Bad Bank Debate May Help Stocks Cast Off Chill; Jobs, Autos Loom
SAN FRANCISCO (MarketWatch) -- Progress creating a government structure to absorb banks' rotten assets could provide some relief next week for the stock market, which otherwise faces a tough lineup of woeful corporate outlooks, plunging auto sales and big job losses.
Investors are hoping for more clarity from Congress and the White House on establishing a good bank/bad bank institution that would buy up the delinquent loans and illiquid securities corroding banks' books.
Traders will also be cued to policymakers' decision on how to spend the second half of last fall's $700 billion Troubled Asset Relief Program, or TARP.
"The market fully understands that the two largest problems we're faced with are the solvency of the banking system and bringing about the end to the real estate crisis," said Robert Siewert, a portfolio manager at Philadelphia-based Glenmede Trust Co., which manages about $17 billion in assets.
"It could start to rally on any sort of indication of putting the banking system on a better footing," he said.
The market could use the good news. The S&P 500 and Dow Jones Industrial Average have lost about 9% this year, adding to last year's double-digit losses.
Any spark of hope from Washington faces a squall of negative reports from corporations around the country.
Some 193 S&P 500 companies, 40% of the entire index, have already reported fourth-quarter results. Another 102, including Dow Jones Industrial Average components Merck Co. , Kraft Foods, Inc. and Walt Disney Co. , are slated to report next week.
So far, earnings look bad and forecasts look worse.
S&P 500 companies are on track for a 35% earnings decline. Companies are missing earnings' expectations at a rate not seen since the fourth quarter of 1995.
"Most people have thrown away the fourth quarter," said Bill Greiner, chief investment officer for Kansas City, Missouri-based UMB Asset Management, a unit of UMB Financial Corp. that manages $8.5 billion.
"What's more important than the actual earnings is the company guidance," he said.
Along with outlooks, companies like Boeing , Caterpillar and Starbucks made shockwaves last week with large-scale layoffs. These added to a gloomy jobs picture that next Friday's jobs report will likely illustrate.
Economists are expecting the economy lost 400,000 to 600,000 jobs in January.
As in past months, the Wednesday release of payroll processor ADP's job forecast, followed by Thursday's jobless claims figures, could roil traders ahead of the Friday Labor Dept. release.
January sales figures from the auto industry and retailers could also tip indexes, even though the theme of plunging auto sales and stingy shoppers is a familiar one.
Analysts and investors are anticipating General Motors Corp. and Ford Motor Co. sales fell about 40%, Chrysler sales dropped 50% and Toyota Motor Co. sales lost more than 30%.
Devil's in the bad-bank details
The possibility that policymakers would take a page from the 1980s savings and loan crisis by creating an agency to buy institutions' bad assets sparked a rally in bank shares last week.
After some jaw-jumping intraday rises, the Financial Select Sector SPDR Fund , which tracks the S&P 500 bank stocks, ended the week 2.8% higher vs. a 0.7% drop for the broader index.
Many agree that the market won't rally until the financial system works through the toxic mortgage and related assets. These prompted the failures last year of Lehman Bros. and Washington Mutual, caused successive writedowns as big banks such as Bank of America Corp. and Citigroup, Inc. and sent the industry running hat in hand to the U.S. government - repeatedly knocking down any chance of a stock market rally.
But even if policymakers pull together to form a new version of the 1980s' Resolution Trust Corp., investors say a sustained rally wont necessarily follow.
A lot rides on the details of the structure. If a government "bad bank" buys up bank debts for a steep discount to par value, say at 23 cents on the dollar, those purchases could force struggling institutions to embark on another big round of writedowns and capital raisings. That process could send more down the path to bankruptcy.
But if the government buys the assets at par value, in other words, for far more than they are worth now, the problem passes on to the government and ultimately, the taxpayer.
"The idea that this will be such a sizeable pricetag to the taxpayer is certainly something investors are weary of," Siewert said.
And regardless of the details of a proposed bank fix, the market still faces a rocky road. Siewert said his firm continues to underweight equities in favor of more investments in bonds, such as high-yield and municipal securities.
Greiner is shunning financial stocks; carrying higher levels of cash, short-term bonds and gold; and looking for companies with strong dividends.
"As we go through the process of deleveragin the economy, which won't be over in two or three quarters, any business that prospered from an increase use of leverage, that model is over," Greiner said.
By Laura Mandaro