U.S. stocks to extend losses next week
Turmoil on Wall Street, Citi, to take toll
By Carly Mozee, MarketWatch
Last Update: 7:00 AM ET Nov 3, 2007
SAN FRANCISCO (MarketWatch) - U.S. stocks will extend their losses next week as concern over poor earnings, oil nearing $100 a barrel, and more turmoil in the banking and brokerage industries promise to rock Wall Street for a second week, with Citigroup, Inc. at the center of the action on Monday after an emergency weekend board meeting.
The market's attention is poised to stay trained on the financial sector after the group suffered its worst week in years as Merrill Lynch & Co.'s (MER: 56.00, -1.28, -2.2%) chief executive was forced out and Citigroup's (C: 35.82, -1.91, -5.1%) board prepared to decide whether to accept the resignation of CEO Chuck Price as well.
"The market is obsessed with these credit problems. People feel like they're standing in a mine field and they don't know where all the mines are," said Brian Gendreau, investment strategist at ING Investment Management. "We're looking for an opportunity to go back into equities. I just don't think next week is going to be the time. There's still just too much uncertainty."
The unraveling of the subprime mortgage crisis on Wall Street shook the financial service sector and much of the stock market during the past week, with uncertainty about the extent of losses in the collateralized debt obligations business locking up many of the global credit and derivatives markets.
Earnings worse then expected
The worsening state of quarterly results from Corporate America may pull stocks lower as well, with a 1.6% decline in earnings, down from a 1% decline last week, according to data from Thomson Financial. Investors will assess results next week from Cisco Systems Inc. (CSCO: 33.08, +0.54, +0.9%), General Motors (GM: 36.10, -0.89, -0.1%), oil firm Total SA (TOT: 78.79, -0.43, +0.5%), American International Group (AIG: 59.66, +0.54, +0.9%) and Walt Disney Co. (DIS: 33.94, +0.02, +0.1%).
Also to come will be Federal Reserve Chairman Ben Bernanke's congressional testimony on the outlook for economy, monthly sales figures from retailers, and the first look at consumer sentiment in November heading into the all-important holiday shopping season.
News from Citigroup could be a highlight of the new trading week, with the board of the country's largest bank expected to hold an emergency meeting this weekend, The Wall Street Journal reported late Friday. CEO Charles Prince is expected to offer his resignation, and the subject of more write-downs could be part of the discussion, according to the Journal.
Last month, the compnay reported a 57% drop in third-quarter profit after billions of dollars in write-downs related to the trouble credit markets.
Wall Street could also find itself weighed down by a further climb in commodity prices, particularly crude-oil which jumped 4.4% this week and closed above $95 a barrel on Friday.
"The all-important $100 level [for oil prices] may be a psychological breaking point for investors," said Michael Sheldon, chief market strategies at Spencer Clark, LLC.
The market found pockets of strength this past week, notably after the Federal Reserve delivered a widely expected quarter-point cut in its key interest rates to edged higher with help from Google, Inc. (GOOG: 725.65, +14.40, +2.0%) as it surpassed the $700-a-share level for the first time.
But the dismal news form the financial sector and quarterly profit misses at oil giant Exxon Mobile (XOM: 87.90, -0.03, 0.0%) and Chevron Corp. (CVX: 88.70, +0.22, +0.3%) contributed to weekly losses in the Dow Jones Industrial Average (DOW: 13,543.40, -51.70, -0.04%) and the S&P 500 ($SPX: 1,502.12, -7.48, -0.5).
"Holders of U.S. equities are nervous and holding on by their fingernails. There is going to be little or no good news coming any time soon," wrote Adam Hewison, president of INO.com, a technical analysis Web site.
Financial frets
Key indicies that track the financial group suffered heavy losses this week. The Amex Securities Broker/Dealer Index (XBD: 213.95, -6.00, -2.7%), which includes Merrill Lynch, dropped 5.6% and the KBW Bank Index ($BKX: 95.68, -0.86, -0.9%), which tracks 24 leading banks, fell more then 6%.
Gendreau said the unfolding impact of the credit market mess on the sector have sparked speculation about whether firms are withholding bad news or "if the firms themselves know the extent of the damages."
In addition to troubles at Citigroup and Merrill Lynch, investors grappled with Swiss bank UBS Ag's (UBS: 47.60, -1.67, 3.4%) report that its investment-bank segment took about $3.6 billion of write-downs due to subprime mortgage exposure, and the filing of a lawsuit by the New York Attorney General against a unit of First American Corp. The firm was accused of "colluding" with Washington Mutual Inc. (WM: 23.21, -0.06, -2.5%) to inflate the appraisal value of homes.
Earnings and economic reports
About 50 companies on the S&P 500 Index are scheduled to report results next week, including KKR Financial Holdings (KFN: 15.02, -0.05, -0.3%), Total SA (TOT: 78.79, 0.43, -0.5%), Revlon (REV: 1.13, -0.01, -0.9%), Time Warner Inc. (17.86, -0.02, -0.1%) and News Corp. (NWS: 22.03, -0.30, -1.3%), which is acquiring Dow Jones & Co. (DJ: 59.65, -0.02, 0.0%), parent of MarketWatch, the publisher of this report.
"Earnings estimates this quarter and next and looking towards 2008, are not particularly positive," said Owen Fitzpatrick, managing director or private wealth management at Deutsche Bank.
Of the 388 companies that have already posted results for the third quarter, 65% have beat analysts' targets, 13% have matched and 22% have missed, which is closely in line with past performances.
But dig deeper and investors will find the results that have come in better than estimates are only beating them by 0.2%, said John Butter at Thomson Financial.
In terms of economic reports, the ISM Services report is due Monday and the University of Michigan's consumer sentiment survey will arrive Friday.
Monthly sales from retailers will be released throughout the week.
The same-store sales estimates for October is for a 2.3% gain in October, down from growth of 3% last year, according to Thomson Financial, as the majority of the sectors tracked continue to report weaker compared with the year-ago period. Thomson's October same-sales report will be released Thursday.
"As we head into the upcoming months, it will be very interesting to see the extent to which the [same-store sales indicies] continue to recover for the holiday season," said analysts as Thomson.
Carla Mozee is a reported for MarketWatch in San Francisco
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