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Saturday, August 21, 2010

Gloom and Doom for the Market & the end of the earnings season this week ..

The gloom was very broad. The Dow Jones industrials ($INDU) fell 58 points on Friday to 10,214, on top of a 144-point loss on Thursday.

For the week, the blue chips were down 0.9%. The Standard & Poor's 500 Index ($INX) was off 0.7% on the week, but the Nasdaq Composite Index ($COMPX) bucked the trend, ending the week up 0.3%.

There was a bizarre, even disturbing, dichotomy as the week ended.

The Dow finished the week down 2% on the year, with the S&P 500 down 3.9% and the Nasdaq off 3.9%. Yet, the yield on the 10-year Treasury note was 2.61%. A rate below 3% is a signal that many investors and analysts believe a major bad event is near.

The 10-year yield is, in fact, down a third this year. The decline is so big that Morgan Stanley (MS) apologized for being so wildly wrong on its interest-rate forecast at the beginning of the year. The investment bank thought the 10-year yield would be 5.5% this year.

In fact, you had to look to find someone who doesn't think the world was falling apart.

One was Doug Oberhelman, the new CEO of Caterpillar (CAT).

At the construction equipment maker's analyst meeting this past week, he said bluntly, "We don't think the world has ended." Caterpillar is bullish. There are big projects going on around the world and more in the pipeline. The company has even started to hire back some of the employees it cut in the last year or so.

Investors seemed to buy the Caterpillar story, especially the global growth story. Shares were up 1.3% for the week and are the best Dow performer this year with a 21% gain. That doesn't suggest they see a collapse any time soon.

Maybe Oberhelman is right. But let's get the market through next week. It won't be easy. Here's why.

Markets for the week



% chg.

YTD chg.

Dow industrials





S&P 500










Russell 2000





Crude oil





(per barrel)

U.S. Dollar Index





10-yr. Treasury










(per troy ounce)

The economic news will continue to challenge

It's a relatively light week for economic reports, but it will be hard to get a lot of cheer from them. Here's what to look for:

Existing-home sales for July. Due Tuesday morning from the National Association of Realtors. This number could take your breath away. The consensus is for sales to come in at an annualized 4.6 million units, a 13% decline from June. IHS Global Insight is expecting a 4.3-million-unit rate, which would be a decline of 20%. The reason is that sales that qualified for the homebuyer tax credits are done. So, numbers will drop.

Durable-goods orders for July. Due Wednesday from the Commerce Department. This number will show a gain of at least 2.5%, maybe more. The gain will be entirely due to orders that Boeing took at the big Farnborough Air Show in England and auto sales.

New-home sales for July. Due Wednesday from the Commerce Department. The annualized number should be around 325,000. That would be very close to the lowest sales rate on record, 267,000 in May. New-homes sales are a function of interest rates, prices and jobs. And the national unemployment rate is 9.5%.

Initial jobless claims. Due Thursday from the Labor Department. Jobless claims have moved higher over the past three weeks. And the trend is worrying lots of analysts. "It seems to reflect a real deterioration rather than seasonal adjustment distortions," Nomura Securities said Friday. Unless it turns around, the August nonfarm payrolls report, due Sept. 3, will likely disappoint again.

Gross-domestic-product growth for the second quarter. Due Friday morning from the Commerce Department. The first estimate on GDP was a relatively robust 2.4% (annualized). Expect that to be cut to 1.2% or so. Weaker-than-expected results for both inventories and net exports should account for most of the downward revision.

Reuters/Michigan Consumer Sentiment Index for July. This measure of consumer confidence has been falling of late, and declines tend to affect consumer behavior far more than gains.

Can Canada save the market?

The second-quarter earnings season effectively ended this past week with earnings from Wal-Mart Stores (WMT), Target (TGT), Lowe's (LOW), Home Depot (HD), Hewlett-Packard (HPQ) and Dell (DELL).

A number of retailers will report results next week. The most interesting are Barnes & Noble (BKS), which recently put itself up for sale, and Tiffany (TIF).

Investors and customers will want to know how the sale is progressing and if Barnes & Noble -- and other book chains -- can survive.

Tiffany will be the cheeriest. The affluent, especially in Asia, have been unafraid to spend. So, watch how the company describes the current operating environment.

Only six S&P 500 companies will report results next week, and they're all small.

But a number of big Canadian banks will report in the week ahead and the week following. And they're worth paying attention to.

Reporting next week are Bank of Montreal (BMO) on Tuesday, Canadian Imperial Bank of Commerce (CM) on Wednesday and National Bank of Canada (NTIOF) and the Royal Bank of Canada (RY) on Thursday.

The Toronto Dominion Bank (TD) and Bank of Nova Scotia (BNS) will report the week of Aug. 30.

The Canadians have the advantage of an economy that's benefited from a global boom in natural resources. Plus, they've been relatively conservative in how they lend. And Canadian tax laws on mortgages have limited speculation.

But there are worries, Credit Suisse analysts said this week that retail lending will slow as the Canadian economy adjusts in part to stresses in the American economy.

Other reports due next include:

Monday: Sanderson Farms (SAFM) and Tuesday Morning (TUES).

Tuesday: Barnes & Noble, Big Lots (BIG), Burger King (BKC) and Medtronic (MDT).

Wednesday: American Eagle Outfitters (AEO), BHP Billiton (BHP), brewer Heineken (HINKY).

Thursday: Bebe Stores (BEBE), Credit Agricole (CRARY) and Bank of China (BACHY).

Friday: National Bank of Greece (NBG) and Tiffany.
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