Coming Week: Get Over It Already

The week ahead holds earnings reports from key brokerage firms, which again look like they might be more "something to overcome" than anything else.
Author:
Publish date:

Things will get better if we can just get past

____

(fill in the blank).

That's what investors and market strategists have been saying for months now, but the markets and economy just don't seem to be able to break out of their doldrums.

The week ahead holds earnings reports from key brokerage firms, which again look like they might be more "something to overcome" than anything else.

Lehman Brothers

(LEH)

reports its earnings on Monday, and

Goldman Sachs

(GS) - Get Report

chimes in on Tuesday, while

Morgan Stanley

(MS) - Get Report

comes out Wednesday. All the firms

will be under heightened scrutiny

as everyone continues to struggle to figure out exactly when

the bank and brokerage bloodletting

will ease.

The

executive-suite shakeup at Lehman

on Thursday certainly didn't help instill confidence in the sector -- or in the economy as a whole.

The major indices were mixed last week. The

Dow Jones Industrial Average

gained 0.8% to end at 12,307.35, while the

S&P 500

finished less than a point lower at 1360.03, and the

Nasdaq Composite Index

dropped about 0.8% in the five-day period to end the week at 2454.50.

"We like to look at monetary conditions through the eyes of the banks," says Bill O'Donnell, rate strategist at

UBS

. "The banks won't get back to lending money until they start making money, and they won't make money until they stop the writedowns."

Because credit conditions are so tight, he says, "the banks themselves have effectively sterilized much of the good work of the

Federal Reserve

." Banks are "sitting on cash, hoarding it," and "that's a major headwind for the economy."

Anthony Conroy, head trader at

BNY ConvergEx

, thinks it could be some time before things stabilize.

"You can't have a healthy economy if you don't have a healthy financial system," he says. And "we're not going to have a read on the financials until housing stabilizes" because of the way mortgage financing works -- and most estimates don't see housing stabilizing until the end of this year or into 2009.

Bob Pavlik, chief investment officer at

Oaktree Asset Management

, says "there are expectations that the loss reported by Lehman may be larger than what they thought early last week."

In addition, the producer price index will be released by the Bureau of Labor Statistics on Tuesday. Given the concerns about inflation that have been stoked by high oil prices, a weak dollar and the Federal Reserve's rate cuts, this will be watched for any more signs of price increases. On Friday, the consumer price index was a bit higher than expected, but the core rate of inflation was in line with estimates.

A big part of the price gains, of course, has been due to the rising cost of oil and

other commodities such as food

.

Joe Keating, chief investment officer at

First American Asset Management

, believes the higher food and oil prices will eventually be deflationary, rather than inflationary. He notes that discretionary spending is being squeezed because the more essential costs are biting, while wages haven't started to spiral upward.

"When we get a crack in energy costs, we'll see the headline inflation readings come down also," he says.

The

dollar finally strengthened last week

in anticipation of the weekend's G8 meeting and greater expectations of rate-tightening by the Fed -- and if that continues, the crack Keating's been waiting for may come.

In the meantime, though, investors are watching for effects of the surging commodity costs all over the economy.

FedEx

(FDX) - Get Report

reports earnings on Wednesday, and many people suspect that the company will show signs of strain from the high energy prices.

At the same time, a number of market observers say stocks in the energy sector may be on the high side.

"I think some of these oil and oil-service companies are probably a little extended," Conroy says. So, if oil pulls back, stocks such as

National Oilwell Varco

(NOV) - Get Report

and

Halliburton

(HAL) - Get Report

on the oil-services side, and

BP

(BP) - Get Report

,

Exxon Mobil

(XOM) - Get Report

and

ConocoPhillips

(COP) - Get Report

on the oil side, could retreat as well.

A few other numbers will be coming out next week, including the

New York Empire State Index

on Monday, housing starts from the Census Bureau on Tuesday and the

Philadelphia Fed

gauge on Thursday.

Pavlik of Oaktree is going to be looking for any signs that the demand from the economic stimulus checks is trickling down into the Philly and New York measures, and seeking clues from housing that the bleeding has been stanched.

"I'd like to see some kinds of stabilization there, to be able to get out of this trend we're in, but I don't think it's going to be happening with this economic data," he says. He thinks that the Dow moving above 12,550 and the S&P 500 moving above 1370 would be signs of a real breakthrough.

The current data "say to us the economy is in a mild recession, but there's no significant inventory imbalance," so it isn't too bad, Keating of First American says. "I think we're close to the point where the economy is going to begin an extended period of slow growth."

Several retailers will be reporting earnings next week, which could show whether the recent positive retail-sales data are translating into strong earnings.

Best Buy

(BBY) - Get Report

comes out on Tuesday, while

CarMax

(KMX) - Get Report

reports on Wednesday and

Circuit City

(CC) - Get Report

is scheduled for Thursday.