A bull’s week at US Market

Market sentiments shows improvement amid ongoing problems

After weeks of extreme choppy and sea saw trading, US Market’s tone was much improved for the week ended Friday, 24 August, 2007. Market did exhibit cautiousness at every step, but underlying sentiment was much improved. Market registered good gains for the week.

The basic comfort came from Bank of America's announcement that it plans to invest $2 billion in mortgage lender Countrywide Financial to help the company overcome its problems. Some deal news also cheered investors who thought that liquidity has not dried up to the extent as has being portrayed.

The Dow Jones Industrial Average gained 300 points for the week. Tech - heavy Nasdaq gained 71 points while S&P 500 gained 33 points. Crude prices ended the week crossing $70/barrel.

But mortgage related problems continued in Wall Street. Lehman Brothers said it will close one of its mortgage unit and cut roughly 1,200 jobs. Capital One Financial announced that it will close its wholesale mortgage business, GreenPoint Mortgage. HSBC and Accredited Home Lenders also announced job cuts related to the difficult credit conditions.

Four big banks - Citigroup, JPMorgan Chase, Wachovia and Bank of America said during the week that they had borrowed $500 million each from the Federal Reserve's discount window after the Fed cut its discount rate last week.

On Friday, 24 August, better than expected economic data, better than expected earnings results from several retailers and speculation that a buyout deal might be in the offing gave stocks a good boost. Technology and Energy sectors rallied. Dow closed higher by 143 points on that day.

On the economic data front, on Friday, the Commerce Department reported orders for durable goods surged 5.9% in July after an upward revision to 1.9% in June. This easily beat market expectations and was encouraging news for business investment. July new home sales also unexpectedly rose 2.8% to 870,000 after an upward revision to June.

Earnings report continued to trickle in the market during the week at times. Home improvement retailer Lowe's reported a higher than expected profit despite weakness in the housing market. Luxury homebuilder Toll Brothers posted grim results due to lower demand and write-downs, but managed to beat analysts' expectations.

Among retailers, Target reported strong results, despite increased consumer pressures. Gap and Ann Taylor, both reported better than expected earnings results and provided reassuring earnings guidance.

Deal reports that made headlines were - Rio Tinto has raised a record-breaking $40 bln to fund its proposed takeover of Alcan; Dubai World is reportedly investing $5 bln to buy a 9.5% stake in MGM Mirage; TD Ameritrade and E*Trade Financial were reported to merge; Nymex Holdings confirmed it is in takeover talks.

Executive Summary

For the week, all the three indices registered good gains measuring 2%-3%. DJIx is up by 2.2%, S&P 500 is up by 2.3% and Nasdaq is up by 2.9%. Investors were a bit confused with Federal Reserve’s action. One side, Fed showed concerns about current market condition, but on other side gave no hint about an imminent rate cut.

For the year, Dow is up by 7.3%, Nasdaq is up by 6.7% and S&P 500 is up by 4.3%.

Volatility is expected to continue in the market. Federal Reserve’s meeting in September is expected to be a major factor in dictating market momentum next. Till then, market is expected to go through these rollercoaster rides.