Credit related upheaval in market send indices lower

Nasdaq manages to score little gains in a week when Citigroup plays the spoilt sport

A strong start ended in a lackluster mode in the US Market for the week ending on Friday, 2 November, 2007. Federal Reserve’s key decision on interest rate remained the focal point during the week. High crude oil prices, a few misses on the earning front and renewed mess in the financial sector led to quite a roller coaster ride in the stock market during the week.

The Federal Open Market Committee gave the market what it wanted when it decided to cut the fed funds rate and discount rates by 25 basis points each to 4.5% and 5% respectively. Though stocks took some time to react, they rallied after the rate cut.

But led by the Financial sector which led to a huge sell-off in the market on Thursday, 1 November, 2007, indices, barring Nasdaq, closed lower for the week. The loss came despite indices closing higher on Friday, 2 November, led by a modestly strong employment report from the Labor Department.

The Dow Jones Industrial Average lost 211 points for the week. Tech - heavy Nasdaq gained 6.2 points. S&P 500 lost 25.6 points.

Microsoft, Apple and Google were the main reasons for Nasdaq’s gains. Google crossed the $700 mark for the first time ever during the week. Apple gained on solid numbers from its Leopard operating system sales. Verizon shares were up on reports that the company was in talks with Google to come out with a product against Apple’s iPhone.

After Merrill Lynch, it was Citigroup’s turn this week to lead the subprime mess rally. But Merrill Lynch too continued to be in the headlines. The subprime story once again started after CIBC World Market downgraded Citigroup. Estimates that the company will have to raise more than $30 billion by either selling assets, cutting its dividend or raising capital imparted a sense of feeling that all in still not so well in the financial market.

Merrill Lynch also fell and continued to be in the news after its chief executive Stan O’Neal resigned. Also on Friday, 2 November, Deutsche Securities downgraded Merrill Lynch to Hold from Buy amid its concerns that new write-downs of the company for collateralized debt obligations could approach $10 billion.

All financial stocks – Citigroup, AIG, JP Morgan and American Express ended considerably lower for the week spurring of a huge sell-off both on Thursday, 1 November and Friday, 2 November.

On the earnings front, Dow component Verizon beat market expectations. On the other hand, cereal maker Kellogs reported earnings beating estimates but issued FY 2008 guidance that was below expectations. P&G missed on meeting Wall Street estimates and it started a huge sell-off in the market on Tuesday, 30 October.

Another important Dow component which failed to keep up to Wall Street’s expectations was Exxon Mobil. The company announced that third-quarter income fell 10% as the rising cost of oil raised expenses. It was the worst drop in profit for the company in three years and the company could not get comparative better price for its products.

Among major economic news hitting the market during the week, the Labor Department reported on Friday that non-farm payrolls rose 166,000 in October (against an expected increase of 80,000). The September increase in payrolls was revised slightly lower, but it did not negate the strong October gain. The unemployment rate remained at a low 4.7%.

Also, the Conference Board's reading on consumer confidence fell to 95.6 for October from 99.8 in September, amid record oil prices and persisting weakness in the housing market. This was against a consensus estimate which called for an increase to 99 or 100.

Third quarter real GDP rose at a 3.9% annual rate. Also good news came from the fact that GDP deflator (inflation measure) was up at just a 0.8% annual rate in the quarter. The figures were quite surprising in nature given the nature of housing slump and sub prime mess market has witnessed this quarter.

The only economic news that led to some metal stocks losing ground was the Institute of Supply Management. The ISM data showed that manufacturing in USA expanded at its slowest pace since March because of tight credit conditions and a housing downturn. The dollar fell against most of its rival currencies. The Institute for Supply Management's factory index fell to 50.9, against an expectation of 51.5.

Executive Summary

For the week, indices ended mixed. Dow and S&P 500 slipped while Nasdaq was almost unchanged. DJIx closed down by 1.6% and S&P 500 closed down by 1.7%. Nasdaq gained a paltry 0.2%. Credit-related upheaval in the financial market once again spurted sell-off in the market. P&G and Exxon Mobil were two big Dow names that reported below-expected earnings during the week.

Crude for December delivery gained $2.44 to a record close of $95.93 a barrel, while the benchmark gold contract rallied to close above $800 at their highest level in nearly 28 years, finishing up $14.80 to end at $808.50 an ounce.

For the year, Dow is up by 9.1%, Nasdaq is up by 16.4% and S&P 500 is up by 6.4%.