Banks and economy to keep bears' grip on stocks

Reuters

Posted at Feb 28 2009 08:09 AM | Updated as of Feb 28 2009 04:09 PM

NEW YORK – Wall Street is unlikely to get a reprieve next week as relentless worries about US banks and the economy could embolden bears to drive the market below the 12-year lows hit on Friday.

Investors will also be looking for further action from the government in its campaign to shore up the financial system. The Federal Reserve will release details early next week on its latest plans, a massive program to support consumer and small business lending, a Fed official said on Friday.

The Term Asset-Backed Securities Loan Facility, also known as TALF, is a key part of the efforts to stop the unraveling of the financial system in the wake of the credit crisis and US housing collapse. The program could grow to up to $1 trillion in size.

A raft of data due out is expected to show the recession-hit economy is worsening. Among the reports, non-farm payrolls for February will shed light on the labor market, with analysts expecting unemployment to reach 7.9 percent.

Following Friday's fall in US stocks, with the S&P 500 closing at a 12-year low, analysts are watching to see if indexes can hold and recover from these lows, suggesting a bottom has been formed, or whether stocks have further depths to plumb.

"We continue to get hit on a daily basis by very bad economic news and the markets are trying to put in a stand here at the November 2008 lows," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

"Much will depend on the government policies regarding TALF, the financial stability plan, along with additional clarity on what's going to happen to the nation's banks will help determine where the market is headed next," he said.

The benchmark S&P 500 was down 4.5 percent for the week and 11 percent for the month.

Blue chips also fared badly, with the Dow falling 4 percent for the week after breaking through its November lows last week. The Dow was down 11.7 percent for February, its sixth straight month of losses.

Uncertainty over how banks will be relieved of the toxic assets that remain on their balance sheets has kept pressure on the markets, with pundits decrying the lack of details in the White House's plan to shore up the financial system.

The market is also wary of the prospect of nationalization, which would dilute shareholders. The announcement on Friday that the US government will boost its equity stake in Citigroup (C.N) stoked concerns over how much more aid major banks will need to stay afloat.

"The news flow will continue to be dominated by the state of the health of our financial institutions and it will continue to be dominated by the parsing of Obama's rescue plan," said Matt Kaufler, portfolio manager and equity analyst at Clover Capital Management in Rochester, New York.

"I think there's going to continue to be anxiety that even if the shoe doesn't drop next week, there's still going to be shareholder-unfriendly news in front of us."

The problems in financials have spread to the rest of the economy, resulting in widespread job losses, corporate losses and tumbling home prices -- creating an economic crisis that has fed upon itself.

"It unfortunately appears that the same issues creating the contraction in the economy -- that being job losses and (home) foreclosures -- are the same issues impacting banks' balance sheets," said Dean Curnutt, president of Macro Risk Advisors in New York. "There's a real unfortunate feedback loop here."

Fresh data is expected to confirm the dismal state of the economy next week. Data is anticipated to show non-farm payrolls tumbled in February while the unemployment rate rose to 7.9 percent, according to a Reuters poll.

Same-store retail sales will also provide insight into how consumer spending is holding up. Other data on tap includes manufacturing and non-manufacturing ISM, weekly initial jobless claims and factory orders.

The Federal Reserve's anecdotal Beige Book report on the economy should also provide a look at the state of the economy and could add to the negative picture, in addition to speeches from Federal Reserve Chairman Ben Bernanke, Treasury Secretary Timothy Geithner and a round of Fed officials.