US Market tries to make a comeback

Friday’s gain fails to wipe out the weekly losses

Freddie Mac and Fannie Mae remained the headlines during the course of the week that ended on Friday, 22 August, 2008. The battered financial sector, negative data on the housing front, volatile crude prices and a few earning reports dominated the headlines during the week. Dollar remained relatively strong though lost 1.2% to the euro during the course of the week. Stocks at Wall Street registered losses on all the days of the week barring the last day, Friday, 22 August. Volume of trading remained relatively light during the course of the week.

The Dow Jones Industrial Average lost 31.84 points for the week to end at 11,628.06. Tech - heavy Nasdaq lost 37.81 points at 2,414.71. S&P 500 lost 6 points to end at 1,292.2.

The financials sector continued to be under pressure even today after Fannie Mae and Freddie Mac reports that they will need to be bailed out by the federal government sooner than was previously thought. This continued to create turmoil in the finance sector off and on.

The sector also came under pressure after Bank of America was named in The Wall Street Journal as being the focus of increased probes from the New York Attorney General regarding auction rate securities. S&P Financial sector dropped 2.4% and 6.5%, respectively, in the first two days of trading.

In the US stock market on Friday, 22 August, despite low volumes, US stocks rallied. The rally was broad based and there were a couple of catalysts for the rally. Comments from famous investor Warren Buffet and Fed Chairman Ben Bernanke gave US stocks a good reason to rally on Friday. The dollar also strengthened and financial sector also climbed up on reports that Korea Development Bank has shown interest in acquiring Lehman Brothers.

The Dow Jones industrial Average ended the day with a gain of 197.85 points at 11,628.06. The Nasdaq Composite Index, finished higher by 34.3 points at 2,414.71. S&P 500 finished higher by 14.48 points at 1,292.2.

Famed investor Warren Buffett stated in an interview that Fannie Mae and Freddie Macare looking for private investment and also offered positive comments on the attractive values currently offered by stocks and said that he doesn't have any bets against the dollar.

Elsewhere, Fed Chairman Ben Bernanke said on Friday that the declines in commodity prices and the stability of the dollar are encouraging as their trends are likely to slow inflation. He also stated that inflation will be further helped as the U.S. economy falls short of its growth potential for a time. Still, the inflation outlook is highly uncertain.

The economic data seen during the week were mixed, but mostly negative in nature. The Commerce Department reported that the number of new homes starting construction in July has sharply dropped. The number of new single-family permits dropped to the lowest level in 26 years. Builders are cutting back their production of new homes and trying to work off unsold inventory. Rising foreclosures on existing homes are complicating the builders' efforts to bring supply back down to meet sluggish demand. Housing starts fell 11% to a seasonally adjusted annual rate of 965,000 in July, 2008.It marked the lowest level for housing starts in 17 years. June's starts were revised higher to a 1.084 million annual pace. Housing starts are down 29.6% in the past year.

The Labor Department reported that U.S. producer prices rose by a bigger-than-expected 1.2% in July. It was driven higher by prices for energy, food and other products. Market was looking for an increase of 0.3% in July. Excluding food and energy, producer prices rose 0.7% in the month, which was also higher than expected. In July, energy prices rose 3.1% and food prices climbed by 0.3%.

Also, initial jobless claims for the week ending 16 August totaled 432,000, which was below the 440,000 expected. Claims fell 13,000 relative to the prior week's downwardly revised total. Still, the 4-week moving average for jobless claims advanced to 445,750 from 438,500.

In a separate report, the Conference Board in USA reported that the leading economic indicators for July dipped 0.7%. The leading index is designed to forecast turning points in the economy. Market was looking for a 0.2% decline. The report pointed to slow growth the rest of the year and possibly an economy grinding to a halt.

Among earning report for the week, Dow component Hewlett-Packard turned in another solid earnings report and provided a reassuring outlook. Meanwhile, several retailers, including Home Depot, Target and Gap reported relatively good results.

At the crude market at US on Friday, crude-oil futures dropped more than 5%, reversing the rally in the previous session, as a stronger U.S. dollar and ongoing concerns about a slowdown in demand pressured crude prices. Crude prices for October delivery closed at $114.59 (lower by $6.6 or 5.4%). For the week it managed to end higher by a little 0.6%.

Executive Summary

For the week, indices registered little losses. In percentage terms, Dow and Nasdaq lost 0.3% and 1.5% respectively. S&P 500 lost 0.5%. Negative economic reports and Freddie Mac and Fannie Mae dominated the headlines during the week which witnessed relatively less volumes in trading. Indices registered gains only on the last day of the week.

For the year, Dow, Nasdaq and S&P 500 are down by 12.3%, 12% and 9% respectively.

Developments surrounding the Government sponsored enterprises (GSEs) will be the thing to watch in the coming week, along with oil prices and some key economic reports for existing home sales, new home sales, Q2 GDP (revised), and personal income and spending.