Investors Nervously Await US Numbers

Source : The Business Times, April 14, 2008

The volatile ride in the market has not reached the end yet as investors nervously await a slew of corporate earnings as well as economic reports in the US. So far, news from the US earnings front has been grim with a sharply disappointing earnings report from General Electric, which is often seen as a microcosm of the economy, and lacklustre results from aluminium maker Alcoa, according to an AFP report.

The big question for investors is whether the market has already priced in the impact of the housing and financial market turmoil on stock prices and earnings, or whether more surprises are in the offing, say analysts.

In the week to Friday, the Dow Jones Industrial Average lost 2.25 per cent to 12,325.42, while the Standard & Poor’s 500 broad-market index shed 2.74 per cent to 1,332.83. The tech-dominated Nasdaq composite index slid 3.4 per cent to 2,290.24.

The past week’s market action was also marked by a disappointing report on the US trade balance, a sharply weaker consumer sentiment survey as well as the earnings news. In addition, the Federal Reserve released meeting minutes which effectively acknowledged a contraction in the US economy and the threat of recession.

Among the economic indicators due to be released are two inflation indicators - the Producer Price Index and the Consumer Price Index. Others include US housing starts, industrial output and capacity utilisation, and the Fed’s Beige Book.

Views are split as to whether the market has reached the bottom. Barry Ritholtz at Ritholtz Research & Analytics said markets are not cheap, and are not priced for a full-blown earnings recession. ‘The stock market may be entering a minefield as earnings start to flood the tape next week. We shall soon see if investors are getting real about earnings. GE proves that the economic slowdown is directly impacting corporate America,’ AFP quoted him as saying. Another analyst, Gregory Drahuschak at Janney Montgomery Scott, however, said it is important to keep a longer view in mind. ‘The news is and has been largely negative lately, but it is important to remember that it is highly likely the market will begin a turnaround long before the economic data do,’ he said.

Prices in Singapore are expected to ease this week as well, following the strong surge in prices on Friday which was not supported by Wall Street. Gabriel Yap, dealing director at DMG and Partners Securities, was quoted by AFP as saying that the market is expected to be clouded by the slowing US economy and further losses in financial institutions related to risky mortgage loans. ‘We would be expecting signs of market troughing very soon in the absence of bad news. But if you ask me whether there will be more bad news, the answer is yes,’ he said.

The International Monetary Fund said last week that the worldwide losses stemming from the US sub-prime mortgage crisis could hit US$945 billion as its impact continues to spread through the global economy.

Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors in Sydney, said: “Despite some recent improvement, credit markets are still a long way from behaving normally, the economic outlook is still deteriorating, and considerable profit downgrades lie ahead.”

For the week ended April 11, the Straits Times Index closed at 3,126.87, down 28.69 points or 0.91 per cent from the previous week. Average daily volume was 1.64 billion shares valued at $1.72 billion, compared with 1.68 billion shares worth $2.03 billion the week before.

All our portfolios weakened, except the lowest price-to-book portfolio which climbed 6.2 per cent. The portfolio was boosted by the doubling of the price of Tri-M Technologies. As for our portfolios, the purpose is to provide real-time tracking of the various trading strategies - namely, buying the stocks recently upgraded by analysts, the one-year top losers, the one-month top winners, stocks with the lowest PE ratio, and those with the lowest PTB ratio. The process is mechanical and no qualitative judgement is exercised. So stocks that appear in the portfolios are not necessarily good buys.

But as the state of the portfolios shows, and as numerous other empirical studies have found, a low PTB ratio has again turned out to be the best predictor of future price performance - despite the severe decline of the portfolio in the current market turmoil.