By Markos Kaminis
The market turned in another wild ride last week, chalking up hours within which the value of the Dow Jones Industrials Index varied dramatically. From top to bottom on Thursday, the Dow varied by 950 points, and closed on an enthusing rally. On Friday, the Dow swung wildly again, taking an afternoon rally of roughly 450 points and reversing it completely out in the last hour of trade.
Historically, significant market corrections have occurred during periods of great volatility. This leaves your Wall Street insider worried, because I see a dangerous catalyst on the horizon. I realize the market is already off sharply, in fact exactly 40% from its October 9, 2007 peak on the Dow. Also, between now and Christmas, the government will likely authorize aid to the auto sector (estimated $25 billion); the Fed will likely reduce rates by another 50 basis points; and tax loss selling will be exchanged for replacement purchases of other beaten down shares. These are all positive catalysts for stocks.
On the down side, economic data should continue to supply bad news. A Russian fiscal crisis looms as well, because of oilʼs slide. On the geopolitical scene, between now and Christmas things should be calm, due to the global importance of uninterrupted holiday shopping. However, sometime soon, and most likely after January 1st but before Barack Obama is sworn in as President of the United States, I have concern that Israel might bomb Iran. So while the market may rally Santa Claus style, it could offer false profit.
Last weekʼs action had underlying catalysts of an Obama Cabinet coming together, with late rumors Friday of one Madam Clinton for Secretary of State. The market is more concerned about Obamaʼs choice for Treasury Secretary. We think Sheila Bair is perfect for the role, and would bring a calm to the financial scene.
The week will also be remembered for the political jockeying between so-called lame duck President Bush and Congress. President-Elect Obama would like to see aid provided to the auto sector as soon as possible, and Bush knows it. As a result, heʼs holding out his Colombia free-trade pact as carrot for signing on to a $25 billion package for Detroit.
The week will remain infamous for a couple economic reports as well. Thursdayʼs Weekly Jobless Claims data came in above that fear threshold weʼve been warning of here, at 516K. Then on Friday, October Retail Sales were reported drastically lower, down 2.8% from September.
The week ahead will offer results from the meeting of the G-20. On the economic report schedule, look for troubling news from the New York and Philadelphia manufacturing surveys. Inflation data from the Producer and Consumer Price Indexes should be greatly softened by collapsed energy prices. The Federal Open Market Committee meeting minutes are to be released on Wednesday afternoon and may reflect a flustered Fed. Investors will also be hopeful for stabilized housing data on Tuesday and Wednesday. Finally, Thursdayʼs Leading Indicators Index might point toward a very hard landing for Q4.
Look for earnings news from: Monday – Loweʼs (NYSE: LOW), Target (NYSE: TGT); Tuesday – Home Depot (NYSE: HD), Saks (NYSE: SKS); Wednesday – BJʼs Wholesale Club (NYSE: BJ), Trina Solar (NYSE: TSL); Thursday – Dell (Nasdaq: DELL), Limited Brands (NYSE: LTD); Friday – AnnTaylor (NYSE: ANN) and H.J. Heinz (NYSE: HNZ).