Coming Week: New Stress, New Tests

Next week will pit sellers against bargain hunters as the banking crisis continues to weigh on the broad market and threatens to erase any distinctions between the good stocks and the bad.
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Next week will pit sellers against bargain hunters as the banking crisis continues to weigh on the broad market and threatens to erase any distinctions between the good stocks and the bad.

Among the factors weighing against an upswing next week will be

AIG's

(AIG) - Get Report

earnings and restructuring report, expected on Monday, as well as any negative news from the

stress tests

the Treasury Department is performing on banks that have received its funds.

After seeing the results of

Citigroup's

(C) - Get Report

deal, in which the government diluted shareholders by acquiring a 36% common equity stake, investors in other firms like

Bank of America

(BAC) - Get Report

and AIG fear a similar fate. Those stocks had intense volatility this week as waves of panic and reassurance alternately swept through the market.

Peter Sorrentino, a vice president and portfolio manager at Huntington Funds, says that healthier banks, like

Wells Fargo

(WFC) - Get Report

, whose stocks have wavered along with struggling competitors, may simply return Treasury funds. Louisiana's

IberiaBank

(IBKC) - Get Report

made such a move last week.

"There's a bit of a rebellion building against some of the restrictions from the TARP," says Sorrentino. "As the stress test rolls out I'm sure we're going to see some restructuring of balance sheets to clear the hurdles, and we may see a bifurcation where healthy banks say, 'Look, enough is enough. We have a business to run here.'"

Sorrentino is looking outside the financial space to fertilizer companies like

Mosaic

(MOS) - Get Report

and

Potash

(POT)

, as well as industrial firms like

Honeywell

(HON) - Get Report

that have strong aerospace operations, and companies in the metals and commodities space that he believes are ready for an upswing.

But

GE's

(GE) - Get Report

move to slash its

dividend

nearly 70% to a mere dime per quarter on Friday shows that even big, diversified firms haven't been insulated from the financial mess.

Although major earnings reports will be sparse next week, there will be plenty of data to show how various aspects of the economy are weathering the downturn. Personal income, spending, auto sales, payroll and unemployment reports will provide clues about the consumer, and investors will scrutinize construction spending and pending-home sales data for signs of a housing-market trough.

Rich Hughes, co-president of Portfolio Management Consultants, notes that there are expected to be marginal bright spots in the economic data, including an uptick in consumer spending. Even pullbacks in construction, while at some level a double-edged sword, will hasten the housing market's recovery by limiting excess inventory.

"In a perverse sort of way, it can be seen as a negative, but also ... as a positive," says Hughes. "If we're not spending on new construction, it gives us a fair chance of bleeding through the existing inventory."

However, Hughes believes market volatility will continue until there is a way to handle

toxic assets

that have pervaded banks' balance sheets and to shore up their capital to adequate and sustainable levels. He says the government should unveil the stress-test results in "one fell swoop" as quickly as possible, to rid the market of uncertainty.

But Bob Auer, portfolio manager of the Auer Growth Fund, is a bit more optimistic, noting bargains he has encountered amid the market melee. Auer says it will be "pretty significant," but not all that surprising, if the

Dow Jones Industrial Average

breaks below the 7000 level, or the

S&P 500

drops beneath 750. But it has provided opportunities for him, like adding to his position in shoe-maker

Deckers

(DECK) - Get Report

, which owns the Ugg brand shoes.

"Here you have a $42 stock that had record

results and the stock in April was $146," says Auer. "This was the 12th consecutive quarter that they beat consensus, and analysts came out with reports saying they have good orders for their spring collection from

Nordstrom

(JWN) - Get Report

and Bloomingdales."

Still, Auer is realistic about market conditions and how much government actions are influencing the dips and peaks. He believes that even with unprecedented intervention into the financial system, politicians could improve the situation by toning down the rhetoric implying that the entire market is full of fat-cat businessmen and

Ponzi

schemers.

"One thing I would like to see starting next week," says Auer, "is someone coming out to say that Wall Street is not the enemy."