appliance <NTAP.O>,
Applied Materials <AMAT.O> and NVIDIA Corp. <NVDA.O>.
Retailers, however, will likely take front stage with
results expected from discount retailer Wal-Mart, J.C. Penney
Co. Inc. <JCP.N>, Federated Department Stores Inc. <FD.N>,
Nordstrom <JWN.N>, Kohl's Corp <KSS.N>, Target Corp. <TGT.N>
and Tiffany & Co. <TIF.N>.
Operating earnings at the companies in the S&P 500 index
are expected to show a slim gain of 0.9 percent in the second
quarter, according to research firm Thomson First Call.
*** About 91 percent of the S&P 500 companies have issued
results so far this reporting period, and out of those, 60
percent have beaten analysts' estimates, 25 percent were on
target, and 15 percent fell short of expectations.
(( -- Wall Street Desk, 646-223-6113 -- ))
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